<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<S> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE PERIOD ENDED MARCH 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</TABLE>
COMMISSION FILE NUMBER 0-21409
------------------------
CELLNET DATA SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 94-2951096
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 SHOREWAY ROAD
SAN CARLOS, CALIFORNIA 94070
(Address of principal executive (Zip Code)
offices)
</TABLE>
(415) 508-6000
(Registrant's Telephone Number, Including Area Code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(a) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of May 1, 1997, 39,546,932 shares of the Registrant's Common Stock,
$0.001 par value, were issued and outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CELLNET DATA SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
(a) Condensed Consolidated Financial Statements (unaudited)................................ 1
(b) Condensed Consolidated Balance Sheets--As of March 31, 1997 and December 31, 1996...... 1
(c) Condensed Consolidated Statements of Operations--Three months ended March 31, 1997 and
March 31, 1996....................................................................... 2
(d) Condensed Consolidated Statements of Cash Flows--Three months ended March 31, 1997 and
March 31, 1996....................................................................... 3
(e) Notes to Condensed Consolidated Financial Statements................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............
6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................. 23
Item 2. Changes in Securities............................................................................. 23
Item 3. Defaults Upon Senior Securities................................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders............................................... 24
Item 5. Other Information................................................................................. 24
Item 6. Exhibits and Reports on Form 8-K.................................................................. 24
SIGNATURES..................................................................................................... 25
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CELLNET DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 115,850 $ 124,232
Short-term investments.............................................................. 34,300 54,643
Accounts receivable--trade.......................................................... 1,220 850
Accounts receivable--other.......................................................... 1,150 1,264
Prepaid expenses and other.......................................................... 1,385 1,124
----------- ------------
Total current assets.............................................................. 153,905 182,113
Network components and inventory...................................................... 14,105 11,211
Networks in progress--net............................................................. 57,264 48,426
Property--net......................................................................... 13,961 12,236
Debt issuance and other costs--net.................................................... 5,420 5,565
----------- ------------
Total assets...................................................................... $ 244,655 $ 259,551
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 8,226 $ 8,133
Accrued compensation and related benefits........................................... 2,686 2,371
Accrued liabilities................................................................. 831 950
Current portion of capital lease obligations........................................ 298 308
----------- ------------
Total current liabilities......................................................... 12,041 11,762
----------- ------------
Senior discount notes--13%............................................................ 213,896 207,178
----------- ------------
Capital lease obligations--net........................................................ 321 366
----------- ------------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 3)
Stockholders' equity:
Preferred stock--$.001 par value; 15,000,000 shares authorized; shares outstanding,
1996: none; 1997: none............................................................ -- --
Common stock--$.001 par value; 100,000,000 shares authorized; shares outstanding,
1996: 38,537,517; 1997: 39,437,432................................................ 206,611 205,793
Notes receivable from sale of common stock.......................................... (718) (814)
Warrants............................................................................ 2,223 2,984
Accumulated deficit................................................................. (189,719) (167,715)
Net unrealized loss on short-term investments....................................... 0 (3)
----------- ------------
Total stockholders' equity........................................................ 18,397 40,245
----------- ------------
Total liabilities and stockholders' equity............................................ $ 244,655 $ 259,551
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
1
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues:
Network service revenues................................................................ $ 859 $ 74
Product sales........................................................................... 64 70
Other revenues.......................................................................... 56 25
---------- ----------
Total revenues........................................................................ 979 169
---------- ----------
Costs and expenses:
Cost of network operations.............................................................. 3,565 1,252
Cost of product sales................................................................... 78 65
Research and development................................................................ 6,396 5,686
Marketing and sales..................................................................... 1,739 1,309
General and administrative.............................................................. 4,427 2,220
Depreciation and amortization........................................................... 2,465 891
---------- ----------
Total costs and expenses.............................................................. 18,670 11,423
---------- ----------
Loss from operations...................................................................... (17,691) (11,254)
Equity in income (loss) of unconsolidated affiliate....................................... (358) 0
Other income (expense):
Interest income......................................................................... 2,291 1,905
Interest expense........................................................................ (6,311) (5,710)
Other--net.............................................................................. 66 (6)
---------- ----------
Total other income (expense).............................................................. (3,954) (3,811)
---------- ----------
Net loss before income taxes.............................................................. (22,003) (15,065)
Provision for income taxes................................................................ 1 1
---------- ----------
Net loss.................................................................................. $ (22,004) $ (15,066)
---------- ----------
---------- ----------
NET LOSS PER SHARE........................................................................ ($ 0.56) ($ 0.48)
SHARES USED IN COMPUTING PER SHARE AMOUNTS................................................ 38,945 31,158
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................................ $ (22,004) $ (15,067)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization......................................................... 2,465 891
Accretion on 13% senior discount notes................................................ 6,132 5,537
Amortization of debt issuance costs................................................... 155 148
Changes in:
Accounts receivable--trade.......................................................... (370) 299
Accounts receivable--other.......................................................... 114 (2,156)
Prepaid expenses and other assets................................................... (261) (660)
Accounts payable.................................................................... 93 200
Accrued compensation and related benefits........................................... 315 (671)
Accrued liabilities................................................................. (119) 1,158
---------- ----------
Net cash used for operating activities............................................ (13,480) (10,321)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Network components and inventory........................................................ (2,894) (794)
Purchase of property.................................................................... (3,310) (1,406)
Networks in progress.................................................................... (9,107) (8,205)
Other assets............................................................................ (10) --
Purchase of short-term investments...................................................... (11,590) (64,014)
Proceeds from sales and maturities of short-term investments............................ 31,934 89,760
---------- ----------
Net cash (used) provided for investing activities................................. 5,023 15,341
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations.................................................. (78) (82)
Proceeds from sale of common stock...................................................... 57 4
Collection of note receivable from sale of common stock................................. 96 --
---------- ----------
Net cash (used) provided by financing activities.................................. 75 (78)
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS..................................................... (8,382) 4,942
CASH AND CASH EQUIVALENTS, Beginning of period............................................ 124,232 48,018
---------- ----------
CASH AND CASH EQUIVALENTS, End of period.................................................. $ 115,850 $ 52,960
---------- ----------
---------- ----------
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property under capital leases............................................ $ 23 $ 23
Capitalized interest on networks in progress............................................ $ 586 $ 460
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest................................................ $ 22 $ 21
Cash paid for income taxes.............................................................. $ 1 $ 1
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S><C>
1. BASIS OF PRESENTATION. In the opinion of management, these unaudited
condensed consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments and accruals the
Company considers necessary for a fair presentation of the Company's
financial position as of March 31, 1997, and the results of operations
and cash flows for the three months ended March 31, 1997 and 1996.
This unaudited interim information should be read in conjunction with
the audited consolidated financial statements of CellNet Data Systems,
Inc. and the notes thereto for the year ended December 31, 1996.
Operating results for the three months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the
year ended December 31, 1997.
Investment in affiliate is accounted for using the equity method.
Income or loss of affiliate is based upon the Company's beneficial
interest (50%).
2. NET LOSS PER SHARE. Net loss per share is computed using the weighted
average number of common and common equivalent shares outstanding
during the year ended December 31, 1996, and three months ended March
31, 1997. For the three months ended March 31, 1996, common equivalent
shares include all outstanding preferred stock and warrants that were
converted in connection with the initial public offering completed
October 2, 1996, even when the effect is anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, EARNINGS PER
SHARE (SFAS 128). The Company is required to adopt SFAS 128 in the
fourth quarter of fiscal 1997 and will restate at that time earnings
per share (EPS) data for prior periods to conform with SFAS 128.
Earlier application is not permitted. The Company has determined that
adoption of SFAS 128 will not have a material effect on losses per
share which have been previously reported.
3. COMMITMENTS AND CONTINGENCIES. The industry in which the Company
operates is characterized by frequent litigation regarding patent and
other intellectual property rights. The Company is a party to three
such claims. Although the ultimate outcome of these matters is not
presently determinable, management believes that the resolution of
these matters will not have a material adverse effect on the Company's
financial position or results of operations.
Although the Company has been granted federal registration of its
"CellNet" trademark, in January 1995, Century Telephone Enterprises,
Inc. (Century Telephone) filed a petition for cancellation in an
attempt to challenge such registration. The matter is currently
pending before the Trademark Trial and Appeal Board of the U.S. Patent
and Trademark Office. CellNet and Century Telephone are the sole
parties in the action. If such challenge were successful, the Company
could lose its registration and could be required to adopt a new
trademark and possibly a new or modified corporate name. CellNet could
encounter similar challenges in the future. While the requirement to
adopt a new trademark or new or modified corporate name could involve
a significant expense and could result in the loss of any goodwill and
name recognition associated with the Company's current trademark and
corporate name, the Company does not believe this would have a
long-term material adverse impact on its business, operating results,
financial condition and cash flow.
In October 1996, Itron, Inc., one of the Company's competitors, filed
a complaint against the Company in the Federal District Court in
Minnesota alleging that the Company infringes an Itron patent which
was issued in September 1996. Itron is seeking a judgment for damages,
attorneys fees and injunctive relief. The Company believes, based on
its current information, that the Company's products do not infringe
any valid claim in the Itron patent, and in the Company's opinion, the
ultimate outcome of the lawsuit is not expected to have a material
adverse effect on its results of operations or financial condition.
</TABLE>
4
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S><C>
In April 1997, the Company filed a patent infringement suit against
Itron, Inc. in the Federal District Court for the Northern District of
California claiming violation of CellNet's U.S. Patent No. 4,783,623.
