AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 1999
REGISTRATION NO. 333-71967
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SECURITIES AND EXCHANGE COMMISSION
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AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CELLNET DATA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2951096
(State of (I.R.S. Employer Identification
incorporation) No.)
125 SHOREWAY ROAD
SAN CARLOS, CALIFORNIA 94070
(650) 508-6000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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JOHN T. LAMACCHIA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CELLNET DATA SYSTEMS, INC.
125 SHOREWAY ROAD
SAN CARLOS, CALIFORNIA 94070
(650) 508-6000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
BARRY E. TAYLOR, ESQ.
TREVOR J. CHAPLICK, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
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Approximate date of commencement of proposed sale to the public: FROM TIME
TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
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"), other than securities offered only in
connection with dividend or interest reinvestment plans, 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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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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION
8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
(Subject to completion, dated June 14, 1999)
8,942,517 SHARES
CELLNET DATA SYSTEMS, INC.
COMMON STOCK
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All of the 8,942,517 shares of Common Stock (the "Warrant Shares") are being
offered for sale by CellNet Data Systems, Inc. ("CellNet") to holders electing
to exercise warrants (the "Warrants") issued in connection with the Warrant
Agreement dated as of September 29, 1997 (the "Warrant Agreement") between
CellNet and The Bank of New York as Warrant Agent. The Warrants were originally
issued on September 29, 1997 in connection with CellNet's issuance of 14% Senior
Discount Notes due 2007 (the "1997 Notes") to certain investors (the "Warrant
Holders") including prior holders of CellNet's Series B 13% Senior Discount
Notes which were exchanged in such offering for the 1997 Notes. The 1997 Notes
and Warrants were originally offered in units which became separately
transferrable on October 15, 1997. CellNet has registered under the Securities
Act of 1933, as amended (the "Securities Act") the Warrant Shares issuable upon
exercise of the Warrants. The Warrants became exercisable on September 29, 1998
and are exercisable at any time until expiration on October 1, 2007. If not
exercised prior to expiration, the Warrants terminate and may not be exercised
thereafter.
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THE SHARES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER CERTAIN "RISK FACTORS" IN DETERMINING WHETHER TO BUY
ANY COMMON STOCK. SEE PAGE 6.
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CellNet's Common Stock is listed on the Nasdaq National Market under the
symbol "CNDS." On June , 1999 the closing price of the Common Stock was
$ per share.
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This Prospectus is part of a registration statement that CellNet filed with
the Securities and Exchange Commission using the "shelf" registration process
and covers 8,942,517 shares of CellNet's Common Stock issuable upon exercise of
the Warrants for the exercise price of $14.30 per share. These shares may be
offered and sold from time to time by CellNet to the Warrant Holders pursuant to
this shelf registration statement. The offering is not being underwritten.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS JUNE 14, 1999
TABLE OF CONTENTS
PAGE
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The Company................................................................................................ 3
Risk Factors............................................................................................... 6
Use of Proceeds............................................................................................ 23
Plan of Distribution....................................................................................... 23
Legal Matters.............................................................................................. 24
Experts.................................................................................................... 24
Where You Can Find More Information........................................................................ 24
Information Incorporated by Reference...................................................................... 24
2
THE COMPANY
CellNet Data Systems, Inc. ("CellNet") has designed, developed and is
commercially deploying in scale innovative wireless data communications networks
which provide high-volume, low-cost, real-time data collection services, capable
of monitoring millions of fixed endpoints. The primary application of CellNet's
network is the provision of commercial, industrial and residential network meter
reading services to electric, gas and water suppliers. The meter reading
services for electric suppliers position CellNet to benefit from the
deregulation of the electric utility industry. As of March 31, 1999, CellNet had
approximately 4,019,000 meters under long-term contracts, of which a total of
approximately 2,152,000 meters were generating revenues ("in revenue service")
for CellNet. The CellNet network uses radio devices fitted to utility meters
that are capable of reading and reporting data from each meter every few
minutes. Through extremely efficient use of radio frequency spectrum, the
CellNet network has substantial additional capacity to service non-utility
applications that require low-cost monitoring of fixed endpoints, such as home
security and remote status monitoring of vending machines and office equipment.
CellNet believes it has an early market opportunity to offer wireless data
communications services on a broad commercial scale for utility and selected
non-utility applications. CellNet's network is distinguished by the following
advantages:
- sufficiently low infrastructure and operating costs to permit
cost-effective utility meter reading and other fixed point monitoring
applications;
- highly efficient use of spectrum--the equivalent of approximately a single
voice channel is needed to operate a network;
- proprietary software specifically designed to manage real-time data
collection from millions of endpoints; and
- open systems architecture designed to allow new applications to be added
to the CellNet system.
The electric utility industry is undergoing a fundamental and broad-based
transition. The traditional utility structure, consisting of a vertically
integrated system operating as a natural monopoly with rates set in relation to
cost, has historically presented utilities with little incentive to improve
service quality or operating efficiency. Similar to the regulatory evolution
that has already taken place in the transportation and telecommunications
industries, customer demands and regulatory mandates by federal and state
governments are opening the electric utility market to competition, thus forcing
electric utilities to transform themselves from regulated monopolies into
competitive enterprises. While regulatory initiatives vary from state to state,
many involve a shift from rate-of-return rate making, in which a utility's rates
are determined by its return on assets, to performance-based rate making, in
which a utility's rates and profitability are based upon its cost, efficiency
and service quality.
With deregulation of the electric utility industry underway, established
utilities are under increasing regulatory, consumer and competitive pressures.
The changing regulatory environment means that other utility industry
participants, including energy service providers, power marketers, brokers and
aggregators, system operators, power exchanges, and scheduling coordinators,
will be seeking viable strategies to enter a market traditionally dominated by
established utilities. CellNet believes its network meter reading services offer
a state-of-the-art solution to the demands created by the increased regulatory
and competitive pressures within the energy service industry. CellNet's meter
reading service is a proven, efficient, low-cost, scaleable network, which
enables both established utilities and other utility industry participants to
implement time-of-use pricing plans, peak demand monitoring, load forecasting
activities, real-time responses to billing inquiries and power outage detection,
on-demand meter reads, customized billing functions, and customer access to
consumption, rate and billing information. CellNet's system allows utilities to
respond effectively to regulatory changes, reduce costs and enhance their
operating efficiencies, defer capital spending and implement customer retention
plans and facilitate market entrance by new power market participants.
3
CellNet is actively targeting the largest Metropolitan Statistical Areas,
and consolidated Metropolitan Statistical Areas, which together represent a
majority of the approximately 230 million electric, gas and water meters in the
United States, and other areas of high population density, state-by-state, as
deregulation becomes effective. CellNet believes that utilities and other
utility industry participants operating in or entering these densely populated
areas will be most affected by increasing competitive and regulatory pressures.
These pressures will likely prompt established utilities to improve their
efficiency and service levels, and CellNet believes that its network and
services would facilitate this improvement. However, the utility industry has
generally been characterized by long purchasing cycles and cautious decision
making. Although the uncertainty surrounding proposed regulatory changes in some
states may have caused, and may continue to cause, additional delays in
purchasing decisions by established electric and gas utilities, CellNet believes
that actual implementation of utility deregulation will ultimately accelerate
purchasing decisions by established utilities. CellNet is evaluating new
opportunities arising from deregulation. CellNet's open systems architecture is
designed for deployment strategies focused either on established utilities or
other utility industry participants, or both, without requiring significant
modifications to CellNet's network system.
CellNet has existing long-term contracts to provide NMR services to Kansas
City Power & Light Company ("Kansas City Power & Light") for approximately
437,000 meters, AmerenUE (formerly known as the Union Electric Company)
("AmerenUE") for approximately 1,264,000 meters, Northern States Power Company
("Northern Power") for approximately 1,087,000 meters, Puget Sound Energy, Inc.
("Puget Sound Energy") for approximately 800,000 meters and Indianapolis Power &
Light Company for approximately 420,000 meters. Of the 4,019,000 meters covered
under these contracts, approximately 2,152,000 meters were in revenue service as
of March 31, 1999. Each of these contracts results from CellNet's "saturation
deployment" strategy for providing commercial, industrial and residential
network meter reading ("network meter reading") services to existing utilities.
Under this strategy, CellNet builds out a network to cover every meter in a
utility's designated service area. To implement the strategy, CellNet builds out
its wide area network and local area network concurrently. The network begins
generating revenue shortly after individual meters come on-line, and new meters
can be added incrementally. CellNet has ongoing discussions concerning
additional contracts of a similar kind with other utilities in the United
States.
CellNet began actively targeting new power market participants in September
1997. To date, CellNet has entered into contracts with eleven energy service
providers and two energy aggregators, including contracts with nonregulated
power marketing arms of the nation's large utilities and energy providers for
the provision of network meter reading services in California, including Sempra
Energy Solutions, New West Energy, Duke Solutions, Commonwealth Energy, and
Dynergy, a division of NGC Corp. CellNet expects to enter into similar
arrangements with additional power market participants both in California and in
other states where deregulated markets open up further opportunities for the
deployment of CellNet's networks. Each of these contracts results from CellNet's
alternative "broad deployment" strategy, which is a slight variation of
CellNet's saturation deployment strategy outlined above. Under CellNet's broad
deployment strategy, CellNet first deploys its wide area network in service
areas where the largest consumers of energy are located and where energy
consumers and other power market participants are most likely to value CellNet's
services and/or to concentrate their marketing efforts. As contracts for the
provision of network meter reading services are obtained, CellNet builds out its
local area network on an incremental basis as necessary to service those
customers or for advanced coverage of certain areas. Broad deployment offers
energy service providers who lack the established utilities' designated
geographical customer bases the flexibility to build as they grow or to pursue
particular market niches. It also offers established utilities, which are not
yet prepared to commit resources to a long-term saturation deployment project,
the opportunity to cover a portion of their customers initially and to increase
coverage in their service areas over time, potentially to all of their meters.
