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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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OR
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<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-21409
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CELLNET FUNDING, L.L.C.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 94-3298620
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or Number)
organization)
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125 SHOREWAY ROAD
SAN CARLOS, CALIFORNIA 94070
(Address of principal executive offices, including zip code)
(650) 508-6000
(Registrant's Telephone Number, Including Area Code)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. Yes /X/ No / /
As of November 12, 1998, one share of Common Limited Liability Company
Securities was issued and outstanding, which is beneficially owned by CellNet
Data Systems, Inc., and 4,400,000 shares of 7% Exchangeable Limited Liability
Company Preferred Securities were issued and outstanding.
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TABLE OF CONTENTS
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION............................................................................ 3
Item 1. Financial Statements (Unaudited)........................................................ 3
Condensed Balance Sheet--As of September 30, 1998....................................... 3
Condensed Statements of Operations--Three Months Ended September 30, 1998 and Period May 4
13, 1998 (inception) to September 30, 1998..............................................
Condensed Statements of Cash Flows--Period May 13, 1998 (inception) to September 30, 5
1998....................................................................................
Notes to Condensed Financial Statements................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 12
PART II. OTHER INFORMATION............................................................................... 13
Item 1. Legal Proceedings....................................................................... 13
Item 2. Changes in Securities and Use of Proceeds............................................... 13
Item 3. Defaults upon Senior Securities......................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders..................................... 13
Item 5. Other Information....................................................................... 13
Item 6. Exhibits and Reports on Form 8-K........................................................ 13
SIGNATURE................................................................................................ 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CELLNET FUNDING, L.L.C.
CONDENSED BALANCE SHEET
(IN THOUSANDS)
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SEPTEMBER 30,
1998
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ASSETS:
Investment in CellNet Preferred Stock.............................................................. $ 95,957
Restricted cash (Note 2)........................................................................... 19,649
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Total assets....................................................................................... $ 115,606
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LIABILITIES AND STOCKHOLDER'S EQUITY:
Accrued dividends.................................................................................. $ 642
Payable to Parent.................................................................................. 612
Mandatorily Redeemable Preferred Securities (Note 2)............................................... $ 106,062
STOCKHOLDER'S EQUITY:
Common limited liability security outstanding...................................................... $ 10
Additional paid-in capital......................................................................... 8,341
Accumulated deficit................................................................................ (61)
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Total stockholder's equity....................................................................... 8,290
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Total liabilities and stockholder's equity......................................................... $ 115,606
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See accompanying notes to condensed financial statements.
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CELLNET FUNDING, L.L.C.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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FOR THE
PERIOD MAY
13, 1998
(INCEPTION)
THROUGH
THREE MONTHS ENDED SEPTEMBER 30,
SEPTEMBER 30, 1998 1998
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Interest income.............................................................. $ 291 $ 427
Dividend income.............................................................. 2,457 2,457
Dividends and accretion on preferred securities.............................. (2,007) (2,945)
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Net loss..................................................................... $ (741) $ (61)
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See accompanying notes to condensed financial statements.
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CELLNET FUNDING, L.L.C.
CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
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FOR THE
PERIOD MAY
13, 1998
(INCEPTION)
THROUGH
SEPTEMBER 30,
1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................................... $ (61)
Adjustments to reconcile net loss to net cash used in operating activities:
Accretion on preferred securities.................................................................. 122
Changes in:
Accrued dividends.................................................................................. 642
Interest income receivable......................................................................... (398)
Dividend income receivable......................................................................... (2,457)
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Net cash used for operating activities............................................................. (2,152)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Parent preferred stock................................................................. (93,500)
Restriction of cash associated with Treasury Strips................................................ (21,433)
Proceeds from maturity of restricted cash.......................................................... 2,182
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Net cash used for investing activities............................................................. (112,751)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred securities..................................................... 105,940
Proceeds from sale of common liability security.................................................... 10
Additional paid-in capital from Parent............................................................. 8,341
Payable to Parent.................................................................................. 612
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Net cash provided by financing activities.......................................................... 114,903
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NET CHANGE IN CASH................................................................................. --
CASH, beginning of period.......................................................................... --
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CASH, end of period................................................................................ $ --
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................................................. $ --
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Cash paid for income taxes......................................................................... $ --
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See accompanying notes to condensed financial statements.