The Company seeks an injuction, damages and other relief.
On October 31, 1996, a complaint SETTLE V. SEIDL, ET AL., No. 398464,
was filed in the Superior Court of California for the County of San
Mateo against the Company, certain of its officers and directors and
underwriters of the Company's Initial Public Offering. The complaint,
which is a purported class action filed on behalf of the Company's
stockholders who purchased shares in the Company's Initial Public
Offering, seeks unspecified damages and rescission for alleged
liability under various provisions of the federal securities laws and
California state law. Plaintiff alleges that the Prospectus and
Registration statement dated September 26, 1996, pursuant to which the
Company issued 5,000,000 shares of Common Stock to the public,
contained materially misleading statements and/or omissions in that
defendants were obligated to disclose, but failed to disclose, that a
patent conflict with Itron, Inc. was likely to ensue. On November 8
and 13, 1996, two additional complaints, KAREN ZULLY V. CELLNET DATA
SYSTEMS, INC., ET AL., No. 398551 and HOWARD FIENMAN AND GERALD
SLAPSOWITZ V. CELLNET DATA SYSTEMS, INC., ET AL., No. 398560, were
filed in the Superior Court of California for the County of San Mateo.
These cases are essentially similar in nature to the SETTLE case. The
Court has ordered consolidation of the SETTLE and ZULLY actions. The
Company expects that the FIENMAN action will be consolidated with the
SETTLE and ZULLY actions before trial. The Company believes that the
allegations in these complaints are without merit and intends to
defend these actions vigorously. In the Company's opinion, the
ultimate outcome of these lawsuits is not expected to have a material
adverse effect on its results of operations or financial condition.
</TABLE>
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTAINS TREND ANALYSIS AND OTHER FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT INVOLVE
RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET
FORTH IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF THE FACTORS SET FORTH
UNDER "FACTORS THAT MAY AFFECT OPERATING RESULTS" AND OTHER RISKS DETAILED FROM
TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION.
OVERVIEW
CellNet Data Systems, Inc. ("CellNet" or the "Company") intends to deploy
and operate a series of wireless data communications networks pursuant to
long-term contracts with utility company customers and to earn recurring
revenues by providing Network Meter Reading ("NMR") services to the utilities
and using the network to support a variety of non-utility applications. The
Company may also provide NMR services pursuant to (i) joint ventures or
alliances with utilities to form and own metering companies, (ii) contracts of
shorter duration than those the Company has previously entered into, (iii)
deployments with utilities aimed at high-value commercial and industrial
customers, with other customers to be added over time, and (iv) contracts and
deployments with non-regulated third party entities such as power marketers or
others that desire to enter the metering business. The Company's business
strategy has affected and will continue to affect its financial condition and
results of operations as follows:
CHANGING COMPOSITION OF REVENUES. The Company's revenues prior to 1991 were
primarily attributable to sales of, and contract fees related to the development
of, miscellaneous utility communication equipment. The Company believes that
such revenues will be largely non-recurring and will diminish to relatively
insignificant levels over the next few years. The Company derives an increasing
proportion of its revenues from fees earned under services agreements related to
its wireless communications networks. Under the Company's existing services
agreements with Kansas City Power & Light Company ("KCPL"), Union Electric
Company ("UE"), Northern States Power Company ("NSP"), Pacific Gas & Electric
Company ("PG&E") and Puget Sound Energy, Inc. ("Puget"), the Company receives
monthly NMR service fees based on the number of endpoint devices that are in
revenue service during the applicable month to bill customers.
UNEVEN REVENUE GROWTH. The timing and amount of the Company's future
revenues will depend upon its ability to obtain additional services agreements
with utilities and other customers and upon the Company's ability to deploy
successfully and operate its wireless communications networks. New services
agreements are expected to be obtained on an irregular basis, and there may be
prolonged periods during which the Company does not enter into any additional
services agreements and other arrangements. As a result, the Company expects
that its revenues will not grow smoothly over time, but will increase unevenly
as the Company enters into new services agreements and other commercial
relationships, and may decrease sharply in the event that any of its existing
services agreements are terminated or not renewed. See "Factors That May Affect
Future Operating Performance--Uncertainty of Future Revenues; Need for
Additional Services Contracts and Fluctuating Operating Results."
UNCERTAINTY OF UTILITY MARKET ACCEPTANCE. The Company's future revenues
will depend on the number of energy companies signing new services agreements
with CellNet. During the first quarter of 1997, approximately 90% of the
Company's revenues were derived from contracts with KCPL and UE. The utility
industry is generally characterized by long purchasing cycles and cautious
decision making, and purchases of the Company's services are, to a substantial
extent, deferrable in the event that utilities seek to reduce capital
expenditures or decide to defer such purchases for other reasons. Only a limited
number of utilities have made a commitment to purchase the Company's services to
date. The Company believes that it will enter into additional services contracts
with other utilities; however, if the Company's services
6
<PAGE>
do not gain widespread industry acceptance, its revenues would not increase
significantly after services contracts for existing network systems have been
fully installed.
REVENUES LAG NETWORK DEPLOYMENT. The Company generally realizes network
service revenue under a services agreement with a utility only when a portion of
the network is installed and the utility has begun billing customers based upon
NMR data. The Company expects that its receipt of network service revenue will
lag the signing of the related services agreements by a minimum of six months
and that it will generally take two to four years to complete installation of a
network after each services agreement has been signed. A network's service
revenues are not expected to exceed the Company's capital investments and
expenses incurred to deploy such network for several years. As of March 31,
1997, the Company had 2,235,000 meters under long-term contracts, of which
447,000 meters were in revenue service. The Company signed agreements with KCPL
and UE in August 1994 and August 1995, respectively, and did not receive its
first revenue under the KCPL and UE services agreements until September 1995 and
May 1996, respectively. The Company has completed the installation of its NMR
network for KCPL and had installed approximately 365,000 meters on the network
by the end of 1996. The Company expects to add an additional 50,000 meters to
the KCPL network in 1997 and 1998 which would be added to the total number of
meters in revenue service upon acceptance by KCPL for billing purposes. The
Company is in the process of reviewing with KCPL the remaining meters
(approximately 5,000) under contract with KCPL in order to determine the number
which should be automated or read manually. The Company expects substantially to
complete the UE network in 1998. The Company began the installation of both the
NSP and Puget networks in August 1996 and began receiving revenue from Puget in
January 1997. As additional segments of the Company's networks are installed and
used by its utility clients for billing purposes, the Company expects to realize
a corresponding increase in its network service revenues. However, if the
Company is able to deploy successfully an increasing number of networks over the
next few years, the operating losses created by this lag in revenues, and
negative cash flow resulting from such operating losses and the capital
expenditures expected to be required in connection with the installation of such
networks, are expected to widen for a period of time and will continue until the
operating cash flow from installed networks exceeds the costs of deploying and
operating additional networks.
IMPACT OF RAPID EXPANSION. CellNet will not typically invest the capital
necessary to deploy a wireless communications network prior to entering into a
long-term services agreement with a utility or other customer. However, during
its expansion phase, the Company will be required to invest significant amounts
of capital in its networks and to incur substantial and increasing sales and
marketing expenses before receiving any return on such expenditures through
network service revenues. The Company has incurred substantial operating losses
since inception and, as of March 31, 1997, had an accumulated deficit of $189.7
million. The Company does not expect significant revenues relative to
anticipated operating costs during 1997 and expects to incur substantial and
increasing operating losses and negative net cash flow after capital
expenditures for the foreseeable future as it expands its research and
development and marketing efforts and installs additional networks. The Company
does not expect positive cash flow after capital expenditures from its NMR
services operations for several years. The Company will require substantial
capital to fund cash flow deficits and capital expenditures for the foreseeable
future and expects to finance these requirements through significant additional
external financing. See "Factors That May Affect Future Operating
Performance--History and Continuation of Operating Losses" and "--Substantial
Leverage and Ability to Service Debt; Substantial Future Capital Needs."
INTEREST INCOME. The Company has earned substantial amounts of interest
income on short-term investments of the proceeds of its financing activities,
and expects to earn additional interest income through the investment of a
portion of the proceeds of its initial public offering in October 1996 (the
"Initial Public Offering") and certain direct placements of the Company's Common
Stock. The Company expects to utilize substantially all of its cash, cash
equivalents and short-term investments in deploying its wireless communications
networks, in continuing research and development activities related thereto, in
7
<PAGE>
related selling and marketing activities and for general and administrative
purposes. As such funds are expended, interest income is expected to decrease.
RESULTS OF OPERATIONS
REVENUES
Revenues increased to $979,000 for the three months ended March 31, 1997
from $169,000 for the three months ended March 31, 1996. The increase in
revenues for the three months ended March 31, 1997 from the comparable period in
1996 was principally due to the increase in network service revenues. Revenues
prior to 1996 were attributable primarily to product sales and development and
other contract revenues unrelated to the Company's current focus of providing
NMR services that were largely non-recurring and that are expected to decline
and remain at relatively insignificant levels over the next few years. During
the first three months of 1997, KCPL and UE accounted for 61% and 29% of the
Company's revenues, respectively. During the first three months of 1996, KCPL
and UE accounted for 79% and 0% of the Company's revenues, respectively. The
Company's NMR service revenues grew to $859,000 for the three months ended March
31, 1997 from $74,000 for the comparable period in 1996. As of March 31, 1997
approximately 2,235,000 meters were under contract and approximately 447,000
meters were in revenue service. In 1996 the Company signed an agreement with NSP
but will not recognize service revenues earned under it until the automated
meters installed on the network are used by NSP to bill their customers. In
connection with the purchase of $15.0 million of restricted Common Stock by NSP
concurrent with the Company's Initial Public Offering, the Company placed shares
in escrow ("Escrow Shares") which will be released upon entering into an NMR
services agreement with Wisconsin Electric Power Company ("WEPC") by December
1997. The fair value of these Escrow Shares will be expensed as a sales discount
over the term of the WEPC services agreement if such services agreement is
entered into.