4
By using networks deployed under either the saturation or broad deployment
strategy, CellNet is also able to offer network meter reading information
metering services directly to energy consumers, to the extent that the
information provided by such services is not being made available to them by
their own utility or energy service provider. Use of these networks also allows
CellNet to offer sub-metering network meter reading services to industrial and
commercial customers who desire to itemize their overall energy usage by
monitoring the energy consumption of particular heating, ventilation and air
conditioning system components, individual manufacturing processes or pieces of
equipment, or individual departments.
CellNet believes its spectrum-efficient networks will have substantial
excess capacity to service non-utility applications requiring low-cost
monitoring of fixed endpoints. Potential non-utility applications of CellNet's
systems include remote status monitoring of home security systems, vending
machines, office equipment, parking meters and other equipment as well as remote
control of traffic lights. CellNet has worked with industry leaders such as
Honeywell, Inc., Real Time Data, Inc., and Interactive Technologies, Inc. to
develop such applications. CellNet believes that its utility networks will
provide an excellent platform to position CellNet as a leading wholesale
provider of wireless data communications services for such non-utility
applications.
CellNet believes that a significant international market also exists for its
services with several hundred million electric, gas and water meters outside of
the United States and comparable opportunities for non-utility applications.
CellNet is pursuing international markets through an existing joint venture with
Bechtel Enterprises, Inc. The joint venture, BCN Data Systems L.L.C. ("BCN"),
has concentrated its initial efforts on entering the market in the United
Kingdom and is also considering opportunities in Australia and elsewhere.
CellNet's principal executive offices are located at 125 Shoreway Road, San
Carlos, California 94070, (650) 508-6000.
5
RISK FACTORS
INVESTING IN THIS COMPANY ENTAILS SUBSTANTIAL RISK. YOU SHOULD PURCHASE
SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS. YOU SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS AND OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE
DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK.
THIS PROSPECTUS AND THE DOCUMENTS REFERRED TO HEREIN CONTAIN FORWARD-LOOKING
STATEMENTS THAT ARE BASED ON CURRENT EXPECTATIONS AND ARE SUBJECT TO SUBSTANTIAL
RISKS AND UNCERTAINTIES. YOU CAN IDENTIFY THESE FORWARD-LOOKING STATEMENTS BY
WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS,"
"ESTIMATES" AND SIMILAR WORDS. YOU SHOULD READ STATEMENTS THAT CONTAIN THESE
WORDS CAREFULLY BECAUSE THEY: (1) DESCRIBE OUR FUTURE EXPECTATIONS; (2) CONTAIN
PROJECTIONS OF OUR FUTURE RESULTS OF OPERATIONS OR FINANCIAL CONDITION; OR (3)
STATE OTHER "FORWARD-LOOKING" INFORMATION. THESE STATEMENTS ARE NOT GUARANTEES
OF FUTURE PERFORMANCE. THERE MAY BE EVENTS IN THE FUTURE THAT WE ARE NOT ABLE TO
PREDICT ACCURATELY OR OVER WHICH WE HAVE NO CONTROL. THE RISK FACTORS LISTED IN
THIS SECTION, AS WELL AS ANY CAUTIONARY LANGUAGE IN THIS PROSPECTUS, PROVIDE
EXAMPLES OF RISKS, UNCERTAINTIES AND EVENTS THAT MAY CAUSE OUR ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THE FORWARD LOOKING STATEMENTS MADE AND MAY CAUSE OUR
STOCK PRICE TO FALL.
YOU SHOULD CAREFULLY CONSIDER THE RISKS OF YOUR INVESTMENT IN THE "RISK
FACTORS" SECTION BELOW, AS WELL AS OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, INFORMATION INCORPORATED BY REFERENCE, AND INFORMATION WHICH WE FILE
WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME. THE INFORMATION
IN THIS PROSPECTUS IS COMPLETE AND ACCURATE AS OF THIS DATE, BUT THE INFORMATION
MAY CHANGE AFTER THE DATE OF THIS PROSPECTUS.
CELLNET WILL NOT EARN SIGNIFICANT REVENUES UNTIL THE UTILITY INDUSTRY WIDELY
ACCEPTS AND AGREES TO PURCHASE OUR AUTOMATED METER READING SYSTEM SERVICES.
CellNet offers automated meter reading services and data generated from such
services to utilities, companies that have recently entered the market to
compete with utilities (also known as "new power market participants") and
utility customers. CellNet contracts with these parties to build wireless data
networks which automatically read utility meters and distribute data gathered
from such meters. CellNet's success will be almost entirely dependent upon
whether or not these parties (a) sign additional contracts with CellNet for
network meter reading and other services, and (b) otherwise allow CellNet to
install wireless data networks for servicing a substantial number of endpoint
monitoring devices such as utility meters.
The utility industry historically has been cautious and deliberate in making
decisions concerning the adoption of new technology. Utilities can take up to
several years to complete a major decision involving the adoption of new
technology. The rate at which utilities elect to adopt CellNet's services, if at
all, will directly affect whether CellNet will earn significant revenues in the
near term from its automated meter reading services. The decision-making process
of utilities can involve multiple stages including:
- the formation of evaluation committees,
- a review of different technical options,
- technology trials,
- equipment testing and certification,
- performance and cost justifications,
6
- regulatory review,
- one or more requests for vendor quotes and proposals, and
- budgetary approvals and other steps.
Although deregulation and privatization initiatives may ultimately
accelerate the adoption of CellNet's technology, CellNet cannot predict the
timing and extent of such adoption. Only a limited number of utilities have made
a commitment to purchase CellNet's services to date. The CellNet system is one
possible solution for automated meter reading and data distribution. It has not
been adopted as an industry standard and it may not be adopted on a broad scale.
Competing systems have been and likely will continue to be selected by utilities
and other potential clients. If CellNet does not enter into additional services
contracts or enter into contracts on terms favorable to CellNet covering a
sufficient number of meters to recoup its costs of deployment and operation,
CellNet's business, operating results, financial condition, cash flows and its
ability to service its indebtedness will be materially and adversely affected.
OUR REVENUES ARE DERIVED ALMOST EXCLUSIVELY FROM CONTRACTS WITH UTILITIES AND
OUR SUCCESS IS SUBSTANTIALLY DEPENDENT UPON ENTERING INTO ADDITIONAL SERVICES
CONTRACTS WITH UTILITIES.
CellNet currently derives almost all of its revenues from long-term services
contracts with a limited number of established utilities. During 1998, 92% of
CellNet's revenues were derived from its contracts with Kansas City Power &
Light, AmerenUE and Northern Power. During 1997, approximately 88% of CellNet's
revenues were derived from its contracts with Kansas City Power & Light and
AmerenUE. CellNet will not generate sufficient cash flow to service its
indebtedness or achieve profitability unless it enters into additional services
contracts covering a significant number of additional meters. If CellNet does
not successfully complete commercial deployments of the CellNet system under
current services contracts or obtain enough additional services contracts on
satisfactory terms for network deployments in a sufficient number of locations,
CellNet will not achieve adequate cash flow to service its indebtedness or
achieve positive cash flow or profitability.
A SIGNIFICANT PORTION OF OUR FUTURE REVENUE ALSO DEPENDS ON NON-UTILITY
APPLICATIONS.
CellNet is planning to generate a significant percentage of future revenues
from non-utility services as part of its long-term business plan. Potential
non-utility applications of CellNet's systems include home security, remote
status monitoring of vending machines, office equipment and parking meters and
other equipment, as well as remote control of traffic lights. While CellNet is
working with industry leaders to develop such non-utility applications, there is
no guarantee that CellNet will successfully develop or commercially introduce
any of such services. CellNet does not currently have any contracts to deploy
non-utility services on a commercial scale. In addition, unless CellNet is
successful in deploying its wireless networks in targeted service areas, CellNet
may not be able to offer any such services in these areas or may be able to
offer these services only on a limited basis. If CellNet is unable to generate
significant revenue from such additional non-utility services, CellNet's ability
to service its indebtedness and to achieve profitability will be materially and
adversely affected.
OUR BUSINESS WILL ALSO BE SUBSTANTIALLY DEPENDENT ON OUR SUCCESS IN FORMING AND
MAINTAINING BUSINESS RELATIONSHIPS TO REACH CUSTOMERS FOR OUR SERVICES.
CellNet must form relationships with leading companies in order to expand
existing markets and enter new markets. These relationships are necessary to
obtain access to certain customers which we cannot otherwise reach economically
by ourselves. CellNet is currently investing, and plans to continue to invest,
significant resources to develop these relationships. CellNet believes that its
success in penetrating markets for utility and non-utility applications of its
network will depend in large part on its ability to maintain these relationships
and to cultivate additional or alternative relationships. If CellNet cannot
develop additional relationships with such companies, maintain existing
relationships or achieve the purpose
7
underlying such existing relationships or successfully discourage such companies
from forming competing arrangements, CellNet's business, operating results,
financial condition, cash flows and its ability to service its indebtedness
could be materially and adversely affected.
WE CANNOT ACCURATELY PREDICT THE TIMING OR AMOUNT OF OUR FUTURE REVENUES;
DEPLOYMENT COSTS WILL EXCEED REVENUES FOR AT LEAST SEVERAL YEARS.
The timing and amount of future revenues will depend almost entirely upon
(a) CellNet's ability to obtain new services agreements with established
utilities and other utility industry participants and (b) the successful
deployment and operation of CellNet's wireless data networks. CellNet expects to
install networks to support a "saturation deployment" strategy whereby the
network would cover all or a substantial portion of the meters in a utility's
designated service area pursuant to contract with that utility. CellNet also
expects to install networks to support a "broad deployment" strategy whereby the
network would be installed incrementally to cover service areas where the
largest consumers of energy or other utility services are located and where
CellNet expects to be able, over time, to secure an adequate number of service
contracts with non-utility clients, such as independent marketers and utility
customers, to justify network installation and operation. CellNet expects that
utilities and other parties will sign new services contracts for saturation or
broad deployments on an irregular basis.
