<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
CELLNET FUNDING, LLC
CELLNET DATA SYSTEMS, INC.
(Exact names of Registrants as specified in their charters)
<TABLE>
<S> <C> <C>
DELAWARE 94-3298620
DELAWARE 94-2951096
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Numbers)
</TABLE>
125 SHOREWAY ROAD
SAN CARLOS, CALIFORNIA 94070
(650) 508-6000
(Address, including zip code, and telephone number, including area code, of
Registrants' principal executive offices)
------------------------
<TABLE>
<S> <C> <C>
BEN H. LYON, ESQ. BARRY E. TAYLOR, ESQ. JERRY V. ELLIOTT, ESQ.
Vice President and General Counsel MEREDITH S. JACKSON, ESQ. IRENE MAVROYANNIS, ESQ.
CellNet Data Systems, Inc. TREVOR J. CHAPLICK, ESQ. Shearman & Sterling
125 Shoreway Road Wilson Sonsini Goodrich & Rosati 599 Lexington Avenue
San Carlos, California 94070 Professional Corporation New York, New York 10022
(650) 508-6000 650 Page Mill Road (212) 848-4000
Palo Alto, California 94304
(650) 493-9300
</TABLE>
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. / /
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED SHARE PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Preferred Securities of CellNet Funding,
LLC....................................... 3,450,000(1) $25.00 $86,250,000
Common Stock, $.001 par value per share, of
CellNet Data Systems, Inc................. (2) -- -- --
Guarantee of the Preferred Securities of
CellNet Funding, LLC(3)................... -- -- -- --
Total..................................... -- -- -- $25,444
</TABLE>
(1) Includes an aggregate of 450,000 Preferred Securities that the Underwriter
has the option to purchase to cover over-allotments, if any.
(2) The Preferred Securities are exchangeable for the common stock, par value
$.001 per share (the "Common Stock") of CellNet Data Systems, Inc. in whole
or in part at the holder's option. The number of shares of Common Stock to
be registered represents the number of shares of Common Stock that may be
issued upon exchange of the Preferred Securities. Pursuant to Rule 416, this
Registration Statement also registers such indeterminate number of
additional shares of Common Stock as may be required as a result of an
adjustment in the number of shares of Common Stock issuable upon exchange by
reason of the formula contained in the terms of the Preferred Securities.
Shares of Common Stock issued upon exchange of the Preferred Securities will
be issued without the payment of additional consideration.
(3) Pursuant to Rule 457(n) under the Securities Act, no separate fee is payable
for the Guarantee.
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
ISSUED APRIL , 1998
[LOGO]
CELLNET FUNDING, LLC
3,000,000 % EXCHANGEABLE PREFERRED SECURITIES
MANDATORILY REDEEMABLE 2010
(LIQUIDATION PREFERENCE $25.00 PER PREFERRED SECURITY)
-----------------
CELLNET FUNDING, LLC ("FUNDING"), A DELAWARE LIMITED LIABILITY COMPANY AND
SUBSIDIARY OF CELLNET DATA SYSTEMS, INC. ("CELLNET" OR THE
"COMPANY"), A DELAWARE CORPORATION, IS OFFERING 3,000,000
EXCHANGEABLE LIMITED LIABILITY COMPANY
PREFERRED SECURITIES (THE
"PREFERRED SECURITIES").
DIVIDENDS ON THE PREFERRED SECURITIES WILL BE CUMULATIVE FROM THE CLOSING DATE
AND ARE PAYABLE QUARTERLY ON EACH FEBRUARY 1, MAY 1, AUGUST 1 AND NOVEMBER 1,
COMMENCING AUGUST 1, 1998. DIVIDENDS ON THE PREFERRED SECURITIES WILL BE
PAYABLE IN CASH THROUGH AND INCLUDING AUGUST 1, 2001, AND THEREAFTER,
DIVIDENDS WILL BE PAYABLE, AT FUNDING'S OPTION, (I) IN CASH, (II) BY
DELIVERY OF COMMON STOCK, PAR VALUE $.001 PER SHARE, OF CELLNET (THE
"COMMON STOCK") BASED UPON 90% OF THE AVERAGE MARKET VALUE (AS DEFINED
HEREIN) OF THE COMMON STOCK OR (III) IN ANY COMBINATION OF CASH AND SUCH
SHARES OF COMMON STOCK. FUNDING IS REQUIRED TO REDEEM THE PREFERRED
SECURITIES ON MAY 1, 2010. THE PREFERRED SECURITIES WILL BE
REDEEMABLE, AT THE OPTION OF FUNDING, AT ANY TIME ON OR AFTER MAY 1,
2001 AT THE REDEMPTION PRICES SET FORTH HEREIN. THE PREFERRED
SECURITIES WILL BE EXCHANGEABLE, AT ANY TIME PRIOR TO MAY 1, 2010, AT
THE OPTION OF THE HOLDERS, INTO COMMON STOCK AT AN EXCHANGE PRICE OF
$ PER SHARE, SUBJECT TO ADJUSTMENT, OR AN AGGREGATE OF
SHARES OF COMMON STOCK, REPRESENTING APPROXIMATELY % OF THE
OUTSTANDING COMMON STOCK ON A FULLY DILUTED BASIS AS OF ,
1998. THE COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "CNDS." ON APRIL 22, 1998, THE LAST REPORTED
SALE PRICE OF THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET WAS $14.06 PER SHARE.
------------------------
AT ANY TIME AFTER THE CLOSING DATE AND ON OR PRIOR TO MAY 1, 2001, THE PREFERRED
SECURITIES WILL AUTOMATICALLY EXCHANGE INTO COMMON STOCK (THE "AUTOMATIC
EXCHANGE"), AT AN EXCHANGE PRICE OF $ PER SHARE IF THE CURRENT
MARKET VALUE (AS DEFINED HEREIN) OF THE COMMON STOCK EQUALS OR
EXCEEDS CERTAIN TRIGGER PERCENTAGES (AS DEFINED HEREIN) OF THE
EXCHANGE PRICE FOR AT LEAST 20 TRADING DAYS IN ANY
CONSECUTIVE 30 DAY TRADING PERIOD. UPON ANY AUTOMATIC
EXCHANGE, FUNDING WILL MAKE A PAYMENT IN CASH WITH
RESPECT TO THE PREFERRED SECURITIES SUBJECT
TO EXCHANGE IN AN AMOUNT EQUAL TO
THE PRO RATA PORTION OF THE
LIQUIDATION PROCEEDS OF ANY
REMAINING TREASURY STRIPS
(AS DEFINED HEREIN)
HELD BY FUNDING.
------------------------
APPLICATION WILL BE MADE FOR QUOTATION OF THE PREFERRED SECURITIES ON THE NASDAQ
NATIONAL MARKET.
-------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
PRICE $25 PER PREFERRED SECURITY
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) FUNDING(2)
--------------------- ----------------------- -----------------------
<S> <C> <C> <C>
PER PREFERRED SECURITY....................... $ $ $
TOTAL(3)..................................... $ $ $
</TABLE>
- ------------
(1) EACH OF FUNDING AND THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITER
AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. SEE "THE UNDERWRITER."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $440,000.
(3) FUNDING HAS GRANTED THE UNDERWRITER AN OPTION, EXERCISABLE WITHIN 30
DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF 450,000
SHARES OF ADDITIONAL PREFERRED SECURITIES AT THE PRICE TO PUBLIC LESS
UNDERWRITING DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING
OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITER EXERCISES SUCH OPTION IN
FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS
AND PROCEEDS TO FUNDING WILL BE $ , $ AND $ , RESPECTIVELY. SEE
"THE UNDERWRITER."
------------------------
THE PREFERRED SECURITIES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF
ACCEPTED BY THE UNDERWRITER NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN
LEGAL MATTERS BY SHEARMAN & STERLING, COUNSEL FOR THE UNDERWRITER. IT IS
EXPECTED THAT DELIVERY OF THE PREFERRED SECURITIES WILL BE MADE ON OR ABOUT
, 1998, AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y.,
AGAINST PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
------------------------
MORGAN STANLEY DEAN WITTER
, 1998
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE PREFERRED SECURITIES
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY PREFERRED SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
The Registrants................................ 3
Available Information.......................... 3
Information Incorporated by Reference.......... 3
Prospectus Summary............................. 5
Risk Factors................................... 17
Funding........................................ 34
Use of Proceeds................................ 34
Dividend Policy................................ 34
Capitalization................................. 35
Common Stock Price Range....................... 36
Selected Consolidated Financial Data........... 37
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 39
<CAPTION>
PAGE
---------
<S> <C>
Business....................................... 48
Management..................................... 72
Principal Stockholders......................... 75
Description of the Preferred Securities........ 77
Description of CellNet Preferred Stock......... 85
Description of CellNet Capital Stock........... 87
Certain United States Federal Income Tax
Considerations............................... 90
The Underwriter................................ 98
Legal Matters.................................. 99
Experts........................................ 99
Index to Consolidated Financial Statements..... F-1
</TABLE>
-------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING OF PREFERRED SECURITIES (THE
"OFFERING") MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE
AFFECT THE MARKET PRICE OF THE PREFERRED SECURITIES OR THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITER MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR, AND PURCHASE, PREFERRED SECURITIES OR COMMON STOCK IN THE OPEN
MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "THE UNDERWRITER."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER AND CERTAIN SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 UNDER REGULATION M. SEE "THE UNDERWRITER."
2
<PAGE>
THE REGISTRANTS
CellNet and Funding have their principal executive offices at 125 Shoreway
Road, San Carlos, California 94070 and their telephone number is (650) 508-6000.
AVAILABLE INFORMATION
CellNet is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance with
the Exchange Act files periodic reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed by the Company with the Commission
can be inspected and copied (at prescribed rates) at the Commission's Public
Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Regional Offices of the Commission located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and 7 World Trade Center, 13th Floor, New York, New York 10048. Such
documents filed by CellNet may also be accessed electronically by means of the
Commission's Electronic Data Gathering and Retrieval System (EDGAR) at
http://www.sec.gov. The Common Stock is quoted on the Nasdaq Stock Market
(symbol: CNDS), and such reports, proxy statements and other information
concerning the Company may also be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington D.C., 20006.
CellNet and Funding have filed with the Commission a registration statement
on Form S-3 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the securities offered hereby.
This Prospectus, which is part of the Registration Statement, does not contain
all the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain items of which are omitted in accordance with the
rules and regulations of the Commission. For further information with respect to
the Company and the securities offered hereby, reference is hereby made to the
Registration Statement and such exhibits and schedules. The Registration
Statement, including the exhibits and schedules thereto, may be inspected at,
and copies thereof may be obtained at prescribed rates from, the public
reference facilities of the Commission set forth above.
No separate financial statements of Funding are included herein. CellNet and
Funding do not believe that such financial statements would be material to
holders of the Preferred Securities because Funding is a newly-created special
purpose entity, has no operating history and no independent operations and is
not engaged in, and does not propose to engage in, any activity other than as
set forth below. See "Funding."
INFORMATION INCORPORATED BY REFERENCE
The following documents have been filed by the Company with the Commission
and are hereby incorporated by reference and made a part of this Prospectus:
1. Annual Report on Form 10-K for the year ended December 31, 1997.
2. Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
3. The description of the Common Stock set forth in the Company's
Registration Statement on Form 8-A filed on September 23, 1996 pursuant
to Section 12 of the Exchange Act and any amendment or report filed for
the purpose of updating such description.
All documents subsequently filed by the Company with the Commission pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of
this Prospectus and prior to the termination of the offering of the securities
made hereby, shall be deemed to be incorporated by reference into the
Registration Statement of which this Prospectus is a part and to be a part
hereof from the date of such filing. Any statement contained in a document
incorporated or deemed to be incorporated by reference in this Prospectus shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed
3
<PAGE>
to be incorporated by reference in this Prospectus modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom this Prospectus is delivered, upon oral or written request of such person,
a copy of any and all information that has been incorporated by reference into
this Prospectus (not including exhibits to the information unless such exhibits
are specifically incorporated by reference into such information). Requests for
information should be addressed to: CellNet Data Systems, Inc., 125 Shoreway
Road, San Carlos, California 94070,
Attention: Investor Relations (telephone number (650) 508-6000, facsimile (650)
592-6858, and email [email protected]).
-------------------
CellNet-TM- is a registered trademark of the Company. This Prospectus also
includes trade names and trademarks of companies other than the Company's.
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. REFERENCES HEREIN TO
"CELLNET" OR THE "COMPANY" REFER TO CELLNET DATA SYSTEMS, INC. AND ITS
SUBSIDIARIES AND REFERENCES TO "FUNDING" REFER TO CELLNET FUNDING, LLC, A
DELAWARE LIMITED LIABILITY COMPANY AND A SUBSIDIARY OF CELLNET. THE PREFERRED
SECURITIES OFFERED HEREBY ARE SUBJECT TO A HIGH DEGREE OF RISK. SEE "RISK
FACTORS." CERTAIN INFORMATION CONTAINED IN THIS SUMMARY AND ELSEWHERE IN THIS
PROSPECTUS, INCLUDING BUT NOT LIMITED TO INFORMATION WITH REGARD TO THE
COMPANY'S EXPECTED WIRELESS DATA COMMUNICATIONS NETWORK DEPLOYMENTS AND
OPERATIONS, ITS STRATEGY FOR MARKETING AND DEPLOYING SUCH NETWORKS AND RELATED
FINANCING ACTIVITIES AND ITS EXPECTED REVENUES, EXPENSES AND CAPITAL
EXPENDITURES, CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AND THE VARIATIONS MAY BE
MATERIAL. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS."
THE COMPANY
CellNet has designed, developed and is commercially deploying in scale
innovative wireless data communications networks which provide high-volume,
low-cost, real-time data collection services, capable of monitoring millions of
fixed endpoints. The primary application of the Company's network is the
provision of commercial, industrial and residential network meter reading
("NMR") services to electric, gas and water suppliers. These services position
the Company to benefit from the deregulation of the electric utility industry.
As of March 31, 1998, the Company had approximately 3,365,000 meters under
long-term contracts, of which a total of approximately 956,000 meters were
generating revenues ("in revenue service") for the Company. The CellNet network
uses radio devices fitted to existing utility meters to read and report data
from each meter every few minutes. Through extremely efficient use of radio
frequency spectrum, the CellNet network has substantial additional capacity to
service non-utility applications that require low-cost monitoring of fixed
endpoints, such as home security and remote status monitoring of vending
machines and office equipment.
CellNet believes it has a first-to-market opportunity to offer wireless data
communications services on a broad commercial scale for utility and selected
non-utility applications. CellNet's network is distinguished by the following
advantages:
- sufficiently low infrastructure and operating costs to permit
cost-effective utility meter reading and other fixed point monitoring
applications;
- highly efficient use of spectrum-the equivalent of approximately a single
voice channel is needed to operate a network;
- specifically designed proprietary software to manage real-time data
collection from millions of endpoints; and
- open systems architecture designed to allow new applications to be added
to the CellNet system.
The electric utility industry is undergoing a fundamental and broad-based
transition. The traditional utility structure, consisting of a vertically
integrated system operating as a natural monopoly with rates set in relation to
cost, has historically presented utilities with little incentive to improve
service quality or operating efficiency. Similar to the regulatory evolution
that has already taken place in the transportation and telecommunications
industries, customer demands and regulatory mandates by federal and state
governments are opening the electric utility market to competition, thus forcing
electric utilities to transform themselves from regulated monopolies into
competitive enterprises. While regulatory initiatives vary from state to state,
many involve a shift from rate-of-return rate making, in which a utility's rates
are
5
<PAGE>
determined by its return on assets, to performance-based rate making, in which a
utility's rates and profitability are based upon its cost, efficiency and
service quality.
With deregulation of the electric utility industry underway, established
utilities are under increasing regulatory, consumer and competitive pressures.
The changing regulatory environment means that new power market participants
(such as energy service providers, power marketers, brokers and aggregators;
system operators; power exchanges; and scheduling coordinators) will be seeking
viable strategies to enter a market traditionally dominated by established
utilities. The Company believes its NMR services offer a state-of-the art
solution to the demands created by the increased regulatory and competitive
pressures within the energy service industry. CellNet's proven, efficient,
low-cost, scaleable NMR service enables both established electric and gas
utilities and new power market participants to implement time-of-use pricing
plans, peak demand monitoring, load forecasting activities, real-time responses
to billing inquiries and power outage detection, on-demand meter reads,
customized billing functions, and customer access to consumption, rate and
billing information. CellNet's system allows utilities to respond effectively to
regulatory changes, reduce costs and enhance their operating efficiencies, defer
capital spending and implement customer retention plans and facilitate market
entrance by new power market participants. See "--Changes in the Electric
Utility Industry" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
The Company is actively targeting the largest Metropolitan Statistical Areas
("MSAs"), and consolidated Metropolitan Statistical Areas ("CMSAs"), which
together represent a majority of the approximately 230 million electric, gas and
water meters in the United States, and other areas of high population density,
state-by-state, as deregulation becomes effective. The Company believes that
utilities and power market participants operating in or entering these densely
populated areas will be most affected by increasing competitive and regulatory
pressures. These pressures will likely prompt established utilities to improve
their efficiency and service levels, and the Company believes that its network
and services would facilitate this improvement. However, the utility industry
has generally been characterized by long purchasing cycles and cautious decision
making. Although the uncertainty surrounding proposed regulatory changes in some
states may have caused, and may continue to cause, additional delays in
purchasing decisions by established electric and gas utilities, the Company
believes that actual implementation of utility deregulation will ultimately
accelerate purchasing decisions by established utilities. See "Risk
Factors--Dependence on and Uncertainty of Market Acceptance." The Company is
evaluating new opportunities arising from deregulation. CellNet's open systems
architecture is designed for deployment strategies focused either on established
utilities or new power market participants, or both, without requiring
significant modifications to CellNet's network system. See "Business Strategy."
The Company has existing long-term contracts to provide NMR services to
Kansas City Power & Light Company ("KCPL") for approximately 420,000 meters,
AmerenUE (formerly known as the Union Electric Company) ("UE") for approximately
800,000 meters, Northern States Power Company ("NSP") for approximately
1,000,000 meters, Pacific Gas & Electric Company ("PG&E") for approximately
30,000 meters, Puget Sound Energy, Inc. ("PSE") for approximately 700,000 meters
and Indianapolis Power & Light Company ("IP&L") for approximately 415,000
meters. Of the 3,365,000 meters covered under these contracts, approximately
956,000 meters were in revenue service as of March 31, 1998. Each of these
contracts results from the Company's "saturation deployment" strategy for
providing NMR services to existing utilities. Under this strategy, the Company
builds out a network to cover every meter in a utility's designated service
area. The strategy allows coverage of all of the energy consumers in those
service areas. To implement the strategy, the Company builds out its wide area
network ("WAN") and local area network ("LAN") concurrently. The network begins
generating revenue shortly after meters come on-line, and new meters can be
added incrementally. The Company has ongoing discussions concerning additional
contracts of a similar kind with other utilities in the United States.
The Company began actively targeting new power market participants in
September 1997. To date, the Company has entered into contracts with eight
energy service providers and two energy aggregators,
6
<PAGE>
including contracts with nonregulated power marketing arms of the nation's large
utilities and energy providers for the provision of NMR services in California,
including Energy Pacific, New West Energy, Duke Solutions and the Electric
Clearinghouse, a subsidiary of NGC Corp. The Company expects to enter into
similar arrangements with additional power market participants both in
California and in other states where deregulated markets open up further
opportunities for the deployment of the Company's networks. Each of these
contracts results from the Company's alternative "broad deployment" strategy,
which is a slight variation of the Company's saturation deployment strategy
outlined above. Under the Company's broad deployment strategy, the Company first
deploys its WAN in service areas where the largest consumers of energy are
located and where energy consumers and other power market participants are most
likely to value the Company's services and/or to concentrate their marketing
efforts. As contracts for the provision of NMR services are obtained, the
Company builds out its LAN on an incremental basis as necessary to service those
customers or for advanced coverage of certain areas. Broad deployment offers
energy service providers who lack the established utilities' designated
geographical customer bases the flexibility to build as they grow or to pursue
particular market niches. It also offers established utilities, which are not
yet prepared to commit resources to a long-term saturation deployment project,
the opportunity to cover a portion of their customers initially and to increase
coverage in their service areas over time, potentially to all of their meters.
By using networks deployed under either the saturation or broad deployment
strategy, the Company is also able to offer NMR information metering services
directly to energy consumers, to the extent that the information provided by
such services is not being made available to them by their own utility or energy
service provider. Use of these networks also allows the Company to offer
sub-metering NMR services to industrial and commercial customers who desire to
itemize their overall energy usage by monitoring the energy consumption of
particular heating, ventilation and air conditioning ("HVAC") system components,
individual manufacturing processes or pieces of equipment, individual
departments, etc.
The Company believes its spectrum-efficient networks will have substantial
excess capacity to service non-utility applications requiring low-cost
monitoring of fixed endpoints. Potential non-utility applications of the
Company's systems include remote status monitoring of home security systems,
vending machines, office equipment, parking meters and other equipment and
remote control of traffic lights. The Company is working with industry leaders
such as Honeywell, Inc., Real Time Data, Inc., and Interactive Technologies,
Inc. to develop such applications. The Company believes that its utility
networks will provide an excellent platform to position the Company as a leading
wholesale provider of wireless data communications services for such non-utility
applications.
The Company believes that a significant international market also exists for
its services with several hundred million electric, gas and water meters outside
of the United States and comparable opportunities for non-utility applications.
The Company is pursuing international markets through a joint venture with
Bechtel Enterprises, Inc. ("BEn"). The joint venture, BCN Data Systems L.L.C.
("BCN"), has concentrated its initial efforts on entering the market in the
United Kingdom and is also considering opportunities in Australia and elsewhere.
See "Business Strategy-Pursue International Expansion."
RECENT DEVELOPMENTS
SATURATION DEPLOYMENT. The Company continues to expand its utility customer
base through new arrangements to provide NMR services to utility customers. In
March 1998, the Company reached a preliminary understanding with C3
Communications ("C3"), a non-regulated subsidiary of Central and South West
Corporation, to jointly deploy up to 350,000 meters and provide NMR services in
four states.
In October 1997, the Company announced that it had reached an agreement with
PSE to deploy 700,000 meters to provide NMR services. The term of this agreement
is for 15 years. This long-term contract commitment from PSE represents a
substantial increase from the 15,000 meter Initial Service
7
<PAGE>
Agreement reached between the Company and PSE in 1996 and demonstrates the
success of that initial project.
