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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-21409
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CELLNET FUNDING, LLC
(Exact name of registrant as specified in its charter)
DELAWARE 94-3298620
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
125 SHOREWAY ROAD
SAN CARLOS, CALIFORNIA 94070
(Address of principal executive offices, including zip code)
(650) 508-6000
(Registrant's Telephone Number, Including Area Code)
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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 June 30, 1999, one share of Common Limited Liability Company
Securities was issued and outstanding, which is beneficially owned by CellNet
Data Systems, Inc., and 4,400,000 shares of 7% Exchangeable Limited Liability
Company Preferred Securities were issued and outstanding.
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TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION.................................................................................... 3
Item 1. Financial Statements (Unaudited)........................................................... 3
Condensed Balance Sheets as of June 30, 1999 and December 31, 1998......................... 3
Condensed Statements of Operations for the Three and Six Months Ended June 30, 1999 and the
Period from April 21, 1998 (inception) to June 30, 1998.................................. 4
Condensed Statements of Cash Flows for the Six Months Ended June 30, 1999 and the Period
from April 21, 1998 (inception) to June 30, 1998......................................... 5
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................................. 14
PART II. OTHER INFORMATION....................................................................................... 16
Item 1. Legal Proceedings.......................................................................... 16
Item 2. Changes in Securities...................................................................... 16
Item 3. Defaults upon Senior Securities............................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders........................................ 16
Item 5. Other Information.......................................................................... 16
Item 6. Exhibits and Reports on Form 8-K........................................................... 16
SIGNATURE........................................................................................................ 17
EXHIBIT INDEX.................................................................................................... 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CELLNET FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF CELLNET DATA SYSTEMS, INC.)
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
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JUNE 30, DECEMBER 31,
1999 1998
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ASSETS
Noncurrent assets:
Dividends receivable from Parent..................................................... $ 7,523 $ 4,106
Investment in CellNet Preferred Stock (Note 2)....................................... 93,500 93,500
Restricted cash (Note 2)............................................................. 14,580 17,984
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Total assets........................................................................... $ 115,603 $ 115,590
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LIABILITIES AND MEMBER'S EQUITY:
Current liability-accrued dividends payable to preferred security holders.............. $ 641 $ 642
Payable to Parent...................................................................... 564 564
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Total liabilities.................................................................. 1,205 1,206
Mandatorily reedemable preferred securities (Note 2)................................... 106,355 106,191
Member's Equity:
Common limited liability security outstanding........................................ 10 10
Additional paid-in capital........................................................... 8,341 8,341
Accumulated deficit.................................................................. (308) (158)
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Total member's equity.............................................................. 8,043 8,193
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Total liabilities and member's equity.................................................. $ 115,603 $ 115,590
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</TABLE>
See accompanying notes to condensed financial statements.
3
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CELLNET FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF CELLNET DATA SYSTEMS, INC.)
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
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PERIOD FROM
APRIL 21,
1998
THREE MONTHS SIX MONTHS (INCEPTION)
ENDED ENDED TO
JUNE 30, 1999 JUNE 30, 1999 JUNE 30, 1998
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Interest Income...................................................... $ 218 $ 447 $ 136
Dividend income from Parent preferred
stock.............................................................. 1,732 3,417 --
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Income before dividends and accretion on preferred securities...... 1,950 3,864 136
Dividends and accretion on preferred securities (Note 2)............. (2,008) (4,014) (938)
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Net loss applicable to common member............................... $ (58) $ (150) $ (802)
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</TABLE>
See accompanying notes to condensed financial statements.
4
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CELLNET FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF CELLNET DATA SYSTEMS, INC.)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 21,
1998
(INCEPTION)
SIX MONTHS ENDED TO JUNE 30,
JUNE 30, 1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss applicable to common member............................................ $ (150) $ (802)
Adjustment to reconcile net loss applicable to common member to net cash used
for operating activities:
Noncash interest income..................................................... (446) (136)
Accretion on preferred securities........................................... 164 39
Changes in:
Dividend receivable from Parent........................................... (3,417) --
Accrued dividends payable to preferred security holders................... (1) 899
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Net cash used for operating activities.................................. (3,850) --
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of restricted cash..................................... 3,850 --
Purchase of CellNet preferred stock........................................... -- (93,500)
Increase in restricted cash................................................... -- (21,403)
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Net cash provided by (used for) investing activities.................... 3,850 (114,903)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred securities, net of issuance
costs....................................................................... -- 105,940
Proceeds from sale of common liability security............................... -- 10
Additional paid-in capital contributed by Parent.............................. -- 8,341
Payable to Parent............................................................. -- 612
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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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</TABLE>
See accompanying notes to condensed financial statements.