The Company generally realizes service revenues under its services
agreements with utilities only when its networks or portions thereof are
successfully installed and operating and the utility commences billing its
customers based upon the NMR data obtained. Revenues are expected to increase as
the Company continues to install its networks, the networks or portions thereof
become operational, and utilities begin billing their customers based upon data
obtained over the CellNet system. Due primarily to the nature, amount and timing
of revenues received to date, no meaningful period-to-period comparisons can be
made. Revenues received during the three month periods ending March 31, 1997 and
1996 are not reliable indicators of revenues that might be expected in the
future.
COST OF REVENUES
Cost of revenues historically have consisted of the cost of product sales.
For the three months ended March 31, 1997 and March 31, 1996, cost of revenues
primarily consisted of network operations costs. Cost of revenues were $3.6
million and $1.3 million for the three-month periods ended March 31, 1997 and
1996, respectively. The increase in cost of revenues was driven by increasing
costs of providing network services, due primarily to growth in the number of
employees and associated costs necessary for network monitoring operations at
customer sites and at the Company's headquarters, network deployment management
and customer training. Costs of network services also include the increased
installation, applications and RF engineering staffing at the Company's
headquarters to support anticipated additional utility contracts. Network
services do not currently generate a profit as the Company has not yet achieved
a scale of services sufficient to cover network costs. The Company will incur
significant and increasing costs primarily attributable to network operation and
depreciation. Once a network has been fully installed, costs associated with
generating network revenues will consist primarily of maintaining a monitoring
center for such network, network depreciation and miscellaneous maintenance and
operating expenses.
8
<PAGE>
OPERATING EXPENSES
Operating expenses, consisting of research and development, marketing and
sales, general and administrative costs and depreciation and amortization
expenses, were $15.0 million and $10.1 million for the three-month periods ended
March 31, 1997 and March 31, 1996, respectively. The increase in operating
expenses on a period to period basis is attributable to the Company's rapid
growth and to increasing research and development and marketing and sales
expenditures. The Company expects to continue to spend a significant portion of
its resources on research and development activities for the foreseeable future.
Marketing and sales and general and administrative costs are expected to
increase in the future as the Company seeks to sign new service agreements.
RESEARCH AND DEVELOPMENT. Research and development expenses are
attributable largely to continuing system software, firmware and equipment
development costs, prototype manufacturing, testing, personnel costs, consulting
fees, and supplies. Research and development costs are expensed as incurred. The
Company's networks include certain software applications which are integral to
their operation. The costs to develop such software have not been capitalized as
the Company believes its software development is essentially completed when
technological feasibility of the software is established and/or development of
the related network hardware is complete. Research and development expenses were
$6.4 million and $5.7 million for the three-month periods ended March 31, 1997
and March 31, 1996, respectively. Research and development spending increases
for the three-month period ended March 31, 1997 from the comparable period in
1996 reflect primarily additions to the Company's engineering staff. The Company
expects that research and development expenses will increase in the near term
for additional investments in research and development projects for the
principal purposes of increasing network functionality and performance and
lowering network costs, and in connection with the establishment of
international operations.
MARKETING AND SALES. Marketing and sales expenses consist principally of
compensation, including commissions paid to sales and marketing personnel,
travel, advertising, trade show and other promotional costs. Marketing and sales
expenses were $1.7 million and $1.3 million for the three-month periods ended
March 31, 1997 and March 31, 1996, respectively. These expenses have increased
due to the Company's accelerated efforts to sign new services agreements. The
Company expects marketing and sales expenses to continue to increase in absolute
dollars as the Company seeks to enter into new services agreements.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
compensation paid to general management and administrative personnel, home
office expense, communications charges, recruiting costs, travel, and
communications and other general administrative expenses, including fees for
professional services. General and administrative expenses were $4.4 million and
$2.2 million for the three-month periods ended March 31, 1997 and March 31,
1996, respectively. The Company expects general and administrative expenses to
continue to increase in absolute dollars as the Company increases staffing and
continues developing information systems to support its planned growth. The
Company will need to increase administrative expenditures in the longer term to
expand domestic and establish international operations.
INTEREST INCOME AND EXPENSE
Prior to June 1995 the Company funded its liquidity needs primarily from the
issuance of equity securities. In June and November 1995, the Company issued and
sold a total of $325.0 million aggregate principal amount at maturity of the
Company's 13% Senior Discount Notes due 2005 (the "Senior Discount Notes") and
warrants (the "Note Warrants") for proceeds, net of issuance costs, of $169.9
million. On October 2, 1996, the Company completed its Initial Public Offering
in which it sold 5,000,000 shares of its Common Stock at an offering price of
$20 per share for net proceeds of $92.2 million after deducting underwriting
discounts and commissions and offering expenses payable by the Company. In
connection with the Initial Public Offering, the Company also received $1.2
million in proceeds from the cash exercise of warrants (the "Warrant Exercise")
to purchase securities converted into 495,918 shares of
9
<PAGE>
its Common Stock. In addition, on October 2, 1996, the Company completed certain
direct placements (the "Direct Placements") in which it sold 1,579,404 shares of
its Common Stock for proceeds of $28.0 million. Accordingly, the Company has
earned interest income on the invested proceeds from the Senior Discount Notes,
Note Warrants, the Initial Public Offering, Warrant Exercise and Direct
Placements. The Company has also incurred significant interest expense from the
amortization of the original issue discount on the Senior Discount Notes.
Interest income has been and will continue to be received by the Company
from the short-term investment of proceeds from the issuance of equity and debt
securities pending the use of such proceeds by the Company for capital
expenditures and operating and other expenses. Interest income is expected to be
highly variable over time as proceeds from the issue and sale of additional
equity and debt securities are received and as funds are used by the Company in
its business. Interest income for the three months ended March 31, 1997 and
March 31, 1996 was $2.3 million and $1.9 million, respectively.
No interest on the Senior Discount Notes is payable prior to December 15,
2000. Thereafter until maturity in June 2005, interest will be payable
semi-annually in arrears on each December 15 and June 15. The carrying amount of
the Senior Discount Notes accretes from the date of issue and the Company's
interest expense includes such accretion. Interest expense was $6.3 million and
$5.7 million for the three-month periods ended March 31, 1997 and March 31,
1996, respectively.
PROVISION FOR INCOME TAXES
The Company has not provided for or paid federal income taxes due to the
Company's net losses. A nominal provision has been recorded for various state
minimum income and franchise taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires significant amounts of capital for research and
development in connection with the development of its proprietary wireless
communications network and related products and services, for investments in the
installation and testing of such networks and for related sales and marketing
and general and administrative expenses. Historically, the Company has satisfied
its liquidity requirements primarily through external financings, including
private placements of equity and debt securities and interest income derived
from the investment of the proceeds of its financing activities.
In the first three months of 1997 and 1996, net cash used in the Company's
operating activities totaled $13.5 million and $10.3 million, respectively. Net
cash used in operating activities resulted primarily from cash used to fund net
operating losses.
As of March 31, 1997, the Company had cash, cash equivalents and short-term
investments totaling $150.1 million. As of December 31, 1996, the Company had
cash, cash equivalents and short-term investments totaling $178.9 million. The
decline of $28.8 million from December 31, 1996 was due primarily to operating
costs and the development and construction of the Company's wireless
communications network.
In the first three months of 1997 net cash provided by the Company's
financing activities totaled $75,000 and in the first three months of 1996 net
cash used in financing activities was $78,000. The Company's financing
activities consisted primarily of the collection of sales proceeds and notes
receivable in connection with the exercise of employee stock options. In the
first three months of 1997 and 1996 net cash provided by investing activities
totaled $5.0 million and $15.3 million, respectively. The Company's investing
activities consisted primarily of purchases of network components and inventory,
the construction and installation of networks, purchases of property and
equipment, and purchases, sales and maturities of short-term investments. The
$5.0 million of net cash provided by investing activities in the first three
months of 1997 was largely attributable to proceeds from the sale of short-term
investments. These proceeds exceed investments in short-term instruments as the
Company used the proceeds of short-term
10
<PAGE>
investments to fund its operating activities. The Company shortened the maturity
of the majority of its portfolio of short-term investments to less than 90 days,
which are classified, accordingly, as cash equivalents.