BROAD DEPLOYMENT. The Company initiated its broad deployment strategy in
September 1997. To date, the Company has entered into service agreements with
energy service providers and energy aggregators including: Keystone Energy;
Friendly Power Company; Commonwealth Energy Corp.; Duke Solutions; the Electric
Clearinghouse, a subsidiary of NGC Corp; Montana Power Group; New West Energy;
Energy Pacific; The Association of Bay Area Governments, which is an association
that will make collective power purchases for 64 local San Francisco Bay Area
governments; and the School Project for Utility Rate Restriction, a joint power
agency representing 229 Northern California school districts, community colleges
and county offices. These contracts generally have terms of one to five years
and provide that the market participant will use the Company's NMR services for
their customers in the geographic areas where the Company completes a network.
Currently, the Company is building networks in a number of cities in Northern
and Southern California. The contracts do not require that the participant
provide any minimum number of customers and, accordingly, the Company is
dependent on the participants' success in attaining and retaining customers.
STRATEGIC DEVELOPMENTS. In March 1998, the Company received approval from
the major energy utilities as a Meter Data Management Agent ("MDMA") and
approval from the California Public Utilities Commission ("CPUC") as a Meter
Service Provider ("MSP") for California's deregulated power market. CellNet is
the first non-utility company in the U.S. to be authorized by the CPUC to
provide meter services.
Also in March 1998, the Company reached an agreement to provide NMR services
to 71 Circuit City stores in California. Under the terms of the agreement,
CellNet will provide Circuit City with metering data relating to in-store
electricity consumption stated in hourly intervals. Circuit City may access this
data on the Internet through a CellNet-operated website.
In January 1998, the Company announced a strategic partnership with Landis &
Gyr, Inc. ("Landis & Gyr"), a global supplier of advanced metering products,
customer management systems and software for the electric utility industry.
Together, the Company and Landis & Gyr intend to incorporate CellNet's data
communications technology into the recently released Altimus electricity
metering system. Altimus is an innovative solid state, residential electricity
metering system designed for the electric power industry.
FINANCING. On September 24, 1997, the Company received an aggregate of
approximately $332.3 million from the sale of its 14% Senior Discount Notes due
2007 (the "1997 Notes") and warrants to purchase Common Stock. All holders of
the Company's 13% Senior Discount Notes due 2005 (the "1995 Notes") tendered and
exchanged their 1995 Notes for 1997 Notes having an initial accreted value of
$231.0 million. The net proceeds from the 1997 Notes to the Company were
approximately $96.3 million.
8
<PAGE>
THE PREFERRED SECURITIES
<TABLE>
<S> <C>
Issuer....................................... CellNet Funding, LLC is a special purpose
limited liability company recently formed
under the laws of the State of Delaware. All
of its common limited liability company
securities (the "Common Securities") are
owned directly by CellNet. Funding will
conduct no business and have no assets or
liabilities except as described herein. See
"Funding."
Securities................................... 3,000,000 of Funding's % Exchangeable
Limited Liability Company Preferred
Securities Mandatorily Redeemable 2010,
having an aggregate liquidation preference of
$75 million (3,450,000 Preferred Securities
and $86.25 million liquidation preference if
the Underwriter's over-allotment option is
exercised in full).
Mandatory Redemption Date.................... May 1, 2010.
Liquidation Preference....................... $25 per Preferred Security, plus accrued and
unpaid dividends.
Dividends.................................... The Preferred Securities will accrue
dividends at the rate of % per annum and
dividends will be payable quarterly on
February 1, May 1, August 1 and November 1 of
each year (each, a "Dividend Payment Date"),
commencing August 1, 1998 to holders of
record on the corresponding record dates. The
first dividend payment of $ per Preferred
Security will be for the period from the
Closing Date (as defined below) to and
including July 31, 1998 and will be payable
on August 1, 1998. Dividends on the Preferred
Securities will accrue and be cumulative from
the closing date of the Offering (the
"Closing Date").
Mandatory Redemption by Funding.............. Unless earlier redeemed, the Preferred
Securities must be redeemed (the "Mandatory
Redemption"), out of funds held by Funding
legally available therefor, at a redemption
price of 100% of the liquidation preference
thereof plus accrued and unpaid dividends, if
any, to the Mandatory Redemption Date.
Method of Redemption Price and Dividend
Payments................................... Through and including August 1, 2001,
dividends on the Preferred Securities will be
payable in cash. Thereafter, dividends on the
Preferred Securities will be payable, and at
any time any redemption price (including at
the Mandatory Redemption Date) may be paid,
in each case at Funding's option (i) in cash,
(ii) by delivery of Common Stock, valued at
90% of the Average Market Value (as defined
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
below) of the Common Stock in the case of
dividend payments or payment of the
redemption price pursuant to an Optional
Redemption (as defined herein), respectively,
and 100% of the Average Market Value of the
Common Stock in the case of payment of the
redemption price pursuant to the Mandatory
Redemption or (iii) in any combination of
cash and shares of Common Stock; provided
that any payment must be made in cash to the
extent Funding shall have sufficient cash
legally available to make all or any portion
of such payment with respect to the Preferred
Securities.
"Average Market Value" of the Common Stock
means the average of the Current Market Value
for the ten trading days ending on the second
business day prior to the applicable date of
payment. "Current Market Value" of the Common
Stock means (i) the Volume Weighted Average
Price, as reported on the Nasdaq National
Market or (ii) the average of the high and
low sales prices of the Common Stock, if
reported on any other national securities
exchange.
Exchange Rights of Holders................... The Preferred Securities are exchangeable
with Funding at any time prior to the
Mandatory Redemption Date (unless earlier
redeemed), in whole or in part, at the option
of the holders, into shares of Common Stock
at an initial exchange rate of shares
of Common Stock per $25 liquidation
preference of Preferred Securities
(equivalent to an exchange price of $ per
share of Common Stock), subject to adjustment
as described under "Description of the
Preferred Securities--Exchange
Rights--Exchange Rate Adjustments," or an
aggregate of shares of Common Stock
(based on the exchange rate on the Closing
Date), representing approximately % of
the outstanding Common Stock on a fully
diluted basis as of . The Common
Stock is currently quoted on the Nasdaq
National Market under the symbol "CNDS." On
April 22, 1998, the last reported sale price
for the Common Stock on the Nasdaq National
Market was $14.06 per share. Generally, such
exchange with Funding, in whole or in part,
should not be a taxable event to the holders.
See "Certain United States Federal Income Tax
Considerations." Holders of Preferred
Securities at the close of business on a
dividend record date will be entitled to
receive the dividend payable on such
Preferred Securities on the corresponding
Dividend Payment Date notwithstanding the
exchange of
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
such Preferred Securities following such
dividend record date but prior to such
Dividend Payment Date. Except as provided in
the immediately preceding sentence, neither
Funding nor CellNet will make, or be required
to make, any payment, allowance or adjustment
for accumulated and unpaid dividends, whether
or not in arrears, on exchanged Preferred
Securities. Following any exchange at the
election of a holder of such holder's
Preferred Securities into Common Stock,
dividends will cease to accrue on such
Preferred Securities and such holder will not
be entitled to participate in the proceeds
from the Treasury Strips (as defined herein)
held by Funding. See "Description of the
Preferred Securities--Exchange Rights."
Automatic Exchange by Funding................ The Preferred Securities will be
automatically exchanged for Common Stock at
any time after the Closing Date and on or
prior to May 1, 2001, at an exchange price of
$ per share in the event that the Current
Market Value of the Common Stock equals or
exceeds the following trigger percentages
(the "Trigger Percentages") of the exchange
price then in effect for at least 20 trading
days in any consecutive 30-day trading period
during the 12 month period ending on May 1 of
the indicated year:
</TABLE>
<TABLE>
<CAPTION>
YEAR TRIGGER PERCENTAGE
--------- ---------------------
<S> <C> <C>
1999 170 %
2000 160
2001 150
</TABLE>
<TABLE>
<S> <C>
In any consecutive 30 day trading period that
includes trading days before and after May 1,
1999 or May 1, 2000, the applicable Trigger
Percentage for each trading day in the
trading period shall be used in order to
determine whether an Exchange Event has
occurred.
Upon any Automatic Exchange, Funding will
make a payment in cash (the "Dividend
Make-Whole Payment") with respect to the
Preferred Securities which are exchanged in
an amount equal to the liquidation proceeds
of any remaining U.S. Treasury strips
("Treasury Strips") held by Funding.
Following any Automatic Exchange, dividends
will cease to accrue on such Preferred
Securities. See "--Use of Proceeds and
Structure." Funding will be obligated to make
the Dividend Make-Whole Payment on all
Preferred Securities automatically exchanged.
The Dividend Make-Whole Payment
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
must be made in cash. See "Description of the
Preferred Securities--Automatic Exchange."
Optional Redemption by Funding............... At any time on or after May 1, 2001, the
Preferred Securities will be redeemable at
the option of Funding (the "Optional
Redemption"), at a redemption price equal to
the percentage of the liquidation preference
set forth below plus accrued and unpaid
dividends, if any, to the date of redemption
(the "Optional Redemption Date"), if redeemed
in the 12 month period beginning on May 1 of
the indicated year:
</TABLE>
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
--------- ----------------
<S> <C> <C>
2001 %
2002
2003
2004
2005
2006
2007
2008
2009
2010 100.000
</TABLE>
<TABLE>
<S> <C>
Voting Rights................................ Except as described below or provided by law,
the holders of the Preferred Securities will
not have any voting rights. The Limited
Liability Company Agreement of Funding, (the
"Operating Agreement") provides that Funding
may not amend the Operating Agreement so as
to affect adversely the specific rights,
preferences, privileges or voting rights of
holders of Preferred Securities, or cause the
dissolution, winding-up or termination of
Funding, without the affirmative vote or
consent of the holders of at least a majority
of the outstanding Preferred Securities,
voting or consenting, as the case may be,
separately as one class. Furthermore, the
Certificate of Designation provides that
CellNet may not, without the approval of the
holders of a majority of the Redeemable
Preferred Stock of CellNet (the "CellNet
Preferred Stock") which will be held by
Funding, amend the Certificate of
Incorporation of CellNet so as to have a
material adverse effect on the specific
rights, preferences, privileges or voting
rights of the holders of the CellNet
Preferred Stock with respect to the CellNet
Preferred Stock, or cause the dissolution,
winding- up or termination of Funding or
CellNet. Funding will initially be the sole
holder of the CellNet Preferred Stock.
Funding has agreed not to grant such approval
without the consent of the holders of a
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
majority of the Preferred Securities then
outstanding.
Listing...................................... Application will be made for quotation of the
Preferred Securities on the Nasdaq National
Market. The shares of Common Stock payable as
dividends on the Preferred Securities,
payable in connection with a redemption of
Preferred Securities or issuable in
connection with an Automatic Exchange will be
quoted on the Nasdaq National Market.
Ranking...................................... The Preferred Securities will be senior to
all classes of common securities of Funding.
The Operating Agreement will not permit
Funding to incur any indebtedness or
liabilities or issue any securities except
common securities to CellNet and the
Preferred Securities. See "Description of the
Preferred Securities--Ranking" and
"Description of CellNet Preferred
Stock--Ranking."
Use of Proceeds and Structure................ On the Closing Date, Funding will purchase,
and place in escrow, Treasury Strips in an
amount anticipated to be sufficient to fund
the cash payment of the first 13 dividends.
It is expected that approximately $
million of Treasury Strips will be purchased,
but the precise amount of Treasury Strips to
be purchased will depend on market rates for
U.S. government securities on the Closing
Date. On the Closing Date, the entire
proceeds of this Offering, less the amount
used to purchase Treasury Strips, will be
used to pay the purchase price of $
million ($ million, if the Underwriter's
over-allotment option is exercised in full)
of CellNet Preferred Stock. In the event such
proceeds do not equal $ million ($
million, if the Underwriter's over-allotment
option is exercised in full), CellNet will
provide Funding with cash in an amount, or
distribute to Funding shares of Common Stock
in a number that, when sold by Funding in the
open market, will be sufficient to eliminate
such cash shortfall. Dividends on the CellNet
Preferred Stock will, at the option of
CellNet, be payable either in cash, shares of
Common Stock or any combination of cash and
Common Stock. Such shares may, at the option
of Funding, be used to pay dividends on the
Preferred Securities or sold to raise funds
to pay cash dividends on the Preferred
Securities. See "--Method of Redemption Price
and Dividend Payments."
</TABLE>
13
<PAGE>
RISK FACTORS
SEE "RISK FACTORS," IMMEDIATELY FOLLOWING THIS SUMMARY, FOR A DISCUSSION OF
CERTAIN RISKS THAT SHOULD BE CONSIDERED IN CONJUNCTION WITH AN INVESTMENT IN THE
PREFERRED SECURITIES, INCLUDING RISKS RELATED TO HISTORICAL AND ANTICIPATED
OPERATING LOSSES, NEGATIVE CASH FLOWS AND SUBSTANTIAL INDEBTEDNESS.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the Company's Consolidated Financial Statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein. The consolidated statement of operations data for
the years ended December 31, 1997, 1996 and 1995, and the consolidated balance
sheet data at December 31, 1997 and 1996 are derived from, and are qualified by
reference to, the audited Consolidated Financial Statements included herein. The
consolidated statement of operations data for the years ended December 31, 1994
and 1993, and the consolidated balance sheet data at December 31, 1995, 1994 and
1993 are derived from audited consolidated financial statements not included
herein. The consolidated statement of operations data for the three months ended
March 31, 1998 and 1997 and the consolidated balance sheet data at March 31,
1998 are derived from unaudited consolidated financial statements that include,
in the opinion of management, all adjustments, consisting of only normal,
recurring adjustments, necessary for a fair presentation of the information set
forth therein. The consolidated results of operations for the three months ended
March 31, 1998 or any other period are not necessarily indicative of future
results.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 2,269 $ 979 $ 5,842 $ 1,669 $ 2,126 $ 1,651 $ 1,757
Costs and expenses:
Cost of revenues........................ 5,229 3,643 18,907 8,429 4,965 1,109 1,741
Research and development................ 7,024 6,396 27,524 25,394 20,883 9,091 4,979
Marketing and sales..................... 3,051 1,739 10,148 6,021 4,114 3,179 1,408
General and administrative.............. 3,624 4,427 15,670 12,036 6,258 2,353 1,206
Depreciation and amortization........... 4,179 2,465 11,973 6,123 2,295 992 665
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses.............. 23,107 18,670 84,222 58,003 38,515 16,724 9,999
--------- --------- --------- --------- --------- --------- ---------
Loss from operations...................... (20,838) (17,691) (78,380) (56,334) (36,389) (15,073) (8,242)
Equity in loss of unconsolidated
affiliate............................... (351) (358) (2,834) -- -- -- --
Other income (expense).................... (9,027) (3,954) (21,252) (16,355) (4,564) 441 (148)
--------- --------- --------- --------- --------- --------- ---------
Loss before income taxes and extraordinary
loss on early extinguishment of 1995
Senior Notes............................ (30,216) (22,003) (102,466) (72,689) (40,953) (14,632) (8,390)
Provision for income taxes................ -- 1 1 5 3 2 1
--------- --------- --------- --------- --------- --------- ---------
Loss before extraordinary loss on early
extinguishment of 1995 Senior Notes..... (30,216) (22,004) (102,467) (72,694) (40,956) (14,634) (8,391)
Extraordinary loss on early extinguishment
of 1995 Senior Notes.................... -- -- (11,417) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net loss.................................. $ (30,216) $ (22,004) $(113,884) $ (72,694) $ (40,956) $ (14,634) $ (8,391)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic and diluted earnings per share(1):
Loss per share before extraordinary loss
on early extinguishment of 1995 Senior
Notes................................... $ (0.73) $ (0.59) $ (2.59) $ (6.08) $ (13.93) $ (13.02) $ (13.38)
Extraordinary loss on early extinguishment
of 1995 Senior Notes.................... -- -- (0.29) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Basic and diluted net loss per share...... $ (0.73) $ (0.59) $ (2.88) $ (6.08) $ (13.93) $ (13.02) $ (13.38)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in computing net loss per
share................................... 41,139 37,701 39,506 11,963 2,939 1,124 627
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OTHER OPERATING DATA (UNAUDITED):
EBITDA(2)................................. $ (15,255) $ (13,227) $ (61,159) $ (42,743) $ (29,338) $ (13,539) $ (7,493)
Capital expenditures...................... 21,398 13,003 59,106 46,493 17,491 3,769 535
Deficit of earnings to fixed charges(5)... 30,492 22,231 102,679 74,226 41,411 -- --
CASH FLOW DATA:
Used for operating activities............. $ (12,924) $ (12,964) $ (57,095) $ (41,160) $ (25,014) $ (14,638) $ (9,091)
Provided by (used for) investing
activities.............................. (25,933) 4,507 (53,253) (3,665) (110,323) (12,817) (3,424)
Provided by (used for) financing
activities.............................. (149) 75 97,228 121,039 170,852 34,036 16,201
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
MARCH 31, -------------------------------
1998 1997 1996 1995
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
SELECTED OTHER DATA (UNAUDITED):
Meters under contract(3)............................................ 3,365,000 3,365,000 2,235,000 1,070,000
Meters in revenue service(3)........................................ 956,000 774,000 363,000 18,000
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998 AS OF DECEMBER 31,
------------------------- -------------------------------
ACTUAL AS ADJUSTED(4) 1997 1996 1995
--------- -------------- --------- --------- ---------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $ 109,860 $ - $ 148,058 $ 178,875 $ 143,797
Total assets............................................ 278,759 - 293,985 259,551 184,306
Long-term obligations, including current portion........ 280,993 - 269,551 207,852 183,348
Series CC redeemable convertible preferred stock........ -- - -- -- 29,486
Total stockholders' equity (deficit).................... (27,640) - 2,264 40,245 (38,103)
</TABLE>
- ------------
(1) See Notes to Consolidated Financial Statements for an explanation of the
number of shares used in computing net loss per share.
(2) EBITDA consists of operating loss before interest expense, taxes,
depreciation and amortization. EBITDA is provided because it is a measure
commonly used in the wireless communications industry. It is presented to
enhance an understanding of the Company's operating results and is not
intended to represent cash flow or results of operations in accordance with
generally accepted accounting principles for the periods indicated and may
be calculated differently than EBITDA for other companies.
(3) "Meters under contract" refers to the aggregate number of meters for which
the Company has agreed to provide NMR services under services agreements
with utilities, and "Meters in revenue service" refers to the aggregate
number of meters under contract which have been installed on the Company's
networks and for which the Company is receiving NMR service revenues.
(4) Information with respect to the as adjusted balance sheet of the Company
includes the proceeds received from the issuance of the Preferred Securities
and the shares of CellNet Preferred Stock issued in connection with the
Offering.
(5) Deficit of earnings to fixed charges is calculated as follows: earnings
(loss before taxes on income, equity in loss of affiliate and interest
expense, including that portion of rental expense the Company believes to be
representative of interest (i.e., one-third of rental expense), and not
including capitalized interest) plus fixed charges (interest expense,
including capitalized interest and that portion of rental expense the
Company believes to be representative of interest (i.e. one-third of rental
expense)).
16
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE PREFERRED SECURITIES OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. THE FOLLOWING RISK FACTORS, TOGETHER WITH THE OTHER INFORMATION
SET FORTH IN THIS PROSPECTUS, SHOULD BE CONSIDERED WHEN EVALUATING AN INVESTMENT
IN THE COMPANY. THIS PROSPECTUS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO, INFORMATION WITH
REGARD TO THE COMPANY'S EXPECTED WIRELESS DATA COMMUNICATIONS NETWORK
DEPLOYMENTS AND OPERATIONS, ITS STRATEGY FOR MARKETING AND DEPLOYING SUCH
NETWORKS AND RELATED FINANCING ACTIVITIES, AND ITS EXPECTED REVENUES, EXPENSES
AND CAPITAL EXPENDITURES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AND THE VARIATIONS
MAY BE MATERIAL. THE DISCUSSION SET FORTH BELOW CONTAINS CAUTIONARY STATEMENTS
IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS.
DEPENDENCE ON AND UNCERTAINTY OF MARKET ACCEPTANCE
The Company's success will be almost entirely dependent on whether
established utilities and other parties, including new power market
participants, sign services contracts with CellNet or enter into other
arrangements which allow CellNet to install NMR networks servicing a substantial
number of meters.
Because automation of utility meter reading and distribution is a relatively
new and evolving market and is likely to be significantly affected by
deregulation, it is difficult to predict the future growth rate and size of this
market. Utilities 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.
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 utilities or other
parties, including new power market participants, do not adopt the Company's
technology, or do so less rapidly than expected by the Company, the Company's
future results, including its ability to service its indebtedness and achieve
positive cash flow or profitability, will be materially and adversely affected.
In recent competitive bids, potential electric and gas utility customers and new
power market participants have selected competing systems to those offered by
the Company and potential utility customers and new power market participants,
from time to time, may select competing services in the future. See
"--Substantial and Increasing Competition" and "Business--Competition."
Any decision by an energy provider to utilize the Company's services will
involve significant organizational, technological and financial commitments. The
utility industry historically is characterized by long purchasing cycles and
cautious decision making. Utilities typically undergo 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. Although the uncertainty surrounding proposed regulatory
changes in some states may have caused, and may continue to cause, additional
delays in purchasing decisions by established utilities, the Company believes
that implementation of utility deregulation will ultimately accelerate the
utility decision-making process. Purchases of the Company's services are, to a
substantial extent, deferrable in the event that utilities seek to limit 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 contracts would be on terms
favorable to the Company. See "Business."
With the advent of utility industry deregulation, the Company is seeking
opportunities to provide its NMR services to other parties, including new power
market participants. The Company believes it is well-positioned to offer
competitive advantages to established utilities and other parties, including new
power market participants. Although the Company has entered into several
contracts with new power market participants and other parties, there can be no
assurance that the Company will be able to enter into
17
<PAGE>
contracts covering a sufficient number of meters to recoup its costs of
deployment, on terms favorable to the Company, or at all. The Company's ability
to enter into contracts with other parties, including new power market
participants, depends, in part, on the timing and type of deregulation in each
state. The Company also anticipates that under contracts with other parties,
including new power market participants, it would build out its networks, at
least in part, before the capacity was fully committed. See "Business Strategy."