5
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CELLNET FUNDING, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
CellNet Funding, L.L.C. ("Funding") is a special purpose limited liability
company formed under the laws of the State of Delaware on May 13, 1998 as a
wholly-owned subsidiary of CellNet Data Systems, Inc. (the "Company" or
"CellNet"). Funding exists for the exclusive purposes of issuing its Preferred
Securities (see Note 2), investing the proceeds of the sale thereof in the
Company's preferred stock and restricted cash and engaging in those other
activities necessary or incidental thereto. In the opinion of management, these
unaudited condensed financial statements include all adjustments, consisting of
normal recurring adjustments and accruals considered necessary for a fair
presentation of Funding's financial position as of September 30, 1998 and the
results of operations and cash flows for the three months ended September 30,
1998 and the period from May 13, 1998 (inception) through September 30, 1998.
This unaudited interim information should be read in conjunction with the
audited consolidated financial statements of the Company and the notes thereto
for the year ended December 31, 1997. Operating results for the three months
ended September 30, 1998 and the period May 13, 1998 (inception) through
September 30, 1998 are not necessarily indicative of the results that may be
expected for the period May 13, 1998 (inception) through December 31, 1998.
2. MANDATORILY REDEEMABLE PREFERRED SECURITIES
During May 1998, Funding completed the sale of Preferred Securities for
gross proceeds of $110,000,000. Net proceeds from the offering, after offering
costs, were approximately $105,940,000. The recorded amount of the Preferred
Securities will fully accrete to the face value of $110,000,000 on June 1, 2010.
The restricted cash at September 30, 1998 of approximately $19,649,000 includes
the proceeds of the offering which are designated for the payment of cash
dividends on the Preferred Securities through June 1, 2001. Funding invested the
restricted cash in U.S. Treasury strips ("Treasury Strips") which were placed in
escrow upon the closing of the offering of the Preferred Securities. The
Treasury Strips have been pledged to The Bank of New York as escrow agent (the
"Escrow Agent") pursuant to an escrow agreement for the benefit of the holders
of the Preferred Securities. The Escrow Agent is required under the Escrow
Agreement to release from escrow amounts sufficient to pay quarterly dividends
on the Preferred Securities through September 1, 2001.
The Preferred Securities consist of 4,400,000 exchangeable preferred
securities of Funding that bear a cumulative dividend at the rate of 7% per
annum. The dividend is paid quarterly in arrears each March 1, June 1, September
1 and December 1, and commenced September 1, 1998. The dividend is payable in
cash through June 1, 2001 and thereafter, by cash or shares of CellNet common
stock, at the option of Funding. The first dividend payment was made on
September 1, 1998 in the amount of $2,182,000.
The Preferred Securities are exchangeable at any time prior to June 1, 2010,
at the option of the holders, into CellNet common stock, at a rate of 1.8328
shares of common stock per Preferred Security, or $13.64 per share, subject to
adjustment. On or prior to June 1, 2001, the Preferred Securities must be
automatically exchanged for common stock of the Company at an exchange price of
$13.64 per share in the event the Current Market Value (which is a formula as
defined in the Written Action of the Manager of Funding, the "Written Action")
of the Company's common stock equals or exceeds the following percentage of the
exchange price, for at least 20 days of any 30-day trading period during the 12
month period ending prior to June 1 of the indicated year: 170% prior to June 1,
1999; 160% from June 1, 1999 through June 1, 2000; and 150% from June 2, 2000 up
to and prior to June 1, 2001. The Preferred Securities are subject to mandatory
redemption on June 1, 2010 at a redemption price of 100% of the
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CELLNET FUNDING, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
2. MANDATORILY REDEEMABLE PREFERRED SECURITIES (CONTINUED)
liquidation preference of the Preferred Securities, plus accrued and unpaid
dividends, if any. Funding may redeem, at its option, the Preferred Securities,
in whole or in part, at any time on or after June 1, 2001 at certain redemption
prices equal to a percentage of the liquidation preference (set forth in the
Written Action) which declines each year until maturity of the Preferred
Securities, together with accrued and unpaid dividends, if any.