Deployments of the Company's wireless communications networks will require
substantial additional capital. In addition, funds will be required for further
enhancements to the system software, firmware, hardware and other equipment to
increase the speed, capacity and functionality of the system, to enhance system
productivity over time and to expand the scope of utility and other network
information services that may be offered on the CellNet system. The Company
expects that cash used for the construction and installation of networks and for
the purchase of property and equipment will increase substantially as and when
the Company obtains new services agreements or enters into other arrangements
for the installation of its networks, and that the Company will require
significant amounts of additional capital from external sources. Sources of
additional capital for the Company and its subsidiaries may include project or
conventional bank financing, public and private offerings of debt and equity
securities and cash generated from operating activities. To provide financing
for installation of the Company's network under its UE Services Agreement, the
Company has received a commitment from Toronto Dominion Bank for $25.0 million
for a nine-year and three-month secured revolving credit facility on
conventional bank financing terms. This commitment is subject to standard
conditions including satisfactory documentation. This facility is expected to
require the Company's St. Louis operations to meet certain revenue requirements
and to limit the capital expenditures and indebtedness of such operations. The
Company expects that a substantial portion of its future financing will be at
the subsidiary level on a project basis. The Company expects to obtain third
party financing for the construction of wireless networks, based on the
projected cash flow expected to be generated from such projects. The Company
expects that the recurring revenue stream from services contracts and other
arrangements will support the amortization of debt raised for the project
involved. The Company does not anticipate deriving any significant cash from
such operations for several years.
The Senior Discount Notes were issued at a substantial discount from their
aggregate principal amount at maturity of $325.0 million. Although interest is
not payable on the Senior Discount Notes prior to December 15, 2000, the
carrying amount of such indebtedness will increase as the original issue
discount is amortized through maturity in June 2005. Beginning June 15, 2000,
the Senior Discount Notes will bear interest, payable semi-annually, at a rate
of 13% per annum, with payments commencing December 15, 2000. No principal
payments on the Senior Discount Notes are due prior to maturity in 2005.
The Company believes that existing cash, cash equivalents and anticipated
interest income and other revenues, will be sufficient to meet its cash
requirements for at least the next 12 months using management's best estimates.
Thereafter, the Company expects that it will require substantial additional
capital. The extent of additional financing will depend on the success of the
Company's business. The Company expects to incur significant operating losses
and to generate increasingly negative net cash flow during the next several
years while it develops and installs its network communications systems. There
can be no assurance that additional financing will be available to the Company
or, if available, that it can be obtained on terms acceptable to the Company and
within the limitations contained in the Indenture or that may be contained in
any additional financing arrangements. The Indenture governing the Senior
Discount Notes contains certain covenants that limit the Company's ability to
incur additional indebtedness. Future financings may be dilutive to existing
stockholders. Failure to obtain such financing could result in the delay or
abandonment of some or all of the Company's development and expansion plans and
expenditures, which could limit the ability of the Company to meet its debt
service requirements and could have a material adverse effect on its business
and on the value of the Common Stock. See "Factors That May Affect Future
Operating Performance--Substantial Leverage and Ability to Service Debt;
Substantial Future Capital Needs."
11
<PAGE>
FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT; SUBSTANTIAL FUTURE CAPITAL
NEEDS
The Company has substantial outstanding indebtedness and must begin paying
cash interest on the aggregate accreted amount of $325 million of the Senior
Discount Notes on December 15, 2000. The Company and its subsidiaries intend to
incur substantial additional indebtedness, primarily in connection with
installing future networks. As a result, the Company and its subsidiaries will
have substantial debt service obligations. The Company's capital expenditures
will increase significantly if new services contracts are signed, and the
Company expects that its cash flow taking into account capital expenditures will
be increasingly negative over the next several years. The ability of the Company
to meet its debt service requirements will depend upon achieving significant and
sustained growth in the Company's cash flow, which will be affected by its
success in implementing its business strategy, prevailing economic conditions
and financial, business and other factors, certain of which are beyond the
Company's control. The Company's ability to generate such cash flow is subject
to a number of risks and contingencies. Included among these risks are: (i) the
possibilities that the Company may not obtain sufficient additional services
agreements or complete scheduled installations on a timely basis, (ii) revenues
may not be generated quickly enough to meet the Company's operating costs and
debt service obligations, (iii) the Company's wireless systems could experience
performance problems, or (iv) adoption of the Company's system could be less
widespread than anticipated. Accordingly, there can be no assurance as to
whether or when the Company's operations will generate positive cash flow or
become profitable or whether the Company or its subsidiaries will at any time
have sufficient resources to meet their debt service obligations. If the Company
is unable to generate sufficient cash flow to service its indebtedness, it will
have to reduce or delay planned capital expenditures, sell assets, restructure
or refinance its indebtedness or seek additional equity capital. There can be no
assurance that any of these strategies could be effected on satisfactory terms,
if at all, particularly in light of the Company's high levels of indebtedness.
In addition, the degree to which the Company is leveraged could have significant
consequences, including, but not limited to, the following: (i) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, research and development, acquisitions, and other general
corporate purposes may be materially limited or impaired, (ii) a substantial
portion of the Company's cash flow from operations must be dedicated to the
payment of principal and interest on its indebtedness and therefore cannot be
used in the Company's business, and (iii) the Company's high degree of leverage
may make it more vulnerable to economic downturns, may limit its ability to
withstand competitive pressures and may reduce its flexibility in responding to
changing business and economic conditions.
The Company will require substantial additional funds for the development,
commercial deployment and expansion of its networks, as well as to fund
operating losses. As of March 31, 1997, the Company had $150.1 million in cash,
cash equivalents and short-term investments. The Company believes that its
existing cash, cash equivalents and short-term investments and anticipated
interest income and other revenues, will be sufficient to meet its cash
requirements for at least the next 12 months based on management's best
estimates. Thereafter, the Company expects that it will require substantial
additional capital. Depending upon the number and timing of any new services
agreements and upon the associated network deployment costs and schedules, the
Company may require additional equity or debt financing earlier than estimated
in order to fund its working capital and other requirements. Future financings
may be dilutive to existing stockholders. There can be no assurance that
additional financing will be available when required or, if available, that it
will be on terms satisfactory to the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Substantially all of the operations of the Company are and will be conducted
through subsidiaries. Nonetheless, the Company has incurred significant
indebtedness at the holding company level and intends to incur substantial
additional holding company indebtedness. The ability of the Company to service
such indebtedness will depend on the availability of income and cash flow from
its subsidiaries for distribution to the holding company. Such availability will
depend on a number of factors, including the terms of
12
<PAGE>
financing agreements entered into by the Company's subsidiaries and restrictions
arising under the laws of the jurisdictions, which may be foreign jurisdictions,
wherein those subsidiaries conduct their businesses. The Company's subsidiaries
are separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due on the Company's indebtedness or to make any
funds available therefor, whether in the form of loans, dividends or otherwise.
In addition, the Company intends to pursue its international business through a
proposed joint venture with Bechtel Enterprises, Inc., and additional risks may
arise from the joint venture subsidiary structure. Any default in the payment of
its debt obligations could seriously impair the value of the Common Stock.
In the event that the Company is unable to generate sufficient cash flow and
is otherwise unable to obtain funds necessary to meet required payments on its
indebtedness, the Company could be in default under the terms of the agreements
governing such indebtedness. In the event of such default, the holders of such
indebtedness would have certain enforcement rights, including the right to
accelerate such debt and the right to commence an involuntary bankruptcy
proceeding against the Company. In any such proceeding, the holders of the
Company's debt would be entitled to receive payment of their claims prior to any
distributions to equity holders. In addition, any holders of secured
indebtedness of the Company and its subsidiaries would have certain rights to
repossess, foreclose upon and sell the assets securing such indebtedness. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
HISTORY AND CONTINUATION OF OPERATING LOSSES
The Company has incurred substantial and increasing operating losses since
inception. As of March 31, 1997, the Company had an accumulated deficit of
$189.7 million, primarily resulting from expenses incurred in the development of
the Company's wireless data communications system, marketing of the Company's
NMR, distribution automation and other services, the installation of its
wireless data communications networks and the payment of other normal operating
costs.
The Company does not expect significant revenues relative to anticipated
operating costs during 1997 and expects to incur substantial and increasing
operating losses and negative net cash flow after capital expenditures for the
foreseeable future as it expands its research and development and marketing
efforts and installs additional networks. The Company expects that its receipt
of network service revenues will lag the signing of the related services
agreements by a minimum of six months and that it will generally take two to
four years to complete installation of a network after each services agreement
has been signed. The Company's network service revenues from a particular
network are expected to lag significantly behind network installation expenses
until such network is substantially complete. If the Company is able to deploy
additional networks, the losses created by this lag in revenues are expected to
increase until the revenues from the installed networks overtake the costs
associated with the deployment and operation of such additional networks. The
Company does not expect positive cash flow after capital expenditures from its
NMR services operations for several years. A large portion of the Company's
limited revenues to date has been attributable to miscellaneous equipment sales
and development and other contract revenues that are largely non-recurring and
that the Company expects to decrease and remain at relatively insignificant
levels over the next few years. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON AND UNCERTAINTY OF UTILITY MARKET ACCEPTANCE
The Company's success will be almost entirely dependent on whether a
material number of utility or other companies sign services contracts with
CellNet or enter into other arrangements which allow CellNet to install its NMR
networks. During 1996, approximately 90% of the Company's revenues were derived
from contracts with KCPL and UE. Any decision by a utility to utilize the
Company's services will involve a significant organizational, technological and
financial commitment by such utility. The utility industry is generally
characterized by long purchasing cycles and cautious decision making. Utilities
typically go
13
<PAGE>
through numerous steps before making a final purchase decision. These steps,
which can take up to several years to complete, may include the formation of a
committee to evaluate the purchase, the review of different technical options
with vendors, performance and cost justifications, regulatory review and the
creation and issuance of requests for quotes and proposals, as well as the
utilities' normal budget approval process. Purchases of the Company's services
are, to a substantial extent, deferrable in the event that utilities seek to
reduce capital expenditures or decide to defer such purchases for other reasons.