5
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CELLNET FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF CELLNET DATA SYSTEMS, INC.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND THE PERIOD FROM APRIL 21,
1998 (INCEPTION) TO JUNE 30, 1998
1. BASIS OF PRESENTATION
CellNet Funding, LLC ("Funding") is a special purpose limited liability
company formed under the laws of the State of Delaware on April 21, 1998 as a
wholly-owned subsidiary of CellNet Data Systems, Inc. ("CellNet"). Funding
exists for the exclusive purpose of selling its preferred securities (see Note
2) and investing the proceeds of the sale thereof in restricted cash and
CellNet's preferred stock. CellNet is the sole member of Funding that holds
common securities. The business and affairs of Funding are conducted by CellNet
and CellNet pays all of Funding's administrative expenses, which are not
significant. In the opinion of management, these unaudited condensed financial
statements include all adjustments, consisting of normal recurring adjustments
and accruals considered necessary for a fair presentation of Funding's financial
position as of June 30, 1999 and the results of operations and cash flows for
the three and six months ended June 30, 1999, and the period from April 21, 1998
(inception) to June 30, 1998. This unaudited interim information should be read
in conjunction with the audited financial statements of Funding for the period
from April 21, 1998 (inception) through December 31, 1998 and the notes thereto,
and the audited financial statements of CellNet for the year ended December 31,
1998 and the notes thereto.
NET LOSS PER SHARE--Funding's one issued and outstanding common limited
liability company security is owned directly by CellNet. Accordingly, Funding
does not present net loss per share in its financial statements as such
disclosure is not considered to be meaningful.
COMPREHENSIVE LOSS--Comprehensive loss, the change in net assets during the
period from nonowner sources, and the reported net loss were the same for all
periods presented.
SEGMENT INFORMATION--Funding operates in one reportable segment; issuing its
preferred securities, investing the proceeds of the sale thereof in CellNet's
preferred stock and restricted cash.
RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which defines
derivatives, requires that all derivatives be carried at fair value, and
provides for hedge accounting when certain conditions are met. SFAS No. 133 is
effective for quarters of fiscal years beginning after June 15, 2000. Funding
has not fully assessed the implications of this new standard.
2. MANDATORILY REDEEMABLE PREFERRED SECURITIES
In May 1998, Funding completed the sale of 7% Exchangeable Preferred
Securities Mandatorily Redeemable 2010 (the "Preferred Securities") for gross
proceeds of $110,000,000. Net proceeds from the offering, after offering costs,
were approximately $105,989,000. The recorded amount of the Preferred Securities
will fully accrete to the face value of $110,000,000 on June 1, 2010. The
restricted cash at June 30, 1999 of approximately $14,580,000 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.
6
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CELLNET FUNDING, LLC
(A WHOLLY-OWNED SUBSIDIARY OF CELLNET DATA SYSTEMS, INC.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND THE PERIOD FROM APRIL 21,
1998 (INCEPTION) TO JUNE 30, 1998 (CONTINUED)
2. MANDATORILY REDEEMABLE PREFERRED SECURITIES (CONTINUED)
Dividend payments of $1,925,000 and $3,850,000 were made in the three and six
months ended June 30, 1999, respectively, from proceeds of the Treasury Strips.
No dividend payments were made for the period from April 21, 1998 (inception) to
June 30, 1998.
The Preferred Securities consist of 4,400,000 exchangeable preferred
securities of Funding that bear a cumulative dividend at the rate of 7% per
annum. The dividend is paid quarterly in arrears each March 1, June 1, September
1 and December 1. The dividend is payable in cash through June 1, 2001 and
thereafter, by cash or shares of CellNet common stock, at the option of Funding.