For these reasons, the Company's ability to obtain financing for the capital
expenditures associated with these contracts may be limited. The Company
believes, however, that it will be able to defer a significant portion of the
required capital expenditures by building out its networks incrementally as
needed, and that the new power market participants and other parties would lease
or acquire the endpoints from the Company, reducing the Company's costs. The
Company also anticipates that its contracts with new power market participants
and other parties will be shorter-term than those it has entered into with
established utilities, and the revenues may therefore not fully cover the costs
of network build-out and associated operating costs. The Company intends to
reduce this risk by marketing its services to a wide range of new power market
participants and other parties, but there can be no assurance that the Company
will be successful in such marketing efforts, or that the new power market
participants and other parties will be successful in capturing any significant
share of the energy service market.
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 established
utilities and other parties including new power market participants and upon the
successful deployment and operation of the Company's wireless data
communications networks. The signing of any new services contracts for
saturation or broad deployments is expected to occur on an irregular basis. The
Company expects that it will generally take two to four years to complete the
installation of each saturation deployment network after a services contract has
been signed. Service revenues from both types of such networks are not expected
to exceed the Company's capital investments and expenses incurred to deploy and
operate such networks 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 in saturation deployments no
earlier than six months after the execution of the applicable services contract.
The Company begins to incur capital expenditures for the construction of
networks used in broad deployments and does not begin to receive recurring
revenues until portions of the network become operational. 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, cost of site leases, the nature and sophistication of services
being provided, the cost of spectrum acquisition, 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 established utilities. During 1997,
approximately 88% of the Company's revenues were derived from its contracts with
KCPL and UE and during the first three months of 1998, 94% of the Company's
revenues were derived from its contracts with KCPL, UE and NSP. The Company will
not generate sufficient cash flow to service its indebtedness or achieve
profitability unless it enters into additional services contracts covering a
significant number of additional meters. There can be no assurance that the
Company will complete commercial deployments of the CellNet system under current
services contracts successfully or that it will obtain enough additional
services 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 positive cash flow or 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 established utilities and new power market
participants enter into new services contracts, general economic conditions,
economic conditions in the utility industry,
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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 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 relationships or
investments that could result in a material adverse effect on the Company's
business, operating results, 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 the generation of a
significant percentage of future revenues from non-utility services. Potential
non-utility applications of the Company's systems include home security, remote
status monitoring of vending machines, office equipment and parking meters and
other equipment and remote control of traffic lights. The Company believes its
future ability to service its indebtedness and to achieve profitability will
depend, in part, upon its success in generating substantial revenues from such
additional services. The Company is working with industry leaders such as
Honeywell, Inc., Real Time Data, Inc., and Interactive Technologies, Inc. to
develop such applications. However, there is no assurance any of these
activities will result in the successful development or commercial introduction
of any such services. The Company currently has no services contracts which
provide for the implementation of such services, and the Company has not yet
completed development or deployed any such services on a commercial scale. In
addition, unless the Company is successful in deploying its wireless networks in
targeted 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.
See "Business-- Business Strategy."
DEPENDENCE ON BUSINESS RELATIONSHIPS TO ACHIEVE MARKET PENETRATION
A key element of the Company's business strategy is the formation of
corporate relationships 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 utility and non-utility applications of its network will depend in
large part on its ability to maintain these relationships and to cultivate
additional or alternative relationships. There can be no assurance that the
Company will be able to develop additional corporate relationships with such
companies, that existing relationships will continue or be successful in
achieving their purposes or that such companies will not form competing
arrangements. See "Business--Business Strategy--Form Strategic Alliances."
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT; SUBSTANTIAL FUTURE CAPITAL
NEEDS
The Company has substantial outstanding indebtedness, including $654.1
million in aggregate principal amount at maturity of the 1997 Notes. The Company
will be required to pay cash interest on the 1997 Notes commencing April 1, 2003
and repay the 1997 Notes on October 1, 2007. CellNet intends to incur
substantial additional indebtedness, primarily in connection with installing
future networks. As a result, CellNet 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,
in part due to increased 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 a number of factors, including
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 the possibilities that:
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(i) 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 operating and/or capital costs associated with the
installation and maintenance of the network could be higher than projected, (iv)
the Company's wireless systems could experience performance problems, or (v)
adoption of the Company's services within a network 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 or obtain alternate liquidity to service its
indebtedness, it will have to take actions such as 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, or that effecting
any of these strategies would yield sufficient proceeds to make the required
payments on any of the Company's indebtedness. In particular, there is a risk
that the Company would be unable, if needed, to refinance the 1997 Notes prior
to the date cash interest payments become due and payable on the 1997 Notes or
at their maturity date, given uncertainty about prevailing capital market
conditions, the Company's then performance and financial position and the
Company's projected high levels of indebtedness. Such inability to refinance the
1997 Notes could result in cross-defaults under other indebtedness and may limit
the Company's ability to meet its obligations in respect of the CellNet
Preferred Stock and Funding's ability to meet its obligations in respect of the
Preferred Securities.
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) the
Company's cash flow, if any, cannot be used in the Company's business as 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 (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, and for funding operating
losses. As of March 31, 1998, the Company had $109.9 million in cash, cash
equivalents and short-term investments. The Company intends to raise a
substantial amount of additional capital in 1998 (in addition to this Offering)
and expects that it will continue to require substantial amounts of additional
capital in the future. Depending upon the number and timing of any new services
agreements and upon the associated network deployment costs and schedules, the
Company may require additional equity or debt financing earlier than estimated
in order to fund its working capital and other requirements. 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."
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 its indebtedness. In the event of such default, the holders of such
indebtedness and other liabilities would have certain enforcement rights,
including the right to accelerate such indebtedness and the right to commence an
involuntary bankruptcy proceeding against the Company.
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HISTORY AND CONTINUATION OF OPERATING LOSSES
The Company has incurred substantial and increasing operating losses since
inception. As of March 31, 1998, the Company had an accumulated deficit of
$311.8 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 1998 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.
Accordingly, the Company does not expect positive cash flow after capital
expenditures from its NMR services operations for several years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SUBSTANTIAL AND INCREASING COMPETITION
The emerging market for utility NMR systems, the deregulation of the
electric utility industry 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. Deregulation will likely cause competition to increase. The
Company believes that its only significant direct competitor in the marketplace
at present is Itron, Inc. ("Itron"), an established manufacturer and seller of
hand-held and drive-by automated meter reading ("AMR") equipment for utilities.
Itron is currently providing to customers its Genesis-TM- system, a radio
network system similar to the Company's system, for meter reading purposes.
There may be many potential alternative solutions to the Company's NMR
services including traditional wireless solutions. Motorola is an example of a
company whose technology might be adapted for NMR and who might become a
competitor of the Company. Mtel has announced that it intends to adapt its
technology to offer residential services similar to NMR some time in 1999 over
its existing paging network, with the development of endpoint radios and network
management capabilities being left to other independent companies. Whisper
Communications (formerly, a part of Diablo Research) now offers its True 2
Way-TM- fixed-based radio frequency ("RF") architecture communications
technology for automated meter reading and other services and has several trials
underway. Metricom, a provider primarily of subscriber-based, wireless data
communications for users of portable and desktop computers, is currently
involved in the AMR market through trials with Whisper Communications.
Schlumberger Industries, Inc. ("Schlumberger") and Greenland are among the
companies that have conducted, or are in the process of conducting, pilot trials
of utility network automation systems. Several companies are offering telephone-
based network automated meter reading services or equipment. Among these are
International Teldata and American Innovations. 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
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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, including its software, 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, technologies or software
that are better or more cost effective. In addition, current and potential
competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties that increase their ability
to address the needs of 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 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 new services contracts and maintain existing
agreements. Competition for services relating to non-utility applications may be
more intense than competition for 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. See "Business--Competition."
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 utilities' electric, gas and water meters and 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 continue to
expand and upgrade its capabilities in connection with such commercial
implementation, the success of which cannot be assured. There can be no
assurance that the Company will be able to develop successfully a full range of
endpoint devices. The Company must also continue to develop the hardware
enhancements necessary to utilize its system on a commercial basis with a
variety of different electric, gas and water meters. The Company's future
success will be materially adversely affected if it is not successful or is
significantly delayed in continuing technology development and enhancement
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, specialized mobile radio services and
personal communications systems ("PCS") and other commercial mobile radio
services 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 and
paging, as well as more recently developed media such as cellular and PCS-based
networks. Competitors may be capable of offering significant cost savings or
other benefits to 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 future
performance will also depend significantly on its ability to respond to future
regulatory changes. See "Business--Wireless Communications Industry Overview."
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. See "Business--Research and Development."
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ACCESS TO RADIO FREQUENCY ("RF") SPECTRUM; REGULATION BY THE FEDERAL
COMMUNICATIONS COMMISSION ("FCC")
The Company attempts to obtain exclusive usage of licensed bandwidth and/or
secure its own licenses. The Company has focused its spectrum acquisition
strategy generally on the largest MSAs and CMSAs in the United States. As of
March 31, 1998, the Company had acquired a total of 87 spectrum licenses in 50
of the top 60 MSAs/CMSAs. However, sufficient 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 provide its network services and on the Company's business,
operating results, financial condition and cash flow. See "Business--Spectrum
Regulation."
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. 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 a 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 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, operating results,
financial condition and cash flow. The FCC recently 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.
While the Company intends to offer alternate market services over its
private, internal network, some of those services may include the use of the
Company's network for private carrier service offerings. The Company's offerings
would be structured to comply with FCC rules governing the offering of private
carrier services, and each such service offering would need to be reviewed
relative to these rules. The FCC's rules currently prohibit the use of the MAS
frequencies on which 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
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assurances 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. See "Business--Spectrum
Regulation."
In February 1997, the FCC published for public comment a Notice of Proposed
Rule Making in WT Docket No. 97-81 regarding the future licensing of frequencies
for use by Multiple Address Systems. The FCC has reached certain tentative
conclusions which, if adopted without any change, would result in (i) the
restriction on future licenses in the 928/952/956 MHz band (in which the Company
now operates its wide area network) for systems exclusively used for private
internal purposes, and the prohibition on future licensing in this band for
systems which provide "subscriber-based" services, (ii) the designation of the
932/941 and 928/959 MHz bands for licensees offering subscriber-based services,
(iii) the use of geographic licensing (using very large licensed service areas)
in lieu of site-by-site licensing for the bands designated for subscriber-based
services, (iv) the use of competitive bidding to award licenses for
subscriber-based services, (v) the grandfathering and protection from
interference of existing licensees, but only to the extent of their current
service areas, (vi) with respect to new geographic service area licensees,
liberalizing the time periods by which construction must be completed, but
imposing more burdensome construction requirements over the term of the license,
and (vii) for incumbent and new licensees, liberalizing some of the technical
and operational restrictions on the use of the licensed channels.
These proposals have engendered substantial public comment from a wide range
of industry sectors currently utilizing the MAS channels, including extensive
comments from the Company. The Company has urged, in particular, that there
should not be any restrictions imposed on the use of the 928/952 MHz bands in
which the Company has developed its network facilities that would unreasonably
limit the Company's ability to provide its current and anticipated utility and
non-utility service offerings. The Company has also urged that competitive
bidding and geographic licensing should not be the primary basis for awarding
licenses in this highly encumbered, heavily utilized band. The Company has also
supported many of the proposed changes that will make the use of the band more
technically efficient, although the Company has also opposed any use of the band
that would change its fundamental use for point-to-multipoint fixed operations,
and in particular, the use of the band for mobile operations. The Company's
positions have substantial support in the record, although the effort to retain
the status quo eligibility for the 928/952 MHz band has been opposed by
representatives of the utility and transportation industries who would prefer to
limit the use of this band solely to private internal networks and to prohibit
any private carrier or subscriber-based service offerings.
In August, 1997, the FCC's authority to utilize competitive bidding as a
licensing mechanism was amended and expanded by Congress in the BUDGET ACT OF
1997. Under this recent enactment, the FCC must use competitive bidding
procedures to choose between any mutually exclusive applications, except where
the radio frequency spectrum is being used for public safety radio services.
Congress included a very broad definition of "public safety radio services," to
include private internal radio services used by state and local governments and
non-governmental entities, including emergency road services provided by
not-for-profit organizations that are used to protect the safety of life,
health, or property and that are not made commercially available to the public.
As a result, licensed systems that protect the safety of life, health, or
property and are not made commercially available to the public are not subject
to licensing by FCC auctions.
The new auction legislation post-dates the Notice of Proposed Rulemaking in
WT Docket 97-81 and will, in the Company's view, require the FCC to review and
revise its proposals in that proceeding relating to the breadth of the auction
authority granted to the FCC, which no longer distinguishes between private
internal systems, and proposals relating to the grant of "subscriber based"
services. The Company is unable to determine how the new auction legislation
will affect the proposals in that proceeding, whether the Company's use of MAS
spectrum will subject its applications to the possibility of auctions or will,
instead, be considered a "public safety" use, or whether the Commission will
otherwise exempt the 928/952 MHZ
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band in which the Company currently operates from circumstances in which mutual
exclusivity between applicants for the same license, requiring the use of
auctions, is likely to exist. Nor is the Company able to determine when the FCC
will act in WT Docket 97-81, either to issue new proposals consistent with the
new auction legislation or adopt new rules consistent with the positions already
established in the proceeding or a combination thereof.
The Company is also working with a coalition of interested parties,
including representatives of the utility and transportation industries, to
attempt to develop a compromise consensus proposal that would satisfy most of
the interested parties' concerns for presentation to the FCC in this proceeding.
However, the Company is unable to predict whether such a compromise can be
developed, or if it is developed, whether the FCC will view it favorably, and if
not, what form the final rules adopted in this proceeding will take. Given the
current proposal and the variety of comments submitted, it is possible that some
or all of the Company's uses of the MAS channels could be determined to be the
offering of private carrier or subscriber-based services, and that future
licenses for such offerings would be prohibited in the 928/952 MHz band in which
the Company currently operates, requiring the Company to develop equipment
capable of operating in one of the other MAS bands, and further requiring the
Company to obtain future licenses in a competitive bidding process. 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, and
the Company could experience substantial delays in adapting its networks if the
proposed rules were adopted. The adoption of new rules, depending upon the form
in which such rules are adopted, could have a material adverse effect upon 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, major amendments, or major
modifications for the 928/959 MHz bands and applications to provide
subscriber-based services in the 928/952/956 MHz bands. This temporary
suspension does not affect applications for 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. All of the Company's
pending applications for licenses in the 928/952 MHz band have been or are being
processed in due course. In addition, the Company's applications for the
assignment of licenses held by others have been processed during the processing
suspension. At the request of the Company, the FCC has determined that the
Company's current use of the MAS spectrum constitutes the use as a private,
internal network, and so the Company's applications for new licenses, and for
major modifications to existing licenses, are being processed in due course.
There is no assurance that the Company's future uses of the MAS spectrum will
similarly qualify as a use in a private, internal network, or the the FCC will
not change or expand its freeze on the processing of applications to recognize
the impact of the new auction legislation described above. In either case, the
Company's ability to obtain new licenses could be materially adversely affected,
with similar consequences on the Company's ability to service areas where it has
not yet acquired adequate frequencies.
Finally, when the Company acquires licenses assigned to other applicants, or
utilizes licenses issued in the past, the Company is required to modify its
licenses to reflect more advanced technological parameters now utilized by the
Company and its systems. The Company has developed such amendments with the
approval of the FCC's staff and anticipates timely grant of all required
modifications. There can be no assurance that any particular modification will
be granted timely to the Company's introduction of service on a particular
license, and the failure to obtain the required license modifications could have
a material adverse effect on the Company's ability to serve areas covered by
such unmodified licenses.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
The Company is pursuing international markets through BCN Data Systems
L.L.C. ("BCN"), its international joint venture with Bechtel Enterprises, Inc.
("BEn"). The Company does not expect to
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generate any revenues from its international operations during 1998. The Company
has incurred, and anticipates that it will continue to incur, significant and
increasing expenses in connection with the establishment of international
operations. If revenues generated by international activities 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 may not materialize, and where present, is likely to vary
by country, based on such factors as the regulatory environment, electric power
generating capacity and demand, labor costs, costs of spectrum acquisition and
other political and economic conditions. In addition, the Company may confront
significant challenges in developing and implementing localized versions of its
NMR system due to many factors including the differing standards among utilities
on a country by country basis. To date, the Company has extremely limited
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, 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. See "Business--Business Strategy--Pursue International Expansion."
The Company's strategy of pursuing international markets through BCN may
involve additional partners in local operating project entities in particular
countries. The Company or BCN may not have a majority interest or control of the
board of directors of any such local operating project entity. In any such joint
venture in which the Company or BCN may determine to participate, there is a
risk 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 or BCN or that such partner will not impose the
same or similar accounting and financial controls as the Company or BCN. The
risk is also present that a joint venture partner may be unable to meet its
economic or other obligations and that the Company or BCN may be required to
fulfill those obligations. In addition, in any joint venture in which the
Company or BCN does not have a majority interest, the Company or BCN may not
have control over the operations or assets of such joint venture. Furthermore,
the joint venture structure may limit the amount of funds that can be upstreamed
to the Company or BCN. See "Business--Business Strategy--Pursue International
Expansion."
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.
26
<PAGE>
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. Substantially all of the 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. See "Management."
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 United States patent applications are maintained in secrecy until
patents are issued, and since publication of inventions in the technical or
patent literature tend to lag behind such inventions by several months, CellNet
cannot be certain that it was the first creator of inventions covered by its
issued patents or pending patent applications, that it was the first to file
patent applications for such inventions or that no patent conflict will exist
with other products or processes which could compete with 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 pending at the United States Patent and Trademark
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. See "Business--
Proprietary Rights."
In October 1996, Itron, 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
27
<PAGE>
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 outcome of the lawsuit is not
expected to have a material adverse effect on the Company's business, operating
results, financial condition and cash flow. See "--Litigation," "Business--Legal
Proceedings."
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.
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.
See "Business--Manufacturing and Operations."
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. See "Business--Manufacturing and Operations."
A significant number of new electric meters are required to initiate meter
retrofit and replacement in connection with each network deployment and to
replace existing meters in the field which are found to be obsolete, worn out or
otherwise unsuitable for retrofit and redeployment. Any sudden or material
increase in the number of deployments would result in an increase in the number
of new electric meters ordered by electric utilities and new power market
participants over and above those ordered on account of normal growth and
replacement within their service areas. To the extent that electric meter
manufacturers are unable or unwilling to increase production in line with such
increase in demand, temporarily or over a longer term, deployments may be
delayed or postponed, with the result that revenues from such deployments will
be likewise delayed or postponed.
28
<PAGE>
POSSIBLE TERMINATION OF CONTRACTS
The Company expects that a substantial portion of its future revenues will
be provided pursuant to services contracts of various kinds. These contracts
will generally be subject to cancellation or termination in certain
circumstances 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 utility services contracts provides for termination of such
contracts by the respective utility without cause in less than ten years,
subject to certain reimbursement provisions. Such contracts also provide that
CellNet will be required to compensate such utilities for the use of its system
for non-utility applications. Future services contracts with utilities may
contain similar provisions. Contracts with new power market participants
generally allow for termination without cause by the new power market
participant on thirty days prior written notice except to the extent they have
already ordered services under the contract. In the event that such a services
contract is terminated, the Company may incur substantial losses. In addition,
the Company anticipates that any contracts with new power market participants
will generally have shorter terms than the Company's existing utility contracts.
The Company's current contracts with new power market participants generally
have terms of one to five years, compared to terms of ten to twenty years with
utilities. 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 services contracts would have a material adverse
effect on the Company's business, results of operations, financial condition and
cash flow. See "Business--Current Utility Services Agreements."
SHAREHOLDERS' AGREEMENT
Under the terms of a Shareholders' Agreement among the Company and certain
stockholders of the Company (the "Shareholders' Agreement"), so long as certain
parties to the Shareholders' Agreement continue to hold not less than 700,000
shares of Common Stock (as such number is adjusted for stock splits,
consolidations or other similar events), the Company is obligated to nominate
for election representatives of certain stockholders as directors at each
meeting of the Company's stockholders at which a vote for directors will be
taken. The intent of the Shareholders' Agreement is to give certain stockholders
greater influence over the management of the Company than they would otherwise
have and to provide certain stockholders with, among other things, certain
registration, first refusal, co-sale and other rights.
LITIGATION
In October 1996, Itron, 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 injunction 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 in
the Federal District Court for the Northern District of California, claiming
that Itron's use of its electric meter reading Encoder Receiver Transmitter
(ERT-Registered Trademark-) device infringes CellNet's U.S. Patent No.
4,783,623. The Company seeks an injunction, damages and other relief. See
"--Uncertainty of Protection of Copyrights Patents and Proprietary Rights."
The consolidated complaint of JERE SETTLE AND KAREN ZULLY V. JOHN M. SEIDL,
ET AL., No. 398464, filed in the Superior Court of California for the County of
San Mateo was dismissed on February 9, 1998, without leave to amend. Counsel for
the plaintiffs in the SETTLE/ZULLY action have filed a notice of their intention
to appeal this dismissal to the California Court of Appeal. A second complaint,
also filed in the same Court, of HOWARD FIENMAN AND GERALD SLAPSOWITZ V. CELLNET
DATA SYSTEMS, INC., ET AL., No. 398560, was earlier
29
<PAGE>
voluntarily dismissed with prejudice. These complaints, purported class actions
filed on behalf of the Company's stockholders against the Company, certain of
its officers and directors and underwriters of the Company's initial public
offering, sought unspecified damages and rescission for alleged liability under
various provisions of the federal securities law and California state law. The
plaintiffs alleged generally that the Prospectus and Registration Statement
dated September 26, 1996, pursuant to which 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 was likely to ensue.
In 1995, Century Telephone Enterprises, Inc. ("Century Telephone") filed a
petition before the Trademark Trial and Appeal Board of the U.S. Patent and
Trademark Office for cancellation of the Company's "CellNet" trademark
registration. The parties have agreed to settle the matter under arrangements
whereby Century Telephone will withdraw its petition for cancellation and the
Company will purchase from Century Telephone their rights to the "CellNet"
trademark now registered in Century Telephone's name. The settlement is pending
execution of settlement documents.
ABSENCE OF PUBLIC MARKET FOR THE PREFERRED SECURITIES; VOLATILITY OF COMMON
STOCK PRICE
The Preferred Securities are a new issue of securities for which there is
currently no active trading market. If the Preferred Securities are traded after
their initial issuance, they may trade at a discount from their initial offering
price, depending upon prevailing interest rates, the market for similar
securities, the market price of the Common Stock and other factors, including
general economic conditions and the financial condition, performance of, and
prospects for the Company. If an active market for the Preferred Securities
fails to develop or be sustained, the trading price of such Preferred Securities
could be materially adversely affected.