Only a limited number of utilities have made a commitment to purchase the
Company's services to date, and there can be no assurance as to when or if the
Company will enter into additional services contracts or that any such agreement
would be on favorable terms to the Company.
Because automation of utility meter reading and distribution is a relatively
new and evolving market, it is difficult to predict the future growth rate and
size of this market. Utility companies are testing products from various
suppliers for various applications, and no industry standard has been broadly
adopted. The CellNet system is one possible solution for automated meter reading
and distribution automation. There can be no assurance that the Company will be
successful in achieving the large-scale adoption of its system. In the event
that the utility industry does not adopt the Company's technology, or does so
less rapidly than expected by the Company, the Company's future results,
including its ability to service its indebtedness and achieve profitability,
will be materially and adversely affected. In recent competitive bids, potential
utility customers have from time to time selected competing systems to perform
services offered by the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNCERTAINTY OF FUTURE REVENUES; NEED FOR ADDITIONAL SERVICES CONTRACTS AND
FLUCTUATING OPERATING RESULTS
The timing and amount of future revenues will depend almost entirely upon
the Company's ability to obtain new services agreements with utilities and other
parties and upon the successful deployment and operation of the Company's
wireless data communications networks. The signing of any new services contracts
is expected to occur on an irregular basis, if at all. The Company expects that
it will generally take two to four years to complete the installation of each
network after a services contract has been signed. Service revenues from such
networks are not expected to exceed the Company's capital investments and
expenses incurred to deploy and operate such network for several years. The
Company will not begin to receive recurring revenues under a services contract
until portions of the network become operational, which is expected to occur no
earlier than six months after installation begins. The Company's results of
operations may be adversely affected by delays or difficulties arising in the
network installation process. The cost of network deployments will be highly
variable and depend upon a wide variety of factors, including radio frequency
characteristics, the size of a service territory and density of endpoints within
such territory, the nature and sophistication of services being provided, local
labor rates and other economic factors.
CellNet currently derives almost all of its revenues from long-term services
contracts with a limited number of utilities. The Company will not generate
sufficient cash flow to service its indebtedness or achieve profitability unless
it enters into a significant number of additional services contracts. There can
be no assurance that the Company will complete commercial deployments of the
CellNet system under current utility contracts successfully or that it will
obtain enough additional contracts on satisfactory terms for network deployments
in a sufficient number of locations to allow the Company to achieve adequate
cash flow to service its indebtedness or achieve profitability. The Company's
operating results will fluctuate significantly in the future as a result of a
variety of factors, some of which are outside of the Company's control,
including the rate at which utilities and other customers enter into new
services contracts, general economic conditions, economic conditions in the
utility industry, the effects of governmental regulations and regulatory
changes, capital expenditures and other costs relating to the expansion of
operations, the introduction of new services by the Company or its competitors,
the mix of services sold, pricing changes
14
<PAGE>
and new service introductions by the Company and its competitors and prices
charged by suppliers. In response to a changing competitive environment, the
Company may elect from time to time to make certain pricing, service or
marketing decisions or enter into strategic alliances or investments that could
have a material adverse effect on the Company's business, results of operations,
financial condition and cash flow. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNCERTAINTY OF ACCEPTANCE OF AND DEPENDENCE ON OTHER APPLICATIONS
The Company's long-term business plan contemplates offering non-utility
application services. The Company believes its future ability to service its
indebtedness and to achieve profitability will be significantly dependent on its
success in generating substantial revenues from such additional services. The
Company currently has no services contracts which provide for the implementation
of such services, and the Company has not yet demonstrated an ability to deploy
such services on a commercial scale. In addition, unless utilities sign services
contracts that enable the Company to deploy its wireless networks in their
service areas, the Company may not be able to offer any such services in such
areas or may be able to offer these services only on a limited basis.
SUBSTANTIAL AND INCREASING COMPETITION
The emerging market for utility NMR systems, and the potential market for
other applications once a common infrastructure is in place, have led
electronics, communications and utility product companies to begin developing
various systems, some of which currently compete, and others of which may in the
future compete, with the CellNet system. The Company believes that its only
significant direct competitor in the marketplace at present is Itron, Inc.
("Itron"), an established supplier to the utility industry. Itron has announced
the development of its Genesis-TM- system, a radio network system similar to the
Company's, for meter reading purposes and is presently offering that system in
the marketplace.
There may be many potential alternative solutions to the Company's NMR
services including traditional wireless solutions. Metricom, Inc., a provider
primarily of subscriber-based, wireless data communications for users of
portable and desktop computers; First Pacific Networks, a provider primarily of
bandwidth efficient wireline communications technology; and Lucent Technologies
are examples of companies whose technology might be adapted for NMR and who may
become direct competitors of the Company in the future. Whisper Communications
Inc. (formerly, a part of Diablo Research Company) has recently announced the
introduction of its Whisper-TM- fixed-base communications technology for
automated meter reading and other services and indicated that it had several
trials currently underway. Schlumberger is developing a fixed network system in
cooperation with Motorola for meter reading as well. Schlumberger, Lucent
Technologies and First Pacific Networks either have conducted, or are in the
process of conducting, pilot trials of utility network automation systems.
Established suppliers of equipment, services and technology to the utility
industry such as Asea Brown Boveri and General Electric could expand their
current product and service offerings so as to compete directly with the
Company, although they have not yet done so. Many of the Company's present and
potential future competitors have substantially greater financial, marketing,
technical and manufacturing resources, name recognition and experience than the
Company. The Company's competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or to devote greater
resources to the development, promotion and sale of their products and services
than the Company. While CellNet believes its technology is widely regarded as
competitive at the present time, there can be no assurance that the Company's
competitors will not succeed in developing products or technologies that are
better or more cost effective. In addition, current and potential competitors
may make strategic acquisitions or establish cooperative relationships among
themselves or with third parties that increase their ability to address the
needs of the Company's prospective customers. Accordingly, it is possible that
new competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. In addition, if the Company achieves
significant success it could draw additional competitors into the market.
Traditional
15
<PAGE>
providers of wireless services may in the future choose to enter the Company's
markets. Such existing and future competition could materially adversely affect
the pricing for the Company's services and the Company's ability to sign
long-term contracts and maintain existing agreements with utilities. Competition
for services relating to non-utility applications may be more intense than
competition for utility NMR services, and additional competitors may emerge as
the Company continues to develop non-utility applications. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors, and any failure to do so would have a material adverse
effect on the Company's business, operating results, financial condition and
cash flow.
TECHNOLOGICAL PERFORMANCE AND BUILD-OUT OF THE SYSTEM; RAPID TECHNOLOGICAL
CHANGE AND UNCERTAINTY
The Company's initial target market is the monitoring, control and
automation of utility companies' electric, gas and water distribution networks.
There can be no assurance that unforeseen problems will not develop with respect
to the Company's technology, products or services, or that the Company will be
successful in completing the development and commercial implementation of its
technology on a wider scale. The Company must complete a number of technical
development projects and continue to expand and upgrade its capabilities in
connection with such commercial implementation, the success of which cannot be
assured. While the Company believes that it has developed the necessary hardware
to install its endpoint devices on most of the standard electromechanical
electric meters manufactured by the four largest U.S. electric meter
manufacturers, there can be no assurance that the Company will be able to
develop successfully a full range of endpoint devices required by utilities. The
Company must also continue to develop the hardware enhancements necessary to
utilize its system on a commercial basis with a number of different gas and
water meters. The Company's future success will be materially adversely affected
if it is not successful or is significantly delayed in the completion of its
hardware development programs.
The Company's future success will also depend, in part, on its ability to
enhance its existing hardware, software and wireless communications technology.
The telecommunications industry has been characterized by rapid, significant
technological advances. The advent of computer-linked electronic networks, fiber
optic transmission, advanced data digitization technology, cellular and
satellite communications capabilities and personal communications systems
("PCS") have radically expanded communications capabilities and market
opportunities. Future advances may render the Company's technology obsolete or
less cost effective than competitive systems or erode the Company's market
position. Many companies from diverse industries are seeking solutions for the
transmission of data over traditional communications media, including radio, as
well as more recently developed media such as cellular and PCS-based networks.
Competitors may be capable of offering significant cost savings or other
benefits to the Company's customers, and there can be no assurance that the
Company will maintain competitive services or obtain appropriate new
technologies on a timely basis or on satisfactory terms.
The Company's necessary development efforts will require it to make
continued substantial investments. The Company has encountered product
development delays in the past affecting both software and hardware components
of its system.
ACCESS TO RADIO FREQUENCY ("RF") SPECTRUM; REGULATION BY THE FEDERAL
COMMUNICATIONS COMMISSION ("FCC")
The Company will attempt to obtain exclusive usage of licensed bandwidth
and/or secure its own licenses. CellNet licenses radio spectrum for its wireless
networks in the top 60 MSAs in the U.S. sufficient to support its projected
utility and non-utility applications with a margin for future growth. Enough
frequency spectrum may not be available to fully enable the delivery of all or a
part of the Company's wireless data communications services or the Company may
be required to find alternative frequencies. The cost of obtaining such spectrum
is currently difficult to estimate and may involve time delays and/or increased
cost to the Company. The Company could also be unable to obtain frequency in
certain areas. Any of these circumstances could have a material adverse impact
on the Company's future ability to
16
<PAGE>
provide its network services and on the Company's business, operating results,
financial condition and cash flow.
