<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K
(Mark
One) /X/ Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
December 31, 1998
OR
/ / Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
to
Commission File Number 000-21409
CELLNET FUNDING, LLC
(Exact name of registrant as specified in its charter)
Delaware 94-3298620
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
125 Shoreway Road, San Carlos, California 94070
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 508-6000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act
EXCHANGEABLE LIMITED LIABILITY COMPANY PREFERRED SECURITIES,
$25 Liquidation Preference
(Title of Class)
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
filing requirements for the past 90 days. /X/ YES / / NO.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
There are 4,400,000 outstanding 7% Exchangeable Limited Liability Company
Preferred Securities Mandatorily Redeemable June 1, 2010 (the "Redeemable
Preferred Securites"). No affiliates of CellNet Data Systems, Inc. or
CellNet Funding, LLC currently holds any Redeemable Preferred Securities.
All of the issued and outstanding common securities of CellNet Funding,
LLC are owned by CellNet Data Systems, Inc.
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
PART I
Item 1. Business 3
Item 2. Properties 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 4
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 5
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 8
Item 8. Financial Statements and Supplementary Data 9
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 19
PART III
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions. 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 20
SIGNATURES 22
</TABLE>
-2-
<PAGE>
PART I
ITEM 1. BUSINESS
THIS ITEM CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. FUNDING'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS
AS A RESULT OF CERTAIN FACTORS SET FORTH IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" UNDER "RISK
FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE" AND ELSEWHERE IN THIS
REPORT.
GENERAL
CellNet Funding, LLC ("Funding") is a special purpose limited liability
company formed on April 21, 1998 under the laws of the State of Delaware.
Funding's principal executive offices are located at 125 Shoreway Road, San
Carlos, California 94070. All of the common securities of Funding (the
"Common Securities") are owned by CellNet Data Systems, Inc. ("CellNet").
CellNet is a Delaware corporation that files annual, quarterly and current
reports with the Securities and Exchange Commission. CellNet's Commission
File Number is 0-21409.
Pursuant to the terms of the Amended and Restated Limited Liability
Company Agreement of Funding, dated as of May 13, 1998 (the "LLC Agreement"),
Funding was formed solely for the purposes of: (i) issuing limited liability
interests of Funding, (ii) using at least 85% of the net proceeds of such
issuances together with related capital contributions to purchase shares of
preferred stock of CellNet ("CellNet Preferred Stock") in a private
placement, (iii) investing 15% of the proceeds from its offering of Preferred
Securities in U.S. Treasury securities ("Treasury Strips"), to be held in
escrow in an amount sufficient to fund the cash payments of the first twelve
quarterly dividends on Funding's preferred securities (the "Redeemable
Preferred Securities"), and (iv) entering into, making and performing all
contracts and other undertakings, and taking any and all actions to or for
the furtherance of the purposes of Funding. Unless previously dissolved,
Funding's term will continue until December 31, 2050.
CellNet is the sole member of Funding that holds common securities.
CellNet is also the Manager of Funding, and as such, manages the business and
affairs of Funding. CellNet does not receive any compensation for performing
such management services. Additionally, all of Funding's administrative
expenses, which are insignificant, are paid by CellNet.
Funding does not manufacture or sell any products, does not provide any
services to any party and does not intend to enter into any business, other
than complying with its obligations under the Redeemable Preferred Securities
and effecting the purposes as set forth in the LLC Agreement.
For financial information about Funding, see the financial statements
included in response to Items 6 and 8 of Part II of this Annual Report on
Form 10-K.
-3-
<PAGE>
KEY TRANSACTIONS DURING FISCAL 1998
On May 13, 1998, Funding completed the sale of 4.4 million shares of its
Redeemable Preferred Securities for gross proceeds of $110.0 million. On May
19, 1998, CellNet made a capital contribution of $8.3 million. Funding
recorded the contribution as additional paid-in capital.
On May 19, 1998, Funding used the proceeds from the registered offering
of the Redeemable Preferred Securities, along with the capital contribution
described above to purchase approximately $93.5 million of CellNet Preferred
Stock and $21.4 million in Treasury Strips. The CellNet Preferred Stock
cumulates dividends each March 1, June 1, September 1 and December 1,
commencing on September 1, 1998 and through June 1, 2010 payable in
additional shares of CellNet Preferred Stock through June 1, 2001. Subsequent
to June 1, 2001, dividends on the CellNet Preferred Stock are payable in cash
or shares of CellNet Common Stock or any combination of cash and shares of
CellNet Common Stock, at the option of CellNet. The CellNet Preferred Stock
is exchangeable, at the option of Funding, at any time prior to June 1, 2010
into shares of CellNet Common Stock at an exchange rate based on the exchange
rate of the Redeemable Preferred Securities. At the option of CellNet, the
CellNet Preferred Stock is redeemable up to two business days prior to June
1, 2010.