The Preferred Securities are exchangeable at any time prior to June 1, 2010, at
the option of the holders, into CellNet common stock, at 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 CellNet's common stock at an exchange rate
based on the exchange rate of the Preferred Securities. The CellNet Preferred
Stock is subject to mandatory redemption on June 1, 2010. During the three and
six months ended June 30, 1999, Funding earned dividends on CellNet Preferred
Stock of $1,732,000 and $3,417,000, respectively.
7
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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
WITH NO INDEPENDENT OPERATIONS, FUNDING'S SUCCESS IS ENTIRELY DEPENDENT ON THE
SUCCESS OF ITS PARENT, AND ACCORDINGLY, REFERENCE MUST ALSO BE MADE TO THE RISK
FACTORS AND OTHER CAUTIONARY STATEMENTS SET FORTH IN CELLNET'S ANNUAL REPORT ON
FORM 10-K, QUARTERLY REPORTS ON FORM 10-Q AND OTHER FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION.
OVERVIEW
Funding is a special purpose limited liability company formed under the laws
of the State of Delaware on April 21, 1998 as a wholly-owned subsidiary of
CellNet. Funding has no independent operations and exists for the exclusive
purposes of selling the Preferred Securities, investing the proceeds of the sale
thereof and engaging in other incidental activities. During May 1998, Funding
completed the sale of the Preferred Securities for gross proceeds of $110.0
million. Net proceeds from the offering, after offering costs, were
approximately $106.0 million.
The 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 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 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 the
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 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 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 Preferred Securities upon the liquidation of
Funding. The Guarantee may also be subject to contractual restrictions under
agreements governing future indebtedness of CellNet.
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RESULTS OF OPERATIONS
Funding is a wholly-owned subsidiary of CellNet, has no independent
operations and exists for the exclusive purposes of selling the Preferred
Securities, investing the proceeds from the sale thereof, and engaging in other
incidental activities. The restricted cash at June 30, 1999 of $14.6 million
includes a portion of the proceeds of the offering of the Preferred Securities
which are designated for the payment of cash dividends through June 1, 2001.
Funding invested the restricted cash in Treasury Strips which were placed in
escrow upon the closing of the offering of the Preferred Securities. For the
three months and the six months ended June 30, 1999, Funding earned interest on
the amounts invested in Treasury Strips of $218,000 and $447,000, respectively.
For the period from April 21, 1998 (inception) through June 30, 1998, Funding
earned interest on the amount invested in Treasury Strips of $136,000. For the
three and six months ended June 30, 1999, Funding accrued dividend income on
CellNet Preferred Stock of $1.7 million and $3.4 million (which will be paid in
additional shares of CellNet Preferred Stock). For the period April 21, 1998
(inception) through June 30, 1998, Funding accrued no income from CellNet
Preferred Stock.
For the three and six months ended June 30, 1999, Funding incurred $2.0
million and $4.0 million, respectively, in dividends and accretion on the
Preferred Securities, for an aggregate net loss applicable to CellNet of $58,000
and $150,000, respectively. For the period from April 21, 1998 (inception)
through June 30, 1998, Funding incurred $938,000 in dividends and accretion on
the Preferred Securities, for an aggregate net loss applicable to CellNet of
$802,000.
Funding expects interest income to decrease each period through June 1, 2001
as restricted cash balances are used to pay cash dividends on the Preferred
Securities. Funding expects dividend income to be approximately $1.7 million per
quarter, absent the conversion or redemption of the CellNet Preferred Stock.
Funding expects dividend will be approximately $1.9 million per quarter, absent
conversion or redemption of the Preferred Securities.
LIQUIDITY AND CAPITAL RESOURCES
During May 1998, Funding completed the sale of the Preferred Securities for
gross proceeds of $110.0 million. Net proceeds from the offering, after offering
costs, were approximately $106.0 million. The amount recorded as equity for the
Preferred Securities will fully accrete to the face value of $110.0 million on
June 1, 2010.
The restricted cash at June 30, 1999 of approximately $14.6 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 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 Preferred Securities bear a cumulative dividend at the rate of 7% per
annum which must be paid quarterly in arrears each March 1, June 1, September 1
and December 1, which commenced September 1, 1998. The dividend is payable in
cash through June 1, 2001 and thereafter, by cash or shares of CellNet Common
Stock, at the option of Funding. The Treasury Strips have been pledged to The
Bank of New York as escrow agent (the "Escrow Agent") pursuant to an escrow
agreement for the benefit of the holders of the Preferred Securities. The Escrow
Agent is required under the Escrow Agreement to release from
9
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escrow amounts sufficient to pay quarterly dividends on the Preferred Securities
through June 1, 2001. Funding paid dividends of approximately $1.9 million and
$3.8 million during the three and six months ended June 30, 1999.