The Company's network equipment uses radio spectrum and, as such, is subject
to regulation by the FCC. The Company's network equipment uses both licensed RF
spectrum allocated for multiple address system ("MAS") operations in the 928/952
MHz band and unlicensed spectrum in the 902-928 MHz band. In order to obtain a
license to operate the Company's network equipment in the 928/952 MHz band,
license applicants may need to obtain a waiver of various sections of the FCC's
rules. There can be no assurance that the Company will be able to obtain such
waivers on a timely basis or to obtain them at all. In addition, as the amount
of spectrum in the 928/952 MHz band is limited, issuance of these licenses is
contingent upon the availability of spectrum in the area(s) for which the
licenses are requested. The Company might not be able to obtain licenses to the
spectrum it needs in every area in which it has prospective customers. The FCC's
current rules, subject to a number of limited exceptions, permit third parties
such as CellNet to operate on spectrum licensed to utilities to provide other
services. The Company plans to use these provisions of the FCC's rules to expand
its network system.
The FCC requires that a minimum configuration of an MAS system be in
operation within eighteen months from the initial date of the grant of the
system authorization or risk forfeiture of the license for the MAS frequencies.
The eighteen-month deadline may be extended upon showing of good cause, but
there is no assurance that the FCC will grant any such extension. The Company is
responding to this requirement by selectively building out transmission capacity
in some areas where it does not yet have utility telecommunications services
contracts and may return certain licenses to the FCC in certain areas.
No license is needed to operate the Company's equipment utilizing the
902-928 MHz band, although the equipment must be certified by the Company and
the FCC as being compliant with certain FCC restrictions on radio frequency
emissions designed to protect licensed services from objectionable interference.
While the Company believes it has obtained all required certifications for its
products, the FCC could modify the limits imposed on such products or otherwise
impose new authorization requirements, and in either case, such changes could
have a material adverse impact on the Company's business. The FCC completed a
rulemaking proceeding designed to better accommodate the cohabitation in the
902-928 MHz band of existing licensed services with newly authorized and
expanded uses of licensed systems, and existing and newly designed unlicensed
devices like those used by the Company. In this proceeding, the FCC expressly
recognized the rights of such unlicensed services to operate under certain
delineated operating parameters even if the potential for interference to the
licensed operations exists. The Company's systems will operate within those
specified parameters. The FCC retains the right to modify those rules or to
allow for other uses of this spectrum that might create interference to the
Company's systems, which could, in either case, have a material adverse impact
on the Company's business, operating results, financial condition and cash flow.
While the Company intends to offer non-utility services as a private carrier
and in accordance with FCC Rules, each such service offering would need to be
reviewed relative to these rules. The FCC's rules currently prohibit the use of
the MAS frequencies on which the Company is operating its systems for the
provision of common carrier service offerings. In the event that it is
determined that a particular service offering does not comply with the rules,
the Company may be required to restructure such offering or to utilize other
frequencies for the purpose of providing such service. There can be no assurance
that the Company will gain access to such other frequencies. Future
interpretation of regulations by the FCC or changes in the regulation of the
Company's industry by the FCC or other regulatory bodies or legislation by
Congress could have a material adverse effect on the Company's business,
operating results, financial condition and cash flow.
In February 1997, the FCC published for public comment a Notice of Proposed
Rule Making regarding Multiple Address Systems. The FCC's proposed rules would,
if adopted in the form proposed, among other things (i) provide for the award of
new MAS licenses through competitive bidding at auction,
17
<PAGE>
(ii) limit the use by holders of new MAS licensed frequency in the 928/952/956
MHz bands (where the Company now operates) exclusively for private internal
purposes and not for subscriber-based services, (iii) in respect of new MAS
licenses, replace the FCC's existing local area, site-based MAS licensing policy
with a broader, as yet undetermined, service or geographical area MAS licensing
policy for those frequency bands designated for subscriber-based services (and
possibly also for private internal purposes), (iv) afford interference
protection to incumbent licensees who would be allowed to continue operating
under their current authorizations within designated protected service areas as
long as the incumbent licensee does not encroach on the co-channel operations of
the geographic area licensee or otherwise expand its service area signal beyond
its designated, protected service area, (v) grant incumbent and new MAS
licensees greater technical and operational flexibility in certain respects, and
(vi) in respect of new MAS licenses, allow geographic area licensees longer
periods of time within which to satisfy the construction and service
requirements necessary for maintaining a license but impose more burdensome
construction and service requirements as of the end of such periods than at
present. The Company is unable to predict whether the proposed rules will be
adopted in the form proposed, in another form, or at all. If the proposed rules
are adopted in the form proposed and the Company is determined to be offering
subscriber-based services, as that term may ultimately be defined, the Company
could be required to obtain any new MAS licenses it requires in MAS frequency
bands other than those in which it now operates. In addition, the Company could
be subject to regulation as a common carrier which could increase both
administrative and marketing burdens on the Company. Although the Company
believes that additional licensed frequency will be generally available to it as
required, the cost associated with acquiring such licensed frequency as well as
the Company's operating costs could increase, perhaps substantially, if the
proposed rules are adopted. The adoption of new rules, depending upon the form
in which such rules are adopted, could have a material adverse effect upon the
Company's business, operating results, financial condition and cash flow.
In connection with the foregoing, the FCC has temporarily suspended
acceptance of MAS applications for new licenses, amendments, or modifications
for the 928/959 MHz bands and applications to provide subscriber-based services
in the 928/952/956 MHz bands. The temporary suspension does not affect
applications for MAS licenses for private internal purposes in the 928/952/956
MHz bands or applications for assignment of licenses or transfer of control.
Subject to certain limitations, pending applications at the time of the
suspension will continue to be processed. The Company had certain applications
pending at the time of the suspension that the Company expects will be processed
in due course, although some or all of these may be delayed. Should the Company
be determined by the FCC to be offering subscriber-based services, the Company
could be precluded from applying for new MAS licenses during the suspension
period. This may adversely affect the Company's ability to service areas where
it has not yet acquired adequate frequency.
MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL
The Company's recent growth has placed, and is expected to continue to
place, a significant strain on its managerial, operational and financial
resources. The Company's ability to manage growth effectively will require it to
continue to implement and improve its operational and financial systems and to
expand, and manage its employee base. These demands are expected to require the
addition of new management personnel and the development of additional expertise
by existing management personnel. There can be no assurance that the Company
will be able to effectively manage the expansion of its operations, that its
systems, procedures or controls will be adequate to support the Company's
operations or that Company management will be able to exploit opportunities for
the Company's services. An inability to manage growth, if any, could have a
material adverse effect on the Company's business, results of operations,
financial condition and cash flow.
The success of the Company is substantially dependent on its key management
and technical personnel, the loss of one or more of whom could adversely affect
the Company's business. All of the
18
<PAGE>
Company's employees and officers are employed on an at-will basis. Presently,
the Company does not maintain a "key man" life insurance policy on any of its
executives or employees. The Company's future success also depends on its
continuing ability to identify, hire, train and retain other highly qualified
technical and managerial personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will be able to attract or retain
highly qualified technical and managerial personnel in the future. An inability
to attract and retain the necessary technical and managerial personnel could
have a material adverse effect on the Company's business, operating results,
financial condition and cash flow.
UNCERTAINTY OF PROTECTION OF COPYRIGHTS, PATENTS AND PROPRIETARY RIGHTS
The Company relies on a combination of trade secret protection, copyright,
patent, trademark and confidentiality agreements and licensing arrangements to
establish and protect its proprietary rights. The Company's success will depend
in part on its ability to maintain copyright and patent protection for its
products, to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties. While the Company has obtained and applied
for patents, and intends to file applications as appropriate for patents
covering its products and processes, there can be no assurance that additional
patents will be issued or, if issued, that the scope of any patent protection
will be significant, or that any patents issued to the Company or licensed by
the Company will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide proprietary protection to the Company.
Since U.S. patent applications are maintained in secrecy until patents are
issued, and since publication of inventions in the technical or patent
literature tend to lag behind such inventions by several months, CellNet cannot
be certain that it was the first creator of inventions covered by its issued
patents or pending patent applications, that it was the first to file patent
applications for such inventions or that no patent conflict will exist with
other products or processes which could compete with the Company's products or
approach. Despite the Company's efforts to safeguard and maintain these
proprietary rights, there can be no assurance that the Company will be
successful or that the Company's competitors will not independently develop and
patent technologies that are substantially equivalent or superior to the
Company's technologies. Participants in the wireless industry, including
competitors of the Company, typically seek to obtain patents which will provide
as broad a protection as possible for their products and processes. There is a
substantial backlog of patents at the U.S. Patent Office. It is uncertain
whether any such third-party patents will require the Company to alter its
products or processes, obtain licenses or cease certain activities. An adverse
outcome with regard to a third-party patent infringement claim could subject the
Company to significant liabilities, require disputed rights to be licensed or
restrict the Company's ability to use such technology. The Company also relies
to a substantial degree upon unpatented trade secrets, and no assurance can be
given that others, including the Company's competitors, will not independently
develop or otherwise acquire substantially equivalent trade secrets. In
addition, whether or not additional patents are issued to the Company, others
may receive patents which contain claims applicable to products or processes
developed by the Company. If any such claims were to be upheld, the Company
would require licenses, and no assurance can be given that licenses would be
available on acceptable terms, if at all. In addition, the Company could incur
substantial costs in defending against suits brought against it by others for
infringement of intellectual property rights or in prosecuting suits which the
Company might bring against other parties to protect its intellectual property
rights. From time to time the Company receives inquiries with respect to the
coverage of its intellectual property rights, and there can be no assurance that
such inquiries will not develop into litigation.