Although broad deployment networks are deployed incrementally to meet
anticipated service requirements and to mitigate financial risks, CellNet
expects that such networks will be installed before a sufficient number of
service contracts are in hand to generate revenues adequate enough to cover the
costs of network construction and associated operating costs. The installation
of each saturation deployment network generally will require two to four years
after a services contract has been signed. Service revenues from both types of
such networks are not expected to exceed CellNet's capital investments and
expenses incurred to deploy and operate such networks for several years.
CellNet will not begin to receive recurring revenues under a services
contract until portions of the network become operational, which, for saturation
deployments, is expected to occur at least six months after the execution of the
applicable services contract. Although CellNet begins to incur capital
expenditures for the construction of networks used in broad deployments, it does
not begin to receive recurring revenues until portions of the network are
operating. Delays or difficulties in the network installation process will delay
our ability to earn revenue and increase deployment costs. The cost of network
deployments will vary based upon a wide variety of factors, including:
- radio frequency characteristics,
- the size of a service territory and density of endpoints within such
territory,
- cost of site leases,
- the nature and sophistication of services being provided,
- the spectrum acquisition costs,
- governmental approvals costs and fees, and
- local labor rates and other economic factors.
8
OUR OPERATING RESULTS WILL BE DIFFICULT TO PREDICT DUE TO SIGNIFICANT
FLUCTUATIONS.
CellNet's operating results will be difficult to predict because of
significant fluctuations due to a variety of factors, some of which are outside
of CellNet's control, including the following factors:
- the rate at which established utilities, other utility industry
participants and utility customers enter into new services contracts;
- capital expenditures and other costs relating to the expansion of
operations;
- the introduction of new services by CellNet or its competitors and the mix
of services sold;
- pricing changes and new service introductions by CellNet and its
competitors and prices charged by suppliers.
- the effects of governmental regulations and regulatory changes; and
- general economic conditions and economic conditions in the utility
industry.
Any of these factors could have a substantial impact on our operating
results in any given quarter. In addition, CellNet may elect from time to time
to make certain pricing, service or marketing decisions or enter into strategic
relationships or investments that could result in a material adverse effect on
CellNet's business, operating results, financial condition, cash flows and its
ability to service its indebtedness.
WE HAVE A SIGNIFICANT AMOUNT OF DEBT AND PREFERRED STOCK WHICH WILL REQUIRE US
TO GENERATE SUBSTANTIAL CASH FLOW IN ORDER TO SATISFY OUR OBLIGATIONS.
CellNet has substantial outstanding indebtedness, including $654.1 million
in aggregate principal amount due at maturity of 14% Senior Discount Notes due
2007 (the "1997 Notes"). CellNet will be required to pay cash interest on the
1997 Notes commencing April 1, 2003 and repay the 1997 Notes on October 1, 2007.
In May 1998, CellNet Funding LLC ("Funding"), a wholly-owned finance subsidiary
of CellNet, completed its offering of Preferred Securities, which will fully
accrete to a face value of $110.0 million on June 1, 2010. The Preferred
Securities bear a cumulative dividend at the rate of 7% per annum. Funding is
required to pay quarterly dividends in cash on the Preferred Securities through
June 1, 2001, and thereafter, in cash or shares of CellNet common stock, at the
option of Funding. The Preferred Securities are subject 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. CellNet has
issued Preferred Stock to Funding (the "CellNet Preferred Stock") and provided
the holders of the Preferred Securities certain guarantees of payment of
dividends, distributions, and redemptions. In November 1998, two wholly-owned
subsidiaries of CellNet each entered into the Revolving Credit Agreements with a
group of banks, which provide for borrowings of $60.0 million and $15.0 million,
respectively, through December 31, 2007, at which time the Revolving Credit
Agreements expire. Borrowings are secured by the wholly-owned subsidiaries'
assets, contracts and leases. Borrowings bear interest at the wholly-owned
subsidiaries' option at various rates based on the lead bank's prime rate, or
margins above the Federal Funds rate or LIBOR. At December 31, 1998, the
wholly-owned subsidiaries had outstanding advances totaling $31.4 million.
CellNet intends to incur substantial additional indebtedness to finance
operations and to install networks. As a result, CellNet will have a substantial
debt balance and related debt service obligations. CellNet's capital
expenditures will increase significantly if new services contracts are signed,
and CellNet expects that its cash flow, in part due to increased capital
expenditures, will be negative until such time as revenues exceed increased
capital and operating costs.
The ability of CellNet to meet its debt service requirements will depend
upon achieving significant and sustained growth in CellNet's cash flow, which
will be affected by a number of factors, including CellNet's success in
implementing its business strategy, prevailing economic conditions and
financial, business and
9
other factors, certain of which are beyond CellNet's control. CellNet's ability
to generate such cash flow is subject to a number of risks and contingencies,
including the following:
- CellNet may not obtain a sufficient number of new services contracts on
terms favorable to CellNet;
- network installations may not be completed on a timely basis;
- revenues may not be generated quickly enough to meet CellNet's operating
costs and debt service obligations;
- the operating and/or capital costs associated with the installation and
maintenance of CellNet's networks could be higher than projected;
- CellNet's wireless systems could experience performance problems; and
- the adoption of CellNet's services could be less widespread than
anticipated.
CellNet's operations may not generate sufficient cash flow or become
profitable on a timely basis, or at all. CellNet or its subsidiaries may not
have sufficient resources to meet their debt service obligations. If CellNet is
unable to generate sufficient cash flow or obtain sufficient liquidity to
service its indebtedness, CellNet will have to take actions which could
materially and adversely affect CellNet's business such as to reduce or delay
planned capital expenditures, sell assets, restructure or refinance its
indebtedness or seek additional equity capital. CellNet may not be able to
effect these strategies on satisfactory terms, if at all, and these strategies
may yield insufficient proceeds to make the required payments on any of
CellNet's indebtedness. In particular, there is a risk that CellNet would be
unable, if needed, to refinance the 1997 Notes prior to the date cash interest
payments become due and payable on the 1997 Notes or at their maturity date,
given uncertainty about prevailing capital market conditions, CellNet's then
performance and financial position and CellNet's projected high levels of
indebtedness. Such inability to refinance the 1997 Notes could result in
cross-defaults under other indebtedness and may limit CellNet's ability to meet
its obligations in respect of the CellNet Preferred Stock and Funding's ability
to meet its obligations in respect of the Preferred Securities.
WE WILL REQUIRE A SUBSTANTIAL AMOUNT OF CAPITAL IN THE FUTURE TO FINANCE OUR
OPERATIONS.
CellNet will require substantial additional funds for the development,
commercial deployment and expansion of its networks, and for funding operating
losses. As of March 31, 1999, CellNet had $54.8 million in cash, cash
equivalents and short-term investments. CellNet intends to raise a substantial
amount of additional capital in 1999 and expects that it will continue to
require substantial amounts of additional capital in the future. Depending upon
the number and timing of any new services agreements and upon the associated
network deployment costs and schedules, CellNet may require additional equity or
debt financing earlier than estimated in order to fund its working capital and
other requirements. Additional financing may not be available when required or,
if available, it may not be on terms satisfactory to CellNet. At our last annual
meeting of stockholders, our stockholders approved a proposal to amend our
certificate of incorporation to increase the amount of authorized shares that
may be issued. One of the reasons for increasing the authorized shares is to
enable us to raise funds from the sale of our securities. If we issue equity
securities, the ownership percentage of our stockholders would be reduced, and
the new equity securities may have rights, preferences or privileges senior to
those of existing holders of our common stock.
In the event that CellNet is unable to generate sufficient cash flow and is
otherwise unable to obtain funds necessary to meet required payments on its
indebtedness, CellNet could be in default under the terms of the agreements
governing its indebtedness. In the event of such default, the holders of such
indebtedness would have certain enforcement rights, including the right to
accelerate such debt and the right to commence an involuntary bankruptcy
proceeding against CellNet.
10
WE HAVE A HISTORY OF LOSSES AND WE EXPECT TO INCUR LOSSES IN THE FUTURE.
CellNet has incurred substantial and increasing operating losses since
inception. As of March 31, 1999, CellNet had an accumulated deficit of $460.6
million, primarily resulting from expenses incurred in the development of
CellNet's wireless data communications system, marketing of CellNet's wireless
network, distribution automation and other services, the installation of its
wireless data communications networks and the payment of other normal operating
costs.
CellNet does not expect to generate significant revenues relative to its
anticipated operating costs during 1999 and expects to incur substantial and
increasing operating losses and negative net cash flow after capital
expenditures for the foreseeable future. CellNet expects that its receipt of
network service revenues will lag the signing of the related services agreements
by a minimum of six months and that it will generally take two to four years to
complete installation of a network after each services agreement has been
signed. CellNet's network service revenues from a particular network are
expected to lag significantly behind network deployment and operating expenses
until such network is substantially complete. If CellNet is able to deploy
additional networks, the losses created by this lag in revenues are expected to
increase until the revenues from the installed networks overtake the costs
associated with the deployment and operation of such additional networks.
Accordingly, CellNet expects that operating activities will require the
consumption of substantial cash resources for the next several years.
WE EXPECT THAT SUBSTANTIAL AND INCREASING COMPETITION WILL MAKE IT HARDER TO
SIGN NETWORK SERVICES CONTRACTS FOR UTILITY AND NON-UTILITY APPLICATIONS.
Electronics, communications and utility product companies are beginning to
develop various wireless network meter reading systems as a result of the
deregulation of the electric utility industry and the potential market for other
applications once a common infrastructure is in place. A number of these systems
currently compete, and others may in the future compete, with the CellNet
system. Deregulation will likely cause competition to increase. CellNet believes
that at this time its most significant direct competitor in the marketplace is
Itron, an established manufacturer and seller of hand-held and drive-by
automated meter reading equipment for utilities. Itron is currently providing to
customers its Genesis-TM- system, a wireless radio network marketed as similar
to CellNet's for meter reading purposes.
There are other potential alternative solutions to CellNet's network meter
reading services including traditional wireless solutions. Mtel has announced
that it intends to adapt its technology to carry data from local area networks
operated by third parties who would offer residential services similar to
network meter reading some time in 1999, with the development of endpoint radios
and network management capabilities being left to other independent companies.