Cash used for operating activities was approximately $3.9 million for the
six months ended June 30, 1999 and consists primarily of dividends paid on the
Preferred Securities offset by interest income receivable on the Treasury
Strips.
Cash provided by investing activities was approximately $3.9 million for the
six months ended June 30, 1999 and consists of the proceeds received on maturity
of two Treasury Strips. The restricted cash balance will decrease in future
periods as preferred dividends are paid.
There were no financing activities in the six months ended June 30, 1999.
Funding expects cash provided from financing activities will not be significant
as future periods are not anticipated to include proceeds from securities
offerings.
CASH COMMITMENTS
The Preferred Securities require payments of dividends to be made in cash
through June 1, 2001. Funding has cash dividend obligations on the Preferred
Securities of approximately $7.7 million in each of 1999 and 2000, and $3.9
million in 2001.
YEAR 2000 COMPLIANCE
As a wholly-owned subsidiary of CellNet, Funding's Year 2000 compliance plan
is dependent on CellNet's Year 2000 compliance plans for its consolidated
operations. Because Funding has no independent operations, Funding has not
addressed the state of Year 2000 readiness, compliance costs, risks or
contingency plans of Funding.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
FUNDING IS A WHOLLY-OWNED FINANCE SUBSIDIARY OF CELLNET, HAS NO INDEPENDENT
OPERATIONS AND EXISTS FOR THE PURPOSES OF ISSUING PREFERRED SECURITIES AND
INVESTING THE PROCEEDS FROM THE SALE THEREOF AND ENGAGING IN OTHER ACTIVITIES
NECESSARY OR INCIDENTAL THERETO. THE SUCCESS OF FUNDING IS COMPLETELY DEPENDENT
UPON THE SUCCESS OF CELLNET, AND ACCORDINGLY, REFERENCE MUST BE MADE TO THE RISK
FACTORS AND OTHER CAUTIONARY STATEMENTS SET FORTH IN CELLNET'S ANNUAL REPORT ON
FORM 10-K, QUARTERLY REPORTS ON FORM 10-Q AND OTHER FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION.
NO OPERATIONS OF FUNDING
Funding, the issuer of the Preferred Securities, is a special purpose
subsidiary of CellNet which is a Delaware limited liability company with no
operations or assets other than the CellNet Preferred Stock and Treasury Strips
which were purchased with the proceeds of the offering of the Preferred
Securities. Funding will have no other funds to pay cash dividends. In order to
pay subsequent dividends, Funding will be dependent on CellNet (i) to distribute
cash dividends in respect of the CellNet Preferred Stock (which distribution is
restricted by the terms of the indenture governing the 1997 Notes (the
"Indenture")), (ii) provide to Funding funds or (iii) issue to Funding common
stock (which is required by the terms of the CellNet Preferred Stock). Funding's
assets will consist almost entirely of its interest in the CellNet Preferred
Stock and the Treasury Strips.
10
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NO PRACTICAL BENEFIT TO HOLDERS FROM THE GUARANTEE
CellNet will guarantee the payment in full to the holders of the Preferred
Securities of (i) accrued and unpaid dividends on the Preferred Securities, if
and only to the extent Funding has funds sufficient and legally available
therefor to make such payment, (ii) the redemption price with respect to the
Preferred Securities redeemed, if and only to the extent Funding has funds
sufficient and legally available therefor to make such payment and (iii) upon a
voluntary termination or involuntary dissolution, winding-up or termination of
Funding (other than in connection with a redemption of all of the Preferred
Securities), the lesser of (a) the aggregate of the liquidation preference and
all accrued and unpaid dividends on the Preferred Securities to the date of
payment, to the extent Funding has funds sufficient and legally available
therefor to make such payment, and (b) the amount of assets of Funding remaining
available for distribution to holders of the Preferred Securities upon
liquidation of Funding. The Guarantee may also be subject to contractual
restrictions under agreements governing future indebtedness of CellNet.