Pursuant to and to the extent set forth in the guarantee of the Preferred
Securities (the "Guarantee") by the Company for the benefit of the holders of
Preferred Securities, CellNet has agreed to pay in full to the holders of the
Preferred Securities (except to the extent paid by Funding), as and when due,
regardless of any defense, right of set off or counterclaim which Funding may
have or assert, the following payments (the "Guarantee Payments"), without
duplication: (i) any accrued and unpaid distributions that are required to be
paid on the Preferred Securities, to the extent Funding has sufficient funds
legally available therefor, (ii) the redemption price, with respect to any
Preferred Securities called for redemption by Funding, to the extent Funding has
sufficient funds legally available therefor, and (iii) upon a voluntary or
involuntary dissolution, winding-up or termination of Funding, the lesser of (a)
the aggregate of the liquidation preference and all accrued and unpaid dividends
on the Preferred Securities to the date of payment to the extent Funding has
sufficient funds legally available therefor and (b) the amount of assets of
Funding remaining for distribution to holders of Preferred Securities upon the
liquidation of Funding. The Guarantee may also be subject to contractual
restrictions under agreements governing future indebtedness of the Company.
On May 19, 1998 Funding applied $93,500,000, 85% of the net proceeds from
the offering of the Preferred Securities, to purchase $93,500,000 of CellNet
Data Systems, Inc. Preferred Stock (the "CellNet Preferred Stock") which pays
dividends each March 1, June 1, September 1 and December 1 in additional shares
of CellNet Preferred Stock through June 1, 2001. Subsequent to June 1, 2001,
dividends are payable in cash or shares of the Company's common stock, at the
option of CellNet. The CellNet Preferred Stock is exchangeable, at the option of
Funding, at any time prior to June 1, 2010 into shares of Company common stock
at an exchange rate based on the exchange rate of the Preferred Securities. The
CellNet Preferred Stock is subject to mandatory redemption on June 1, 2010.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS SECTION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO, INFORMATION WITH REGARD TO
FUNDING'S FINANCING ACTIVITIES AND THE PAYMENT OF DIVIDENDS ON ITS SECURITIES.
FUNDING'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS SET FORTH IN "RISK
FACTORS" AND ELSEWHERE IN THIS REPORT. AS A WHOLLY-OWNED SUBSIDIARY OF CELLNET
DATA SYSTEMS, INC. WITH NO INDEPENDENT OPERATIONS, FUNDING'S SUCCESS IS ENTIRELY
DEPENDENT ON THE SUCCESS OF ITS PARENT, AND ACCORDINGLY, REFERENCE MUST ALSO BE
MADE TO THE RISK FACTORS AND OTHER CAUTIONARY STATEMENTS SET FORTH IN CELLNET
DATA SYSTEMS' ANNUAL REPORT ON FORM 10-K, QUARTERLY REPORTS ON FORM 10-Q AND
OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
CellNet Funding, L.L.C. ("Funding") is a special purpose limited liability
company formed under the laws of the State of Delaware on May 13, 1998 as a
wholly-owned subsidiary of CellNet Data Systems, Inc. ("CellNet" or the
"Company"). Funding has no independent operations and exists for the exclusive
purposes of issuing 7% Exchangeable Preferred Securities Mandatorily Redeemable
2010 (the "Preferred Securities"), investing the proceeds of the sale thereof
and engaging in other activities necessary or incidental thereto. During May
1998, Funding completed the sale of Preferred Securities for gross proceeds of
$110.0 million. Net proceeds from the offering, after offering costs, were
approximately $105.9 million.