Whisper Communications now offers its True 2 Way-TM- fixed-based radio frequency
architecture communications technology for automated meter reading and other
services and has several trials and one deployment underway. Metricom, a
provider primarily of subscriber-based, wireless data communications for users
of portable and desktop computers, is currently involved in the automated meter
reading market through trials with Whisper Communications. Schlumberger is
working with a number of companies including CellNet, to conduct pilot trials of
utility network automation systems. Other wireless communications providers who
have entered the market for utility and commercial data services include
cellular control channel companies such as Cellemetry and Aeris Communications.
These companies offer low bandwidth services that compete with some of CellNet's
metering applications. Several companies are offering telephone-based network
automated meter reading services or equipment. Among these are Teldata, Inc. and
American Innovations. Bell South Wireless (formerly, Ram Mobile Data) offers
data services that may compete with a variety of CellNet's data services.
Established suppliers of equipment, services and technology to the utility
industry, such as Asea Brown Boveri and General Electric, could expand their
current product and service offerings so as to compete directly with CellNet
although they have not yet done so. Communications or technology companies may
also seek to adapt new or existing technology to serve this market.
11
Many of CellNet's present and potential future competitors have
substantially greater financial, marketing, technical and manufacturing
resources, name recognition and experience than CellNet. CellNet's competitors
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements or to devote greater resources to the development,
promotion and sale of their products and services than CellNet. While CellNet
believes its technology, including its software, is widely regarded as
competitive at the present time, CellNet's competitors may successfully develop
products, technologies or software that are better or more cost effective. In
addition, current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties that
increase their ability to address the needs of CellNet's prospective customers.
Accordingly, it is possible that new competitors or alliances among current and
new competitors may emerge and rapidly gain significant market share. In
addition, if CellNet achieves significant success it could draw additional
competitors into the market. Providers of wireless services may in the future
choose to enter CellNet's markets. Such existing and future competition could
materially and adversely affect the pricing for CellNet's services and CellNet's
ability to sign new services contracts and maintain existing agreements.
Competition for services relating to non-utility applications may be more
intense than competition for network meter reading services, and additional
competitors may emerge as CellNet continues to develop non-utility applications.
CellNet may be unable to compete successfully against current and future
competitors, and any failure to do so would have a material adverse effect on
CellNet's business, operating results, financial condition, cash flows and its
ability to service its indebtedness.
OUR TECHNOLOGY IS COMPLEX AND SUBJECT TO OBSOLESCENCE WHICH AFFECTS OUR ABILITY
TO SIGN NETWORK SERVICES CONTRACTS AND RAPIDLY DEPLOY OUR NETWORKS.
CellNet's initial target market is the monitoring, control and automation of
utilities' electric, gas and water meters and distribution networks. Unforeseen
problems may occur with respect to CellNet's technology, products or services,
and CellNet may not successfully complete the development and commercial
implementation of its technology on a wide scale. CellNet must continue to
expand and upgrade its ability to implement successfully its wireless networks.
CellNet may not be able to develop successfully a full range of endpoint
devices. If we encounter difficulties in successfully deploying networks, our
reputation will suffer which will make signing future contracts more difficult.
CellNet's future success will also depend, in part, on its ability to
enhance its existing hardware, software and wireless communications technology.
Significant technological advances occur rapidly and frequently in the
telecommunications industry. The advent of computer-linked electronic networks,
fiber optic transmission, advanced data digitization technology, cellular and
satellite communications capabilities, specialized mobile radio services and PCS
and other commercial mobile radio services have radically expanded
communications capabilities and market opportunities. Future advances may render
CellNet's technology obsolete or less cost effective than competitive systems or
erode CellNet's market position. Many companies from diverse industries are
seeking solutions for the transmission of data over traditional communications
media, including radio and paging, as well as more recently developed media such
as cellular and PCS-based networks. Competitors may be capable of offering
significant cost savings or other benefits to CellNet's customers. Consequently,
CellNet may be unable to offer competitive services or obtain appropriate new
technologies on a timely basis or on satisfactory terms. CellNet's future
performance will also depend significantly on its ability to respond to future
regulatory changes. Accordingly, CellNet must make continued substantial
investments to develop its technology. CellNet has encountered product
development delays in the past affecting both software and hardware components
of its system.
THE DELIVERY OF CELLNET'S SERVICES DEPENDS ON ITS ACCESS TO RADIO FREQUENCY
SPECTRUM WHICH IS COSTLY AND SUBJECT TO REGULATION BY THE FCC.
CellNet's network equipment uses radio spectrum for the transmission of data
over a radio frequency and, as such, is subject to regulation by the FCC.
CellNet attempts to obtain exclusive usage of licensed bandwidth by securing its
own Multiple Address System ("MAS") licenses in compliance with FCC
12
regulations in order to ensure the ability to deliver wireless data services on
a wide scale. These spectrum licenses are required by the FCC for the wireless
transmission of data over a specific radio frequency. CellNet has obtained
spectrum licenses in many of the largest Metropolitan Statistical Areas and
Consolidated Metropolitan Statistical Areas in the United States. As of December
31, 1998, CellNet had obtained a total of 154 spectrum licenses in 54 of the top
60 Metropolitan Statistical Areas/Consolidated Metropolitan Statistical Areas.
However, sufficient frequency spectrum available for MAS uses may not be
available to fully enable the delivery of all or a part of CellNet's wireless
based data services or CellNet may be required to find alternative frequencies.
The cost of obtaining such spectrum is currently difficult to estimate and may
involve time delays and/or increased cost to CellNet.
CellNet might not be able to obtain licenses for the spectrum it needs in
every area in which it has prospective customers. Issuance of these licenses is
contingent upon the availability of spectrum allocated for MAS uses in the
area(s) for which the licenses are requested. The FCC's current rules, subject
to a number of limited exceptions, permit third parties such as CellNet to
operate on spectrum licensed to utilities to provide other services. CellNet
plans to use these provisions of the FCC's rules to expand its network system.
For each MAS license granted to CellNet, the FCC requires that a minimum
configuration of an MAS radio system be in operation within eighteen months from
the initial date of the grant of the system authorization, or the MAS license
will be terminated. The eighteen-month deadline may be extended upon a showing
of good cause, but the FCC has discretion to deny any such extension. CellNet is
responding to this requirement by selectively building out transmission capacity
in some areas where it does not yet have utility telecommunications services
contracts, and may voluntarily return licenses to the FCC in certain other areas
rather than risk license termination.
CHANGES IN FCC REGULATION COULD LIMIT THE FUTURE AVAILABILITY OF RADIO FREQUENCY
SPECTRUM AND REQUIRE US TO OBTAIN LICENSES WHICH COULD BE COSTLY.
No license is needed to operate CellNet's equipment utilizing the 902-928
MHz band, although the equipment must be certified by CellNet and the FCC as
being compliant with certain FCC restrictions on radio frequency emissions
designed to protect licensed services from objectionable interference. While
CellNet believes it has obtained all required certifications for such products,
the FCC could modify the limits imposed on such products or otherwise impose new
authorization requirements. The FCC's rules accommodate the cohabitation in the
902-928 MHz band of existing licensed services with newly authorized and
expanded uses of licensed systems and existing and newly designed unlicensed
devices like those used by the Company. The FCC's rules expressly recognize the
rights of such unlicensed services to operate under certain delineated operating
parameters even if the potential for interference to the licensed operations
exists. The Company's systems will operate within those specified parameters.
The Commission is currently issuing new LMS licenses by competitive bidding for
the 902-928 MHz band; these new licenses, when issued, will authorize operation
of LMS systems in virtually all areas of the nation which are not currently
served by an LMS system. While the Company believes that the FCC's rules are
adequate to provide interference protection for its systems, the authorization
of additional LMS licenses may materially and adversely impact the Company's
operations in any given location.
CellNet intends to offer alternate market services over its private,
internal network. Some of those services may include the use of CellNet's
network by third partners as a private carrier service offering. CellNet's
offerings would be structured to comply with FCC rules restricting the offering
of private carrier services on private MAS networks, and each such service
offering would need to be reviewed relative to these rules. The FCC's rules
currently prohibit the use of the MAS frequencies on which CellNet is operating
for the provision of common carrier service offerings. In the event that it is
determined that a particular service offering is a common carrier service rather
than a private carrier service, CellNet may be required to restructure such
offering or to utilize other frequencies for the purpose of providing such
service. CellNet may not be able to gain access to such other frequencies.
Future interpretation of regulations by the FCC or changes in the regulation of
CellNet's industry by the FCC or other regulatory bodies or legislation by
Congress which changes the manner in which the MAS frequencies may be used by
13
CellNet could have a material adverse effect on CellNet's business, operating
results, financial condition, cash flows and its ability to service its
indebtedness.
In February 1997, the FCC published for public comment a Notice of Proposed
Rule Making in WT Docket No. 97-81 regarding the future licensing of frequencies
for use by Multiple Address Systems. The FCC reached certain tentative
conclusions which, if adopted, would restrict future licenses in the 928/952/956
MHz band (in which CellNet now operates its wide area network) to systems
exclusively used for private internal purposes and would prohibit future
licensing in this band for systems which provide "subscriber-based services". It
also would have adopted a system of geographic licensing (using very large
licensed service areas) in lieu of site-by-site licensing for the bands
designated for subscriber-based services; and would require the use of
competitive bidding to award licenses for subscriber-based services. While
existing licenses would be grandfathered and protected from interference to the
extent of their current service areas, further expansion would be severely
restricted.
These proposals received substantial public comment from a wide range of
industry sectors currently utilizing the multiple address radio system channels,
including extensive comments from CellNet. However, in August 1997, the FCC's
authority to utilize competitive bidding as a licensing mechanism was amended
and expanded by Congress in the Budget Act of 1997. Under this enactment, the
FCC must use competitive bidding procedures to choose between ANY mutually
exclusive applications, except where the radio frequency spectrum is being used
for public radio safety services. Thus, competitive bidding may be required for
channels used in private, internal networks, whether or not they are used to
provide "subscriber-based" services.