ITEM 2. PROPERTIES
At December 31, 1998, Funding's property consisted of: (i) Treasury
Strips in the amount of approximately $18.0 million held in escrow to pay
quarterly cash dividends on the Redeemable Preferred Securities; (ii) CellNet
Preferred Stock in the amount of $93.5 million; and (iii) a receivable for
preferred dividends earned on the CellNet Preferred Stock of approximately
$4.1 million. Funding does not own any real property.
ITEM 3. LEGAL PROCEEDINGS
Funding is not a party to any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
-4-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITYHOLDER
MATTERS.
To date, all issued and outstanding Common Securities of Funding are
held by CellNet. There exists no established public trading market for
Funding's Common Securities. CellNet purchased the Common Securities on May
13, 1998 in a private placement pursuant to Section 4(2) of the Securities
Act of 1933, as amended (the "1933 Act"). Since the formation of Funding and
CellNet's initial capital investment for the Common Securities, there have
been no sales or transfers of Common Securities of Funding. No cash dividends
have been declared on the Common Securities of Funding.
On May 13, 1998, Funding completed a registered public offering of 4.4
million shares of the Redeemable Preferred Securities for an aggregate gross
cash offering price of $110.0 million.
The Redeemable Preferred Securities are mandatorily redeemable by
Funding on June 1, 2010 at the liquidation preference of $25.00 per security,
plus accrued and unpaid dividends. Dividends on the Redeemable Preferred
Securities are cumulative at the rate of 7% per annum and are payable in cash
through June 1, 2001 and, thereafter, in cash, shares of CellNet Common
Stock or some combination of cash and shares of CellNet Common Stock, at the
option of Funding, provided that to the extent available, any dividend
payment must be made with cash.
Funding's Redeemable Preferred Securities trade on the Nasdaq National
Market under the symbol "CNDSP." The following table sets forth, for the
periods indicated, the range of the low and high sales prices for Funding's
Redeemable Preferred Securities as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
HIGH LOW
- -------------------------------------------------------------------------------
<S> <C> <C>
Fiscal 1998
Second Quarter (from May 15, 1998) $25.00 $22.50
Third Quarter 23.25 16.00
Fourth Quarter 17.13 12.00
- -------------------------------------------------------------------------------
Fiscal 1999
First Quarter (through March 29, 1999) $19.50 $12.50
- -------------------------------------------------------------------------------
</TABLE>
As of March 29, 1999, there was one holder of record of Funding's
Redeemable Preferred Securities. On March 29, 1999, the last reported sale
price on the Nasdaq National Market for the Funding's Redeemable Preferred
Securities was $13.75. The market for Funding's Redeemable Preferred
Securities is highly volatile.
Effective August 15, 1998 and November 16, 1998, Funding declared cash
dividends in the amount of $0.495833 and $0.4375 per Redeemable Preferred
Security to holders of record at the close of business on August 15, 1998 and
November 16, 1998, respectively, which were paid on September 1, 1998 and
December 1, 1998, respectively. In accordance with their terms, the
Redeemable Preferred Securities shall bear a cumulative dividend at the rate
of 7% per annum. Such dividend is paid quarterly in arrears each March 1,
June 1, September 1 and December 1. The dividend is payable in cash through
June 1, 2001, and thereafter, in cash or shares of CellNet common stock, at
the option of Funding. Funding's existing financing arrangements restrict the
payment of any dividends other than those described above.
-5-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the period from April 21, 1998 (inception) to
December 31, 1998 has been derived from the audited financial statements of
Funding. The information set forth below should be read in conjunction with the
financial statements of Funding and the notes thereto included elsewhere in this
Annual Report. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
Period from
April 21, 1998
(inception) to
December 31,
1998
--------------
(in thousands)
<S> <C>
Statement of Operations Data:
Interest income $ 687
Dividend income from Parent preferred stock 4,106
-------------
Income before dividends and accretion on
preferred securities 4,793
Dividends and accretion on preferred securities (4,951)
-------------
Net loss applicable to common member $ (158)
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
December 31,
1998
-------------
(in thousands)
<S> <C>
Balance Sheet Data:
Dividends receivable from Parent $ 4,106
Investment in CellNet Preferred Stock 93,500
Restricted cash 17,984
Total assets 115,590
Accrued dividends payable to preferred security holders 642
Payable to Parent 564
Mandatorily redeemable preferred securities 106,191
Total member's equity 8,193
</TABLE>
-6-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Funding is a special purpose limited liability company formed under the
laws of the State of Delaware on April 21, 1998 as a wholly-owned subsidiary
of CellNet. Funding has no independent operations and exists for the
exclusive purposes of selling the Redeemable Preferred Securities, investing
the proceeds of the sale thereof and engaging in other incidental activities.