The Preferred Securities consist of 4,400,000 exchangeable preferred
securities of Funding that bear a cumulative dividend at the rate of 7% per
annum. The dividend is paid quarterly in arrears each March 1, June 1, September
1 and December 1, and commenced September 1, 1998. The dividend is payable in
cash through June 1, 2001 and thereafter, by cash or shares of CellNet common
stock, at the option of Funding. The Preferred Securities are exchangeable at
any time prior to June 1, 2010, at the option of the holders, into CellNet
common stock, at a rate of 1.8328 shares of common stock per Preferred Security,
or $13.64 per share, subject to adjustment. On or prior to June 1, 2001, the
Preferred Securities must be automatically exchanged for common stock of the
Company at an exchange price of $13.64 per share in the event the Current Market
Value (which is a formula as defined in the Written Action of the Manager of
Funding, the "Written Action") of the Company's common stock equals or exceeds
the following percentage of the exchange price, for at least 20 days of any
30-day trading period during the 12 month period ending prior to June 1 of the
indicated year: 170% prior to June 1, 1999; 160% from June 1, 1999 through June
1, 2000; and 150% from June 2, 2000 up to and prior to June 1, 2001. 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. Funding may redeem, at
its option, the Preferred Securities, in whole or in part, at any time on or
after June 1, 2001 at certain redemption prices equal to a percentage of the
liquidation preference (set forth in the Written Action) which declines each
year until maturity of the Preferred Securities, together with accrued and
unpaid dividends, if any.
Pursuant to and to the extent set forth in the guarantee of the Preferred
Securities (the "Guarantee") by the Company for the benefit of the holders of
Preferred Securities, CellNet has agreed to pay in full to the holders of the
Preferred Securities (except to the extent paid by Funding), as and when due,
regardless of any defense, right of set off or counterclaim which Funding may
have or assert, the following payments, without duplication: (i) any accrued and
unpaid distributions that are required to be paid on the Preferred Securities,
to the extent Funding has sufficient funds legally available thereof, (ii) the
redemption price, with respect to any Preferred Securities called for redemption
by Funding, to the extent Funding has sufficient funds legally available
therefor, and (iii) upon a voluntary or involuntary dissolution, winding-up or
termination of Funding, the lesser of (a) the aggregate of the liquidation
preference and all accrued and unpaid dividends on the Preferred Securities to
the date of payment to the extent Funding has sufficient funds legally available
therefor and (b) the amount of assets of Funding remaining for distribution to
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holders of Preferred Securities upon the liquidation of Funding. The Guarantee
may also be subject to contractual restrictions under agreements governing
future indebtedness of the Company.
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. Funding may redeem, at
its option, the Preferred Securities, in whole or in part, at any time on or
after June 1, 2001 at certain redemption prices equal to a percentage of the
liquidation preference (set forth in the Written Action) which declines each
year until maturity of the Preferred Securities, together with accrued and
unpaid dividends, if any.
RESULTS OF OPERATIONS
Funding is a wholly-owned finance subsidiary of CellNet, has no independent
operations, and exists for the purposes of issuing Preferred Securities and
investing the proceeds from the sale thereof and engaging in other activities
necessary or incidental thereto. The restricted cash at September 30, 1998 of
approximately $19.6 million includes a portion of the proceeds of the offering
of Preferred Securities which are designated for the payment of cash dividends
through June 1, 2001. Funding invested the restricted cash in U.S. Treasury
strips ("Treasury Strips") which were placed in escrow upon the closing of the
offering of the Preferred Securities. For the three months ended September 30,
1998, Funding earned interest on the amounts invested in Treasury Strips of
$291,000 and accrued dividends on the CellNet Preferred Stock of approximately
$2.5 million (which will be paid in additional shares of CellNet Preferred
Stock). For the three months ended September 30, 1998, Funding incurred $2.0
million in dividend expense and accretion on the Preferred Securities, for an
aggregate net loss of $741,000. During the period of inception of Funding
through September 30, 1998, Funding earned $427,000 of interest on the amounts
invested in Treasury Strips, accrued dividend income of $2.5 million on the
CellNet Preferred Stock and incurred $2.9 million of dividend expense and
accretion on the Preferred Securities, for an aggregate net loss of $61,000.
Funding expects the dividend income to be approximately $1.6 million per
quarter, absent conversions or redemption of the CellNet Preferred Stock.