Because the obligations supported by the Guarantee are limited by the amount
of the funds in Funding, if CellNet were to default on its obligation to pay
amounts payable on the CellNet Preferred Stock, Funding would lack available
funds for the payment of dividends or amounts payable on redemption of the
Preferred Securities or otherwise, and, in such event, holders of the Preferred
Securities would not be able to rely upon the Guarantee for payment of such
amounts. In addition, upon the initiation of any proceedings by or against
Funding under bankruptcy, insolvency or similar laws, or upon the occurrence of
certain other events, funds held by Funding may not be legally available for
distribution to the holders of the Preferred Securities and the holders would
then not be able to rely on the Guarantee for payment of such amounts.
Because the obligations supported by the Guarantee are limited to the amount
of the funds held by Funding that are legally available to make the payments
described above and because the Guarantee is subordinated to CellNet's existing
and future obligations not expressly subordinated to the Guarantee, the
Guarantee is of no practical benefit to holders of the Preferred Securities.
RANKING OF CELLNET PREFERRED STOCK; PRIOR PAYMENT OBLIGATIONS OF CELLNET;
UNCERTAINTY OF REDEMPTION
The CellNet Preferred Stock will be subordinated to all existing and future
indebtedness and other liabilities of CellNet, and will, with respect to
dividend distributions and distributions upon the liquidation, winding-up or
dissolution of CellNet, rank senior to all common stock and senior to or PARI
PASSU with all other capital stock of CellNet. There are no terms in the CellNet
Preferred Stock, the Preferred Securities or the Guarantee that limit CellNet's
ability to incur additional indebtedness or issue PARI PASSU preferred stock. As
of June 30, 1999, CellNet had approximately $414.5 million of 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. No ruling from the Internal Revenue Service (the "IRS") as
to such classification or treatment has been or is expected to be requested.
Assuming Funding is classified as a partnership for federal income tax purposes,
Funding intends to issue
11
<PAGE>
each holder of Preferred Securities an IRS Form K-1 on or about June 30 of each
relevant year and will not issue a Form 1099.
If Funding were classified or treated as an association taxable as a
corporation for federal income tax purposes, Funding would pay tax on its income
at corporate rates (currently a maximum 35% federal rate), distributions would
generally be taxed again to the holders of Preferred Securities as corporate
distributions, and no income, gains, losses or deductions would flow through to
the holders of Preferred Securities. Because a tax would be imposed upon Funding
as an entity, the cash available for distribution to the holders of Preferred
Securities would be substantially reduced. Classification or treatment of
Funding as an association taxable as a corporation or otherwise as a taxable
entity would result in a material reduction in the anticipated cash flow and
after-tax return of the holders of Preferred Securities and thus would likely
result in a substantial reduction in the value of Preferred Securities.
All holders of Preferred Securities are advised to consult their own legal,
tax and investment advisors as to all legal, tax and investment matters,
including without limitation, federal, state, local and foreign tax consequences
of the purchase, ownership, exchange, redemption and disposition of the
Preferred Securities and the reporting of income or loss with respect to the
Preferred Securities.
FUNDING ALLOCATIONS
It is possible that a holder of Preferred Securities may receive allocations
of taxable income without matching cash distributions. Furthermore, a holder who
disposes of Preferred Securities between record dates for dividends may be
required pursuant to Funding's method of allocation to include its pro rata
share of Funding's income (and deductions) through the end of the applicable
fiscal period in which such disposition occurs in the holder's calculation of
taxable income (and to add such amount to (or subtract such amount from) the
adjusted tax basis in the holder's Preferred Securities) without receiving the
dividend for the quarter in which such disposition occurs. Furthermore, certain
allocation methods used by Funding may be challenged by the IRS, which may
result in greater tax liability to holders of Preferred Securities during their
period of ownership or upon disposition.
DISPOSITION OF PREFERRED SECURITIES
A holder that sells Preferred Securities will recognize gain or loss equal
to the difference between the amount realized and its adjusted tax basis in such
Preferred Securities. Thus, prior Funding distributions in excess of cumulative
net taxable income in respect of Preferred Securities which decreased a holder's
tax basis in such Preferred Securities will, in effect, become taxable income or
gain if the Preferred Securities are sold at a price greater than the holder's
tax basis in such Preferred Securities, even if the price is less than such
holder's original cost. To the extent the selling price is less than the
holder's adjusted tax basis, a 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.