The trading price of the Company's Common Stock has been highly volatile
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 and the
Preferred Securities.
NO DIVIDENDS ON COMMON STOCK; DIVIDEND RESTRICTIONS
The Company has not declared or paid any dividends on its Common 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 on the Common Stock in the
foreseeable future. In addition, the Company's existing financing arrangements
restrict the payment of any dividends on the Common Stock.
30
<PAGE>
NO OPERATIONS OF FUNDING
The issuer of the Preferred Securities, Funding, is a special purpose
subsidiary of CellNet which is a newly formed Delaware limited liability company
with no operations or assets other than the agreement to purchase CellNet
Preferred Stock and Treasury Strips with the proceeds of this Offering. Funding
will have no other funds to pay cash dividends. In order to pay subsequent
dividends, Funding will be dependent on CellNet (i) to distribute cash dividends
in respect of the CellNet Preferred Stock (which distribution is restricted by
the terms of the indenture governing the 1997 Notes) (the "Indenture")), (ii)
provide to Funding funds or (iii) issue to Funding Common Stock (which is
required by the terms of the CellNet Preferred Stock). Funding's assets will
consist almost entirely of its interest in the CellNet Preferred Stock and the
Treasury Strips.
NO PRACTICAL BENEFIT TO HOLDERS FROM THE GUARANTEE
CellNet will guarantee the payment in full to the holders of the Preferred
Securities of (i) accrued and unpaid dividends on the Preferred Securities, if
and only to the extent Funding has funds sufficient and legally available
therefor to make such payment, (ii) the redemption price with respect to the
Preferred Securities redeemed, if and only to the extent Funding has funds
sufficient and legally available therefor to make such payment and (iii) upon a
voluntary termination or involuntary dissolution, winding-up or termination of
Funding (other than in connection with a redemption of all of the Preferred
Securities), the lesser of (a) the aggregate of the liquidation preference and
all accrued and unpaid dividends on the Preferred Securities to the date of
payment, to the extent Funding has funds sufficient and legally available
therefor to make such payment, and (b) the amount of assets of Funding remaining
available for distribution to holders of the Preferred Securities upon
liquidation of Funding. The Guarantee may also be subject to contractual
restrictions under agreements governing future indebtedness of CellNet.
Because the obligations supported by the Guarantee are limited by the amount
of the funds in Funding, if CellNet were to default on its obligation to pay
amounts payable on the CellNet Preferred Stock, Funding would lack available
funds for the payment of dividends or amounts payable on redemption of the
Preferred Securities or otherwise, and, in such event, holders of the Preferred
Securities would not be able to rely upon the Guarantee for payment of such
amounts. In addition, upon the initiation of any proceedings by or against
Funding under bankruptcy, insolvency or similar laws, or upon the occurrence of
certain other events, funds held by Funding may not be legally available for
distribution to the holders of the Preferred Securities and the holders would
then not be able to rely on the Guarantee for payment of such amounts.
Because the obligations supported by the Guarantee are limited to the amount
of the funds held by Funding that are legally available to make the payments
described above and because the Guarantee is subordinated to CellNet's existing
and future obligations not expressly subordinated to the Guarantee, the
Guarantee is of no practical benefit to holders of the Preferred Securities.
RANKING OF CELLNET PREFERRED STOCK; PRIOR PAYMENT OBLIGATIONS OF CELLNET;
UNCERTAINTY OF REDEMPTION
The CellNet Preferred Stock will be subordinated to all existing and future
indebtedness and other liabilities of CellNet, and will, with respect to
dividend distributions and distributions upon the liquidation, winding-up or
dissolution of CellNet, rank senior to all Common Stock and senior to or pari
passu with all other capital stock of CellNet. There are no terms in the CellNet
Preferred Stock, the Preferred Securities or the Guarantee that limit CellNet's
ability to incur additional indebtedness or issue pari passu preferred stock. As
of March 31, 1998, the Company had approximately $306.4 million of indebtedness
outstanding and no preferred stock outstanding. CellNet has authorized the
issuance of up to 15 million shares of preferred stock. The Indenture permits
CellNet to incur substantial additional indebtedness and issue additional
preferred stock. Any new indebtedness incurred by CellNet, any securities issued
to refinance existing indebtedness and any future issuances of new series of
CellNet preferred stock may prohibit or
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<PAGE>
restrict the redemption of the CellNet Preferred Stock for cash, thus
effectively prohibiting or restricting Funding's ability to redeem the Preferred
Securities for cash. See "--Substantial Indebtedness" and "Description of
CellNet Preferred Stock."
POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
A substantial portion of the Company's Common Stock is presently eligible
for immediate sale in the public market subject, in the case of certain shares,
to the limitations of Rules 144, 144(k) or 701 under the Securities Act. In
addition, the holders of a significant number of such shares of Common Stock are
entitled to certain registration rights with respect to such shares and the
number of shares sold in the public market could increase substantially upon
exercise of such registration rights. See "Description of CellNet Capital
Stock--Registration Rights of Certain Holders."
RISK FACTORS RELATED TO CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
PARTNERSHIP STATUS
Funding's ability to pay dividends on Preferred Securities depends, in part,
on the classification and treatment of Funding as a partnership for federal
income tax purposes. Assuming the accuracy of certain factual matters as to
which Funding has made representations, counsel is of the opinion that, under
current law, Funding will be classified and treated as a partnership for federal
income tax purposes. No ruling from the Internal Revenue Service (the "IRS") as
to such classification or treatment has been or is expected to be requested.
Instead, Funding intends to rely on such opinion of counsel (which is not
binding on the IRS).
If Funding were classified or treated as an association taxable as a
corporation for federal income tax purposes, Funding would pay tax on its income
at corporate rates (currently a maximum 35% federal rate), distributions would
generally be taxed again to the holders of Preferred Securities as corporate
distributions, and no income, gains, losses or deductions would flow through to
the holders of Preferred Securities. Because a tax would be imposed upon Funding
as an entity, the cash available for distribution to the holders of Preferred
Securities would be substantially reduced. Classification or treatment of
Funding as an association taxable as a corporation or otherwise as a taxable
entity would result in a material reduction in the anticipated cash flow and
after-tax return of the holders of Preferred Securities and thus would likely
result in a substantial reduction in the value of Preferred Securities. See
"Certain United States Federal Income Tax Considerations--Partnership Status of
Funding."
FUNDING ALLOCATIONS
It is possible that a holder of Preferred Securities may receive allocations
of taxable income without matching cash distributions. Furthermore, a holder who
disposes of Preferred Securities between record dates for dividends may be
required pursuant to Funding's method of allocation to include its pro rata
share of Funding's income (and deductions) through the end of the applicable
fiscal period in which such disposition occurs in the holder's calculation of
taxable income (and to add such amount to (or subtract such amount from) the
adjusted tax basis in the holder's Preferred Securities) without receiving the
dividend for the quarter in which such disposition occurs. Furthermore, certain
allocation methods used by Funding may be challenged by the IRS, which may
result in greater tax liability to holders of Preferred Securities during their
period of ownership or upon disposition. See "Certain United States Federal
Income Tax Considerations."
DISPOSITION OF PREFERRED SECURITIES
A holder who sells Preferred Securities will recognize gain or loss equal to
the difference between the amount realized and its adjusted tax basis in such
Preferred Securities. Thus, prior Funding distributions in excess of cumulative
net taxable income in respect of Preferred Securities which decreased a holder's
tax
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<PAGE>
basis in such Preferred Securities will, in effect, become taxable income or
gain if the Preferred Securities are sold at a price greater than the holder's
tax basis in such Preferred Securities, even if the price is less than such
holder's original cost. To the extent the selling price is less than the
holder's adjusted tax basis, a holder will recognize a capital loss. Subject to
certain limited exceptions, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes.
LIMITED VOTING RIGHTS
Generally, holders of the Preferred Securities do not have any voting
rights. However, the vote of a majority of the Preferred Securities is required
to approve any amendment to the Operating Agreement or any proposed action by
Funding that would (i) have a material adverse effect on the powers, preferences
or special rights of the holders of the Preferred Securities or (ii) cause the
dissolution, winding-up or termination of Funding. The approval of the holders
of a majority of the CellNet Preferred Stock is required to approve any change
to CellNet's charter or any proposed action by CellNet that would (i) have a
material adverse effect on the powers, preferences or special rights of the
holder of the CellNet Preferred Stock or (ii) cause the dissolution, winding-up
or termination of Funding. Funding is expected to be the sole holder of the
CellNet Preferred Stock. Funding has agreed not to grant such approval without
the consent of the holders of a majority of the Preferred Securities then
outstanding.
ANTI-TAKEOVER PROVISIONS
The Board of Directors, without further shareholder approval, can issue
preferred shares with dividend, liquidation, conversion, voting, exchange or
other rights which could adversely affect the voting power or other rights of
the holders of the Common Stock. In the event of issuance, the preferred shares
could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change of control of CellNet. In addition, the Company
is, and will continue to be, subject to the anti-takeover provisions of the
Delaware General Corporation Law, which could have the effect of delaying or
preventing a change of control of the Company. Furthermore, upon a change of
control, the holders of substantially all of the Company's outstanding
indebtedness are entitled, at their option, to be repaid in cash and the holders
of CellNet's preferred stock may, at their option, require CellNet to redeem
their shares for cash. Such provisions may have the effect of delaying or
preventing changes in control or management of the Company. All of these factors
could materially adversely affect the price of the Preferred Securities.
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<PAGE>
FUNDING
Funding is a special purpose limited liability company formed under the laws
of the State of Delaware. CellNet owns all of the Common Securities of Funding.
Funding exists for the exclusive purposes of (i) issuing the Preferred
Securities, (ii) investing the proceeds of the sale thereof in the CellNet
Preferred Stock and Treasury Strips and (iii) engaging in those other activities
necessary or incidental thereto.
The business and affairs of Funding are conducted by CellNet, in its
capacity as manager (the "Manager"). The duties and obligations of the Manager
are governed by the Operating Agreement. Funding will hold the CellNet Preferred
Stock for the benefit of the holders of the Preferred Securities and has the
power to exercise all rights, powers and privileges under the CellNet Preferred
Stock. CellNet has agreed to pay all fees and expenses related to the Offering
of the Preferred Securities.
USE OF PROCEEDS
The gross proceeds to Funding from the Offering are estimated to be
approximately $ million (approximately $ million if the Underwriter's
over-allotment option is exercised in full).
On the Closing Date, Funding will purchase, and place into escrow, Treasury
Strips in an amount anticipated to be sufficient to fund the cash payments of
the first 13 dividends on the Preferred Securities. It is expected that
approximately $ million of Treasury Strips will be purchased, but the precise
amount of Treasury Strips to be purchased will depend on market rates for U.S.
government securities on the Closing Date. On the Closing Date, the entire
proceeds of this Offering, less the amount used to purchase Treasury Strips,
will be used to pay the purchase price of $ million ($ million if the
Underwriter's over-allotment option is exercised in full) of CellNet Preferred
Stock. In the event such proceeds do not equal $ million ($ million if the
Underwriter's over-allotment option is exercised in full), CellNet will provide
Funding with cash in an amount, or distribute to Funding shares of Common Stock
in a number that when sold in the open market, will be sufficient to eliminate
such cash shortfall.
The Company expects to use the net proceeds received from Funding's purchase
of CellNet Preferred Stock (i) to fund continuing research and development
activities related to its wireless data communications systems, (ii) to expand
opportunities for the use of its wireless data communications systems through
alternate market applications, (iii) to enhance the performance and lower the
component and operating cost of its wireless data communications systems, (iv)
to continue investing in an international joint venture with BEn for the
deployment of its wireless data communications systems on a worldwide basis, (v)
to fund the adaptation and migration of its technology for use outside the
United States, (vi) to support network deployment for both utility and
non-utility applications, (vii) to expand the Company's business generally, and
(viii) for working capital, general corporate and other purposes permitted by
the Indenture.
DIVIDEND POLICY
Dividends on the Preferred Securities will accrue from the date of the
original issuance of the Preferred Securities and will be payable at the annual
rate of % of the liquidation preference of $25 per Preferred Security.
Dividends on the Preferred Securities will be payable quarterly in arrears on
each February 1, May 1, August 1 and November 1, commencing August 1, 1998.
The Company has not declared or paid any dividends on its Common 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 on its Common Stock in the
foreseeable future, and any changes in the Company's dividend policies will be
determined by its Board of Directors. The Company's existing financing
arrangements also restrict the payment of any dividends on its Common Stock. The
Company anticipates that it and its Subsidiaries will incur substantial
additional indebtedness, which is likely to restrict the payment of dividends on
its Common Stock.
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CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
March 31, 1998 and (ii) the as adjusted capitalization of the Company to reflect
the issuance of the Preferred Securities and CellNet Preferred Stock in
connection with this Offering (assuming that the Underwriter's over-allotment
option is not exercised).
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------
ACTUAL AS ADJUSTED(1)
----------- --------------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations:
1997 Notes(2)...................................................................... $ 279,952 $ 279,952
Capital lease obligations, including current portion(3)............................ 1,041 1,041
----------- --------------
Total long-term obligations...................................................... 280,993 280,993
----------- --------------
Preferred Securities of Funding offered hereby ($75.0 million liquidation value)..... -- 72,310
Stockholders' equity (deficit):
Preferred stock, $.001 par value; 15,000,000 shares authorized; no shares
outstanding......................................................................
Common Stock, $.001 par value; 100,000,000 shares authorized and 41,917,026 shares
outstanding...................................................................... 210,302 210,302
Notes receivable from sale of Common Stock......................................... (668) (668)
Warrants........................................................................... 74,546 74,546
Accumulated deficit................................................................ (311,815) (311,815)
Net unrealized loss on short-term investments...................................... (5) (5)
----------- --------------
Total stockholders' equity (deficit)............................................. (27,640) (27,640)
----------- --------------
Total capitalization........................................................... $ 253,353 $ 397,973
----------- --------------
----------- --------------
</TABLE>
- ----------
(1) Information with respect to the as adjusted capitalization of the Company
includes the issuance of the Preferred Securities and CellNet Preferred
Stock in connection with this Offering.
(2) See Note 6 of Notes to Consolidated Financial Statements.
(3) Amounts given are for the Company and its subsidiaries on a consolidated
basis. See Note 9 of Notes to Consolidated Financial Statements.
35
<PAGE>
COMMON STOCK PRICE RANGE
Since the Company's initial public offering, the Common Stock has been
quoted on the Nasdaq National Market under the symbol "CNDS." The following
table sets forth for the periods indicated the high and low reported last sale
prices for the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Year Ended December 31, 1996
Third Quarter (since September 27, 1996).............................. $ 21.375 $ 15.500
Fourth Quarter........................................................ 18.500 11.500
Year Ended December 31, 1997
First Quarter......................................................... 14.875 7.125
Second Quarter........................................................ 12.750 6.750
Third Quarter......................................................... 13.125 10.500
Fourth Quarter........................................................ 12.750 7.375
Year Ended December 31, 1998
First Quarter......................................................... 11.000 14.063
Second Quarter (through April 22)..................................... 7.630 11.000
</TABLE>
The last reported sale price for the Common Stock on the Nasdaq National
Market was $14.06 on April 22, 1998. As of March 31, 1998, there were
approximately 951 stockholders of record of the Common Stock.
36
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and related
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included herein. The consolidated statement of
operations data for the years ended December 31, 1997, 1996 and 1995 and the
consolidated balance sheet data at December 31, 1997 and 1996 are derived from,
and are qualified by reference to, the audited Consolidated Financial Statements
included herein. The consolidated statement of operations data for the years
ended December 31, 1994 and 1993 and the consolidated balance sheet data at
December 31, 1995, 1994 and 1993 are derived from audited consolidated financial
statements not included herein. The consolidated statement of operations data
for the three months ended March 31, 1998 and 1997 and the consolidated balance
sheet data at March 31, 1998 are derived from unaudited consolidated financial
statements that include, in the opinion of management, all adjustments,
consisting of only normal, recurring adjustments, necessary for a fair
presentation of the information set forth therein. The consolidated results of
operations for the three months ended March 31, 1998 or any other period are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues........................................... $ 2,269 $ 979 $ 5,842 $ 1,669 $ 2,126 $ 1,651 $ 1,757
Costs and expenses:
Cost of revenues................................. 5,229 3,643 18,907 8,429 4,965 1,109 1,741
Research and development......................... 7,024 6,396 27,524 25,394 20,883 9,091 4,979
Marketing and sales.............................. 3,051 1,739 10,148 6,021 4,114 3,179 1,408
General and administrative....................... 3,624 4,427 15,670 12,036 6,258 2,353 1,206
Depreciation and amortization.................... 4,179 2,465 11,973 6,123 2,295 992 665
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses....................... 23,107 18,670 84,222 58,003 38,515 16,724 9,999
--------- --------- --------- --------- --------- --------- ---------
Loss from operations............................... (20,838) (17,691) (78,380) (56,334) (36,389) (15,073) (8,242)
Equity in loss of unconsolidated affiliate......... (351) (358) (2,834) -- -- -- --
Other income (expense)............................. (9,027) (3,954) (21,252) (16,355) (4,564) 441 (148)
--------- --------- --------- --------- --------- --------- ---------
Loss before income taxes and extraordinary loss on
early extinguishment of 1995 Senior Notes........ (30,216) (22,003) (102,466) (72,689) (40,953) (14,632) (8,390)
Provision for income taxes......................... -- 1 1 5 3 2 1
--------- --------- --------- --------- --------- --------- ---------
Loss before extraordinary loss on early
extinguishment of 1995 Senior Notes.............. (30,216) (22,004) (102,467) (72,694) (40,956) (14,634) (8,391)
Extraordinary loss on early extinguishment of 1995
Senior Notes..................................... -- -- (11,417) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net loss........................................... $ (30,216) $ (22,004) $(113,884) $ (72,694) $ (40,956) $ (14,634) $ (8,391)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic and diluted earnings per share(1):
Loss per share before extraordinary loss on early
extinguishment of 1995 Senior Notes.............. $ (0.73) $ (0.59) $ (2.59) $ (6.08) $ (13.93) $ (13.02) $ (13.38)
--------- --------- --------- --------- --------- --------- ---------
Extraordinary loss on early extinguishment of 1995
Senior Notes..................................... -- -- (0.29) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Basic and diluted net loss per share............... $ (0.73) $ (0.59) $ (2.88) $ (6.08) $ (13.93) $ (13.02) $ (13.38)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in computing net loss per share........ 41,139 37,701 39,506 11,963 2,939 1,124 627
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OTHER OPERATING DATA (UNAUDITED):
EBITDA(2).......................................... $ (15,255) $ (13,227) $ (61,159) $ (42,743) $ (29,338) $ (13,539) $ (7,493)
Capital Expenditures............................... 21,398 13,003 59,106 46,493 17,491 3,769 535
Deficit of earnings to fixed charges(3)............ 30,492 22,231 102,679 74,226 41,411 -- --
CASH FLOW DATA:
Used for operating activities...................... $ (12,924) $ (12,964) $ (57,095) $ (41,160) $ (25,014) $ (14,638) $ (9,091)
Provided by (used for) investing activities........ (25,433) 4,507 (53,253) (3,665) (110,323) (12,817) (3,424)
Provided by (used for) financing activities........ (149) 75 97,228 121,039 170,852 34,036 16,201
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
AS OF MARCH
31,
-----------
1998
-----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........ $ 109,860 $ 148,058 $ 178,875 $ 143,797 $ 24,508 $ 8,884
Total assets............................................. 278,759 293,985 259,551 184,306 31,809 11,510
Long-term obligations, including current portion......... 280,993 269,551 207,852 183,348 546 825
Series CC redeemable convertible preferred stock......... -- -- -- 29,486 29,486 --
Total stockholders' equity (deficit)..................... (27,640) 2,264 40,245 (38,103) (1,564) 8,011
</TABLE>
- ------------
(1) See Notes to Consolidated Financial Statements for an explanation of the
number of shares used in computing net loss per share.
(2) EBITDA consists of operating loss before interest expense, taxes,
depreciation and amortization. EBITDA is provided because it is a measure
commonly used in the wireless communications industry. It is presented to
enhance an understanding of the Company's operating results and is not
intended to represent cash flow or results of operations in accordance with
generally accepted accounting principles for the periods indicated and may
be calculated differently than EBITDA for other companies.
(3) Deficit of earnings to fixed charges is calculated as follows: earnings
(loss before taxes on income, equity in loss of affiliate and interest
expense including that portion of rental expense the Company believes to be
representative of interest (i.e. one-third of rental expense), and not
including capitalized interest) plus fixed charges (interest expense,
including capitalized interest and that portion of rental expense the
Company believes to be representative of interest (i.e. one-third of rental
expense)).
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS SECTION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO, INFORMATION WITH REGARD TO THE
COMPANY'S EXPECTED WIRELESS DATA COMMUNICATIONS NETWORK DEPLOYMENTS AND
OPERATIONS, ITS STRATEGY FOR MARKETING AND DEPLOYING SUCH NETWORKS AND RELATED
FINANCING ACTIVITIES AND ITS EXPECTED REVENUES, EXPENSES AND CAPITAL
EXPENDITURES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS SET FORTH IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company intends to deploy and operate a series of wireless data
communications networks pursuant to services agreements with utilities and other
parties including new power market participants to earn recurring revenues by
providing NMR services and to use the networks to support a variety of non-
utility applications. The Company employs two basic strategies in the deployment
of its networks-- saturation deployments for providing NMR services to existing
utilities, and broad deployments for providing NMR services to other parties
including new power market participants. Under the Company's saturation
deployment strategy, the Company builds out its WAN and LAN concurrently in
order to cover every meter in a utility's designated service area. The
saturation deployment strategy has proven effective because it allows coverage
of all of the energy consumers in those service areas. Under the Company's broad
deployment strategy, the Company first deploys its WAN in service areas where
the largest consumers of energy are located and where energy consumers and other
power market participants are most likely to value the Company's services and/or
to concentrate their marketing efforts. As contracts for the provision of NMR
services are obtained, the Company builds out its LAN on an incremental basis as
necessary to service those customers or for advanced coverage of certain areas.