In October 1996, Itron, Inc., one of the Company's competitors, filed a
complaint against the Company in the Federal District Court in Minnesota,
alleging that the Company infringes an Itron patent which was issued in
September 1996. Itron is seeking a judgment for damages, attorneys' fees and
injunctive relief. The Company believes, based on information currently known,
that the Company's products do not infringe any valid claim in the Itron patent,
and in the Company's opinion, the ultimate
19
<PAGE>
outcome of the lawsuit is not expected to have a material adverse effect on its
results of operations or financial condition.
In April 1997, the Company filed a patent infringement suit against Itron,
Inc. in the Federal District Court for the Northern District of California
claiming violation of CellNet's U.S. Patent No. 4,783,623. The Company seeks an
injunction, damages and other relief.
Although the Company has been granted federal registration of its "CellNet"
trademark, another Company has filed a petition for cancellation in an attempt
to challenge such registration which, if successful, would mean the Company
could lose its registration and be required to adopt a new trademark and
possibly a new or modified corporate name. CellNet could encounter similar
challenges to its trademark and corporate name in the future. While the
requirement to adopt a new trademark or new or modified corporate name could
involve a significant expense and could result in the loss of any goodwill and
name recognition associated with the Company's current trademark and corporate
name, the Company does not believe this would have a long-term material adverse
impact on its business, operating results, financial condition and cash flow.
DEPENDENCE ON THIRD-PARTY MANUFACTURERS; EXPOSURE TO COMPONENT SHORTAGES
The Company relies and will continue to rely on outside parties to
manufacture a majority of its network equipment such as radio devices and
printed circuit boards. As the Company signs additional services contracts,
there will be a significant ramp-up in the amount of manufacturing by third
parties in order to enable the Company to meet its contractual commitments. The
Company currently relies on single manufacturers for radio devices and for
printed circuit boards. There can be no assurance that these manufacturers will
be able to meet the Company's manufacturing needs in a satisfactory and timely
manner or that the Company can obtain additional manufacturers when and if
needed. Although the Company believes alternative manufacturers are available,
an inability of the Company to develop alternative suppliers quickly or
cost-effectively could materially impair its ability to manufacture and install
systems. The Company's reliance on third-party manufacturers involves a number
of additional risks, including the absence of guaranteed capacity and reduced
control over delivery schedules, quality assurance, production yields and costs.
Although the Company believes that these manufacturers would have an economic
incentive to perform such manufacturing for the Company, the quality, amount and
timing of resources to be devoted to these activities is not within the control
of the Company, and there can be no assurance that manufacturing problems will
not occur in the future. A significant price increase, a quality control
problem, an interruption in supply from one or more of such manufacturers or the
inability to obtain additional manufacturers when and if needed could have a
material adverse effect on the Company's business, operating results, financial
condition and cash flow.
Certain of the Company's subassemblies, components and network equipment are
procured from single sources and others are procured only from a limited number
of sources. In addition, CellNet may be affected by general shortages of certain
components, such as surface mounted integrated circuits and memory chips. There
have been shortages of such materials generally in the marketplace from time to
time in the past. The Company's reliance on such components and on a limited
number of vendors and subcontractors involves certain risks, including the
possibility of shortages and reduced control over delivery schedules,
manufacturing capability, quality and cost. A significant price increase or
interruption in supply from one or more of such suppliers could have a material
adverse effect on the Company's business, operating results, financial condition
and cash flow. Although the Company believes alternative suppliers of
sub-assemblies, components and network equipment are available, the inability of
the Company to develop alternative sources quickly or cost-effectively could
materially impair its ability to manufacture and install systems. Lead times can
be as long as a year for certain components, which may require the Company to
use working capital to purchase inventory significantly in advance of receiving
any revenues.
20
<PAGE>
Electric utilities in the United States are currently experiencing
relatively long lead times, of between 14 and 32 weeks from date of order, for
the delivery of new electric meters from domestic meter manufacturers. A
significant number of new meters are required to initiate meter retrofit and
replacement in connection with each network deployment and to replace existing
meters in the field which are found to be obsolete, worn out or otherwise
unsuitable for retrofit and redeployment. Any increase in the number of
deployments would result in an increase in the number of new meters ordered by
utilities over and above those ordered on account of normal growth and
replacement within their service areas. To the extent that electric meter
manufacturers are unable or unwilling to increase production in line with such
increase in demand, temporarily or over a longer term, deployments may be
delayed or postponed, with the result that revenues from such deployments will
be likewise delayed or postponed.
DEPENDENCE ON BUSINESSES ALLIANCES
A key element of the Company's business strategy is the formation of
corporate alliances with leading companies. The Company is currently investing,
and plans to continue to invest, significant resources to develop these
relationships. The Company believes that its success in penetrating markets for
non-utility applications of its network will depend in large part on its ability
to maintain these relationships and to cultivate additional or alternative
relationships. There can be no assurance that the Company will be able to
develop additional corporate alliances with such companies, that existing
relationships will continue or be successful in achieving their purposes or that
such companies will not form competing arrangements.
POSSIBLE TERMINATION OF CONTRACTS
The Company expects that substantially all of its future revenues will be
provided pursuant to services contracts with utility companies and other
parties. These contracts will generally be subject to cancellation or
termination in certain circumstances in the event of a material and continuing
failure on CellNet's part to meet agreed NMR performance standards on a
consistent basis over agreed time periods, subject to certain rights to cure any
such failure. Each of the Company's existing services contracts also provides
for termination of such contracts by the respective utility without cause in
less than ten years, subject to certain reimbursement provisions. Such contracts
also provide that CellNet will be required to compensate such utilities for the
use of its system for non-utility applications. In the event that a services
contract is terminated by a utility, the Company would incur substantial losses.
A network's service revenues are not expected to exceed the Company's capital
investments to deploy such network for several years. Termination or
cancellation of one or more utility services contracts would have a material
adverse effect on the Company's business, results of operations, financial
condition and cash flow.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
The Company plans to expand into international markets and has begun initial
marketing efforts. The Company does not anticipate that it will have any
material international operations for at least the next 12 months. The Company
anticipates that it will incur significant expenses in connection with the
establishment of international operations. If revenues generated by
international activities are not adequate to offset the expense of establishing
and maintaining these activities, the Company's business, operating results,
financial condition and cash flow could be materially adversely affected.
International demand for the Company's services and systems is expected to vary
by country, based on such factors as the regulatory environment, electric power
generating capacity and demand, labor costs and other political and economic
conditions. To date, the Company has no experience in developing a localized
version of its wireless data communications system for foreign markets. The
Company believes its ability to establish business alliances in each
international market will be critical to its success. There can be no assurance
that the Company will be able to successfully develop, market and implement its
system in international markets or establish successful business alliances for
these markets. In addition, there are certain risks inherent in doing business
internationally, such as unexpected changes in regulatory requirements, export
restrictions,
21
<PAGE>
tariffs and other trade barriers, difficulties in staffing and managing foreign
operations, longer payment cycles, problems in collecting accounts receivable,
political instability, fluctuations in currency exchange rates and potentially
adverse tax consequences, any of which could adversely impact the Company's
potential international operations. There can be no assurance that one or more
of such factors will not have a material adverse effect on the Company's future
international operations and, consequently, on its business, operating results,
financial condition and cash flow.
The Company's strategy is to pursue international markets through a joint
venture with Bechtel Enterprises, Inc. which could involve additional partners
in a local operating project entity in a particular country. The Company may not
have a majority interest or control of the board of directors of any such local
operating project entity. The risk is present in any such joint venture in which
the Company may determine to participate, that the other joint venture partner
may at any time have economic, business or legal interests or goals that are
inconsistent with those of the joint venture or the Company. The risk is also
present that a joint venture partner may be unable to meet its economic or other
obligations and that the Company may be required to fulfill those obligations.
In addition, in any joint venture in which the Company does not have a majority
interest, the Company may not have control over the operations or assets of such
joint venture.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been highly volatile at
relatively low trading volumes since the Company's Initial Public Offering and
has been and is likely to continue to be subject to wide fluctuations in
response to a variety of factors, including quarterly variations in operating
results, the signing of services contracts, new customers, consolidations in the
industry, technological innovations or new products by the Company or its
competitors, developments in patents or other intellectual property rights,
general conditions in the NMR services industry, revised earnings estimates,
comments or recommendations issued by analysts who follow the Company, its
competitors or the NMR services industry and general economic and market
conditions. In addition, it is possible that in some future period the Company's
operating results may be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock could be
materially adversely affected. Additionally, the stock market in general, and
the market for technology stocks in particular, have experienced extreme price
volatility in recent years. Volatility in price and volume has had a substantial
effect on the market prices of many technology companies for reasons unrelated
or disproportionate to the operating performance of such companies. These broad
market fluctuations could have a significant impact on the market price of the
Common Stock.