12
<PAGE>
ANTI-TAKEOVER PROVISIONS
On November 24, 1998 (the "Rights Dividend Declaration Date"), the Board of
Directors of CellNet adopted a Stockholder Rights Plan (the "Rights Plan") and
declared a dividend of one Preferred Share Purchase Right (a "Right") for each
outstanding share of common stock. The dividend was paid to stockholders of
record on December 21, 1998 (the "Record Date"). In addition, one Right will be
issued with each share of common stock that becomes outstanding between the
Record Date and the earlier to occur of the Distribution Date (as defined below)
and the Expiration Date (as defined below). This includes common stock that is
issued upon conversion of securities convertible into common stock such as stock
options, warrants, and the Preferred Securities.
The Distribution Date will occur, if at all, on the earlier of (a) the close
of business on the tenth (10th) day after a person or group acquires beneficial
ownership of fifteen percent (15%) or more of CellNet's common stock (including
common stock issuable upon conversion or exchange of any convertible
securities), and (b) the close of business on the tenth (10th) business day
after a person or group announces a tender or exchange offer, the consummation
of which would result in ownership by a person or group of fifteen percent (15%)
or more of CellNet's common stock (including common stock issuable upon
conversion or exchange of any convertible securities).
The Rights may not be exercised prior to the Distribution Date. Following
the Distribution Date, each Right will entitle the holder to purchase for $50.00
(the "Exercise Price") one one-thousandth (1/1000) of a share of CellNet's
Series A Participating Preferred Stock, $0.001 par value per share subject to
certain adjustments in both price and number of shares.
If a person or group acquires beneficial ownership of fifteen percent (15%)
or more of CellNet's common stock (including common stock issuable upon
conversion or exchange of any convertible securities) (an "Acquiring Person"),
then each Right (other than Rights owned by an Acquiring Person or its
affiliates) will entitle the holder thereof to purchase, for the Exercise Price,
a number of shares of CellNet's common stock having a then current market value
of twice the Exercise Price.
If, after an Acquiring Person acquires beneficial ownership of fifteen
percent (15%) or more of CellNet's common stock (including common stock issuable
upon conversion or exchange of any convertible securities), (a) CellNet merges
into another entity, (b) an acquiring entity merges into CellNet, or (c) CellNet
sells more than fifty percent (50%) of its assets or earning power, then each
Right (other than Rights owned by an Acquiring Person or its affiliates) will
entitle the holder thereof to purchase, for the Exercise Price, a number of
shares of the common stock of the person or entity engaging in the transaction
having a then current market value of twice the Exercise Price.
At any time after an Acquiring Person acquires beneficial ownership of
fifteen percent (15%) or more of CellNet's common stock (including common stock
issuable upon conversion or exchange of any convertible securities) and prior to
the acquisition by the Acquiring Person of fifty percent (50%) of CellNet's
common stock (including common stock issuable upon conversion or exchange of any
convertible securities), the Board of Directors may exchange the Rights (other
than Rights owned by the Acquiring Person or its affiliates), in whole or in
part, for shares of CellNet's common stock at an exchange ratio of one (1) share
of common stock per Right (subject to certain adjustments).
The Rights are redeemable at CellNet's option (with the approval of the
Board of Directors) at any time prior to the close of business on the day (prior
to the Expiration Date) of a public announcement that an Acquiring Person has
acquired beneficial ownership of fifteen percent (15%) or more of CellNet's
common stock (including common stock issuable upon conversion or exchange of any
convertible securities). Upon exercise of CellNet's option to redeem the Rights,
holders will be entitled to receive a redemption payment of $0.001 per Right
(subject to certain adjustments) payable in cash or in shares of CellNet's
common stock.
13
<PAGE>
The Rights expire (the "Expiration Date") on the earliest of (a) November
24, 2008, (b) the consummation of any of the following transactions: (i) CellNet
merges into another entity, (ii) an acquiring entity merges into CellNet, or
(iii) CellNet sells more than fifty percent (50%) of its assets or earning
power, (c) the effective date of a redemption of the Rights determined by the
Board of Directors, and (d) the time at which the Board of Directors orders an
exchange of the Rights.