Funding expects that dividend expenses will be approximately $1.9 million per
quarter, absent conversions or redemptions of the Preferred Securities.
LIQUIDITY AND CAPITAL RESOURCES
During May 1998, Funding completed the sale of Preferred Securities for
gross proceeds of $110.0 million. Net proceeds from the offering, after offering
costs, were approximately $105.9 million. The amount recorded as equity for the
Preferred Securities will fully accrete to the face value of $110.0 million on
June 1, 2010.
The restricted cash at September 30, 1998 of approximately $19.6 million
includes the proceeds of the offering which are designated for the payment of
cash dividends on the Preferred Securities through June 1, 2001. Funding
invested the restricted cash in Treasury Strips which were placed in escrow upon
the closing of the offering of the Preferred Securities. On May 19, 1998,
Funding applied $93.5 million, 85% of the net proceeds from the offering of the
Preferred Securities, to purchase $93.5 million of CellNet Preferred Stock (the
"CellNet Preferred Stock") which pays dividends each March 1, June 1, September
1 and December 1 in additional shares of CellNet Preferred Stock through June 1,
2001. Subsequent to June 1, 2001, dividends are payable in cash or shares of
common stock, at the option of CellNet. The CellNet Preferred Stock is
exchangeable, at the option of Funding, at any time prior to June 1, 2010 into
shares of common stock at an exchange rate based on the exchange rate of the
Preferred Securities. The CellNet Preferred Stock is subject to mandatory
redemption on June 1, 2010.
The Preferred Securities bear a cumulative dividend at the rate of 7% per
annum which must be paid quarterly in arrears each March 1, June 1, September 1
and December 1, and commenced September 1, 1998. The dividend is payable in cash
through June 1, 2001 and thereafter, by cash or shares of CellNet common stock,
at the option of Funding. The Treasury Strips have been pledged to The Bank of
New York
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as escrow agent (the "Escrow Agent") pursuant to an escrow agreement for the
benefit of the holders of the Preferred Securities. The Escrow Agent is required
under the Escrow Agreement to release from escrow amounts sufficient to pay
quarterly dividends on the Preferred Securities through September 1, 2001.
Funding paid its first dividend in the aggregate amount of $2.2 million on
September 1, 1998.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
FUNDING IS A WHOLLY-OWNED FINANCE SUBSIDIARY OF CELLNET, HAS NO INDEPENDENT
OPERATIONS AND EXISTS FOR THE PURPOSES OF ISSUING PREFERRED SECURITIES AND
INVESTING THE PROCEEDS FROM THE SALE THEREOF AND ENGAGING IN OTHER ACTIVITIES
NECESSARY OR INCIDENTAL THERETO. THE SUCCESS OF FUNDING IS COMPLETELY DEPENDENT
UPON THE SUCCESS OF CELLNET, AND ACCORDINGLY, REFERENCE MUST BE MADE TO THE RISK
FACTORS AND OTHER CAUTIONARY STATEMENTS SET FORTH IN CELLNET'S ANNUAL REPORT ON
FORM 10-K, QUARTERLY REPORTS ON FORM 10-Q AND OTHER FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION.
NO OPERATIONS OF FUNDING
Funding, the issuer of the Preferred Securities, is a special purpose
subsidiary of CellNet which is a newly formed Delaware limited liability company
with no operations or assets other than the CellNet Preferred Stock and Treasury
Strips which were purchased with the proceeds of the offering of the Preferred
Securities. Funding will have no other funds to pay cash dividends. In order to
pay subsequent dividends, Funding will be dependent on CellNet (i) to distribute
cash dividends in respect of the CellNet Preferred Stock (which distribution is
restricted by the terms of the indenture governing the 1997 Notes (the
"Indenture")), (ii) provide to Funding funds, or (iii) issue to Funding common
stock (which is required by the terms of the CellNet Preferred Stock). Funding's
assets will consist almost entirely of its interest in the CellNet Preferred
Stock and the Treasury Strips.