During May 1998, Funding completed the sale of the Redeemable Preferred
Securities for gross proceeds of $110.0 million. Net proceeds from the
offering, after offering costs, were approximately $106.0 million.
The Redeemable Preferred Securities consist of 4,400,000 exchangeable
preferred securities of Funding that bear a cumulative dividend at the rate
of 7% per annum. The dividend is paid quarterly in arrears each March 1, June
1, September 1 and December 1, and commenced September 1, 1998. The dividend
is payable in cash through June 1, 2001 and thereafter, by cash or shares of
CellNet Common Stock, at the option of Funding. The Redeemable Preferred
Securities are exchangeable at any time prior to June 1, 2010, at the option
of the holders, into CellNet Common Stock, at a rate of 1.8328 shares of
Common Stock per Redeemable Preferred Security, or $13.64 per share, subject
to adjustment. On or prior to June 1, 2001, the Redeemable Preferred
Securities must be automatically exchanged for CellNet Common Stock at an
exchange price of $13.64 per share in the event the Current Market Value
(which is a formula as defined in the Written Action of the Manager of
Funding, the "Written Action") of the CellNet Common Stock equals or exceeds
the following percentage of the exchange price, for at least 20 days of any
30-day trading period during the 12 month period ending on June 1 of the
indicated year: 170% on or prior to June 1, 1999; 160% from June 2, 1999
through June 1, 2000; and 150% from June 2, 2000 through June 1, 2001. The
Redeemable Preferred Securities are subject to mandatory redemption on June
1, 2010 at a redemption price of 100% of the liquidation preference of the
Redeemable Preferred Securities, plus accrued and unpaid dividends, if any.
Funding may redeem, at its option, the Redeemable Preferred Securities, in
whole or in part, at any time on or after June 1, 2001 at certain redemption
prices equal to a percentage of the liquidation preference (set forth in the
Written Action) which declines each year until maturity of the Redeemable
Preferred Securities, together with accrued and unpaid dividends, if any.
Pursuant to and to the extent set forth in the guarantee of the
Redeemable Preferred Securities (the "Guarantee") by CellNet for the benefit
of the holders of the Redeemable Preferred Securities, CellNet has agreed to
pay in full to the holders of the Redeemable Preferred Securities (except to
the extent paid by Funding), as and when due, regardless of any defense,
right of set off or counterclaim which Funding may have or assert, the
following payments, without duplication: (i) any accrued and unpaid
distributions that are required to be paid on the Redeemable Preferred
Securities, to the extent Funding has sufficient funds legally available
therefor, (ii) the redemption price, with respect to any Redeemable Preferred
Securities called for redemption by Funding, to the extent Funding has
sufficient funds legally available therefor, and (iii) upon a voluntary or
involuntary dissolution, winding-up or termination of Funding, the lesser of
(a) the aggregate of the liquidation preference and all accrued and unpaid
dividends on the Redeemable Preferred Securities to the date of payment to
the extent Funding has sufficient funds legally available therefor, and (b)
the amount of assets of Funding remaining for distribution to holders of the
Redeemable Preferred Securities upon the liquidation of Funding. The
Guarantee may also be subject to contractual restrictions under agreements
governing future indebtedness of CellNet.
RESULTS OF OPERATIONS
Funding is a wholly-owned subsidiary of CellNet, has no independent
operations and exists for the exclusive purposes of selling the Redeemable
Preferred Securities, investing the proceeds from the sale thereof and
engaging in other incidental activities. The restricted cash at December 31,
1998 of $18.0 million includes a portion of the proceeds of the offering of
the Redeemable Preferred Securities which are designated for the payment of
cash dividends through June 1, 2001. Funding invested the restricted cash in
Treasury Strips which were placed in escrow upon the closing of the offering
of the Redeemable Preferred Securities. For the period of inception of
Funding through December 31, 1998, Funding earned interest on the amounts
invested in Treasury Strips of $687,000 and accrued dividend income on
CellNet Preferred Stock of approximately $4.1 million (which will be paid in
additional shares of CellNet Preferred Stock). During the period from April
21, 1998 (inception) through December 31, 1998, Funding incurred $5.0 million
in dividend expense and accretion on the Redeemable Preferred Securities, for
an aggregate net loss applicable to CellNet of $158,000. Funding expects
interest income to decrease each period through June 1, 2001 as restricted
cash balances are used to pay cash dividends on the Redeemable Preferred
Securities. Funding expects dividend income to be approximately $1.6 million
per quarter, absent the conversion or redemption of the CellNet Preferred
Stock. Funding expects that dividend expenses will be approximately $1.9
million per quarter, absent conversion or redemption of the Redeemable
Preferred Securities.