Congress included a very broad definition of "public radio safety services,"
to include private internal radio services used by state and local governments
and non-governmental entities, including emergency road services provided by
not-for-profit organizations that are used to protect the safety of life,
health, or property and that are not made commercially available to the public.
As a result, licensed systems that protect the safety of life, health, or
property and are not made commercially available to the public are not subject
to licensing by FCC auctions. In March 1999, the FCC published for public
comment a Notice of Proposed Rule Making in WT Docket No. 99-87, proposing
revised rules for the licensing of private services generally, including
Multiple Address Systems, as a result of enactment of the Balanced Budget Act of
1997 and the corresponding changes in the Commission's auction authority.
Comments are due in August and September, 1999. Specifically, the FCC seeks
comment on changes to its rules and policies for auction authority, the scope of
the Balanced Budget Act's exemption from competitive bidding for "public safety
radio services", regulatory provisions to ensure that auction exemptions meet
the statutory requirements, how to determine which wireless services fall under
the revised auction authority, and how to implement competitive bidding for
services selected for auction. The rule making in WT Docket 99-87 addresses
auction-related issues generally with requect to all private wireless services.
It is expected that the Commission will also be issuing a Further Notice of
Proposed Rule Making in WT Docket 97-81 to address issues related to
implementation of the new auction authority specifically as applied to Multiple
Address Systems.
While CellNet intends to address the issues raised in the general proceeding
in Docket 99-87, and the more specific issues addressing the licensing of MAS
spectrum in Docket 97-81, the Company cannot at this time predict the outcome of
either proceeding or how the final resolution of the proposals in either
proceeding, will impact the future availability or cost of licenses needed by
the Company. It is not certain whether CellNet's use of multiple address radio
system spectrum will subject its applications to the possibility of auctions or
will, instead, be considered a "public safety" use, or whether the Commission
will otherwise exempt the 928/952 MHz band in which CellNet currently operates
from circumstances in which mutual exclusivity between applicants for the same
license, requiring the use of auctions, is likely to exist. Given the
uncertainty surrounding the future regulations governing the licensing of the
MAS channels, it is possible that some or all of the Company's uses of the MAS
channels would be determined to restrict the ability to acquire additional
licenses in the 928/952 MHz band, thereby requiring the Company to develop
14
equipment capable of operating in one of the other MAS bands. It is also
possible that the Company may be required to obtain any future channels in the
928/952 MHz band or in any other MAS band for which the Company desires a
license from the FCC only through a competitive bidding assignment process.
Although CellNet believes that additional licensed frequency will be generally
available to it as required, the cost associated with acquiring such licensed
frequency as well as CellNet's operating costs could increase, perhaps
substantially, and CellNet could experience substantial delays in adapting its
networks if new rules were adopted. The adoption of new rules, depending upon
the form in which such rules are adopted, could have a material adverse effect
upon CellNet's business, operating results, financial condition, cash flows and
its ability to service its indebtedness.
In connection with the foregoing, the FCC has temporarily suspended
acceptance of multiple address radio system applications for new licenses, major
amendments, or major modifications for the 928/959 MHz bands and applications to
provide subscriber-based services in the 928/952/956 MHz bands. This temporary
suspension does not affect applications for multiple address radio system
licenses for private internal purposes in the 928/952/956 MHz bands or
applications for assignment of licenses or transfer of control. At the request
of CellNet, the FCC has determined that CellNet's current use of the multiple
address radio system spectrum constitutes the use as a private, internal
network, and so CellNet's applications for new licenses, and for major
modifications to existing licenses, are being processed in due course. CellNet's
future uses of the multiple address radio system spectrum may not similarly
qualify as a use in a private, internal network. The FCC may change or expand
its freeze on the processing of applications to recognize the impact of the new
auction legislation described above. In either case, CellNet's ability to obtain
new licenses could be materially and adversely affected, with similar
consequences on CellNet's ability to service areas where it has not yet acquired
adequate frequencies.
Finally, when CellNet acquires licenses assigned to other applicants, or
utilizes licenses issued in the past, CellNet is required to modify its licenses
to reflect more advanced technological parameters now utilized by CellNet and
its systems. CellNet has developed such amendments with the approval of the
FCC's staff and has received and anticipates continuing to receive timely grant
of all required modifications. However, a particular modification may not be
granted timely to CellNet's introduction of service on a particular license, and
the failure to obtain the required license modifications could have a material
adverse effect on CellNet's ability to serve areas covered by such unmodified
licenses.
WE ARE DEVELOPING BUSINESS OUTSIDE OF THE UNITED STATES WHICH EXPOSES US TO
INHERENT RISKS OF INTERNATIONAL BUSINESS.
CellNet is offering its network meter reading services in international
markets through BCN, its international joint venture with Bechtel Enterprises,
Inc. CellNet does not expect to generate material revenues from BCN's operations
during 1999. CellNet has incurred, and anticipates that it will continue to
incur, significant and increasing expenses in connection with the establishment
of international operations. If revenues generated by international activities,
including the proceeds from necessary financings, are not adequate to offset the
expense of establishing and maintaining these international activities,
CellNet's business, operating results, financial condition, cash flows and its
ability to service its indebtedness could be materially and adversely affected.
International demand for CellNet or BCN's services and systems may not
materialize, and where present, is likely to vary by country, based on many
factors including:
- the degree of regulation in a given country;
- competitive factors;
- demand for services;
- labor costs;
- the availability of spectrum and the costs of spectrum acquisition; and
- political and economic conditions.
15
In addition, CellNet may not be able to develop and implement localized
versions of its network meter reading system without significant effort and cost
due to many factors, including the differing standards among utilities on a
country-by-country basis. To date, CellNet has extremely limited experience in
developing a localized version of its wireless data communications system for
foreign markets. CellNet believes BCN's ability to establish business alliances
in each international market will be critical to its success. If BCN is
unsuccessful in developing, marketing and implementing its system in
international markets or in establishing successful business alliances for these
markets, BCN's future international operations could be materially and adversely
affected and, consequently, CellNet's business, operating results, financial
condition, cash flows and its ability to service its indebtedness could be
materially and adversely affected.
In addition, there are certain risks inherent in doing business
internationally, any of which could materially and adversely affect BCN's
potential international operations, including:
- changes in regulatory requirements, import/export restrictions, tariffs
and non-tariff trade barriers;
- the ability to obtain financing for the construction and operation of
networks;
- difficulties in staffing and managing foreign operations;
- longer payment cycles and problems in collecting accounts receivable;
- political conditions;
- fluctuations in currency exchange rates;
- potentially adverse tax consequences;
- legal and economic factors; and
- the ability to protect CellNet's intellectual property.
CellNet's strategy of pursuing international markets through BCN may involve
additional partners in particular countries. While BCN anticipates having a
majority interest and control over the Board of Directors of entities through
which business is carried out in foreign countries, in the event that this does
not occur, BCN may not have control over the operations and assets of such
entities. In any business venture in which CellNet or BCN may determine to
participate, there is a risk that the other venture partner may at any time have
economic, business or legal interests or goals that are inconsistent with those
of CellNet or BCN or that such partner will not impose the same or similar
accounting and financial controls as CellNet or BCN. In addition, an
international partner may be unable to meet its economic or other obligations
and CellNet or BCN may be required to fulfill those obligations. Furthermore,
the entity's structure or the laws of a foreign country may limit or
substantially tax the amount of funds that can be transferred to CellNet or BCN.
THE RAPID EXPANSION OF OUR BUSINESS HAS PLACED A STRAIN ON OUR MANAGEMENT,
PERSONNEL AND OTHER RESOURCES.
CellNet's recent growth has placed, and is expected to continue to place, a
significant strain on its managerial, operational and financial resources.
CellNet's ability to manage growth effectively will require it to continue to
implement and improve its operational and financial systems and to expand or
manage its employee base. CellNet's growth may require the addition of new
management personnel and the development of additional expertise by existing
management personnel. CellNet may be unable to effectively manage the expansion
of its operations. In addition, CellNet's systems, procedures or controls may be
inadequate to support CellNet's operations or Company management may be unable
to exploit opportunities for CellNet's services. An inability to manage growth,
if any, could have a material adverse effect on CellNet's business, operating
results, financial condition, cash flows and its ability to service its
indebtedness.
16
WE ARE DEPENDENT ON A LIMITED NUMBER OF KEY PERSONNEL WHO WOULD BE DIFFICULT TO
REPLACE.
The success of CellNet is substantially dependent on its key management and
technical personnel, the loss of one or more could materially and adversely
affect CellNet's business. Substantially all of CellNet's employees and officers
are employed on an at-will basis. Presently, CellNet does not maintain a "key
man" life insurance policy on any of its executives or employees. CellNet's
future success also depends on its continuing ability to identify, hire, train
and retain other highly qualified technical and managerial personnel.
Competition for such personnel is intense, and CellNet may be unable to attract
or retain highly qualified technical and managerial personnel in the future. If
CellNet is unable to attract and retain the necessary technical and managerial
personnel, CellNet's business, operating results, financial condition, cash
flows and its ability to service its indebtedness could be materially and
adversely affected.
DESPITE OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY, THIRD PARTIES MAY GAIN
ACCESS TO OUR PROPRIETARY TECHNOLOGY OR DEVELOP SUPERIOR TECHNOLOGY AND USE IT
TO COMPETE EFFECTIVELY AGAINST US.
CellNet relies on a combination of trade secret protection, copyright,
patent, trademark and confidentiality agreements and licensing arrangements to
establish and protect its proprietary rights. CellNet's success will depend in
part on its ability to maintain copyright and patent protection for its
products, to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties. While CellNet has obtained and applied for
patents, and intends to file other applications for patents covering its
products and processes, additional patents may not be issued or, if issued, may
not provide adequate protection of CellNet's proprietary rights. In addition,
any patents issued to CellNet or licensed by CellNet may be challenged,
invalidated or circumvented, and the patent rights may not adequately protect
CellNet's intellectual property rights.