Under certain circumstances, Rights beneficially owned by an Acquiring
Person or an affiliate or associate of an Acquiring Person and any subsequent
holder of such Rights may become null and void. The Rights have no voting
rights. The Rights have the benefits of certain customary anti-dilution
provisions.
The foregoing is a summary of certain principal terms of the Rights Plan and
is qualified in its entirety by reference to the terms of the Rights Agreement
pursuant to which the Rights have been issued. A copy has been filed with the
Securities and Exchange Commission on Form 8-A dated December 9, 1998.
The Rights Plan was adopted to provide protection to CellNet's stockholders
in the event of an unsolicited attempt to acquire CellNet on terms that are not
in the stockholders' best interests. The Rights Plan does not prevent an
acquisition of CellNet, impact CellNet's ability to negotiate a transaction on
mutually agreeable terms, or limit CellNet's flexibility in responding to
offers. The Rights Plan is designed to prevent the use of coercive and/or
abusive takeover techniques and to encourage any potential acquiror to negotiate
directly with the Board of Directors for the benefit of all stockholders. The
Rights Plan is also designed to afford the Board of Directors adequate time
within which to consider any takeover proposal and, if appropriate, to explore
alternatives. In addition, the Rights Plan is intended to provide increased
assurance that a potential acquiror would pay an appropriate control premium in
connection with any acquisition of CellNet. Nevertheless, the Rights Plan could
be utilized, under certain circumstances, as a method of discouraging, delaying
or preventing a change of control of CellNet.
CellNet is authorized to issue additional shares of undesignated preferred
stock. The Board of Directors has the authority, without further action by the
stockholders, to issue such stock in one or more series, to fix the rights,
preferences, privileges and restrictions thereof. The issuance of such stock may
also have the effect of delaying, deferring or preventing a change in control of
CellNet, may discourage bids for CellNet's common stock at a premium over its
market price and may materially and adversely affect the market price of and the
voting and other rights of the holders of common stock. In addition, CellNet is,
and will continue to be, subject to the anti-takeover provisions of the Delaware
General Corporation Law, which could have the effect of delaying or preventing a
change of control of CellNet. Furthermore, upon a change of control, the holders
of CellNet's outstanding 1997 Notes are entitled, at their option, to be repaid
in cash. Such provisions may have the effect of delaying or preventing changes
in control or management of CellNet. All of these factors could materially and
adversely affect the price of the Preferred Securities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Funding's restricted cash balances are invested in fixed income Treasury
Strips having staggered maturities matching dividend payment dates of the
Redeemable Preferred Securities. Accordingly, changes in market interest rates
have no effect on Funding's operating results, financial condition and cash
flows.
At June 30, 1999, Funding had $93.5 million of CellNet Preferred Stock,
which is exchangeable into shares of CellNet Common Stock, at an exchange rate
based on the exchange rate of the 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 Preferred
14
<PAGE>
Securities or a Preferred Security holder's decision to exchange those
securities for CellNet Common Stock.
The information below summarizes Funding's financial instruments exposed to
market risks associated with fluctuations in interest rates as of June 30, 1999.
The table presents principal cash flows and related interest rates by year of
maturity for Funding's restricted cash and mandatorily Preferred Securities in
effect at June 30, 1999. This information excludes the potential exercise of the
relevant redemption features (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>
Restricted Cash--
Fixed Rate....................... $ 3,858 $ 7,700 $ 3,850 -- -- -- $ 15,408 $ 14,623
Average Rate..................... 5.60% 5.60% 5.60% -- -- --
Mandatorily Redeemable
Preferred Securities--
Fixed Rate....................... -- -- -- -- -- $ 110,000 $ 110,000 $ 85,800
Interest Rate.................... -- -- -- -- -- 7.0%
</TABLE>
15
<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 ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended June 30,
1999.
16
<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: August 16, 1999 By: /s/ PAUL G. MANCA
-----------------------------------------
Paul G. Manca
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
</TABLE>
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT TITLE
- ------ --------------------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 115,603
<CURRENT-LIABILITIES> (641)
<BONDS> 0
(106,355)
0
<COMMON> (10)
<OTHER-SE> (8,341)
<TOTAL-LIABILITY-AND-EQUITY> (115,603)
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (4,014)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (150)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (150)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