LIQUIDITY AND CAPITAL RESOURCES
During May 1998, Funding completed the sale of the Redeemable Preferred
Securities for gross proceeds of $110.0 million. Net proceeds from the
offering, after offering costs, were approximately $106.0 million. The amount
recorded as equity for the Redeemable Preferred Securities will fully accrete
to the face value of $110.0 million on June 1, 2010.
The restricted cash at December 31, 1998 of approximately $18.0 million
includes the proceeds of the offering which are designated for the payment of
cash dividends on the Redeemable 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 Redeemable Preferred
Securities. On May 19, 1998, Funding purchased $93.5 million of CellNet
Preferred Stock (85% of the gross proceeds from the offering of the
Redeemable Preferred Securities) with the remaining proceeds of the offering
plus capital contributed by CellNet of $8.3 million. The CellNet Preferred
Stock pays dividends each March 1, June 1, September 1 and December 1 in
additional shares of CellNet Preferred Stock through June 1, 2001. Subsequent
to June 1, 2001, dividends are payable in cash or shares of CellNet Common
Stock, at the option of CellNet. The CellNet Preferred Stock is exchangeable,
at the option of Funding, at any time prior to June 1, 2010 into shares of
CellNet Common Stock at an exchange rate based on the exchange rate of the
Redeemable Preferred Securities. The CellNet Preferred Stock is subject to
mandatory redemption on June 1, 2010.
The Redeemable Preferred Securities bear a cumulative dividend at the
rate of 7% per annum which must be paid quarterly in arrears each March 1,
June 1, September 1 and December 1, which commenced September 1, 1998. The
dividend is payable in cash through June 1, 2001 and thereafter, by cash or
shares of CellNet Common Stock, at the option of Funding. The Treasury Strips
have been pledged to The Bank of New York as escrow agent (the "Escrow
Agent")
-7-
<PAGE>
pursuant to an escrow agreement for the benefit of the holders of the
Redeemable Preferred Securities. The Escrow Agent is required under the
Escrow Agreement to release from escrow amounts sufficient to pay quarterly
dividends on the Redeemable Preferred Securities through June 1, 2001.
Funding paid dividends of approximately $4.1 million during the period from
inception through December 31, 1998.
Cash used for operating activities was approximately $4.0 million for
the period April 21, 1998 (inception) through December 31, 1998 and consists
primarily of dividends paid on the Redeemable Preferred Securities, offset by
interest income received on Treasury Strips.
Cash used for investing activities was $110.9 million for the period
April 21, 1998 (inception) through December 31, 1998, and consists of the
purchase of CellNet Preferred Stock for $93.5 million, and the purchase of
the Treasury Strips for $21.4 million, partially offset by cash provided
during the period of $4.1 million resulting from the subsequent proceeds
received on maturity of two Treasury Strips. The restricted cash balance will
decrease in each future period as preferred dividends are paid.
Financing activities provided approximately $114.9 million for the
period April 21, 1998 (inception) through December 31, 1998. Net cash
provided by financing activities includes the net proceeds from the issuance
of the Redeemable Preferred Securities in May 1998 of $106.0 million, capital
contributions made to Funding by CellNet of $8.3 million to purchase CellNet
Preferred Stock and advances made by CellNet to Funding of $564,000 for the
offering costs associated with the issuance of the Redeemable Preferred
Securities. Funding expects cash provided from financing activities will
decrease as future periods are not anticipated to include proceeds from
securities offerings.
CASH COMMITMENTS
The Redeemable Preferred Securities require payments of dividends to be
made in cash through June 1, 2001. Funding has cash dividend obligations on
the Redeemable Preferred Securities of approximately $7.7 million in each of
1999 and 2000, and $3.9 million in 2001.
YEAR 2000 COMPLIANCE
As a wholly-owned subsidiary of CellNet, Funding's Year 2000 compliance
plan is dependent on CellNet's Year 2000 compliance plans for its
consolidated operations. Because Funding has no independent operations,
Funding has not addressed the state of Year 2000 readiness, compliance costs,
risks or contingency plans of Funding. A lack of Year 2000 compliance would
not have a significant impact on Funding's operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Funding's restricted cash balances are invested in fixed income Treasury
Strips having staggered maturities matching dividend payment dates of the
Redeemable Preferred Securities. Accordingly, changes in market interest
rates have no effect on Funding's operating results, financial condition and
cash flows.