NO PRACTICAL BENEFIT TO HOLDERS FROM THE GUARANTEE
CellNet will guarantee the payment in full to the holders of the Preferred
Securities of (i) accrued and unpaid dividends on the Preferred Securities, if
and only to the extent Funding has funds sufficient and legally available
therefor to make such payment, (ii) the redemption price with respect to the
Preferred Securities redeemed, if and only to the extent Funding has funds
sufficient and legally available therefor to make such payment, and (iii) upon a
voluntary termination or involuntary dissolution, winding-up or termination of
Funding (other than in connection with a redemption of all of the Preferred
Securities), the lesser of (a) the aggregate of the liquidation preference and
all accrued and unpaid dividends on the Preferred Securities to the date of
payment, to the extent Funding has funds sufficient and legally available
therefor to make such payment, and (b) the amount of assets of Funding remaining
available for distribution to holders of the Preferred Securities upon
liquidation of Funding. The Guarantee may also be subject to contractual
restrictions under agreements governing future indebtedness of CellNet.
Because the obligations supported by the Guarantee are limited by the amount
of the funds in Funding, if CellNet were to default on its obligation to pay
amounts payable on the CellNet Preferred Stock, Funding would lack available
funds for the payment of dividends or amounts payable on redemption of the
Preferred Securities or otherwise, and, in such event, holders of the Preferred
Securities would not be able to rely upon the Guarantee for payment of such
amounts. In addition, upon the initiation of any proceedings by or against
Funding under bankruptcy, insolvency or similar laws, or upon the occurrence of
certain other events, funds held by Funding may not be legally available for
distribution to the holders of the Preferred Securities and the holders would
then not be able to rely on the Guarantee for payment of such amounts.
Because the obligations supported by the Guarantee are limited to the amount
of the funds held by Funding that are legally available to make the payments
described above and because the Guarantee is
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subordinated to CellNet's existing and future obligations not expressly
subordinated to the Guarantee, the Guarantee is of no practical benefit to
holders of the Preferred Securities.
RANKING OF CELLNET PREFERRED STOCK; PRIOR PAYMENT OBLIGATIONS OF CELLNET;
UNCERTAINTY OF REDEMPTION
The CellNet Preferred Stock will be subordinated to all existing and future
indebtedness and other liabilities of CellNet, and will, with respect to
dividend distributions and distributions upon the liquidation, winding-up or
dissolution of CellNet, rank senior to all common stock and senior to or PARI
PASSU with all other capital stock of CellNet. There are no terms in the CellNet
Preferred Stock, the Preferred Securities or the Guarantee that limit CellNet's
ability to incur additional indebtedness or issue PARI PASSU preferred stock. As
of September 30, 1998, the Company had approximately $303.9 million of senior
indebtedness outstanding and no preferred stock outstanding other than the
CellNet Preferred Stock issued to Funding. CellNet has authorized the issuance
of up to 15 million shares of preferred stock. The Indenture permits CellNet to
incur substantial additional indebtedness and issue additional preferred stock.
Any new indebtedness incurred by CellNet, any securities issued to refinance
existing indebtedness and any future issuances of new series of CellNet
preferred stock may prohibit or restrict the redemption of the CellNet Preferred
Stock for cash, thus effectively prohibiting or restricting Funding's ability to
redeem the Preferred Securities for cash.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
PARTNERSHIP STATUS
Funding's ability to pay dividends on Preferred Securities depends, in part,
on the classification and treatment of Funding as a partnership for federal
income tax purposes. Assuming the accuracy of certain factual matters as to
which Funding has made representations, counsel is of the opinion that, under
current law, Funding will be classified and treated as a partnership for federal
income tax purposes. No ruling from the Internal Revenue Service (the "IRS") as
to such classification or treatment has been or is expected to be requested.
Instead, Funding intends to rely on such opinion of counsel (which is not
binding on the IRS).