Since United States patent applications are maintained in secrecy until
patents are issued, and since publication of inventions in the technical or
patent literature tend to lag behind such inventions by several months, CellNet
cannot be certain that it was the first creator of inventions covered by its
issued patents or pending patent applications, that it was the first to file
patent applications for such inventions or that no patent conflict will exist
with other products or processes which could compete with CellNet's products or
approach. Despite its efforts, CellNet may not be able to safeguard and maintain
these proprietary rights, and CellNet's competitors may independently develop
and patent technologies that are substantially equivalent or superior to
CellNet's technologies. Participants in the wireless industry, including
competitors of CellNet, typically seek to obtain patents which will provide as
broad a protection as possible for their products and processes. There is a
substantial backlog of patents pending at the United States Patent and Trademark
Office. The issuance of third-party patents could require CellNet to alter its
products or processes, obtain licenses or cease certain activities. An adverse
outcome with regard to a third-party patent infringement claim could subject
CellNet to significant liabilities, require disputed rights to be licensed or
restrict CellNet's ability to use such technology. CellNet also relies to a
substantial degree upon unpatented trade secrets. Others, including CellNet's
competitors, may independently develop or otherwise acquire substantially
equivalent trade secrets.
THIRD-PARTY CLAIMS REGARDING INTELLECTUAL PROPERTY COULD LIMIT OUR ABILITY TO
PROVIDE NETWORK SERVICES OR REQUIRE US TO OBTAIN LICENSES WHICH COULD BE
COSTLY.
Whether or not additional patents are issued to CellNet, others may receive
patents which contain claims applicable to products or processes developed by
CellNet. If any such claims were to be upheld, CellNet would require licenses.
Such licenses may not be available on acceptable terms, if at all. In addition,
CellNet could incur substantial costs in defending against suits brought against
it by others for infringement of intellectual property rights or in prosecuting
suits which CellNet might bring against other parties to protect its
intellectual property rights. From time to time CellNet receives inquiries with
respect to the coverage of its intellectual property rights, and inquiries could
develop into litigation.
17
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 judgment 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. These
rulings are subject to possible appeal by either or both of the parties. CellNet
has not yet determined its course of action in this regard. CellNet believes
that the ultimate outcome of the lawsuit is not expected to have a material
adverse effect on CellNet's business, 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 recently filed its notice of appeal in this
action.
WE ARE DEPENDENT ON THIRD-PARTY MANUFACTURERS.
CellNet relies and will continue to rely on outside parties to manufacture
most of its network equipment such as radio devices and printed circuit boards.
As CellNet signs additional services contracts, third party manufacturers must
significantly ramp-up the amount of manufacturing to be undertaken for CellNet
in order to enable CellNet to meet its contractual commitments. These
manufacturers may not be able to meet CellNet's manufacturing needs in a
satisfactory and timely manner. In addition, CellNet may be unable to obtain
additional manufacturers when and if needed. Although CellNet believes
alternative manufacturers are available, if CellNet is unable to develop
alternative suppliers quickly or cost-effectively, CellNet's ability to
manufacture and install systems could be impaired which would materially and
adversely affect CellNet's business, operating results, financial condition,
cash flows and its ability to service its indebtedness. CellNet's reliance on
third-party manufacturers involves a number of additional risks, including the
absence of guaranteed capacity and reduced control over delivery schedules,
quality assurance, production yields and costs. Although CellNet believes that
these manufacturers would have an economic incentive to perform such
manufacturing for CellNet, the quality, amount and timing of resources to be
devoted to these activities are not within the control of CellNet, and
manufacturing problems may occur in the future. A significant price increase, a
quality control problem, an interruption in supply from one or more of such
manufacturers or the inability to obtain additional manufacturers when and if
needed could have a material adverse effect on CellNet's business, operating
results, financial condition, cash flows and its ability to service its
indebtedness.
WE ARE EXPOSED TO THE RISK OF COMPONENT SHORTAGES.
CellNet purchases certain subassemblies, components and network equipment
from single sources or from a limited number of sources. CellNet may be affected
by general shortages of certain components, such as surface mounted integrated
circuits and memory chips. There have been shortages of such materials generally
in the marketplace from time to time in the past. CellNet's reliance on such
components and on a limited number of vendors and subcontractors involves
certain risks, including the possibility of shortages and reduced control over
delivery schedules, manufacturing capability, quality and cost. Some components
relied upon may have an excessive failure rate or inferior capabilities. A
significant price increase or interruption in supply from one or more of such
suppliers could have a material adverse effect on CellNet's business, operating
results, financial condition, cash flows and its ability to service its
indebtedness. Although CellNet believes alternative suppliers of subassemblies,
components and network equipment are available, the inability of CellNet to
develop alternative sources quickly or cost-effectively could materially impair
its ability to manufacture, install and maintain systems. Lead times can be as
long
18
as a year for certain components, which may require CellNet to use working
capital to purchase inventory significantly in advance of receiving any
revenues.
A significant number of new electric meters are required to initiate meter
retrofit and replacement in connection with each network deployment and to
replace existing meters in the field which are found to be obsolete, worn out or
otherwise unsuitable for retrofit and redeployment. Any sudden or material
increase in the number of deployments would result in an increase in the number
of new electric meters ordered by electric utilities and other utility industry
participants over and above those ordered on account of normal growth and
replacement within their service areas. To the extent that electric meter
manufacturers are unable or unwilling to increase production in line with such
increase in demand, temporarily or over a longer term, deployments may be
delayed or postponed, with the result that revenues from such deployments will
be likewise delayed or postponed. Similar situations could also arise in
connection with network deployments for gas and water meters.
SYSTEM FAILURES, DELAYS AND INADEQUACIES COULD SIGNIFICANTLY HARM OUR BUSINESS.
The performance, reliability and availability of CellNet's wireless data
networks are critical to CellNet's reputation and ability to attract and retain
customers and earn revenues from network meter reading services as well as
non-utility applications. These wireless data networks are vulnerable to damage
or interruption from fire, flood, earthquakes, storms and other similar events.
Any system failure that causes interruption in the availability of network
services whether caused by an act of God or not could result in a loss of
revenue and, if sustained or repeated, could reduce the attractiveness of
CellNet's services for future utilities or other customers. The occurrence of
any of the foregoing could have a material adverse effect on CellNet's business,
operating results, financial condition and cash flows and its ability to service
its indebtedness.
OUR BUSINESS IS SUBSTANTIALLY DEPENDENT ON SERVICE CONTRACTS WHICH ARE SUBJECT
TO CANCELLATION.
CellNet expects that a substantial portion of its future revenues will be
provided pursuant to services contracts of various kinds. These contracts will
generally be subject to cancellation or termination in certain circumstances or
in the event CellNet fails to meet in material respects the agreed network meter
reading and other performance standards on a consistent basis over agreed time
periods, subject to certain rights to cure any such failure. Each of CellNet's
existing utility services contracts provides for termination of such contracts
by the respective utility without cause in less than ten years, subject to
certain reimbursement provisions. In many instances, such contracts also provide
that CellNet will be required to compensate such utilities for the use of its
system for non-utility applications. Future services contracts with utilities
may contain similar provisions. Contracts with new power market participants
generally allow for termination without cause on thirty days prior written
notice except to the extent they have already ordered services under the
contract. In the event that such a services contract is terminated, CellNet may
incur substantial losses. In addition, CellNet's contracts with other utility
market participants will generally have shorter terms than CellNet's existing
utility contracts.
CellNet's current contracts with new power market participants generally
have terms of one to five years, compared to terms of ten to twenty years
generally with utilities. Since a network's service revenues are not expected to
exceed CellNet's capital investments to deploy such network for several years,
the termination or cancellation of one or more significant services contracts
would have a material adverse effect on CellNet's business, operating results,
financial condition, cash flows and its ability to service its indebtedness.
ALTHOUGH WE ARE NOT A SUPPLIER OF SOFTWARE, OUR BUSINESS COULD BE AFFECTED BY
YEAR 2000 ISSUES.
Many currently installed computer systems, software products and electronic
products are coded to accept only two-digit entries in the date code field.
These date code fields will need to accept four digit
19
entries to distinguish 21st century dates from 20th century dates. As a result,
during 1999 CellNet, its suppliers and customers and its potential suppliers and
customers, may need to upgrade, repair or replace certain equipment computer
systems or software to ensure that its operations will not be adversely impacted
by system failures related to "Year 2000" noncompliance.
CellNet is in the process of conducting an internal and external review of
all of its systems and contacting all material software and other suppliers to
determine any major areas of exposure of its systems to Year 2000 issues. As a
result of the internal review to date, CellNet believes that its wireless data
networks, through which it provides network meter reading and other services to
its customers, are Year 2000 compliant. As a result of the external review to
date, CellNet believes that its material suppliers will be Year 2000 compliant
by the year 2000.
To date, CellNet has spent an immaterial amount and does not expect to spend
a material amount to review and remedy Year 2000 compliance problems. Although
CellNet believes that its wireless data networks, through which it provides
network meter reading and other services to its customers, are Year 2000
compliant, failure to provide Year 2000 compliant business solutions to its
customers or to receive such business solutions from its suppliers could result
in liability to CellNet or otherwise have a material adverse effect on CellNet's
business, operating results, financial condition, cash flows and its ability to
service its indebtedness. Furthermore, CellNet believes that the purchasing
patterns of customers and potential customers may be affected by Year 2000
issues as companies expend significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase products and services such as those
offered by CellNet, which could result in a material adverse effect on CellNet's
business, operating results, financial condition, cash flows and its ability to
services its indebtedness.
WE ARE BOUND BY ITS SHAREHOLDERS' AGREEMENT WHICH PROVIDES CERTAIN STOCKHOLDERS
GREATER INFLUENCE OVER MANAGEMENT.