Both the LAN and WAN can be further expanded incrementally as additional
business outside the existing coverage areas is obtained. Broad deployment
offers energy service providers who lack the established utilities' designated
geographical customer bases the flexibility to build as they grow or to pursue
particular market niches. It also offers established utilities who are not yet
prepared to commit their resources to a long-term saturation deployment project
the opportunity to cover a portion of their customers initially and to increase
coverage in their service areas over time, potentially to all of their meters.
By using networks deployed under either strategy, the Company is also able (i)
to offer NMR information metering services directly to energy consumers, to the
extent that the information provided by such services is not being made
available to them by their own utility or energy service provider, (ii) to offer
sub-metering NMR services to industrial and commercial customers which desire to
monitor the energy consumption of particular HVAC system components, individual
manufacturing processes or pieces of equipment or individual departments, and
(iii) to offer a range of non-utility wireless data communication services for
such applications as home security, remote status monitoring of vending
machines, office equipment and parking meters, and remote control of traffic
lights.
The Company's business strategy has affected and will continue to affect its
financial condition and results of operations as follows:
COMPOSITION OF REVENUES. The Company derives substantially all of its
revenues from fees earned under services agreements related to its wireless
communications networks. Under the Company's existing services agreements with
utilities, the Company receives monthly NMR service fees based on the number of
endpoint devices that are in revenue service during the applicable month.
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 parties, including new power market participants, and
upon the Company's ability to deploy and operate successfully its wireless
communications networks for utility and non-utility applications. New services
agreements are expected to
be obtained on an irregular basis, and there may be prolonged periods during
which the Company does not
39
<PAGE>
enter into any additional services agreements or 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 "Risk
Factors--Uncertainty of Future Revenues; Need for Additional Services Contracts
and Fluctuating Operating Results."
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's future revenues will depend
on the number of new services agreements with established utilities and other
parties, including new power market participants, and on the amount of NMR
services to be provided thereunder. The Company's existing saturation contracts
are with established utilities. During 1997, approximately 88% of the Company's
revenues were derived from its contracts with KCPL and UE and during the first
three months of 1998, 94% of the Company's revenues were derived from KCPL, UE
and NSP. The utility industry is historically 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
limit 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. Although the uncertainty surrounding proposed
regulatory changes in some states may have caused, and may continue to cause,
additional delays in purchasing decisions by established utilities, the Company
believes that implementation of utility deregulation will ultimately accelerate
the utility decision-making process. The Company believes that it will enter
into additional services contracts with other utilities and other parties
including new power market participants; however, if the Company's services do
not gain widespread industry acceptance, its revenues would not increase
significantly after services contracts for existing network systems have been
fully installed.
With the advent of utility industry deregulation, the Company is seeking
opportunities to provide its NMR services to other parties, including new power
market participants. The Company believes it is well-positioned to offer
competitive advantages to established utilities and other parties including new
power market participants. The Company has entered into several contracts with
new power market participants and others for the provision of NMR services.
However there can be no assurance that the Company will be able to enter into
contracts covering a sufficient number of meters to recoup its costs of
deployment, on terms favorable to the Company, or at all. The Company also
anticipates that, under contracts with new power market participants, it will
build out its networks, at least in part, before the capacity is fully
committed. These contracts do not require that the participants provide any
minimum number of customers and, accordingly, the Company is dependent on the
participant's success in obtaining and retaining customers. See
"Business--Business Strategy." For these reasons, the Company's ability to
obtain financing for the capital expenditures associated with these contracts
may be limited, although the Company also believes that it will be able to defer
a significant portion of the capital expenditures by building out its networks
incrementally as needed, and that the new power market participants would lease
or acquire the endpoints from the Company, reducing the Company's costs. The
Company also anticipates that its contracts with new power market participants
and other parties will be shorter-term than those it has entered into with
established utilities, and may therefore not fully cover the costs of network
build-out and associated operating costs. The Company's current contracts with
new power market participants generally have maximum terms of up to five years,
compared to terms of ten to twenty years with utilities. The Company intends to
reduce this risk by marketing its services to a wide range of new power market
participants and other parties, but there can be no assurance that the Company
will be successful in such marketing efforts, or that the new power market
participants will be successful in capturing any significant share of the energy
service market.
The Company's long-term business plan contemplates the generation of a
significant percentage of future revenues from non-utility services. The Company
believes its future ability to service its indebtedness and to achieve
profitability will be affected by 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 deployed such services on a commercial scale. In addition, unless the
Company is successful in deploying its wireless networks in targeted service
areas, the Company
40
<PAGE>
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.
REVENUES LAG NETWORK DEPLOYMENT. The Company expects to realize network
service revenue under a services agreement with a utility or new power market
participant only when a portion of the network is installed and they have begun
billing their customers based upon the NMR data obtained. 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, 1998, the Company had approximately
3,365,000 meters under long-term contracts, of which approximately 956,000
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 394,000 meters on the network
by March 31, 1998. The Company expects to add an additional 20,000 meters to the
KCPL network in 1998 which would be added to the total number of meters in
revenue service upon acceptance by KCPL for billing purposes. The remaining
6,000 meters under contract with KCPL may be automated or read manually. As of
March 31, 1998, the Company completed the on-line deployment of approximately
615,000 meters to the UE network. The Company began the installation of both the
NSP and Puget networks in August 1996 and began receiving revenue from Puget in
January 1997. The Company has also successfully completed a demonstration
project with PG&E in San Francisco pursuant to which the Company has installed a
network that will cover approximately 30,000 electric and gas meters. PG&E has
acknowledged that the data collection, cost savings, customer service and other
objectives of the demonstration network have been met. In September 1997, the
Company entered into a services contract with IP&L for the installation of its
NMR network that will cover approximately 415,000 meters. Installation of the
initial portion of the IP&L network was completed in November 1997. As
additional segments of the Company's networks are installed and used by its
customers 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, the 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 the
additional networks.
IMPACT OF RAPID EXPANSION. 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 its inception and, as of March 31, 1998, had
an accumulated deficit of $311.8 million. The Company does not expect
significant revenues relative to anticipated operating costs during 1998 and
expects to incur substantial and increasing operating losses and negative net
cash flow after capital expenditures for the foreseeable future as it expands
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 operating cash flow
deficits and capital expenditures for the foreseeable future and expects to
finance these requirements through significant additional external financing.
See "Risk Factors--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.
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 related
selling and marketing activities
41
<PAGE>
and for general and administrative purposes. As such funds are expended,
interest income is expected to decrease.
RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 1998 AND 1997, AND YEARS
ENDED DECEMBER 31, 1997, 1996 AND 1995
REVENUES
Revenues for the three months ended March 31, 1998 and 1997 were $2.3
million and $1.0 million, respectively. The increase in revenues was principally
due to increases in network service revenues. During the three months ended
March 31, 1998, UE, KCPL and NSP accounted for approximately 50%, 34% and 10% of
the Company's revenues, respectively. During the first three months of 1997,
KCPL and UE accounted for 61% and 29% of the Company's revenues, respectively.
Revenues for the three years ended December 31, 1997, 1996 and 1995 were
$5.8 million, $1.7 million and $2.1 million, respectively. 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 are expected to continue to
decline. The Company expects to have product sales associated with certain NMR
deployments which sales could be material to the Company's revenues although no
assurance can be given in this regard. During 1997, KCPL and UE accounted for
47% and 41% of the Company's revenues, respectively. During 1996, KCPL and UE
accounted for 69% and 21% of the Company's revenues, respectively. Revenues for
1996 declined $457,000 from 1995, primarily as a result of the transition from
product sales to network service revenues. During 1995, NSP and KCPL accounted
for 64% and 29% of the Company's revenues, respectively. The Company's NMR
service revenues for the years ended December 31, 1997, 1996 and 1995 were $5.1
million, $1.2 million and $35,000, respectively.
The Company generally realizes service revenues under its services
agreements only when its networks or portions thereof are successfully installed
and operating and its clients begin billing their own customers or begin using
the NMR services provided. Revenues are expected to increase as the Company
continues to install its networks, the networks or portions thereof become
operational, and its clients begin billing their own customers or begin using
the NMR services provided. 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 months ended March 31, 1998 and 1997,
respectively, and the years ended December 31, 1997, 1996 and 1995,
respectively, are not reliable indicators of revenues that might be expected in
the future.
COST OF REVENUES
Cost of revenues was $5.2 million and $3.6 million for the three months
ended March 31, 1998 and 1997, respectively. Cost of revenues was $18.9 million,
$8.4 million and $5.0 million for the years ended December 31, 1997, 1996 and
1995, respectively. Cost of revenues primarily consisted of network operation
costs during the periods. 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.
42
<PAGE>
OPERATING EXPENSES
Operating expenses, consisting of research and development, marketing and
sales, general and administrative costs and depreciation and amortization
expenses, were $17.9 million and $15.0 million for the three months ended March
31, 1998 and 1997, respectively. Operating expenses were $65.3 million, $49.6
million and $33.5 million for the years ended December 31, 1997, 1996 and 1995,
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 costs are
expected to increase moderately over current levels as the Company continues its
efforts to sign new services agreements. General and administrative costs are
expected to increase over time in line with the Company's expected growth and
are expected to increase moderately for the next few years in connection with
the planned installation of a new corporate information system which has
commenced in the second quarter of 1998.
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 $7.0 million and $6.4
million (net of expenses reimbursable by BCN of $245,000 and $347,000 for
technology migration costs) for the three months ended March 31, 1998 and 1997,
respectively. Research and development expenses were $27.5 million (net of
expenses reimbursable by BCN of $2.8 million for technology migration costs),
$25.4 million and $20.9 million for the years ended December 31, 1997, 1996 and
1995, respectively. Research and development spending increases on a period to
period basis reflect primarily additions to the Company's engineering staff. The
Company expects that research and development expenses will increase moderately
in the near term for additional investments in research and development projects
and in connection with the establishment of international operations.
MARKETING AND SALES
Marketing and sales expenses consist principally of personnel costs,
including commissions paid to sales and marketing personnel, travel,
advertising, trade show and other promotional costs. Marketing and sales
expenses were $3.1 million and $1.7 million during the three months ended March
31, 1998 and 1997, respectively. Marketing and sales expenses were $10.1
million, $6.0 million and $4.1 million for the years ended December 31, 1997,
1996 and 1995, respectively. These expenses have increased on a period to period
basis due to the Company's accelerated efforts to sign new services agreements
and a significantly larger advertising program. The Company expects a moderate
increase in marketing and sales expenses over current levels as the Company
continues its efforts to sign new services agreements.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include compensation paid to general
management and administrative personnel costs, travel, and communications and
other general administrative expenses, including fees for professional services.
General and administrative expenses were $3.6 million and $4.4 million for the
three months ended March 31, 1998 and 1997, respectively. The decrease in these
expenses in 1998 from 1997 resulted from a reduction in expenditures for certain
employee compensation and professional fees. General and administrative expenses
were $15.7 million, $12.0 million and $6.3 million for the years ended December
31, 1997, 1996 and 1995, respectively. The Company expects general and
administrative expenses to increase over time in line with its expected growth.
43
<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $4.2 million and $2.5 million for
the three months ended March 31, 1998 and 1997, respectively. Depreciation and
amortization expense was $12.0 million, $6.1 million and $2.3 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Depreciation and
amortization expense is attributable to the Company's networks in progress,
including both equipment manufactured by the Company and systems partially
installed in the field, property and leasehold improvements. Depreciation and
amortization expense has increased as a result of increased additions to
networks in progress, property and leasehold improvements period to period.
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATE
The Company accounts for its investment in BCN, which began operations in
1997, using the equity method. For the three months ended March 31, 1998 and
1997, the Company recognized $351,000 and $358,000 as its share of BCN's losses,
respectively. For the year ended December 31, 1997, the Company recognized $2.8
million as its share of BCN's losses. The Company expects to recognize increased
losses in the future from its share of BCN's losses as BCN expands its
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 Notes due 2005 (the "1995 Notes") and related warrants (the
"1995 Warrants") for proceeds, net of issuance costs, of $169.9 million. In
October 1996, the Company completed an initial public offering of Common Stock
for aggregate net proceeds of $92.2 million. In connection with the initial
public offering, the Company also received $1.2 million in proceeds from the
exercise of warrants to purchase Common Stock. In addition, in October 1996 the
Company completed certain private placements of Common Stock for net proceeds of
approximately $28.0 million. In September 1997, the Company issued and sold a
total of approximately $654.1 million aggregate principal amount at maturity of
the 1997 Notes and warrants (including the 1997 Notes and warrants issued in
exchange for the 1995 Notes) for proceeds, net of issuance costs, of $96.3
million. In connection with the issuance of the 1997 Notes, $231.0 million of
the issue price for the 1997 Notes and warrants was issued in exchange for all
of the Company's 1995 Notes. The Company has earned interest income on the
invested proceeds from these financings. The Company has also incurred
significant interest expense from the amortization of the original issue
discount on the 1995 Notes and the 1997 Notes. Interest expense will increase
significantly in future periods as a result of increased accretion of a larger
original issue discount balance from the 1997 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, 1998 and 1997
was $1.9 million and $2.3 million, respectively. Interest income for the three
years ended December 31, 1997, 1996 and 1995 was $8.2 million, $7.4 million and
$4.6 million, respectively.
No interest on the 1997 Notes will accrue or be payable prior to April 1,
2003. Thereafter, until maturity on October 1, 2007, interest will accrue at the
rate of 14% per annum and be payable semi-annually in arrears on each April 1
and October 1. The carrying amount of the 1997 Notes accretes from the date of
issue and the Company's interest expense includes such accretion. Interest
expense was $10.8 million and $6.3 million for the three months ended March 31,
1998 and 1997, respectively. Interest expense was $29.3 million, $23.8 million
and $9.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
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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.
As of December 31, 1997, the Company had net operating loss carryforwards of
approximately $206.0 million and $56.0 million available to offset future
federal and state taxable income, respectively. The extent to which the loss
carryforwards can be used to offset future taxable income may be limited,
depending on the extent of ownership changes within any three-year period as
provided in the Tax Reform Act of 1986 and the California Conformity Act of
1987. Such state carryforwards will expire between 1998 and 2012. Such federal
carryforwards will expire between 2001 and 2012. Equity issuances in April 1991
and the initial public offering in 1996 triggered such limitations on loss
carryforwards. As of December 31, 1997, approximately $70.0 million of net
operating losses remain limited to an annual usage of approximately $36.0
million for federal tax purposes. Based upon the Company's history of operating
losses and the expiration dates of the loss carryforwards, the Company has
recorded a valuation allowance to the full extent of its net deferred tax
assets.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT
On September 29, 1997, the Company exchanged $654.1 million aggregate value
at maturity of 1997 Notes and warrants for $100.3 million in new proceeds and
the extinguishment of its $325.0 million aggregate value at maturity of 1995
Notes. The exchange of the 1995 Notes was accounted for as an early
extinguishment of debt, resulting in an extraordinary charge of $11.4 million,
consisting of the unamortized portion of the debt issuance cost of the 1995
Notes of $4.8 million, $3.5 million attributable to consent fees and other costs
related to the extinguishment of the 1995 Notes, and accelerated accretion of
interest on the 1995 Notes of $3.1 million.
IMPACT OF THE YEAR 2000
The Company believes that its wireless data communications network systems
are Year 2000 compliant. In addition, the Company will require its third party
vendors and suppliers to be Year 2000 compliant. Accordingly, the Company
expects that the advent of the millennium will have no adverse effect on its
network operations. Certain of the Company's existing internal corporate
information systems require modification, upgrade or replacement in order to be
Year 2000 compliant. Because these systems are becoming obsolete, the Company
has decided to replace them with a new corporate information system to be
installed commencing in the second quarter of 1998 and expects to complete
installation in advance of the year 2000. The Company expects to finance over
several years most of the costs involved in purchasing and installing the new
corporate information system, which are estimated at approximately $1.5 million
for 1998. The Company incurred $223,000 in costs for this project in the three
months ended March 31, 1998.
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.
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
In the first three months of 1998 and 1997, net cash used in the Company's
operating activities totaled $12.9 million and $13.0 million, respectively. Net
cash used in operating activities resulted primarily from cash used to fund net
operating losses.
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In the three months ended March 31, 1998 and 1997, net cash provided by
(used for) investing activities totaled ($25.9) million and $4.5 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. In the first three months of 1997, net
proceeds from the sale and maturation of short-term investments of $20.3 million
were used to fund operating activities.
In the first three months of March 31, 1998 and 1997, net cash provided by
(used for) the Company's financing activities totaled ($149,000) and $75,000,
respectively.
As of March 31, 1998, the Company had cash, cash equivalents and short-term
investments totaling $109.9 million. As of December 31, 1997, the Company had
cash, cash equivalents and short-term investments totaling $148.1 million. The
decline of $38.2 million was due to operating costs and the development and
construction of the Company's wireless communications networks.
YEARS ENDED 1997, 1996 AND 1995
In 1997, 1996 and 1995, net cash used in the Company's operating activities
totaled $57.1 million, $41.2 million and $25.0 million, respectively. Net cash
used in operating activities resulted primarily from cash used to fund net
operating losses.
In 1997, 1996 and 1995, net cash used for investing activities totaled $53.3
million, $3.7 million and $110.3 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. In
1997 and 1996, net proceeds from the sale and the maturation of short-term
investments of $17.7 million and $41.1 million, respectively, were used to fund
operating activities.
In 1997, 1996 and 1995, net cash provided by the Company's financing
activities totaled $97.2 million, $121.0 million and $170.9 million,
respectively, including cash provided by the private sale of the Company's
equity securities of $1.2 million in 1995. In June and November 1995, the
Company received an aggregate of $175.8 million of gross proceeds ($169.9
million in net proceeds) from the private sale of the 1995 Notes and related
warrants. During 1996, the Company financed its operations primarily from the
proceeds of the offering of the 1995 Notes and warrants, together with interest
income of $7.4 million. In October 1996, the Company completed its initial
public offering of Common Stock for net proceeds of $92.2 million. In addition,
in October 1996, the Company completed certain private placements of Common
Stock for net proceeds of approximately $28.0 million. On September 24, 1997,
the Company received an aggregate of approximately $332.3 million ($96.3 million
in net proceeds) from the sale of the 1997 Notes and warrants. All holders of
outstanding 1995 Notes tendered and exchanged their 1995 Notes for 1997 Notes
having an initial accreted value of $231.0 million. Warrants to purchase
8,942,517 shares of the Company's Common Stock with an exercise price of $14.30
per share were attached to the 1997 Notes. Aggregate proceeds of $74.5 million
were attributable to these warrants. The 1997 Notes were issued at an initial
accreted value of $257.8 million and will fully accrete to a face value of
$654.1 million.
The 1997 Notes were issued at a substantial discount from their aggregate
principal amount at maturity of $654.1 million. Although interest is not payable
on the 1997 Notes prior to April 1, 2003, the carrying amount of such
indebtedness will increase as the original issue discount is amortized through
maturity on October 1, 2007. Beginning October 1, 2002, the 1997 Notes will bear
interest, payable semi-annually, at a rate of 14% per annum, with payments
commencing April 1, 2003. No principal payments on the 1997 Notes are due prior
to maturity on October 1, 2007. There is a risk that the Company will not be
able to refinance the 1997 Notes prior to the date cash interest payments become
due and payable on such Notes or at their maturity date. The Company's ability
to refinance the 1997 Notes will depend on prevailing capital market conditions,
the Company's performance and financial position and the Company's indebtedness,
which is projected to be high. Any inability by the Company to refinance the
1997 Notes would limit the Company's ability to meet its obligations on such
1997 Notes.
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As of December 31, 1997, the Company had cash, cash equivalents and
short-term investments totaling $148.1 million. As of December 31, 1996, the
Company had cash, cash equivalents and short-term investments totaling $178.9
million. The decline of $30.8 million was due to increased operating costs and
the development and construction of the Company's wireless communications
networks, offset by proceeds from the issuance of the 1997 Notes.
Deployments of the Company's wireless communications networks will require
substantial additional capital. The Company is committed to make approximately
$89.3 million in capital expenditures in 1998 for saturation deployment network
installations of which $13.9 million was expended by March 31, 1998. In
addition, the Company anticipates that it may spend as much as $37.0 million
during 1998 in capital expenditures relating to the installation of its broad
deployment network in California of which $5.2 million was expended by March 31,
1998. The exact amount of such expenditures will depend, in part, upon the
amount of NMR and other services contracted for. The Company may make additional
capital expenditures in connection with the installation of new networks, the
expansion of existing networks and/or an acceleration in anticipated network
installation schedules. In addition, funds will be required for a number of
purposes including, but not limited to, 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 the 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,
including financing provided by utilities to finance the construction of
networks being built out primarily for them, public and private offerings of
debt and equity securities and cash generated from operating activities. 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 long-term services contracts and
other arrangements will support the amortization of debt raised for the project
involved, however no assurance can be given that this will occur. The Company
does not anticipate deriving any significant cash from such operations for
several years.
The Company believes that existing cash (including the proceeds of this
Offering), cash equivalents, anticipated interest income, other revenues and
expected sources of project financing of approximately $35 million will be
sufficient to meet its cash requirements for at least the next 12 months. The
Company requires and intends to raise a substantial amount of capital in 1998
(in addition to this Offering) and expects that it will continue to require
substantial amounts of additional capital in the future. 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 governing the 1997 Notes or that may
be contained in any additional financing arrangements. The Indenture 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.
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BUSINESS
THIS SECTION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, INFORMATION WITH REGARD TO THE
COMPANY'S EXPECTED WIRELESS DATA COMMUNICATIONS NETWORK DEPLOYMENTS AND
OPERATIONS, ITS STRATEGY FOR MARKETING AND DEPLOYING SUCH NETWORKS AND RELATED
FINANCING ACTIVITIES AND ITS EXPECTED REVENUES, EXPENSES AND CAPITAL
EXPENDITURES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH
A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND ELSEWHERE IN THIS PROSPECTUS.
GENERAL
CellNet has designed, developed and is commercially deploying in scale
innovative wireless data communications networks which provide high-volume,
low-cost, real-time data collection services, capable of monitoring millions of
fixed endpoints. The primary application of the Company's network is the
provision of commercial, industrial and residential NMR services to electric,
gas and water suppliers. These services position the Company to benefit from the
deregulation of the electric utility industry. As of March 31, 1998, the Company
had approximately 3,365,000 meters under long-term contracts, of which a total
of approximately 956,000 meters were generating revenues ("in revenue service")
for the Company. The CellNet network uses radio devices fitted to existing
utility meters to read and report data from each meter every few minutes.
Through extremely efficient use of radio frequency spectrum, the CellNet network
has substantial additional capacity to service non-utility applications that
require low-cost monitoring of fixed endpoints, such as home security and remote
status monitoring of vending machines and office equipment.