-8-
<PAGE>
At December 31, 1998, Funding had $93.5 million of CellNet Preferred
Stock, which is exchangeable into shares of CellNet Common Stock, at an
exchange rate based on the exchange rate of the Redeemable Preferred
Securities. There exists no established public trading market for CellNet
Preferred Stock. The risk of changes in fair market value of the underlying
CellNet Common Stock, which is listed and trades on the Nasdaq National
Market, is eliminated by the adjustable rate of exchange of shares of CellNet
Preferred Stock. The CellNet Preferred Stock pays dividends in cash or
additional shares of CellNet Preferred Stock sufficient to meet the dividend
requirements on the Redeemable Preferred Securities. Although changes in the
fair market value of CellNet Common Stock have no effect on Funding's
financial condition or results of operations, such changes may influence
Funding's decision to redeem the Redeemable Preferred Securities or a
Redeemable Preferred Security holder's decision to exchange those securities
for CellNet Common Stock.
The information below summarizes Funding's financial instruments exposed
to market risks associated with fluctuations in interest rates as of December
31, 1998. The table presents principal cash flows and related interest rates
by year of maturity for Funding's restricted cash and mandatorily Redeemable
Preferred Securities in effect at December 31, 1998. This information
excludes the potential exercise of the relevant redemption features. The
notes to the financial statements contain a description of Funding's
restricted cash and mandatorily Redeemable Preferred Securities, and should
be read in conjunction with the table below (in thousands).
<TABLE>
<CAPTION>
Year of Maturity Total
------------------------------------ Due at Fair
1999 2000 2001 2002 2003 Thereafter Maturity Value
----- ------ ------ ------ -------------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE SENSITIVITY
Restricted Cash-
Fixed Rate $7,690 $7,657 $3,801 - - - $19,148 $18,204
Average Rate 5.6% 5.6% 5.7%
Mandatorily Redeemable Preferred Securities-
Fixed Rate - - - - - $110,000 $110,000 $57,200
Interest Rate - - - - - 7.0%
</TABLE>
9
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
CellNet Funding, LLC:
We have audited the accompanying balance sheet of CellNet Funding, LLC
(Funding) (a wholly-owned subsidiary of CellNet Data Systems, Inc.) as of
December 31, 1998, and the related statements of operations, member's equity
and cash flows for the period from April 21, 1998 (inception) to December 31,
1998. These financial statements are the responsibility of Funding's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of CellNet Funding, LLC (a wholly-owned
subsidiary of CellNet Data Systems, Inc.) at December 31, 1998, and the
results of its operations and its cash flows for the period from April 21,
1998 (inception) to December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
San Jose, California
February 2, 1999
10
<PAGE>
CELLNET FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF CELLNET DATA SYSTEMS, INC.)
BALANCE SHEET
DECEMBER 31, 1998
(in thousands)
<TABLE>
<S> <C>
ASSETS:
Noncurrent assets:
Dividends receivable from Parent $ 4,106
Investment in CellNet Preferred Stock (Note 2) 93,500
Restricted cash (Note 2) 17,984
------------
Total assets $ 115,590
------------
------------
LIABILITIES AND MEMBER'S EQUITY:
Current liability - accrued dividends payable to preferred security holders $ 642
Payable to Parent 564
------------
Total liabilities 1,206
Mandatorily reedemable preferred securities (Note 2) 106,191
Member's Equity:
Common limited liability security outstanding 10
Additional paid-in capital 8,341
Accumulated deficit (158)
------------
Total member's equity 8,193
------------
Total liabilities and member's equity $ 115,590
------------
------------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
CELLNET FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF CELLNET DATA SYSTEMS, INC.)
STATEMENT OF OPERATIONS
PERIOD FROM APRIL 21, 1998 (INCEPTION) TO DECEMBER 31, 1998
(in thousands)
<TABLE>
<S> <C>
Interest income $ 687
Dividend income from Parent preferred stock 4,106
----------------
Income before dividends and accretion on preferred securities 4,793
Dividends and accretion on preferred securities (Note 2) (4,951)
----------------
Net loss applicable to common member $ (158)
----------------
----------------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
CELLNET FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF CELLNET DATA SYSTEMS, INC.)
STATEMENT OF MEMBER'S EQUITY
PERIOD FROM APRIL 21, 1998 (INCEPTION) TO DECEMBER 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Common
Limited
Liability Additional
Security Paid-in Accumulated
Outstanding Capital Deficit Total
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common limited liability security $ 10 $ - $ - $ 10
Additional capital contributed by CellNet 8,341 8,341
Net loss applicable to common member (158) (158)
----------------------------------------------------------------------
Balances, December 31, 1998 $ 10 $ 8,341 $ (158) $ 8,193
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
CELLNET FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF CELLNET DATA SYSTEMS, INC.)