If Funding were classified or treated as an association taxable as a
corporation for federal income tax purposes, Funding would pay tax on its income
at corporate rates (currently a maximum 35% federal rate), distributions would
generally be taxed again to the holders of Preferred Securities as corporate
distributions, and no income, gains, losses or deductions would flow through to
the holders of Preferred Securities. Because a tax would be imposed upon Funding
as an entity, the cash available for distribution to the holders of Preferred
Securities would be substantially reduced. Classification or treatment of
Funding as an association taxable as a corporation or otherwise as a taxable
entity would result in a material reduction in the anticipated cash flow and
after-tax return of the holders of Preferred Securities and thus would likely
result in a substantial reduction in the value of Preferred Securities.
FUNDING ALLOCATIONS
It is possible that a holder of Preferred Securities may receive allocations
of taxable income without matching cash distributions. Furthermore, a holder who
disposes of Preferred Securities between record dates for dividends may be
required pursuant to Funding's method of allocation to include its pro rata
share of Funding's income (and deductions) through the end of the applicable
fiscal period in which such disposition occurs in the holder's calculation of
taxable income (and to add such amount to (or subtract such amount from) the
adjusted tax basis in the holder's Preferred Securities) without receiving the
dividend for the quarter in which such disposition occurs. Furthermore, certain
allocation methods used by Funding may be challenged by the IRS, which may
result in greater tax liability to holders of Preferred Securities during their
period of ownership or upon disposition.
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DISPOSITION OF PREFERRED SECURITIES
A holder that sells Preferred Securities will recognize gain or loss equal
to the difference between the amount realized and its adjusted tax basis in such
Preferred Securities. Thus, prior Funding distributions in excess of cumulative
net taxable income in respect of Preferred Securities which decreased a holder's
tax basis in such Preferred Securities will, in effect, become taxable income or
gain if the Preferred Securities are sold at a price greater than the holder's
tax basis in such Preferred Securities, even if the price is less than such
holder's original cost. To the extent the selling price is less than the
holder's adjusted tax basis, a holder will recognize a capital loss. Subject to
certain limited exceptions, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes.
LIMITED VOTING RIGHTS
Generally, holders of the Preferred Securities do not have any voting
rights. However, the vote of a majority of the Preferred Securities is required
to approve any amendment to the Operating Agreement governing Funding or any
proposed action by Funding that would (i) have a material adverse effect on the
powers, preferences or special rights of the holders of the Preferred Securities
or (ii) cause the dissolution, winding-up or termination of Funding. The
approval of the holders of a majority of the CellNet Preferred Stock is required
to approve any change to CellNet's charter or any proposed action by CellNet
that would (i) have a material adverse effect on the powers, preferences or
special rights of the holder of the CellNet Preferred Stock or (ii) cause the
dissolution, winding-up or termination of Funding. Funding is expected to be the
sole holder of the CellNet Preferred Stock. Funding has agreed not to grant such
approval without the consent of the holders of a majority of the Preferred
Securities then outstanding.
ANTI-TAKEOVER PROVISIONS
The Board of Directors of CellNet, without further stockholder approval, can
issue preferred shares with dividend, liquidation, conversion, voting, exchange
or other rights which could adversely affect the voting power or other rights of
the holders of the common stock. In the event of issuance, the preferred shares
could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change of control of CellNet. In addition, the Company
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 the Company. Furthermore, upon a change of
control, the holders of substantially all of the Company's outstanding
indebtedness are entitled, at their option, to be repaid in cash and the holders
of CellNet's preferred stock may, at their option, require CellNet to redeem
their shares for cash. Such provisions may have the effect of delaying or
preventing changes in control or management of the Company. All of these factors
could materially adversely affect the price of the Preferred Securities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE
- ----------- ----------------------------------------------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
(b) Reports of Form 8-K
There were no reports on Form 8-K filed during the quarter ended September
30, 1998.
13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
CELLNET FUNDING, L.L.C.
Date: November 12, 1998 By: /s/ PAUL G. MANCA
------------------------------------------
Paul G. Manca
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
</TABLE>
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAY-13-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 115,606
<CURRENT-LIABILITIES> (642)
<BONDS> 0
(106,062)
0
<COMMON> (10)
<OTHER-SE> (8,341)
<TOTAL-LIABILITY-AND-EQUITY> (115,606)
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (2,945)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (61)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