CellNet believes it has a first-to-market opportunity to offer wireless data
communications services on a broad commercial scale for utility and selected
non-utility applications. CellNet's network is distinguished by the following
advantages:
- sufficiently low infrastructure and operating costs to permit
cost-effective utility meter reading and other fixed point monitoring
applications;
- highly efficient use of spectrum-the equivalent of approximately a single
voice channel is needed to operate a network;
- specifically designed proprietary software to manage real-time data
collection from millions of endpoints; and
- open systems architecture designed to allow new applications to be added
to the CellNet system.
The electric utility industry is undergoing a fundamental and broad-based
transition. The traditional utility structure, consisting of a vertically
integrated system operating as a natural monopoly with rates set in relation to
cost, has historically presented utilities with little incentive to improve
service quality or operating efficiency. Similar to the regulatory evolution
that has already taken place in the transportation and telecommunications
industries, customer demands and regulatory mandates by federal and state
governments are opening the electric utility market to competition, thus forcing
electric utilities to transform themselves from regulated monopolies into
competitive enterprises. While regulatory initiatives vary from state to state,
many involve a shift from rate-of-return rate making, in which a utility's rates
are determined by its return on assets, to performance-based rate making, in
which a utility's rates and profitability are based upon its cost, efficiency
and service quality.
With deregulation of the electric utility industry underway, established
utilities are under increasing regulatory, consumer and competitive pressures.
The changing regulatory environment means that new power market participants
(such as energy service providers, power marketers, brokers and aggregators;
system operators; power exchanges; and scheduling coordinators) will be seeking
viable strategies to enter
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a market traditionally dominated by established utilities. The Company believes
its NMR services offer a state-of-the art solution to the demands created by the
increased regulatory and competitive pressures within the energy service
industry. CellNet's proven, efficient, low-cost, scaleable NMR service enables
both established electric and gas utilities and new power market participants to
implement time-of-use pricing plans, peak demand monitoring, load forecasting
activities, real-time responses to billing inquiries and power outage detection,
on-demand meter reads, customized billing functions, and customer access to
consumption, rate and billing information. CellNet's system allows utilities to
respond effectively to regulatory changes, reduce costs and enhance their
operating efficiencies, defer capital spending and implement customer retention
plans and facilitates market entrance by new power market participants. See
"--Changes in the Electric Utility Industry" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."
The Company is actively targeting the largest MSAs, and consolidated CMSAs,
which together represent a majority of the approximately 230 million electric,
gas and water meters in the United States, and other areas of high population
density, state-by-state, as deregulation becomes effective. The Company believes
that utilities and power market participants operating in or entering these
densely populated areas will be most affected by increasing competitive and
regulatory pressures. These pressures will likely prompt established utilities
to improve their efficiency and service levels, and the Company believes that
its network and services would facilitate this improvement. However, the utility
industry has generally been characterized by long purchasing cycles and cautious
decision making. Although the uncertainty surrounding proposed regulatory
changes in some states may have caused, and may continue to cause, additional
delays in purchasing decisions by established electric and gas utilities, the
Company believes that actual implementation of utility deregulation will
ultimately accelerate purchasing decisions by established utilities. See "Risk
Factors--Dependence on and Uncertainty of Market Acceptance." The Company is
evaluating new opportunities arising from deregulation. CellNet's open systems
architecture is designed for deployment strategies focused either on established
utilities or new power market participants, or both, without requiring
significant modifications to CellNet's network system. See "Business Strategy."
The Company has existing long-term contracts to provide NMR services to KCPL
for approximately 420,000 meters, UE for approximately 800,000 meters, NSP for
approximately 1,000,000 meters, PG&E for approximately 30,000 meters, PSE for
approximately 700,000 meters and IP&L for approximately 415,000 meters. Of the
3,365,000 meters covered under these contracts, approximately 956,000 meters
were in revenue service as of March 31, 1998. Each of these contracts results
from the Company's "saturation deployment" strategy for providing NMR services
to existing utilities. Under this strategy, the Company builds out a network to
cover every meter in a utility's designated service area. The strategy allows
coverage of all of the energy consumers in those service areas. To implement the
strategy, the Company builds out its WAN and LAN concurrently. The network
begins generating revenue shortly after meters come on-line, and new meters can
be added incrementally. The Company has ongoing discussions concerning
additional contracts of a similar kind with other utilities in the United
States.
The Company began actively targeting new power market participants in
September 1997. To date, the Company has entered into contracts with eight
energy service providers and two energy aggregators including contracts with
nonregulated power marketing arms of the nation's large utilities and energy
providers for the provision of NMR services in California, including Energy
Pacific, New West Energy, Duke Solutions and the Electric Clearinghouse, a
subsidiary of NGC Corp. The Company expects to enter into similar arrangements
with additional power market participants both in California and in other states
where deregulated markets open up further opportunities for the deployment of
the Company's networks. Each of these contracts results from the Company's
alternative "broad deployment" strategy, which is a slight variation of the
Company's saturation deployment strategy outlined above. Under the Company's
broad deployment strategy, the Company first deploys its WAN in service areas
where the largest consumers of energy are located and where energy consumers and
other power market participants are most likely to value the Company's services
and/or to concentrate their marketing efforts. As contracts for
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the provision of NMR services are obtained, the Company builds out its LAN on an
incremental basis as necessary to service those customers or for advanced
coverage of certain areas. Broad deployment offers energy service providers who
lack the established utilities' designated geographical customer bases the
flexibility to build as they grow or to pursue particular market niches. It also
offers established utilities, which are not yet prepared to commit resources to
a long-term saturation deployment project, the opportunity to cover a portion of
their customers initially and to increase coverage in their service areas over
time, potentially to all of their meters.
By using networks deployed under either the saturation or broad deployment
strategy, the Company is also able to offer NMR information metering services
directly to energy consumers, to the extent that the information provided by
such services is not being made available to them by their own utility or energy
service provider. Use of these networks also allows the Company to offer
sub-metering NMR services to industrial and commercial customers who desire to
itemize their overall energy usage by monitoring the energy consumption of
particular HVAC system components, individual manufacturing processes or pieces
of equipment, individual departments, etc.
The Company believes its spectrum-efficient networks will have substantial
excess capacity to service non-utility applications requiring low-cost
monitoring of fixed endpoints. Potential non-utility applications of the
Company's systems include remote status monitoring of home security systems,
vending machines, office equipment, parking meters and other equipment and
remote control of traffic lights. The Company is working with industry leaders
such as Honeywell, Inc., Real Time Data, Inc., and Interactive Technologies,
Inc. to develop such applications. The Company believes that its utility
networks will provide an excellent platform to position the Company as a leading
wholesale provider of wireless data communications services for such non-utility
applications.
The Company believes that a significant international market also exists for
its services with several hundred million electric, gas and water meters outside
of the United States and comparable opportunities for non-utility applications.
The Company is pursuing international markets through a joint venture with BEn.
The joint venture, BCN, has concentrated its initial efforts on entering the
market in the United Kingdom and is also considering opportunities in Australia
and elsewhere. See "Business Strategy-Pursue International Expansion."
RECENT DEVELOPMENTS
SATURATION DEPLOYMENT. The Company continues to expand its utility customer
base through new arrangements to provide NMR services to additional utility
customers. In March 1998, the Company reached a preliminary understanding with
C3, a non-regulated subsidiary of Central and South West Corporation, to jointly
deploy up to 350,000 meters and provide NMR services in four states.
In October 1997, the Company announced that it had reached an agreement with
PSE to deploy 700,000 meters to provide NMR services. The term of this agreement
is for 15 years. This long-term contract commitment from PSE represents a
substantial increase from the 15,000 meter Initial Service Agreement reached
between the Company and PSE in 1996 and demonstrates the success of that initial
project.
BROAD DEPLOYMENT. The Company initiated its broad deployment strategy in
September 1997. To date, the Company has entered into service agreements with
energy service providers and energy aggregators including: Keystone Energy;
Friendly Power Company; Commonwealth Energy Corp.; Duke Solutions; the Electric
Clearinghouse, a subsidiary of NGC Corp; Montana Power Group; New West Energy;
Energy Pacific; The Association of Bay Area Governments, which is an association
that will make collective power purchases for 64 local San Francisco Bay Area
governments; and the School Project for Utility Rate Restriction, a joint power
agency representing 229 Northern California school districts, community colleges
and county offices. These contracts generally have terms of one to five years
and provide that the market participant will use the Company's NMR services for
their customers in the
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geographic areas where the Company completes a network. Currently, the Company
is building networks in a number of cities in Northern and Southern California.
The contracts do not require that the participant provide any minimum number of
customers and, accordingly, the Company is dependent on the participants'
success in attaining and retaining customers.
STRATEGIC DEVELOPMENTS. In March 1998, the Company received approval from
the major energy utilities as a MDMA and approval from the CPUC as a MSP for
California's deregulated power market. CellNet is the first non-utility company
in the U.S. to be authorized to provide meter services.
Also in March 1998, the Company reached an agreement to provide NMR services
to 71 Circuit City stores in California. Under the terms of the agreement,
CellNet will provide Circuit City with metering data relating to in-store
electricity consumption stated in hourly intervals. Circuit City may access this
data on the Internet through a CellNet-operated website.
In January 1998, the Company announced a strategic partnership with Landis &
Gyr, a global supplier of advanced metering products, customer management
systems and software for the electric utility industry. Together, the Company
and Landis & Gyr intend to incorporate CellNet's data communications technology
into the recently released Altimus electricity metering system. Altimus is an
innovative solid state, residential eletricity metering system designed for the
electric power industry.
FINANCING. On September 24, 1997, the Company received an aggregate of
approximately $332.3 million from the sale of the 1997 Notes and warrants to
purchase common stock. All holders of the 1995 Notes tendered and exchanged
their 1995 Notes for 1997 Notes having an initial accreted value of $231.0
million. The net proceeds from the 1997 Notes to the Company were approximately
$96.3 million.
CHANGES IN THE ELECTRIC UTILITY INDUSTRY
The electric utility industry is undergoing a fundamental and broad-based
transition. The traditional utility structure, consisting of a vertically
integrated system operating as a natural monopoly with rates set in relation to
cost, has historically presented utilities with little incentive to improve
service quality or operating efficiency. Similar to the regulatory evolution
that has already taken place in the transportation and telecommunications
industries, customer demands and regulatory mandates by federal and state
governments are opening the electric utility market to competition, thus forcing
electric utilities to transform themselves from regulated monopolies into
competitive enterprises. While regulatory initiatives vary from state to state,
many involve a shift from rate-of-return rate making, in which an electric
utility's rates are determined by its return on assets, to performance-based
rate making, in which an electric utility's rates and profitability are based
upon its cost, efficiency and service quality. The gas utility industry has
already been transformed as a result of competition. Today, commercial and
industrial customers can negotiate to purchase gas directly from producers or
brokers, while utilities are required to provide transportation of such gas to
customers' facilities.
The restructuring of the electric utility industry is underway. In recent
months, several major electric utilities have entered into merger agreements and
other consolidation transactions in connection with this restructuring. The
restructuring has also focused on opening the electric power production
industry, in certain markets, to full competition in the next few years, and
ultimately providing customers access to multiple suppliers. Federal
legislation, such as the National Energy Policy Act of 1992 (the "EP Act"), has
opened utility transmission lines to independent power producers in an effort to
increase competition in the wholesale electric power generation market. As a
result, the construction of cogeneration facilities and independent power
production facilities has been increasing, creating lower cost alternatives for
large commercial and industrial customers. The EP Act authorized the Federal
Energy Regulatory Commission ("FERC") to mandate utilities to transport and
deliver, or "wheel" energy for the supply of bulk power to wholesale, but not
retail, customers. In order to facilitate the transition to increased
competition in the wholesale power markets made possible by the EP Act, in April
1996 FERC issued its final rules that require utilities to (i) establish open
access to all wholesale sellers and buyers, (ii) offer power transmission
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service comparable to what they provide themselves, and (iii) take power
transmission service under the same tariffs offered to other buyers and sellers.
[INSERTED IN THIS SECTION OF THE TEXT IS A MAP OF THE UNITED STATES HIGHLIGHTING
WHICH STATES ARE IMPLEMENTING OR IN THE PROCESS OF IMPLEMENTING ENERGY
DEREGULATION. WITH RESPECT TO DEREGULATION, 16 STATES HAVE FINAL LEGISLATION OR
A COMMISSION PLAN IN PLACE, 10 STATES HAVE A DRAFT COMMISSION PLAN OR APPROVED
PILOT, 18 STATES HAVE A FORMAL COMMISSION INVESTIGATION UNDERWAY, AND SIX STATES
HAVE BEGUN INFORMAL COMMISSION STUDIES.]
Under the EP Act, individual states have the sole authority to mandate the
wheeling of electric power to retail customers. As a result, sixteen states
(Arizona, California, Illinois, Maine, Maryland, Massachusetts, Michigan,
Montana, Nevada, New Hampshire, New Jersey, New York, Oklahoma, Pennsylvania,
Rhode Island and Vermont) now have legislation or final commission orders to
mandate retail wheeling and nearly all of the other states are in various stages
of considering the implementation of retail wheeling and unbundling, both at
legislative and regulatory levels. Arizona, California, Maine and New Hampshire
are also requiring utilities to "unbundle," or offer as separate services,
metering, billing and collection, and three more states have announced their
intention to require unbundling. Unbundling implies that a third party, such as
a new market participant, would be free to own the electric meter that measures
usage and attaches to a commercial, industrial or residential customer's
premises. The traditional owner of the meter has been the electric utility which
has also had a monopoly in providing metering, billing, and collection services.
In California, the state which has to date advanced the furthest in the
deregulation process, the California Public Utility Commission (the "CPUC") has
mandated competitive retail wheeling and unbundling effective March 31, 1998 for
large commercial and industrial customers and unbundling for all remaining
customers effective January 1, 1999. Competitive retail wheeling will involve
direct access, or the customer's ability to choose among energy service
providers. The CPUC has also mandated hourly time-of-use metering capability for
customers requiring more than 20 kW of power and customers choosing direct
access.
The changing regulatory environment means that new power market participants
will be entering into a market traditionally dominated by established utilities.
To date, more than 200 parties have registered with the CPUC as Registered
Energy Service Providers to provide electric services in California commencing
March 31, 1998. The established utilities will each be focusing on retaining and
increasing its market share in the wake of competition. Both new power market
participants and established utilities will be striving to optimize their
offerings and to distinguish themselves in the market. CellNet is well
positioned to offer competitive advantages to all new power market participants,
whether established utilities or new power market participants, using its
existing technology. The CellNet network has demonstrated capabilities in
providing cost-efficient, reliable, real-time data to established utilities. The
same capabilities will enable energy service providers to meet regulatory
metering and forecasting requirements, offer superior, competitively-priced
services, collect customer information and diversify by adding additional
applications as available. CellNet's open architecture will lend itself readily
to deployment strategies focused either on established utilities or new power
market participants, or both, without requiring modifications to the network
system.
The Company believes that competition will require recordation of electric
power consumption data more frequently than is presently customary through a
much wider use of daily, hourly and possibly even more frequent meter readings.
In fact, hourly meter reading has already been mandated for certain classes of
customers in California when deregulation takes effect. Other deregulating
states are likely to follow. The Company believes that the Company's meter
reading technology, or meter reading technology similar to it, will be needed to
satisfy these requirements.
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THE CELLNET SOLUTION
CellNet has designed, developed and is now commercially deploying in scale
the first wireless data communications network designed to provide high-volume
real-time status and event monitoring of up to several million endpoints. Since
the primary application of the network is to provide NMR services, the network
has been designed to meet the energy service industry's cost requirements,
information needs and rigorous design specifications. CellNet's network uses
radio transmitters fitted to existing meters to read and report data from each
meter every few minutes. CellNet uses inexpensive radio devices and proprietary
software in its networks, deploys certain network components on utility power
poles or, where necessary, on buildings or other structures, and requires
minimal frequency spectrum to operate its system.
CellNet's system enables energy service providers to better serve their
customers by offering enhanced services such as:
- time-of-use and demand energy rates;
- real-time response to billing inquiries;
- real-time power outage detection, location and notification;
- remote verification of "power on" and outage restoration;
- on-demand meter reads;
- customer-selected billing dates and consolidated, multi-location billing;
- automatic move-in/move-out meter reading;
- distribution automation; and
- access to consumption, rate and billing information via the Internet.
In light of the changing regulatory environment and resulting competition
for customers, many established utilities will be motivated to retain and
increase their market shares, while energy service providers will seek to
capture market share in the post-deregulation retail market. CellNet's system
will allow established utilities and energy service providers to respond
effectively to regulatory changes and enhance their performance in the
competitive markets. CellNet's system will facilitate accomplishment of
established utilities' and energy service providers' strategic objectives as
follows:
PROVIDE RETAIL MARKET INFORMATION. Established utilities and new power
market participants will seek to implement information systems capable of
supporting new functions, including collecting and exchanging data for billing,
load forecasting and retail settlements. One likely result will be a large
increase in the need for the retrieval and management of high volumes of
metering data, including hourly consumption measurement for retail settlement
(prices will be set hourly in regional power pools). Another likely result will
be the need for rapid retrieval of metering data--hourly or daily in contrast to
today's monthly schedule for meter reading--to support forecasting and
settlement.
ENHANCE INFORMATION SYSTEMS. To implement time-of-use pricing and other
customer-oriented pricing plans, real-time power outage detection and other
services that may be required by deregulation or necessary to maintain market
share, utilities and energy service providers will demand extremely accurate and
timely data regarding energy consumption by customers. For example, the CPUC has
required at least hourly meter-reading capacity for each customer requiring more
than 20 kW of power. The manual meter reading process, even as automated to a
limited degree through the use of hand-held and drive-by AMR equipment, does not
meet these criteria. The consumption data collected by AMR is typically
transmitted to the utility's information system on a monthly basis. Such
periodic meter readings do not provide the necessary data to implement these
regulatory and competitive initiatives.
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RESPOND TO REGULATORY INITIATIVES. If retail wheeling is adopted, consumers
will contract to buy electricity from either utilities or energy service
providers, but all such electricity will be supplied to a designated local
electrical network, which will then distribute power to all local consumers. The
monthly meter reading historically used by traditional utilities may allow
confirmation of aggregate usage, but not of time of use. Time-of-use data is a
critical requirement of retail wheeling, since the cost of power will be
determined by hourly spot prices. By providing real-time data on each consumer's
power usage, CellNet enables utilities to implement retail wheeling without
incurring costs of $150-$200 or more at each service endpoint to install
individual time-of-use meters across their territories.
ACQUIRE AND RETAIN CUSTOMERS. In addition to price-based competition,
utilities and energy service providers will seek to differentiate their services
to the market. The CellNet system's ability to integrate with customer service
systems and platforms will enable the addition of value-added services, enabling
non-price based competition through enhanced product offerings, including new
pricing options, selectable bill dates, outage monitoring, end-use energy
information through the Internet, customized billing plans, remote
move-in/move-out meter reading, multi-location bill consolidation and other
innovations. The information available through the CellNet data collection
services will also allow its users to profile their customers, thus gaining
valuable marketing insights, which will facilitate development of promotions,
service plans and other programs designed to attract and retain customers.
ELIMINATE MANUAL METER READING. Many utilities have already focused on the
inefficiencies of the traditional once-a-month drive-by or walk-by meter reading
process. In addition to the direct expense of monthly meter reading, manual
processes create significant indirect expenses. These expenses include
responding to customer billing service inquiries and complaints, meter reading
errors, missed meter reads, special appointment meter reads to determine and
correct errors, and service calls to discontinue and to initiate service.
Through automation, CellNet's wireless data network helps utilities to reduce
both direct and indirect operating costs associated with meter reading.
OFFER LOWEST-COST NETWORK SYSTEM. The CellNet system offers the
lowest-cost, most frequency-efficient network available, which will enable
utilities, energy service providers to manage their energy trading costs better
and pass savings on to their customers. The CellNet system will provide
time-of-use metering in scale, even to small customers, at costs which the
Company believes to be the lowest available. A new power market participant's
ability to penetrate the energy supply market, and an established utility's
ability to maintain its market share, will depend in part on their ability to
offer competitively-priced services. By allowing CellNet to build and maintain
the wireless network, energy service providers also avoid both the technological
risk and capital outlay of developing and deploying NMR systems.
ENHANCE OPERATING EFFICIENCIES THROUGH AUTOMATION. CellNet's network
enables distribution automation capabilities which include monitoring and
control of power distribution equipment as well as meters. Using the CellNet
network, utilities can manage many aspects of the delivery of electricity,
including the ability to detect power outages, monitor and control circuit
breakers, monitor the load on transformers, control circuits to isolate faults
on feeder power lines, and switch automatically among capacitor banks to produce
constant voltage levels. As a result, problems may be detected earlier and
solved more quickly, operations may become more reliable and service fleets may
be more efficiently deployed and dispatched as outages can be more readily
pinpointed within the utility's service territory. Increased automation and
improved information processing will also aid in detection of energy theft,
which is currently estimated to cost utilities many millions of dollars each
year.
REDUCE PEAK DEMAND COSTS WITH TIME-OF-USE DATA. Established utilities have
historically built plant capacity to meet the anticipated peak demand for energy
on a daily and seasonal basis, requiring an excess capacity margin to respond to
extraordinary demand peaks caused by extreme weather conditions. Power plant
expansions are costly and investments in such capacity may not be fully
compensated by rate making authorities. Reducing peak demand would allow
utilities to defer or avoid additional plant construction or costly peak power
generation with standby power generating facilities. However, unlike phone
companies,
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which currently offer time-of-use rates to discourage consumption during peak
periods, energy service providers have generally been unable to implement
time-of-use plans for any but their largest customers due to inadequate
real-time information about customer power usage. CellNet's NMR services will
enable utilities to adopt time-of-use billing plans, which can be used to
motivate consumers to shift discretionary consumption to off-peak periods.
PROVIDE POST-DEREGULATION MARKET OPPORTUNITIES. With deregulation creating
new market opportunities, new power market participants will aggressively pursue
first-to-market opportunities, particularly in light of the perception that the
highest-value customers will be among the first to respond to the choices made
available by deregulation. CellNet offers an NMR system with demonstrated
capability of providing real-time data collection. As a result, CellNet's system
will enable new power market participants to offer prompt implementation of
state-of-the-art metering-based service rate plans.
For established utilities and new power market participants, CellNet alone
supports each of the basic objectives.