STATEMENT OF CASH FLOWS
PERIOD FROM APRIL 21, 1998 (INCEPTION) TO DECEMBER 31, 1998
(in thousands)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss applicable to common member $ (158)
Adjustments to reconcile net loss applicable to common member to net cash
used in operating activities:
Noncash interest income (605)
Accretion on preferred securities 202
Changes in:
Dividends receivable from Parent (4,106)
Accrued dividends payable to preferred security holders 642
----------------
Net cash used for operating activities (4,025)
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of CellNet preferred stock (93,500)
Increase in restricted cash (21,486)
Proceeds from maturity of restricted cash 4,107
----------------
Net cash used for investing activities (110,879)
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred securities, net of issuance costs 105,989
Proceeds from issuance of common liability security 10
Additional capital contributed by Parent 8,341
Payable to Parent 564
----------------
Net cash provided by financing activities 114,904
----------------
NET CHANGE IN CASH -
CASH, Beginning of period -
----------------
CASH, end of period $ -
----------------
----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ -
Cash paid for income taxes $ -
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
CELLNET FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF CELLNET DATA SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM APRIL 21, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - CellNet Funding, LLC (Funding) is a special
purpose limited liability company formed under the laws of the State of
Delaware on April 21, 1998 as a wholly-owned subsidiary of CellNet Data
Systems, Inc. (CellNet). Funding exists for the exclusive purpose of selling
its preferred securities (see Note 2), investing the proceeds of the sale
thereof in restricted cash and CellNet's preferred stock and engaging in
other incidental activities.
CellNet is the sole common member of Funding. The business and affairs
of Funding are conducted by CellNet and CellNet pays all of Funding's
administrative expenses, which are not significant.
BASIS OF PRESENTATION - The accompanying financial statements have been
prepared in accordance with generally accepted accounting principles.
INVESTMENT IN CELLNET PREFERRED STOCK - Investment in CellNet preferred
stock includes the proceeds from the offering (see Note 2) which were used to
purchase preferred stock of CellNet. The preferred stock pays dividends each
March 1, June 1, September 1 and December 1 in additional shares of CellNet
preferred stock through June 1, 2001. Subsequent to June 1, 2001, dividends
are payable in cash or shares of CellNet common stock, at the option of
CellNet. CellNet has not declared or paid dividends through December 31,
1998. The investment in CellNet preferred stock is stated at cost.
RESTRICTED CASH - Restricted cash includes the proceeds of the offering
which are designated for the payment of cash dividends on the preferred
securities through June 1, 2001 (see Note 2). These proceeds were invested in
U.S. Treasury Strips and were placed in escrow upon the closing of the
offering of the preferred securities and mature at each of the dividend
payment dates. Restricted cash is stated at amortized cost.
ACCRUED DIVIDENDS PAYABLE TO PREFERRED SECURITY HOLDERS - The preferred
securities bear a cumulative dividend at the rate of 7% per annum. The
dividend is paid quarterly in arrears each March 1, June 1, September 1 and
December 1. The dividend is payable in cash through June 1, 2001, and
thereafter, by cash or shares of CellNet common stock, at the option of
Funding.
INCOME TAXES - Funding is a U.S. limited liability company which is
treated as a partnership for U.S. federal and state income tax purposes.
Accordingly, Funding is not subject to U.S. federal and state income taxes.
Funding's results of operations are allocated and included in the individual
income tax returns of the security holders.
NET LOSS PER SHARE- Funding's one issued and outstanding common limited
liability company security is owned directly by CellNet. Accordingly, Funding
does not present net loss per share in its financial statements as such
diclosure is not considered to be meaningful.
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COMPREHENSIVE LOSS - Comprehensive loss, the change in net assets during
the period from nonowner sources, and the reported net loss were the same for
the period April 21, 1998 (inception) through December 31, 1998.
SEGMENT INFORMATION - Funding operates in one reportable segment;
issuing its preferred securities, investing the proceeds of the sale thereof
in CellNet's preferred stock and restricted cash and engaging in other
incidental activities.
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
which defines derivatives, requires that all derivatives be carried at fair
value, and provides for hedge accounting when certain conditions are met.
SFAS 133 is effective for quarters of fiscal years beginning after June 15,
1999. Funding has not fully assessed the implications of this new standard.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values of
Funding's restricted cash and preferred securities were approximately
$18,204,000 and $57,200,000, respectively, at December 31, 1998, which are
based on quoted market prices.
2. MANDATORILY REDEEMABLE PREFERRED SECURITIES
In May 1998, Funding completed the sale of 7% Exchangeable Preferred
Securities Mandatorily Redeemable 2010 (the Preferred Securities) for gross
proceeds of $110,000,000. Net proceeds from the offering, after offering
costs, were approximately $105,989,000. The recorded amount of the Preferred
Securities will fully accrete to the face value of $110,000,000 on June 1,
2010. The restricted cash at December 31, 1998 of approximately $17,984,000
includes the proceeds of the offering which are designated for the payment of
cash dividends on the Preferred Securities through June 1, 2001. Funding
invested the restricted cash in U.S. Treasury strips (the Treasury Strips)
which were placed in escrow upon the closing of the offering of the Preferred
Securities. The Treasury Strips have been pledged to The Bank of New York as
escrow agent (the Escrow Agent) pursuant to an escrow agreement for the
benefit of the holders of the Preferred Securities. The Escrow Agent is
required under the Escrow Agreement to release from escrow amounts sufficient
to pay quarterly dividends on the Preferred Securities through June 1, 2001.