Under the terms of a Shareholders' Agreement among CellNet and certain
stockholders of CellNet (the "Shareholders' Agreement"), so long as certain
parties to the Shareholders' Agreement continue to hold not less than 700,000
shares of common stock (as such number is adjusted for stock splits,
consolidations or other similar events), CellNet is obligated to nominate for
election representatives of certain stockholders as directors at each meeting of
CellNet's stockholders at which a vote for directors will be taken. The effect
of the Shareholders' Agreement is to give certain stockholders greater influence
over the management of CellNet than they would otherwise have and to provide
certain stockholders with, among other things, certain registration, first
refusal, co-sale and other rights.
WE COULD BE SUBJECT TO SECURITIES ACTIONS AND OTHER LITIGATION, WHICH IF OCCURS,
WILL DISTRACT MANAGEMENT, RESULT IN SUBSTANTIAL COSTS AND HARM OUR BUSINESS.
In the past, securities class action litigation has often been filed against
companies for various reasons, including after periods of volatility in the
market price of their securities. We have been and may be the target of similar
litigation in the future. Securities litigation could result in substantial
costs and divert management's attention and resources, which could cause serious
harm to our business.
The consolidated complaint of Jere Settle and Karen Zully v. John M. Seidl,
et al., No. 398464, filed in the Superior Court of California for the County of
San Mateo, is a purported class action on behalf of CellNet's stockholders
against CellNet, certain of its officers and directors and underwriters of
CellNet's initial public offering seeking unspecified damages and rescission for
alleged liability under various provisions of the federal securities law and
California state law. The plaintiffs alleged generally that the Prospectus and
Registration Statement dated September 26, 1996, pursuant to which CellNet
issued 5,000,000 shares of common stock to the public, contained materially
misleading statements and/or omissions in that CellNet was obligated to
disclose, but failed to disclose, that a patent conflict with
20
Itron, Inc. was likely to ensue. The complaint was dismissed on February 9,
1998, without leave to amend. Plaintiffs filed an appeal in the California Court
of Appeal, which is pending. In the opinion of CellNet, the ultimate outcome of
the appeal is not expected to have a material adverse effect on CellNet's
business, operating results, financial condition and cash flows.
OUR STOCK PRICE MAY BE VOLATILE OR THINLY TRADED WHICH MIGHT MAKE IT HARD FOR
INVESTORS TO SELL THEIR SHARES.
The trading price of CellNet's common stock has been highly volatile since
CellNet's initial public offering and an active market for our stock may not be
sustained. Our stock price is likely to continue to be subject to wide
fluctuations in response to a variety of factors, including:
- quarterly variations in operating results;
- signing new services contracts or securing new customers;
- consolidations in the industry;
- technological innovations or the introduction of new products by CellNet
or its competitors;
- developments in patents or other intellectual property rights;
- general conditions in the network meter reading services industry and
other industries in which CellNet's services are provided;
- comments or recommendations issued by analysts who follow CellNet and its
competitors; and
- general economic and market conditions.
In addition, in some future period CellNet's operating results could be
below the expectations of public market analysts and investors. In such event,
the price of CellNet's common stock could be materially and adversely affected.
Additionally, the stock market in general, and the market for technology stocks
in particular, have recently experienced extreme price and volume fluctuations
that are not related to the operating performance of particular companies. These
broad market fluctuations could have a significant impact on the market price of
the common stock and the Preferred Securities.
WE HAVE NOT DECLARED DIVIDENDS ON OUR COMMON STOCK AND ARE RESTRICTED FROM DOING
SO IN THE FUTURE.
CellNet has not declared or paid any dividends on its common stock since its
inception. CellNet currently anticipates that it will retain all of its future
earnings, if any, for use in the operation and expansion of its business and
does not anticipate paying any cash dividends on the common stock in the
foreseeable future. In addition, CellNet's existing financing arrangements
restrict the payment of any dividends on the common stock.
FUTURE SALES OF OUR STOCK MAY DEPRESS OUR STOCK PRICE.
A substantial portion of CellNet's common stock is presently eligible for
immediate sale in the public market subject, in the case of certain shares, to
the limitations of Rules 144, 144(k) or 701 under the Securities Act. In
addition, the holders of a significant number of such shares of common stock are
entitled to certain registration rights with respect to such shares and the
number of shares sold in the public market could increase substantially upon
exercise of such registration rights. If our stockholders sell substantial
amounts of our common stock in the public market, the market price of our common
stock could substantially decline.
THE PREFERRED SECURITIES OF OUR SUBSIDIARY EXPOSES US TO PAYMENT OBLIGATIONS.
In May 1998, Funding, a wholly-owned finance subsidiary of CellNet,
completed an offering of Preferred Securities which will fully accrete to a face
value of $110.0 million on June 1, 2010. The Preferred
21
Securities bear a cumulative dividend at the rate of 7% per annum. Funding has
purchased Treasury Strips sufficient in amount to pay cash dividends on the
Preferred Securities through June 1, 2001 and has deposited the Treasury Strips
in escrow with the Escrow Agent for the benefit of the holders of the Preferred
Securities. Funding is required to pay quarterly dividends in cash on the
Preferred Securities through June 1, 2001, and thereafter, in cash or shares of
CellNet common stock, at the option of Funding. The first two dividend payments
were made on September 1 and December 1, 1998 in the amount of $2.2 million and
$1.9 million, respectively. The Preferred Securities are subject 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. CellNet has provided the holders of the Preferred Securities certain
guarantees of payment of dividends, distributions, and redemptions. The
Preferred Securities involve a high degree of risk, and accordingly, reference
must be made to the Risk Factors and other cautionary statements set forth in
the Registration Statement on Form S-3 in respect of the Preferred Securities
and in Funding's Reports on Form 10-K and Form 10-Q and other filings by Funding
with the Securities and Exchange Commission.
WE HAVE CERTAIN ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN
ACQUISITION OF OUR COMPANY.
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 after the Record
Date (subject to subsequent expiration). The Rights allow stockholders to
purchase a number of shares of CellNet's common stock having a then current
market value of twice the exercise price of the Right. These Rights become
exercisable in the event a third party attempts to acquire a substantial amount
of stock of CellNet or otherwise attempts to acquire CellNet without the board
of directors' authorization.
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 CellNet's common stock and the Preferred
Securities.
22
USE OF PROCEEDS
CellNet expects to receive up to $127,877,993 in gross proceeds from
exercise of all outstanding Warrants. CellNet expects to use the net proceeds
received from this offering (a) to fund continuing research and development
activities related to its wireless data communications systems, (b) to expand
opportunities for the use of its wireless data communications systems through
alternate market applications, (c) to enhance the performance and lower the
component and operating cost of its wireless data communications systems, (d) to
continue investing in an international joint venture with Bechtel Enterprises,
Inc. for the deployment of its wireless data communications systems on a
worldwide basis, (e) to fund the adaptation and migration of its technology for
use outside the United States, (f) to support network deployment for both
utility and non-utility applications, (g) to expand CellNet's business
generally, and (h) for working capital, general corporate and other purposes
permitted by the Indenture governing the 1997 Notes.
PLAN OF DISTRIBUTION
The price of the common stock offered hereby is based on the exercise price
of the Warrants as provided in the Warrant Agreement. Certain of CellNet's
executive officers will participate in the sale of the Warrant Shares to holders
upon exercise of the Warrants. These participants, who will not receive any
compensation for these activities, will not be deemed to brokers pursuant to
Rule 3a4-1 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and will merely ensure compliance with CellNet's obligations under the
Warrant Agreement in connection with the issuance of Warrant Shares upon
exercise of the Warrants. CellNet will not pay any finder's fee or commission in
connection with the offering hereby of Warrant Shares in connection with the
exercise of Warrants. CellNet will pay all of the expenses incident to the
offering of Warrant Shares which are estimated to be approximately $83,050.
The Warrants may be exercised for cash or on a cashless basis any time
before the expiration date on October 1, 2007. Any holder electing to exercise
on a cashless basis will receive the number of Warrant Shares equal to the
product of the number of Warrant Shares for which the Warrant is exercisable and
the Cashless Exercise Ratio as defined in the Warrant Agreement. The "Cashless
Exercise Ratio" is defined in Section 2.2(c) of the Warrant Agreement as a
fraction, the numerator of which is the excess of the Current Market Value of
the common stock on the date of exercise over the exercise price per share as of
the date of exercise and the denominator of which is the Current Market Value of
the common stock on the date of exercise. The "Current Market Value" per share
of the Warrant Shares is defined in Section 5.1(n) of the Warrant Agreement as
the average of the daily closing bid prices for each business day during the
period commencing 15 business days before such date and ending on the date one
day prior to such date or, if the security has been registered under the
Exchange Act for less than 15 consecutive business days before such date, then
the average of the daily closing bid prices for all of the business days before
such date for which daily closing bid prices are available. If the closing bid
is not determinable for at least 10 business days in such period, the Current
Market Value of the security shall be determined reasonably and in good faith by
a disinterested majority of the Board of Directors of CellNet and certified in a
board resolution, or, if at the time there are not at least three disinterested
members of the Board of Directors, by a nationally recognized investment banking
firm or appraisal firm which is not an affiliate of CellNet.