BUSINESS STRATEGY
The Company intends to deploy and operate a series of wireless data
communications networks and to earn recurring revenues by providing NMR services
to utilities and new power market participants and other customers by using the
network to support a variety of non-utility applications. Principal elements of
CellNet's strategy are (i) to focus on power supply markets, (ii) to promote
development of non-utility applications, (iii) to form strategic relationships,
(iv) to pursue international expansion, and (v) to outsource a substantial
portion of its manufacturing and installation activities. The Company is also
focusing increasingly on licensing its technology to leading manufacturers in
key industries, to ensure development of compatible products. See "--Form
Strategic Relationships."
FOCUS ON POWER SUPPLY MARKETS
The Company is initially targeting the largest MSAs, which represent a
majority of the approximately 230 million electric, gas and water meters in the
United States and other areas of high population density, state-by-state, as
deregulation becomes effective. The Company believes that utilities and new
power market participants operating in or entering these densely populated areas
will be the most likely affected by increased consumer, competitive and
regulatory pressures, and as such, will have the greatest need to adopt NMR. The
Company also believes that energy service providers that compete with utilities
in these markets and outside the largest MSAs will have a need to adopt NMR
services. In addition, the Company believes that the largest MSAs offer the
greatest potential markets for non-utility applications.
The Company employs two basic strategies in the deployment of its
networks--saturation deployments for providing NMR services to existing
utilities, and broad deployments for providing NMR services to other parties
including new power market participants. Under the Company's saturation
deployment strategy, the Company builds out its WAN and LAN concurrently in
order to cover every meter in a utility's designated service area. The
saturation deployment strategy has proven effective because it allows coverage
of all of the energy consumers in those service areas.
Under the Company's broad deployment strategy, the Company first deploys its
WAN in service areas where the largest consumers of energy are located and where
energy consumers and other power market participants are most likely to value
the Company's services and/or to concentrate their marketing efforts. As
contracts for the provision of NMR services are obtained, the Company builds out
its LAN on an incremental basis as necessary to service those customers or for
advanced coverage of certain areas. Both the LAN and WAN can be further expanded
incrementally as additional business outside the existing coverage areas is
obtained. Broad deployment offers energy service providers who lack the
established utilities' designated geographical customer bases the flexibility to
build as they grow or to pursue particular market niches. It also offers
established utilities who are not yet prepared to commit their resources to a
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long-term saturation deployment project the opportunity to cover a portion of
their customers initially and to increase coverage in their service areas over
time, potentially to all of their meters.
By using networks deployed under either strategy, the Company is also able
(i) to offer NMR information metering services directly to energy consumers, to
the extent that the information provided by such services is not being made
available to them by their own utility or energy service provider, (ii) to offer
sub-metering NMR services to industrial and commercial customers who desire to
itemize their overall energy usage by monitoring the energy consumption of
particular HVAC system components, individual manufacturing processes or pieces
of equipment, individual departments, etc., and (iii) to offer a range of
non-utility wireless data communication services for such applications as home
security, remote status monitoring of vending machines, office equipment and
parking meters, and remote control of traffic lights.
PROMOTE DEVELOPMENT OF NON-UTILITY APPLICATIONS
Through the efficient use of spectrum, each CellNet network is designed to
have the capacity, after serving all of a utility's NMR and distribution
automation requirements, to support non-utility services that would benefit from
the availability of a low-cost wireless network. Under broad deployment, the
Company expects to have significantly enhanced opportunities to implement
non-utility applications, because the Company's networks will be available in a
substantially greater number of high population density centers. The Company is
working with leading manufacturers and application developers in order to
promote the development of products and services capable of using the CellNet
networks. Potential applications include the following:
- security services for home security, fire alarm and personal safety
devices;
- remote status monitoring for vending, postage, change and commercial
washing machines, office and factory equipment, and intelligent home
devices, such as remote control thermostats; and
- intelligent transportation monitoring systems for traffic lights, parking
meters and toll booths.
The Company believes that its low monthly network service prices will
substantially increase the likelihood of market acceptance of existing
applications and enable potential new applications.
Wireless home security systems are an example of an existing application
that might achieve greater market penetration if equipment and service costs
were reduced by using a CellNet network. CellNet is working with Interactive
Technologies, Inc. ("ITI"), a leading provider of wireless home security
systems, to develop an affordable security system that would communicate over a
CellNet network. A preliminary field trial is presently being conducted.
Remote monitoring of vending machines would substantially reduce the cost of
servicing those machines. Real Time Data, Inc. ("RTD") has developed a vending
machine monitoring device which tracks product sales and inventory. RTD and the
Company have been working together to integrate RTD's devices with the Company's
networks and have a commercial field trial currently underway.
Energy management and home automation services can be enabled by CellNet's
networks as well. CellNet and Honeywell, Inc. ("Honeywell") have jointly
designed a system consisting of a "thermostat-like" panel which allows consumers
to use electricity more efficiently by programming appliances, such as the
heating, ventilation and air conditioning (HVAC) system and hot water heater.
Devices within the home would communicate with one another over existing
electrical wiring using power line carrier (PLC) technology. CellNet's data
network would provide the connection between the home and a utility to deliver
pricing signals, home management services, and public information, and to send
customer messages and device status signals back to the utility. CellNet and
Honeywell are undertaking a pilot program to deploy this system in the second
quarter of 1998 at residences in St. Louis to help refine the system design and
further gauge consumer demand.
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FORM STRATEGIC RELATIONSHIPS
The Company is forming strategic relationships with leading companies and
certain utilities to promote the development and joint marketing of
complementary products or services for utility applications and the development
of non-utility applications whose traffic would be carried on CellNet networks.
CellNet is currently working with the following leading companies:
BADGER METER, INC. ("BADGER"). The Company has entered into an agreement
with Badger, a leading marketer and manufacturer of products using flow
measurement and control technology to serve industrial and utility markets
worldwide, providing for incorporation of the Company's patented radio
technology into Badger's water meter reading technology product lines and to
provide technical assistance to Badger to build radio technology compatible with
the Company's NMR systems into future products.
BEn. The Company has entered into a joint venture with BEn to pursue
international opportunities. See "--Pursue International Expansion."
ConnexT, INC. ("ConnexT"). The Company has entered into a joint marketing
agreement with ConnexT, a subsidiary of Puget which provides network-based
application services to utility companies, whereby the parties agree to assist
each other in marketing their respective products and services to both
companies' existing and prospective utility customers.
GENERAL ELECTRIC ("GE"). GE and the Company have entered into a non-binding
memorandum of understanding ("MOU") to jointly market to utilities, on a
non-exclusive basis, automated NMR solutions that incorporate both parties'
products. GE has installed CellNet radio devices on new GE meters on a trial
basis.
HONEYWELL. Honeywell has entered into a non-binding MOU with the Company
relating to the creation of "smart communicating thermostats" that would serve
as the key elements in a home-based energy management system. The parties also
plan to collaborate on identifying other in-home automation products that could
leverage Honeywell's extensive line of environmental control products with
CellNet's wireless technology.
ITI. The Company has entered into an agreement with ITI, a leading provider
of wireless, in-home security systems, to develop moderately-priced security
systems based on ITI's existing security devices and CellNet's wireless
technology.
LANDIS & GYR ("L&G"). The Company and L&G have agreed to a joint project
whereby L&G will incorporate the Company's data communications technology into
its recently released Altimus-TM- electricity metering system, an innovative
solid state residential metering system designed for the electric power
industry.
METRETEK, INC. ("METRETEK")/MARCUM NATURAL GAS SERVICES, INC. The Company
is working with Metretek, a subsidiary of Marcum Natural Gas Services, Inc., to
develop a combination of wireless and telephone-based services for the gas
utility industry. Metretek's telephone-based data collection and management
software is intended to be integrated into the Company's wireless data
communications system, enabling the Company to provide multi-technology NMR
services, allowing gas utilities to reach a larger percentage of their
customers. Additionally, the Company's wireless data communications technology
is intended to be incorporated into Metretek's new and existing products,
enabling data collected from industrial, commercial and residential gas meters,
volume correctors and other Metretek products to be communicated over CellNet's
wireless networks.
PROCESS SYSTEMS ("PSI"), SIEMENS ENERGY AND AUTOMATION, INC./SIEMENS
MEASUREMENTS LTD. The Company is working with PSI, a Siemens business unit, to
integrate PSI's Energy Analyzer Plus software for collecting data over the
public switched telephone network ("PSTN") from a variety of high-end
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electric and gas meters with the CellNet system, so as to enable the Company to
offer multi-technology NMR services. The Company and BCN are also working with
Siemens Measurements in the United Kingdom to license CellNet's radio technology
to communicate over CellNet's networks.
RTD. As described above, RTD, a developer of remote vending machine
monitoring systems, has entered into an agreement with the Company to integrate
its vending machine monitoring system with the Company's wireless network
technology.
SCHLUMBERGER. The Company has entered into an agreement with Schlumberger,
an international, worldwide leader in oil field services, measurement and
systems and telecommunications, to license to Schlumberger the Company's
proprietary radio technology for use in Schlumberger's electric, gas and water
meter product lines.
PURSUE INTERNATIONAL EXPANSION
With several hundred million utility meters located outside of the United
States and with comparable opportunities to use the CellNet system for utility
and non-utility applications, the international market offers significant
additional opportunities for the Company.
The Company and BEn have formed BCN as an international joint venture in
order to take advantage of these opportunities. BCN has the exclusive right to
deploy and operate the Company's wireless data communications system in
countries outside the United States. The Company is generally allocated 50% of
BCN's net income or loss. The Company licenses its technology to BCN and BCN is
authorized to sublicense that technology to individual local operating project
entities in which BCN or other affiliates of the Company and BEn are expected to
invest and generally maintain operating control. The managing board of BCN is
composed of an equal number of representatives from each party and reviews and
approves all major business decisions.
In considering international expansion opportunities for the CellNet System,
BCN intends to target markets characterized by (i) a well-developed utility
infrastructure, (ii) demand for low-cost monitoring, (iii) a progressive
regulatory climate favoring increased efficiency, customer service and
competitive access, and (iv) well-capitalized, established and reliable local
partners.
The Company considers the United Kingdom a particularly attractive market,
with approximately 22 million electric meters and deregulation already in
effect. BCN is currently concentrating its efforts primarily on entering the
market in the United Kingdom, and is also considering opportunities in Australia
and elsewhere.
OUTSOURCE SUBSTANTIAL MANUFACTURING AND INSTALLATION ACTIVITIES
The Company outsources a substantial portion of its manufacturing and
installation activities. As a result, CellNet leverages the size and
capabilities of key suppliers to take advantage of manufacturing economies of
scale, reduce component pricing through bulk purchasing, and have access to
manufacturing capacity and resources to meet highly variable production
requirements. The Company will retain overall network construction
responsibility, but intends to rely on local subcontractors for installation,
primarily those who have demonstrated their capabilities, experience and
reliability and who have good working relationships with CellNet's customers.
The Company believes that outsourcing installation activities will reduce the
start-up time and the Company's investment risk for each project.
WIRELESS COMMUNICATIONS INDUSTRY OVERVIEW
CellNet operates within the wireless communications industry, which includes
personal communications services ("PCS"), specialized mobile radio ("SMR"),
microwave, cellular (including cellular digital packet data ("CDPD")), paging
and multiple address radio system ("MAS") segments, among others. The two
principal categories of commercial wireless applications are voice and data
transmission. Within those
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broad categories, service requirements for specific applications vary
substantially in terms of quality, speed, capacity, mobility, two-way
capability, geographical coverage and cost. In general, products which provide
for greater mobility and capacity are more expensive. As a consequence, the
market for wireless services is segmented, matching specific service
requirements with the most suitable wireless technology.
[INSERTED IN THE TEXT AT THIS LOCATION IS A GRAPH PLOTTING NETWORK CAPACITY
VERSUS USER/DEVICE MOBILITY AND MONTHLY ENDPOINT COST]
CellNet's system is designed to utilize small amounts of spectrum and to
provide low-cost, high-volume, real-time monitoring of fixed endpoints. The
Company believes other telecommunications applications or market segments are
not as well suited for use in NMR and similar applications except in limited
cases such as high-use industrial metering, where the increased equipment and
service costs might be justified by high rates of power consumption, or in
certain rural applications, where the cost of installing and operating a fixed
network on a per meter basis might be higher. Competing service applications are
therefore expected to develop largely within the segment of the wireless
communications market in which CellNet now operates.
CellNet's network architecture and the nature of the markets that it serves
differ significantly from traditional cellular companies, thereby resulting in
potential advantages for CellNet in providing NMR services which include:
LOWER AVERAGE MARKET ADOPTION RISK. To date, the Company has constructed
its large scale commercial networks after entering into a long-term relationship
with a utility or other client. In such circumstances, the Company does not need
to finance construction of networks in anticipation of obtaining customers.
Under the Company's broad deployment strategy, the Company may build out its
WANs before the capacity is fully committed, thereby creating the risk that the
network will not be fully utilized, and the Company will not recoup its
investment in the build-out.
LOWER CHURN/PENETRATION RATE. Unlike the customer bases for other wireless,
voice and data service providers where customers can easily switch to a
competitive provider, CellNet's existing subscriber endpoints do not experience
frequent change or "churn". The marketing and administrative costs typically
associated with churn, and the capital risk associated with variable penetration
rates, are thus eliminated. Further, due to inflation escalation clauses in the
Company's existing services agreements, the Company believes that the value of
its revenue per endpoint in real terms will likely be maintained over time.
HIGHER CUSTOMER CREDIT QUALITY. CellNet receives the majority of its
contract service revenue directly from utilities and new power market
participants rather than from individual subscribers. As a result, the Company
experiences less credit risk and generally lower billing expenses than other
wireless communication providers.
MORE EFFICIENT DEPLOYMENT. Cellular and PCS cell sites are frequently
costly and can be difficult to obtain. The modularity of the CellNet system and
the efficient size of its components facilitate inexpensive deployment of
scalable networks. The Company's system components have been designed to fit on
utility power poles or, where necessary, on buildings or other structures. With
an electric utility as its customer, CellNet can negotiate to use utility poles,
transmission towers, and various properties for its deployment. Radio devices,
which represent the bulk of network components, are simply "plugged in" as newly
retrofitted meters to replace an existing meter. The Company's MCCs (as defined
below) typically take two hours to install and its CellMasters (as defined
below) less than a week to install, providing a network which can be deployed
swiftly and efficiently. The system is also scalable, thereby allowing coverage
regardless of the size of the service area.
MORE EFFICIENT SYSTEM DESIGN. Cellular telephone networks are designed for
peak usage, with a large percentage of the network underutilized for much of the
day. The CellNet network gathers information
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from its endpoints consistently around the clock and therefore does not
encounter the peak usage problems typically experienced by cellular phone
service providers.
LOWER FREQUENCY COSTS. Cellular, PCS and other two-way wireless systems
typically require a large amount of spectrum which can be very costly to obtain.
Because the Company is able to utilize a small amount of frequency (the
equivalent of approximately a single cellular voice channel) for a wide
metropolitan area, it has not been subject to the substantial frequency costs
associated with wireless communications companies even if any additional
frequency it might require were subject to auction.
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TECHNOLOGY
CellNet's NMR system has been developed specifically to offer real-time,
low-cost, high volume wireless data communications services. Such services
require (i) inexpensive endpoint devices, (ii) the ability to support a wide
range of applications, (iii) reliable, consistent service over a wide area, (iv)
the capacity to handle simultaneous transmission and processing of a large
volume of data, (v) integrated communications and applications support software,
and (vi) efficient use of bandwidth to minimize spectrum acquisition costs.
To meet these cost and data handling requirements, CellNet has designed a
system which uses a two-tiered wireless network hierarchy managed by a central
system control center which collects, concentrates, forwards and manages data
from many fixed endpoints. The elements of this communications hierarchy
include:
- endpoint devices which transmit data relating to the equipment they are
monitoring or controlling, such as utility meters;
- MicroCell Controllers ("MCCs") which manage the endpoint devices in their
local coverage area (as part of a local area network or "LAN") and which
collect and process data transmissions from such endpoint devices;
- CellMasters which gather data from MCCs located in a wide coverage area
(as part of a wide area network or "WAN") and which communicate that data
to a central System Controller; and
- a System Controller which manages the entire network and operates the
application gateways for integration with the client's own data systems.
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[INSERTED IN THE TEXT AT THIS LOCATION IN THE TEXT ARE DEPICTIONS OF THE
NETWORK ARCHITECTURE OF THREE PORTIONS OF THE CELLNET SYSTEM, NAMELY THE
SYSTEM CONTROLLER NETWORK, WIRELESS WIDE AREA NETWORK, AND THE
MICROCELLULAR LOCAL AREA NETWORK]
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ENDPOINT DEVICES. The subscriber unit of the CellNet system is a relatively
inexpensive low-power radio device which is attached to a data source, such as a
utility meter, to collect and transmit information to an MCC and typically
includes a transceiver or transmitter. The Company has developed endpoint
devices for electric utility applications which may be retrofitted to each of
the major types of utility meters presently being used by electric utilities in
the United States. These endpoint devices currently collect customer demand and
load profile data from an electric meter and transmit such information to the
local area MCC once every few minutes. Electric meter endpoints are also able to
transmit "distress signals" indicating meter tampering or power outages. The
Company began introducing its commercial endpoint devices for gas meters in 1996
and completed the development and introduction of additional models in 1997. The
Company is continuing its development of endpoint devices for water meters and
expects to introduce its first models in 1998. The Company is also working with
industry leaders to develop endpoint devices for non-utility applications. See
"--Business Strategy--Form Strategic Alliances."
MICROCELL CONTROLLERS. An MCC is a device which is mounted on a utility
pole or other fixed location in the center of a microcell and which routes data
from all of the endpoints in the microcell to the System Controller via the WAN.
The number of endpoint devices in each microcell depends on a number of factors,
including topography and population density. In addition to functioning as a
router, the MCC is an intelligent node in the distributed control system and has
a powerful microprocessor which enables it to perform data storage, packet
routing and voltage and power outage monitoring for endpoint devices in its
microcell area. Each MCC also has extensive network management capabilities
which permit new endpoint devices to be added automatically without interfering
with the handling of data from existing endpoints. This architecture allows
CellNet to significantly reduce the cost of the endpoint device itself and
increases the potential data throughput of an entire network, as the intelligent
processing is provided at the MCC level. The MCC communicates with the endpoint
devices in its microcell in the 902-928 mHz band, which is an unlicensed portion
of spectrum.
CELLMASTERS. A CellMaster generally communicates with anywhere from 50 to
200 MCCs and RTUs (as defined) over an area typically covering approximately
20-75 square miles (2.5-5-mile radius). The coverage area can vary substantially
depending upon the deployment techniques employed. Each CellMaster incorporates
network management software which manages traffic scheduling, radio frequency
power controls and signal monitoring. CellMasters are built with redundant
hardware, are ruggedly constructed for extreme weather, and can perform
automatic switchovers between system components in case of failure. The WANs
covering specific service areas are composed of a number of CellMaster units. A
CellMaster communicates with the MCCs using a radio link in the 928/952 mHz
band, which is a licensed portion of spectrum.
REMOTE TERMINAL UNITS. Remote Terminal Units ("RTUs") monitor and operate
equipment at specific points in an electric utility's distribution system.
CellNet integrates a two-way radio device into RTU equipment manufactured for a
utility by other parties, which enables remote operation of these RTUs. By
providing a means of remote monitoring and controlling of power distribution
equipment, CellNet's system enables utilities to monitor and control circuit
breakers, monitor the load on transformers, control circuits to isolate faults
on feeder power lines, and switch automatically among capacitor banks to provide
constant voltage levels.
SYSTEM CONTROLLERS. The System Controller provides the link to the client's
corporate data network and serves as the network management platform. The System
Controller consists of a cluster of UNIX-based workstations operating over a
network using standard TCP/IP protocols. Such a configuration is extremely
scaleable as it can be expanded to meet system requirements simply by adding
additional workstations. The System Controller supports a variety of radio-based
and leased line data links to each CellMaster in the network. These links are
redundant for added reliability. The System Controller enables CellNet's on-site
system operator, who manages the network for CellNet's clients, to manage
traffic, monitor performance and configure network devices. At the local systems
operations center, the System
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Controller provides customized gateways to integrate with client data systems.
As non-utility applications are deployed, the Company may integrate additional
server devices to manage such non-utility applications at the System Controller
level.
CellNet's network equipment--MCCs, CellMasters and System Controllers--are
equipped with back-up batteries and continue to operate in the event of a power
outage.
The Company also operates the CellNet Central Operations Room at its San
Carlos, California facilities which monitors performance of all regional System
Controllers and is able to assume operations of the regional networks if the
local System Controller experiences a failure. The Company operates a private
national data network to link these regional sites using third-party carrier
services.
SYSTEM SOFTWARE. CellNet believes that one of its key enabling technologies
is the software which facilitates operation of a large-scale NMR system. While
certain "off-the-shelf" networking approaches work well on a limited scale in a
wireline environment with expensive computers and workstations, the ability to
operate in a wireless environment under extreme conditions at low cost has
required the development of a sophisticated network architecture. CellNet's
network solution is based on distributed computing and messaging technologies
which enable intelligence to be decentralized and ensure efficient use of
spectrum. The CellNet Radio Network Operating System ("R(-)NOS") is a
proprietary system that provides sophisticated network communication services
between the System Controller and the CellMaster units, RTUs, MCCs and endpoint
devices. It is a scaleable system that has been specifically designed to
ultimately handle millions of endpoints in a single regional network. Extensive
real-time diagnostic and network management features manage traffic, monitor
system performance and enable network configuration as data is collected and
delivered to users. The CellNet R(-)NOS is able to maintain fast response times
and system capacity by distributing a significant portion of the network's
computing power at the MCC level.
The R(-)NOS offers the benefits of incrementally adding processing power as
well as supporting remote operations required for redundancy and backup
operations. As such, an entire regional system can be switched quickly from one
System Controller to another in the event of failure. The CellNet R(-)NOS is
also able to segregate network data from multiple non-utility applications and
provide such data to non-utility clients over additional database interfaces.