Dividend payments of $4,107,000 were made in 1998 from proceeds of the
Treasury Strips.
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,
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September 1 and December 1. The dividend is payable in cash through June 1,
2001 and thereafter, by cash or shares of CellNet common stock, at the option
of Funding. The Preferred Securities are exchangeable at any time prior to
June 1, 2010, at the option of the holders, into CellNet common stock, at a
rate of 1.8328 shares of CellNet common stock per Preferred Security, or
$13.64 per share, subject to adjustment. On or prior to June 1, 2001, the
Preferred Securities must be automatically exchanged for CellNet common stock
at an exchange price of $13.64 per share in the event the Current Market
Value (which is a formula as defined in the Written Action of the Manager of
Funding, (the Written Action)) of CellNet's common stock equals or exceeds
the following percentage of the exchange price, for at least 20 days of any
30-day trading period during the 12 month period ending on June 1 of the
indicated year: 170% on and prior to June 1, 1999; 160% from June 2, 1999
through June 1, 2000; and 150% from June 2, 2000 through June 1, 2001. The
Preferred Securities are 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 CellNet for the benefit of the
holders of Preferred Securities, CellNet has agreed to pay in full to the
holders of the Preferred Securities (except to the extent paid by Funding),
as and when due, regardless of any defense, right of set off or counterclaim
which Funding may have or assert, the following payments (the Guarantee
Payments), without duplication: (i) any accrued and unpaid distributions that
are required to be paid on the Preferred Securities, to the extent Funding
has sufficient funds legally available therefor, (ii) the redemption price,
with respect to any Preferred Securities called for redemption by Funding, to
the extent Funding has sufficient funds legally available therefor, and (iii)
upon a voluntary or involuntary dissolution, winding-up or termination of
Funding, the lesser of (a) the aggregate of the liquidation preference and
all accrued and unpaid dividends on the Preferred Securities to the date of
payment to the extent Funding has sufficient funds legally available
therefor, and (b) the amount of assets of Funding remaining for distribution
to holders of Preferred Securities upon the liquidation of Funding. The
Guarantee may also be subject to contractual restrictions under agreements
governing future indebtedness of CellNet.
On May 19, 1998, after the investment in Treasury Strips, Funding
applied the remaining net proceeds from the offering of the Preferred
Securities together with other capital contributed by CellNet to purchase
$93,500,000 of CellNet's Preferred Stock (the CellNet Preferred Stock) which
pays dividends each March 1, June 1, September 1 and December 1 in additional
shares of CellNet Preferred Stock through September 1, 2001. Subsequent to
June 1, 2001, dividends are payable in cash or shares of common stock, at the
option of CellNet. The CellNet Preferred Stock is exchangeable, at the option
of Funding, at any time prior to June 1, 2010 into shares of
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CellNet's common stock at an exchange rate based on the exchange rate of
the Preferred Securities. The CellNet Preferred Stock is subject to mandatory
redemption on June 1, 2010. During the period May 19, 1998 through December
31, 1998, Funding earned dividends on CellNet Preferred Stock of $4,106,000.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information called for by Part III of this Form 10-K is incorporated
by reference to the definitive proxy statement for the annual meeting of
stockholders of CellNet which was filed with the Securities and Exchange
Commission on March 22, 1999.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Company has the following directors:
John M. Seidl Director
Paul G. Manca Director
David L. Perry Director
The Company has the following executive officers:
John M. Seidl President
Paul G. Manca Vice President and Chief Financial Officer
David L. Perry Vice President and Secretary
Ben H. Lyon Vice President and Assistant Secretary
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The duties and authority of the officers and directors, if any, shall be
determined by the Manager (CellNet) in its sole discretion. Its business
affairs are managed by CellNet, as the Manager of Funding, pursuant to
the LLC Agreement.