Delivery of the Warrant Shares upon exercise of a Warrant will be made to
the holder immediately following receipt by CellNet of the original Warrant
certificate, an election to exercise (which is set forth on the reverse side of
the Warrant certificate) duly completed and signed by the registered holder or
holders thereof (an "Election to Exercise"), and full payment of the aggregate
exercise price if the exercise is on a cash basis. If a Warrant is currently
held by the Depository Trust Company in global form, the holder must, by written
request, request the Warrant Agent to issue the holder a definitive Warrant
certificate which may then be delivered to CellNet upon exercise thereof. Upon
receipt by CellNet of the Warrant certificate and Election to Exercise and
collection of the aggregate exercise price, if applicable,
23
such Warrant certificate and any such payment must be delivered by CellNet
immediately to the Warrant Agent. The exercise date shall be deemed to be the
date the Warrant Agent receives the foregoing items, and the Warrant Agent upon
determining that such exercise has been timely, shall then promptly remit
payment of the exercise price, if any, to CellNet and advise CellNet with
respect to delivery of Warrant Shares to the holder. CellNet as soon thereafter
as practicable must issue or cause the issuance of the appropriate number of
Warrant Shares to such holder and such Warrant Shares. Any such Warrant Shares
issued in connection with a timely exercise will be shares of CellNet's Common
Stock which have been registered under the Securities Act as provided in the
Warrant Agreement and are expected to be listed on the Nasdaq National Market.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon by Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California,
counsel to CellNet.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference from CellNet's Annual Report on Form 10-K for the year ended December
31, 1998 have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, which is incorporated herein by reference, and have been
so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Accordingly, we file annual,
quarterly and special reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). You may read and copy any
document that we file at the SEC's public reference rooms in Washington, D.C.,
New York, New York, and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. You can obtain copies of
our SEC filings at prescribed rates from the SEC Public Reference Section at 450
Fifth Street, N.W., Washington, D.C. 20549. Our SEC filings are also available
to you free of charge at the SEC's web site at http://www.sec.gov.
Shares of our common stock are traded as "National Market Securities" on the
Nasdaq National Market. Documents we file can be inspected at the offices of the
National Association of Securities Dealers, Inc., Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006.
This Prospectus is a part of a Registration Statement on Form S-3 (together
with all amendments and exhibits, referred to as the "Registration Statement")
filed by us with the SEC under the Securities Act of 1993, as amended. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the SEC. For further information with respect to us and the
shares of Common Stock offered hereby, please refer to the Registration
Statement. The Registration Statement may be inspected at the public reference
facilities maintained by the SEC at the addresses set forth above. Statements in
this Prospectus about any document filed as an exhibit are not necessarily
complete and, in each instance, you should refer to the copy of such document
filed with the SEC. Each such statement is qualified in its entirety by such
reference.
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this Prospectus, and information that we file later
24
with the SEC will automatically update and supersede previously filed
information, including information contained in this Prospectus.
We incorporate by reference the documents listed below and any future
filings we will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act until this offering has been completed:
(1) Our Annual Report on Form 10-K for the fiscal year ended December
31, 1998;
(2) Our Quarterly Report on Form 10-Q for the quarter ended March 31,
1999; and
(3) The description of our common stock contained in the Registration
Statement on Form 8-A which was filed on September 23, 1996, and in the
Registration Statement on Form 8-A filed on December 9, 1998, each of which
was filed pursuant to Section 12 of the Exchange Act, and any amendment or
report filed for the purpose of updating such description.
You may request a free copy of these documents by writing to Investor
Relations, CellNet Data Systems, Inc., 125 Shoreway Road, San Carlos, CA 94070,
or by calling our Investor Relations department at (650) 508-6000.
You should rely only on the information incorporated by reference or
provided in this Prospectus or a prospectus supplement or amendment. We have not
authorized anyone to provide you with different information. This Prospectus
does not offer these securities in any state where the offer is not permitted.
Also, this Prospectus does not offer to sell any securities other than the
securities covered by this Prospectus. You should not assume that the
information in this Prospectus or a prospectus supplement or amendment is
accurate as of any date other than the date on the front of the document.
25
WE HAVE NOT AUTHORIZED ANY PERSON TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION THAT DIFFERS FROM WHAT IS IN THIS PROSPECTUS. IF ANY PERSON DOES
MAKE A STATEMENT THAT DIFFERS FROM WHAT IS IN THIS PROSPECTUS, YOU SHOULD NOT
RELY ON IT. THIS PROSPECTUS IS NOT AN OFFER TO SELL, NOR IS IT SEEKING AN OFFER
TO BUY, ANY SECURITY OTHER THAN THE SHARES OFFERED HEREBY. THIS PROSPECTUS IS
NOT AN OFFER TO SELL, NOR IS IT SEEKING AN OFFER TO BUY, THESE SHARES IN ANY
JURISDICTION IN WHICH THE OFFER OR SALE IS PROHIBITED. THE INFORMATION IN THIS
PROSPECTUS IS COMPLETE AND ACCURATE AS OF ITS DATE, BUT THE INFORMATION MAY
CHANGE AFTER THAT DATE.
------------------------
TABLE OF CONTENTS
PAGE
-----
The Company................................................................................................ 3
Risk Factors............................................................................................... 6
Use of Proceeds............................................................................................ 23
Plan of Distribution....................................................................................... 23
Legal Matters.............................................................................................. 24
Experts.................................................................................................... 24
Where You Can Find More Information........................................................................ 24
Information Incorporated by Reference...................................................................... 24
------------------------
CELLNET DATA SYSTEMS, INC.
8,942,517 SHARES
OF
COMMON STOCK
---------------------
PROSPECTUS
---------------------
JUNE , 1999
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
CellNet will pay all expenses incident to the offering and sale to the
public of the shares being registered other than any commissions and discounts
of underwriters, dealers or agents and any transfer taxes. Such expenses are set
forth in the following table. All of the amounts shown are estimates except the
SEC registration fee and the Nasdaq National Market listing fee.
SEC registration fee............................................... $ 35,550
NASDAQ National Market listing fee................................. 17,500
Legal fees and expenses............................................ 15,000
Accounting fees and expenses....................................... 10,000
Miscellaneous expenses............................................. 5,000
---------
Total............................................................ $ 83,050
---------
---------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware provides
that a corporation has the power to indemnify a director, officer, employee or
agent of the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he or she is or is threatened
to be made a party by reason of such position, if such person has acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the corporation, and, in any criminal proceeding, if such
person had no reasonable cause to believe his or her conduct was unlawful;
provided that, in the case of actions brought by or in the right of the
corporation, no indemnification may be made with respect to any matter as to
which such person has been adjudged to be liable to the corporation unless and
only to the extent that the adjudicating court determines that such
indemnification is proper under the circumstances.
The Registrant's Certificate of Incorporation provides that no director will
be personally liable to the Registrant or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Registrant or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for authorizing the payment of a
dividend or repurchase of stock or (iv) for any transaction in which the
director derived an improper personal benefit.
The Registrant's by-laws provide that the Registrant must indemnify any
person who was or is a party or is threatened to be made a party 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 the Registrant) by reason of the fact that he or she is or was a
director or officer of the Registrant, or that such director or officer is or
was serving at the request of the Registrant as a director, officer, employee or
agent of another corporation, partnership, joint venture trust or other
enterprise (collectively "Agent"), against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the Registrant, which approval may not be unreasonably withheld)
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding if he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, will not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
or she reasonably believed
II-1
to be in or not opposed to the best interests of the Registrant, and with
respect to any criminal action or proceeding, had reasonable cause to believe
that his or her conduct was unlawful.
The Registrant's by-laws provide further that the Registrant must indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Registrant to procure a judgment in its favor by reason of the fact that he or
she is or was an Agent against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection with the defense or settlement
of such action or suit if he or she acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
Registrant, provided that no indemnification may be made in respect of any
claim, issue or matter as to which such person has been adjudged to be liable to
the Registrant unless and only to the extent that the Delaware Court of Chancery
or the court in which such action or suit was brought determines upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court deems proper.
Pursuant to its by-laws, the Registrant has the power to purchase and
maintain a directors and officers liability policy to insure its officers and
directors against certain liabilities.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the Registrant has been
informed 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.
ITEM 16. EXHIBITS.
Please see Index of Exhibits on Page II-5 below.
ITEM 17. UNDERTAKINGS.
A. UNDERTAKING PURSUANT TO RULE 415.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3)
Securities Act of 1933 (the "Securities Act");
(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. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective Registration Statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
II-2
PROVIDED, HOWEVER, that paragraphs A(1)(i) and A(1)(ii) do not apply if
the Registration Statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act") that are incorporated by reference in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, 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;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of this offering.
B. UNDERTAKING REGARDING FILINGS INCORPORATING SUBSEQUENT EXCHANGE ACT
DOCUMENTS BY REFERENCE.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement 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.
C. UNDERTAKING IN RESPECT OF INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the Securities 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 SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
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 amendment of the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Carlos, California, on this 9(th) day of
June, 1999.
CELLNET DATA SYSTEMS, INC.
By: /s/ PAUL G. MANCA
-----------------------------------------
Paul G. Manca,
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints John T.
LaMacchia and David L. Perry, jointly and severally, as attorneys-in-fact, each
with the power of substitution, for him or her in any and all capacities, to
sign any amendment to this Registration Statement and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting to said attorneys-in-fact, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact or any of them, or their or his
or her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on the
9(th) day of June, 1999 in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
------------------------------------------ ---------------------------------------------- ---------------
/s/ JOHN T. LAMACCHIA
--------------------------------- President, Chief Executive Officer and June 14, 1999
John T. LaMacchia Director (Principal Executive Officer)
/s/ PAUL G. MANCA
--------------------------------- Vice President and Chief Financial Officer June 14, 1999
Paul G. Manca (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has
been signed by the following persons in the capacities and on the dates indicated:
*
--------------------------------- Director June 14, 1999
John M. Seidl
*
--------------------------------- Director June 14, 1999
Neal M. Douglas
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SIGNATURE TITLE DATE
------------------------------------------ ---------------------------------------------- ---------------
*
--------------------------------- Director June 14, 1999
E. Linn Draper, Jr.
*
--------------------------------- Director June 14, 1999
William C. Edwards
*
--------------------------------- Director June 14, 1999
William Hart
*By:
/s/ DAVID L. PERRY
--------------------------------- Attorney-in-Fact June 14, 1999
David L. Perry
II-5
INDEX OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
2.1* Warrant Agreement between the Registrant and The Bank of New York dated as of September 29, 1997.
2.2* Warrant Registration Rights Agreement between and among the Registrant, Morgan Stanley & Co., Inc. and
Donaldson, Lufkin & Jenrette Securities Corp. dated as of September 24, 1997.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney (included on page II-5).
- ------------------------
* Incorporated by reference to CellNet's Registration Statement on Form S-4,
filed with the SEC on October 15, 1997.
** Previously filed with this Registration Statement.