NO DIVIDENDS; DIVIDEND RESTRICTIONS
The Company has not declared or paid any dividends on its capital stock
since its inception. The Company currently anticipates that it will retain all
of its future earnings, if any, for use in the operation and expansion of its
business and does not anticipate paying any cash dividends in the foreseeable
future. In addition, the Company's existing financing arrangements restrict the
payment of any dividends.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The industry in which the Company operates is characterized by frequent
litigation regarding patent and other intellectual property rights. The Company
is a party to three such claims. Although the ultimate outcome of these matters
is not presently determinable, management believes that the resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
Although the Company has been granted federal registration of its "CellNet"
trademark, in January 1995, Century Telephone Enterprises, Inc. (Century
Telephone) filed a petition for cancellation in an attempt to challenge such
registration. The matter is currently pending before the Trademark Trial and
Appeal Board of the U.S. Patent and Trademark Office. CellNet and Century
Telephone are the sole parties in the action. If such challenge were successful,
the Company could lose its registration and could be required to adopt a new
trademark and possibly a new or modified corporate name. CellNet could encounter
similar challenges in the future. While the requirement to adopt a new trademark
or new or modified corporate name could involve a significant expense and could
result in the loss of any goodwill and name recognition associated with the
Company's current trademark and corporate name, the Company does not believe
this would have a long-term material adverse impact on its business, operating
results, financial condition and cash flow.
In October 1996, Itron, Inc., one of the Company's competitors, filed a
complaint against the Company in the Federal District Court in Minnesota
alleging that the Company infringes an Itron patent which was issued in
September 1996. Itron is seeking a judgment for damages, attorneys fees and
injunctive relief. The Company believes, based on its current information, that
the Company's products do not infringe any valid claim in the Itron patent, and
in the Company's opinion, the ultimate outcome of the lawsuit is not expected to
have a material adverse effect on its results of operations or financial
condition.
In April 1997, the Company filed a patent infringement suit against Itron,
Inc. in the Federal District Court for the Northern District of California
claiming violation of CellNet's U.S. Patent No. 4,783,623. The Company seeks an
injunction, damages and other relief.
On October 31, 1996, a complaint SETTLE V. SEIDL, ET AL., No. 398464, was
filed in the Superior Court of California for the County of San Mateo against
the Company, certain of its officers and directors and underwriters of the
Company's Initial Public Offering. The complaint, which is a purported class
action filed on behalf of the Company's stockholders who purchased shares in the
Company's Initial Public Offering, seeks unspecified damages and rescission for
alleged liability under various provisions of the federal securities laws and
California state law. Plaintiff alleges that the Prospectus and Registration
statement dated September 26, 1996, pursuant to which the Company issued
5,000,000 shares of Common Stock to the public, contained materially misleading
statements and/or omissions in that defendants were obligated to disclose, but
failed to disclose, that a patent conflict with Itron, Inc. was likely to ensue.
On November 8 and 13, 1996, two additional complaints, KAREN ZULLY V. CELLNET
DATA SYSTEMS, INC., ET AL., No. 398551 and HOWARD FIENMAN AND GERALD SLAPSOWITZ
V. CELLNET DATA SYSTEMS, INC., ET AL., No. 398560, were filed in the Superior
Court of California for the County of San Mateo. These cases are essentially
similar in nature to the SETTLE case. The Court has ordered consolidation of the
SETTLE and ZULLY actions. The Company expects that the FIENMAN action will be
consolidated with the SETTLE and ZULLY actions before trial. The Company
believes that the allegations in these complaints are without merit and intends
to defend these actions vigorously. In the Company's opinion, the ultimate
outcome of these lawsuits is not expected to have a material adverse effect on
its results of operations or financial condition.
ITEM 2. CHANGES IN SECURITIES
None.
23
<PAGE>
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
NUMBER DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation filed on April 25, 1997.
27.1 Financial Data Schedule
</TABLE>
b. Reports on Form 8-K
There have been no reports on Form 8-K filed during the quarter ended March
31, 1997.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELLNET DATA SYSTEMS, INC.
Date: May 13, 1997 By: /s/ PAUL G. MANCA
-----------------------------------------
Paul G. Manca
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
25
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation filed on April 25, 1997........................
27.1 Financial Data Schedule..........................................................................
</TABLE>
26
<PAGE>
CELLNET DATA SYSTEMS, INC.
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
CellNet Data Systems, Inc., a corporation organized and existing under and
by virtue of the Delaware General Corporation Law, hereby certifies as follows:
1. The name of this corporation is CellNet Data Systems, Inc. and the
original Certificate of Incorporation of the corporation was filed with the
Secretary of State of the State of Delaware on December 7, 1993.
2. This Restated Certificate of Incorporation was duly adopted in
accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware. Pursuant to Sections 228, 242 and 245
of the General Corporation Law of Delaware, this Amended and Restated
Certificate of Incorporation restates and further integrates and further amends
the provisions of this corporation's Certificate of Incorporation.
3. The text of the Amended and Restated Certificate of Incorporation as
heretofore amended or supplemented is hereby restated and further amended to
read in its entirety as set forth in Schedule A attached hereto.
IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation
has been signed under the seal of the corporation this 25th day of April, 1997.
CELLNET DATA SYSTEMS, INC.
By: /s/JOHN M. SEIDL
----------------------------
John M. Seidl, President and
Chief Executive Officer
ATTEST:
/s/DAVID L. PERRY
- -------------------------
David L. Perry, Secretary
<PAGE>
SCHEDULE A
RESTATED CERTIFICATE OF INCORPORATION
OF
CELLNET DATA SYSTEMS, INC.
FIRST. The name of the corporation is CellNet Data Systems, Inc. (the
"Corporation").
SECOND. The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, County of New Castle, Delaware
19801. The name of its registered agent at such address is The Corporation
Trust Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH. This Corporation is authorized to issue two classes of shares,
designated "Common Stock," $0.001 par value and "Preferred Stock," $0.001 par
value, respectively. The number of shares of Common Stock authorized to be
issued is one hundred million (100,000,000) and the number of shares of
Preferred Stock authorized to be issued is fifteen million (15,000,000). The
Board of Directors shall have the authority to issue the authorized but
undesignated Preferred Stock from time to time in one or more series and to fix
the number of shares of such series and to determine the designation of any such
series and to determine or alter the powers, preferences, rights,
qualifications, limitations or restrictions granted to or imposed upon any
wholly unissued series. The Board of Directors, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, may increase or
decrease (but not below the number of shares in any such series then
outstanding) the number of shares of any series subsequent to the issue of
shares of that series.
FIFTH. The Board of Directors of the Corporation is expressly authorized
to make, alter or repeal the Bylaws of the Corporation.
SIXTH. Elections of directors need not be by written ballot except and to
the extent provided in the Bylaws of the Corporation.
SEVENTH. (a) To the fullest extent permitted by the Delaware General
Corporation Law as the same exists or as may hereafter be amended, a director of
the Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
(b) The Corporation shall indemnify to the fullest extent
permitted by law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that he, his testator or intestate is or was a director
-2-
<PAGE>
or executive officer of the Corporation or any predecessor of the Corporation or
serves or served any other enterprise as a director or executive officer at the
request of the Corporation or any predecessor to the Corporation. The
Corporation shall have the authority upon approval of the Board of Directors to
indemnify any other officer and employee of the Corporation.
(c) Neither any amendment nor repeal of this Article SEVENTH,
nor the adoption of any provision of the Corporation's Certificate of
Incorporation inconsistent with this Article SEVENTH, shall eliminate or reduce
the effect of this Article SEVENTH in respect of any matter occurring, or any
action or proceeding accruing or arising or that, but for this Article SEVENTH,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
EIGHTH. Until such time as the Corporation is a publicly-traded company
with more than 800 stockholders of record, in the election of directors, each
holder of stock of any class or series of the Corporation shall be entitled to
as many votes as shall equal the number of votes entitled to be cast for the
election of directors with respect to each holder's shares of stock multiplied
by the number of directors to be elected by each holder, and may cast all of
such votes for a single director or may distribute such votes among the number
of directors to be elected, provided, that, such holder has given notice of the
intention to cumulate votes as specified in the bylaws; notwithstanding the
foregoing, the right to cumulative voting shall exist until August 15, 1997, and
thereafter at such time as the Corporation is a publicly traded company with
more than 800 stockholders of record, such right to cumulative voting will be
eliminated.
NINTH. No action shall be taken by the stockholders of the Corporation
except at an annual or special meeting of the stockholders called in accordance
with the Bylaws and no action shall be taken by the stockholders by written
consent. The affirmative vote of sixty-six and two thirds percent (66 2/3%) of
the then outstanding voting securities of the Corporation, voting together as a
single class, shall be required for the amendment, repeal or modification of the
provisions of this Article NINTH of this Amended and Restated Certificate of
Incorporation or Sections 2.3 and 2.5 of the Corporation's Bylaws.
-3-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
OF THE COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 115,850
<SECURITIES> 34,300
<RECEIVABLES> 2,370
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 153,905
<PP&E> 97,554
<DEPRECIATION> (12,224)
<TOTAL-ASSETS> 244,655
<CURRENT-LIABILITIES> (12,041)
<BONDS> (213,896)
0
0
<COMMON> (206,611)
<OTHER-SE> (1,505)
<TOTAL-LIABILITY-AND-EQUITY> (244,655)
<SALES> 64
<TOTAL-REVENUES> 979
<CGS> (78)
<TOTAL-COSTS> (3,643)
<OTHER-EXPENSES> (15,027)
<LOSS-PROVISION> (358)
<INTEREST-EXPENSE> (6,311)
<INCOME-PRETAX> (22,003)
<INCOME-TAX> (1)
<INCOME-CONTINUING> (22,004)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,004)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