ITEM 11. EXECUTIVE COMPENSATION
Funding's executive officers are as follows:
John M. Seidl President
Paul G. Manca Vice President and
Chief Financial Officer
David L. Perry Vice President and
Secretary
Ben H. Lyon Vice President and
Assistant Secretary
Its business affairs are managed by CellNet, as the Manager of Funding,
pursuant to the LLC Agreement. Neither CellNet nor the Executive Officers
receives any fees or compensation as Manager of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Title of Class Beneficial Owner Beneficial Ownership Class
- -------------------- ---------------------------- ----------------------------- ----------
<S> <C> <C> <C>
Common Securities CellNet Data Systems, Inc. 1 Common Security owned 100%
125 Shoreway Road beneficially with sole voting
San Carlos, California 94070 power
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 19, 1998, CellNet made a capital contribution of $8.3 million to
Funding. On May 19, 1998, Funding used the remaining proceeds from
the private placement of the Redeemable Preferred Securities, along with the
$8.3 million contributed by CellNet to purchase approximately $93.5 million
of CellNet Preferred Stock.
All of Funding's administrative expenses, which are insignificant, are
paid by CellNet. Additionally, CellNet advanced approximately $564,000
million to Funding during the period from April 21, 1998 (inception) through
December 31, 1998 for the offering costs associated with the issuance of the
Redeemable Preferred Securities.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(A) (1) FINANCIAL STATEMENTS. The following financial statements are
included in Item 8 of Part II:
Independent Auditors' Report .......................................... 10
Balance Sheet, December 31, 1998....................................... 11
Statement of Operations, Period from April 21, 1998 (inception)
to December 31, 1998................................................. 12
</TABLE>
20
<PAGE>
<TABLE>
<S> <C>
Statement of Member's Equity, Period from April 21, 1998
(inception) to December 31, 1998..................................... 13
Statement of Cash Flows, Period from April 21, 1998 (inception) to
December 31, 1998.................................................. 14
Notes to Financial Statements, Period from April 21, 1998
(inception) to December 31, 1998................................... 15
(2) FINANCIAL STATEMENT SCHEDULE.
All other schedules have been omitted because they are not
applicable or are not required or the information required to be
set forth therein is included in the Financial Statements or
notes thereto.
(3) REPORTS ON FORM 8-K. None.
(4) EXHIBITS.
CORPORATE ORGANIZATION.
3.1*: Certificate of Formation of CellNet Funding, LLC filed
April 21, 1998 with the Secretary of State of the State of
Delaware.
3.2*: Amended and Restated Limited Liability Company Agreement of
CellNet Funding, LLC, dated as of May 13, 1998.
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES.
4.1*: Guarantee Agreement, dated as of May 19, 1998, between
CellNet Data Systems, Inc. and CellNet Funding, LLC.
4.2*: Written Action of the Manager of CellNet Funding, LLC,
dated as of May 13, 1998, with respect to the terms of the
7% Exchangeable Limited Liability Company Preferred
Securities.
4.3*: Escrow and Security Agreement, dated as of May 19, 1998,
among CellNet Data Systems, Inc., CellNet Funding, LLC and
The Bank of New York.
MATERIAL CONTRACTS.
10.1*: Certificate of Designation, Rights and Preferences of the
Redeemable Preferred Stock of CellNet filed May 18, 1998
with the Secretary of State of the State of Delaware.
FINANCIAL DATA SCHEDULE.
27.1: Financial Data Schedule of CellNet Funding, LLC for the
Fiscal Year Ended December 31, 1998.
</TABLE>
- ------------------------
(*) Incorporated by reference to Funding's Registration Statement on Form S-3
(File No. 333-50851) filed on May 13, 1998.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized
in the City of San Carlos, State of California on March 30, 1999.
CellNet Funding, LLC
By: CellNet Data Systems, Inc., its Manager
---------------------------------------
By: /s/ JOHN M. SEIDL
---------------------------------------
John M. Seidl
Chairman of the Board, President and
Chief Executive Officer of
CellNet Data Systems, Inc.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below under the heading "Signatures" constitutes and appoints John M.
Seidl and Paul G. Manca, and each of them individually, his true and lawful
attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective
amendments) and supplements to this Report on Form 10-K, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and to perform each and every act and thing requisite and necessary to be
done in connection with the above premises, as fully for all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in- fact and agents, or any of them, or his or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, this Report on Form 10-K has been signed by the
following persons in the capacities on March 30, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ JOHN M. SEIDL Chairman of the Board, President
- ------------------------------- and Chief Executive Officer
John M. Seidl (Principal Executive Officer)
/s/ PAUL G. MANCA Vice President and Chief Financial
- ------------------------------- Officer (Principal Financial and
Paul G. Manca Accounting Officer)
/s/ DAVID L. PERRY
- ------------------------------- Secretary and Director of CellNet
David L. Perry Funding, LLC
</TABLE>
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAY-13-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 115,590
<CURRENT-LIABILITIES> (642)
<BONDS> 0
(106,191)
0
<COMMON> (10)
<OTHER-SE> (8,341)
<TOTAL-LIABILITY-AND-EQUITY> (115,590)
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (4,951)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (158)
<INCOME-TAX> 0
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (158)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