Each CellNet system is customized with application-specific gateways which
enable the interface between the System Controller and the client's existing
corporate data systems. CellNet has delivered gateways to support the data
requirements for billing automation, electric distribution automation, customer
service call center automation and load management programs. The flexibility
provided by this R(-)NOS architecture will enable the system to offer services
for many new applications unrelated to NMR services such as distribution
automation and non-utility applications. By building on a general network
capability the Company can extend its services to many other utility and
non-utility services without incurring significant costs of redesigning the
underlying communications architecture. Each new application is expected to be
added with only incremental development, which will be focused primarily on
application-specific endpoint devices and system gateways. Furthermore, since
its design is independent of the specific endpoint radio devices, the Company
believes that this architecture can evolve to incorporate future advances in
wireline and wireless communications. The Company has made a substantial
commitment to establishing a strong competitive position, having invested over
325 staff-years in the design, development and testing of its system.
EFFICIENT SPECTRUM UTILIZATION. CellNet's network components utilize both
licensed and unlicensed radio frequency bands. The CellNet WAN operates in the
928/952 mHz frequencies which are licensed by the FCC in 25 or 12.5 kHz channel
bandwidths for full duplex operation and point-multipoint data services. CellNet
has developed a proprietary technology, subject to issued and pending patents,
which permits a narrowband radio system to derive up to 19 subchannels from a
single 25 kHz channel. By reusing subchannels in a manner similar to that used
by cellular phone systems, CellNet believes it can grow a system to cover a
large region and expand capacity incrementally as needed. As a result, CellNet
is
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able to operate its wide area networks in the spectral equivalent of
approximately a single voice channel. CellNet has obtained a total of 87
spectrum licenses in 50 of the top 60 MSAs and CMSAs and believes that it will
be able to obtain additional spectrum as required although it may not be able to
do so at low cost, particularly if such spectrum becomes subject to auction as
has been recently proposed by the FCC.
MANUFACTURING AND OPERATIONS
The Company currently outsources the manufacture and assembly of its high
volume, low cost equipment such as endpoint radio devices and a portion of its
lower volume, more complex equipment, including MCCs. CellNet's supply strategy
is to leverage the size and production capabilities of key suppliers to take
advantage of manufacturing economies of scale, reduce component pricing through
bulk purchasing and obtain access to manufacturing capacity and resources to
meet highly variable production requirements.
CellNet presently focuses its limited internal manufacturing resources on
final assembly and testing of its CellMasters and those MCCs that it does not
outsource. CellNet assembles these network components, then custom configures
and tests such components to meet stringent utility industry field equipment
standards. Samples of all products, whether internally or externally built, are
thermally and electrically stress-tested to measure product quality and
reliability. Test results are used both to monitor production quality and to
provide information to CellNet's development organization for further design
enhancements.
CellNet has developed and is continuing to improve a high-volume, low-cost
process to retrofit electric utility meters with endpoint radio devices. The
Company's proprietary system for retrofit information management analyzes
operating data, generates reports, and provides this information to customers
for inclusion in their databases. The Company installs its endpoint radios on
both new and previously installed electric meters at its retrofit facilities in
San Carlos, California and Kansas City, Missouri. The Company expects that
similar regional retrofit centers will be established as needed to meet the
network installation requirements under new services agreements with energy
service providers, although a retrofit center can support more than one network
deployment. In addition, certain electric meter manufacturers are installing
CellNet meter radios on new meters as a part of their meter manufacturing
process.
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.
The Company relies on sole and limited source vendors and subcontractors for
certain subassemblies and components which involves certain risks, including the
possibility of shortages and reduced control over delivery schedules,
manufacturing capability, quality and cost. See "Risk Factors--Dependence on
Third-Party Manufacturers; Exposure to Component Shortages."
CURRENT UTILITY SERVICE AGREEMENTS
KANSAS CITY POWER & LIGHT COMPANY. In August 1994, CellNet entered into a
Utility Services Agreement with KCPL (the "KCPL Services Agreement") for the
provision of NMR and other data communications services over a network to be
built, installed and operated by CellNet. KCPL is paying CellNet for certain
installation costs based upon the number of meters retrofitted and installed and
monthly service fees based on the number of meters and RTUs in service being
used to bill customers. The KCPL Services Agreement presently covers
approximately 420,000 meters within KCPL's service territory. The term of the
KCPL Services Agreement is 20 years.
AMERENUE. In August 1995, CellNet entered into a Utility Services Agreement
with UE (the "UE Services Agreement") for the provision of data communications
services over the Company's network for all electric meters within defined
limits of UE's service area in the city of St. Louis and certain surrounding
counties. UE is paying CellNet for certain installation costs and monthly
service fees based on the number of installed meters and RTUs. The UE Services
Agreement now covers approximately 800,000 electric
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meters within such territory. The terms of the UE Services Agreement is 20 years
with an option on UE's part to extend it for two additional periods of five
years each on substantially similar terms.
NORTHERN STATES POWER COMPANY. In August 1996, CellNet entered into the NSP
Services Agreement with NSP for the provision of data communications services
over a network to be built, installed and operated by CellNet. NSP will pay
CellNet a monthly service fee based on the number of meters and RTUs in service
then being used to bill customers. The NSP Services Agreement covers
approximately 1.0 million gas and electric meters within NSP's service territory
located in the Minneapolis-St. Paul metropolitan area. The term of the NSP
Services Agreement is 15 years, with a five year option to extend, exercisable
by NSP.
PACIFIC GAS & ELECTRIC COMPANY. In October 1996, the Company entered into a
Master Agreement for Automated Meter Reading with PG&E and a Contract Work
Authorization issued thereunder (collectively, the "PG&E Services Agreement")
for the provision of electric and gas meter reading services initially to cover
approximately 100,000 PG&E meters in the San Francisco Bay Area. Upon the
installation of approximately 23,000 meters, PG&E acknowledged that the data
collection, cost savings, customer service and other objectives of the Company's
demonstration network had been met and agreed with the Company to build out the
network to approximately 30,000 meters.
PUGET SOUND ENERGY, INC. In August 1996, CellNet entered into a letter of
intent (the "Puget Letter of Intent") and the Puget Initial Services Agreement
with ConnexT, a subsidiary of Puget for the provision of NMR and other data
services over a network to be operated by CellNet. The Puget Initial Services
Agreement covers approximately 15,000 meters within Puget's service territory.
In October 1997, the Company entered into an agreement with Puget to deploy
700,000 meters and provide NMR service. The term of the agreement is 20 years.
INDIANAPOLIS POWER & LIGHT COMPANY. In September 1997, CellNet entered into
a Utility Services Agreement with IP&L for the provision of data communications
services over a network to be built, installed and operated by CellNet. IP&L
will pay CellNet monthly service fees based on the number of installed meters.
The IP&L Services Agreement covers approximately 415,000 electric meters within
IP&L's service territory located in the Indianapolis metropolitan area.
SYSTEM DEPLOYMENT AND OPERATION
For each of its network deployments, the Company provides full
implementation services to its clients, including system design, site selection,
frequency licensing, equipment installation, software modification, systems
integration and project management.
The modular design of the CellNet system and the efficient size of its
components facilitate inexpensive deployment of scaleable networks. Most of the
system components have been designed to fit on utility power poles or, where
necessary, on buildings or other structures. The majority of the network is
simply "plugged in" as the newly retrofitted meters replace existing meters.
Endpoint radio devices are installed on gas meters without interruption in
service by affixing the device (containing a radio, a long-life battery and new
register dials) at the meter register. The MCCs take typically less than two
hours each to install and the CellMasters less than a week to install, providing
a network which can be deployed swiftly and efficiently. The system is also
scalable because of its cellular design, thereby allowing adequate coverage
regardless of the size of the service area.
Field engineering teams are responsible for the installation and deployment
of all of the Company's networks. Once a services contract has been signed,
CellNet places a local project manager in charge of the installation. The
project manager hires local personnel, coordinates activities with various
departments within the utility, and draws on CellNet's corporate staff to
perform specialized services. CellNet's corporate staff is responsible for RF
network design, system software installation and integration, training of local
systems administration personnel, FCC licensing requirements, and remote systems
monitoring.
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CellNet's local personnel are responsible for RF engineering and site
testing, site selection, routine software administration and maintenance,
selection and training of subcontractors, coordination of meter retrofitting,
materials handling, and office administration. During the two to four-year
installation phase of each project, local personnel for the project employed by
CellNet typically number from twenty to fifty people (for deployments the size
of KCPL and UE), depending on the size and anticipated speed of each deployment.
Meter changeout and system equipment installations are generally carried out by
subcontractors and certain other system deployment tasks may be subcontracted
from time to time as well.
Following system deployment, a system management team of typically ten to
twenty CellNet personnel (for deployments the size of KCPL and UE) will remain
on site for the duration of the contract to handle day-to-day operations and
routine customer requests. This group will be supported by CellNet's
headquarters or regional offices, if any, that will provide 24-hour
troubleshooting support as well as additional technical expertise that can be
quickly dispatched if needed.
The Company also intends to provide substantial customer support, including
on-going field support and critical centralized network support functions
through regional network control centers. Currently, the Company is providing
sophisticated network monitoring from its headquarters in San Carlos,
California.
SALES AND MARKETING
The Company has organized its sales and marketing efforts based on utility
and non-utility network applications. For its utility segment, the Company's
initial target market includes the larger MSAs and CMSAs in the United States
which represent a large majority of the meters in the United States. The Company
is also pursuing selected utilities outside the larger MSAs and CMSAs. The
Company has a sales and marketing organization of 47 persons with a mix of
utility and information technology sales backgrounds, several of whom have
extensive experience in the electric utility industry. Regional sales
professionals are supported by corporate specialists in the areas of metering,
systems integration, and deployment.
The Company intends to concentrate its marketing efforts for non-utility
applications on industry-leading providers of products and services that would
benefit from the Company's low-cost wireless network. The Company is working
with leading manufacturers and applications developers to promote and develop
products and services that utilize the Company's networks. See "--Business
Strategy--Promote Development of Non-Utility Applications." The Company expects
that the manufacturers and developers of such products and services would market
such products and services to end users.
The Company has established a team of market managers for the development of
new business opportunities. This team develops business concepts that are
enabled by CellNet's services, pursues market research to validate these
concepts and identifies potential alliances that will be required to create the
products and services. This team is composed of individuals with backgrounds in
cellular and wireless marketing, product management and consumer products.
CellNet's sales approach addresses utilities and new power market
participants' need to prepare for the future competitive environment by reducing
costs, meeting present and future regulatory requirements and enhancing customer
service.
PROPRIETARY RIGHTS
CellNet relies on a combination of trade secret protection, copyrights,
patents, trademarks and confidentiality and licensing agreements to establish
and protect its proprietary rights.
CellNet's WAN radio system has been developed using advanced digital signal
processing techniques and an RF system architecture that enables CellNet to
create a complete digital cellular system in approximately a single 25 kHz voice
channel. This technology is based on narrowband modulation and compression of
many subchannels into a single channel. Extremely stable frequency control is
required to
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preserve system performance. CellNet's system of frequency control is the
subject of several issued patents claims. In addition, the efficiency of the
frequency protocol utilized by the CellMaster is determined in part by its
ability to recover short burst transmissions from an RTU or MCC. The
CellMaster's burst data recovery process is also the subject of an issued
patents claim.
The spread spectrum radio technology utilized in the CellNet LAN has been
licensed to CellNet by Axonn Corporation and an affiliate of Axonn (together,
"Axonn"). The Axonn spread spectrum technology, which is subject to a number of
patents, is a low-cost radio system which offers the price/performance
relationships that the Company believes are required for a commercially-feasible
telemetry network. Under its licenses from Axonn, CellNet has acquired an
exclusive right to use Axonn spread spectrum technology in the utility
distribution and service market and an exclusive right to provide services for
other applications outside the utility market through the CellNet system
architecture. CellNet's right to provide fire and security applications based
upon Axonn's technology is not exclusive under these licenses. The Axonn
licenses do not expire by their terms until the last to expire of any of the
patent rights underlying such licenses which will occur not earlier than March
21, 2014. Up to that time, as each patent licensed under the Axonn licenses
expires, the technology underlying such patent will become freely available in
the public domain. In an action filed by an affiliate of Axonn against Cargill,
Inc. and other defendants in the U.S. District Court for the Northern District
of California for, among other matters, alleged infringement of certain patents
underlying Axonn's spread spectrum technology, the court on August 8, 1997
granted the Cargill defendants' motion for summary adjudication holding that
such patents were invalid and unenforceable because they had expired for failure
to pay the required amount of maintenance and issue fees. The Axonn affiliate is
appealing the decision. While such patents are included in CellNet's license of
the Axonn spread spectrum technology, the Company does not believe the
expiration of these patents will have a material adverse impact on the Company's
business, operating results, financial condition and cash flow.
CellNet has developed a proprietary, patent-pending approach to transmitting
metering information which allows the LAN to accumulate time of use, demand and
load profile data. CellNet's protocols and data transmission methods are
incorporated in its proprietary firmware. During the development and test
deployments of the CellNet WAN and LAN radio systems, the Company has
accumulated substantial information regarding cellular and microcellular radio
systems. This information is being used to develop modeling and planning tools
which assist CellNet in the deployment and operation of complex RF systems.
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. See
"Risk Factors--Uncertainty of Protection of Copyrights, Patents and Proprietary
Rights."
RESEARCH AND DEVELOPMENT
The Company has steadily increased its research and development efforts over
the past several years and expects to continue to spend a significant portion of
its resources on these activities for the foreseeable future. The Company spent
$27.5 million, $25.4 million, and $20.9 million for research and development in
1997, 1996 and 1995, respectively. The Company spent $7.0 million and $6.4
million for research and development in the period ended March 31, 1998 and
1997, respectively. The Company presently employs more than 129 software and
hardware engineers and other professional staff in these efforts and contracts
with a number of highly-specialized outside consultants for additional services
as required. The focus of the Company's research and development efforts in the
past has been on the continued development of the radio hardware, spread
spectrum radio protocols, intelligent base stations (CellMasters and MCCs),
extensive software code, database capacity and other elements required for a
flexible, high-capacity wireless data communications network capable of
processing data from several million endpoints on a real-time basis at a low
cost. The Company expects that the focus of future research and development will
be to make further enhancements to the system software, firmware, hardware and
other equipment to increase the speed, capacity and functionality of the system,
to lower the cost of system equipment over time and,
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working with other companies, to expand the scope of utility and non-utility
services that may be offered on the system. The Company's future success will
depend, in part, on the Company's success in these development projects which
will require continued substantial investments. See "Risk Factors--Technological
Performance and Buildout of the System; Rapid Technological Change and
Uncertainty."
As part of the Company's research and development efforts, the Company has
worked closely with current and potential customers in conducting pilot trials
for non-utility applications and jointly developing system specifications and
requirements.
COMPETITION
The emerging market for utility NMR systems, the deregulation of the
electric utility industry and the potential market for other applications
accessible once a common infrastructure is in place, have led electronics,
communications and utility product companies to begin development of various
systems, some of which currently compete, and others of which may in the future
compete, with the CellNet system. Deregulation will likely cause competition to
increase. The Company believes its only significant direct competitor in the
marketplace at the present time is Itron, an established manufacturer and seller
of hand-held and drive-by AMR equipment to utilities. Itron is currently
providing to customers its Genesis-TM- system, a radio network similar to the
Company's, for meter reading purposes.
Motorola is an example of a company whose technology might be adapted for
NMR and who might become a competitor of the Company. Mtel has announced that it
intends to adapt its technology to offer residential services similar to NMR
some time in 1999 over its existing paging network, with the development of
endpoint radios and network management capabilities being left to other
independent companies. Whisper Communications (formerly, a part of Diablo
Research) now offers its True 2 Way-TM- fixed-based RF architecture
communications technology for AMR and other services, and has several trials
underway. Metricom, a provider primarily of subscriber-based, wireless data
communications for users of portable and desktop computers, is currently
involved in the AMR market through trials with Whisper Communications.
Schlumberger and Greenland are among the companies that have conducted, or are
in the process of conducting, pilot trials of utility network automation
systems. Several companies are offering telephone-based network automated meter
reading services or equipment. Among these are International Teldata and
American Innovations. 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 in the
marketplace 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
significantly greater financial, marketing, technical and manufacturing
resources, name recognition and experience than the Company. There may be many
potential alternative solutions to the Company's NMR services. The Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or 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, thereby increasing 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 providers of wireless services may in the future choose to enter the
Company's markets. However, such telecommunications applications are not well
suited for use in NMR or similar applications given certain technical challenges
and economic costs such as high embedded spectrum costs. Such existing and
future competition could materially adversely affect the pricing for the
Company's services and the Company's ability to sign services contracts and
maintain existing agreements. Competition for services relating to
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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.
The Company believes the principal competitive factors for NMR services
include price, quality of service, system functionality and capacity for
readings as frequently as every 30 minutes, reliability, and ease of
installation. The Company believes it competes favorably in these areas. In
particular, the Company believes that it has developed the first commercially
deployed, large-scale network-based NMR system capable of simultaneously
collecting, processing, transporting and sharing data from millions of endpoints
on an efficient and timely basis.
SPECTRUM REGULATION
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
radio spectrum allocated for 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 CellNet system. The FCC has the authority to amend its rules at any time and
such changes could have a material adverse effect on the Company's spectrum
utilization strategy. See "Risk Factors--Access to RF Spectrum; Regulation by
the FCC."
EMPLOYEES
As of March 31, 1998, CellNet had 722 employees, including 129 in product
development, 151 in materials and manufacturing, 47 in sales and marketing, 359
in field service and support, and 36 in administration. None of the Company's
employees is currently represented by a labor union. The Company believes that
its relationship with its employees is good.
PROPERTIES
The Company's administrative, sales and marketing, product development and
production facilities are located in San Carlos, California, where the Company
leases approximately 106,000 square feet in three buildings under lease and
sublease agreements expiring in December 2000. Subsidiaries of the Company lease
approximately 107,000 square feet of additional warehouse, manufacturing and
office space to support field operations in California and various other states
under lease and sublease agreements expiring at various times commencing
November 2001 through September 2015. The Company anticipates that it will be
able to acquire additional space as required for its operations on acceptable
terms.
LITIGATION
In October 1996, Itron, 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.
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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 the Company's results of operations or financial
condition.
In April 1997, the Company filed a patent infringement suit against Itron in
the Federal District Court for the Northern District of California, claiming
that Itron's use of its electronic meter reading Encoder Receiver Transmitter
(ERT-Registered Trademark-) device infringes CellNet's U.S. Patent No.
4,783,623. The Company seeks an injunction, damages and other relief.
The consolidated complaint of JERE SETTLE AND KAREN ZULLY V. JOHN M. SEIDL
ET AL. No. 398464 filed in the Superior Court of California for the County of
San Mateo was dismissed on February 9, 1998, without leave to amend. Counsel for
the plaintiffs in the SETTLE/ZULLY action have filed a notice of their intention
to appeal this dismissal to the California Court of Appeal. A second complaint,
also filed in the same Court, of HOWARD FIENMAN AND GERALD SLAPSOWITZ V. CELLNET
DATA SYSTEMS, INC. ET AL. No. 398560 was earlier voluntarily dismissed with
prejudice. These complaints, purported class actions filed on behalf of the
Company's stockholders against the Company, certain of its officers and
directors and underwriters of the Company's initial public offering, sought
unspecified damages and rescission for alleged liability under various
provisions of the federal securities law and California state law. The
plaintiffs alleged generally that the Prospectus and Registration Statement
dated September 26, 1996, pursuant to which 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.
In 1995, Century Telephone Enterprises, Inc. ("Century Telephone") filed a
petition before the Trademark Trial and Appeal Board of the U.S. Patent and
Trademark Office for cancellation of the Company's "CellNet" trademark
registration. The parties have agreed to settle the matter under arrangements
whereby Century Telephone will withdraw its petition for cancellation and the
Company will purchase from Century Telephone their rights to the "CellNet"
trademark now registered in Century Telephone's name. The settlement is pending
execution of settlement documents.
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MANAGEMENT
The executive officers and directors of the Company and their ages as of
March 31, 1998 are as follows.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
John M. Seidl........................................ 58 President, Chief Executive Officer and Director
Cree A. Edwards...................................... 40 Vice President, Marketing
Robert A. Hayes...................................... 45 Vice President, Development and Operations
Larsh M. Johnson..................................... 40 Vice President and Chief Technology Officer
Paul G. Manca........................................ 39 Vice President and Chief Financial Officer
Philip H. Mallory.................................... 58 Vice President and General Manager, Services
David L. Perry....................................... 57 Vice President, Secretary and Chief Administrative
Officer
Ben H. Lyon.......................................... 44 Vice President, General Counsel
Paul M. Cook......................................... 73 Director
Neal M. Douglas...................................... 39 Director
E. Linn Draper, Jr................................... 55 Director
William C. Edwards................................... 69 Director
William Hart......................................... 57 Director
</TABLE>
JOHN M. SEIDL became President, Chief Executive Officer and a director of
the Company in September 1994. From December 1992 to September 1994, Mr. Seidl
served as director of St. Mary's Land & Exploration Company, CRSS, Inc., J.B.
Poindexter, Inc. and a privately-held company. From January 1989 through
December 1992, Mr. Seidl served as a director of MAXXAM, Inc., an aluminum,
forest products and real estate concern, and Chairman and Chief Executive
Officer of Kaiser Aluminum Corporation. From September 1990 through December
1992, Mr. Seidl also served as President of MAXXAM, Inc. Previously, Mr. Seidl
was Executive Vice President, from July 1985 to May 1986, and President and
Chief Operating Officer, from May 1986 to January 1989, of Enron Corp., an
energy company. Mr. Seidl currently is a director of St. Mary's Land &
Exploration Company and several privately-held companies and non-profit
organizations. He received a B.S. degree in Engineering from the United States
Military Academy, and M.P.A. and Ph.D. degrees in Political Economy from Harvard
University.
CREE A. EDWARDS is a co-founder of the Company, served as Vice President,
Business Development from January 1994 to January 1997 and has served as Vice
President, Marketing since that time. Mr. Edwards was President of the Company
from October 1984 to February 1990 and Executive Vice President from February
1990 to January 1994. Prior to founding CellNet in 1984, Mr. Edwards was an Area
Sales Manager for Octel Communications Corporation, a voice processing
manufacturer, from September 1984 to September 1985, and a Major Accounts
Manager for the General Electric Information Services Company from March 1983 to
September 1984. He received a B.A. degree in Economics from the University of
California, Davis.
ROBERT A. HAYES joined the Company in January 1993 as Vice President,
Special Assistant to the President. He became Vice President, Software
Development in March 1994 and was named Vice President, Development in January
1995 and Vice President, Development and Operations in April 1997. From February
1991 to December 1992, Mr. Hayes held a number of positions with Everex Systems,
Inc. ("Everex"), a computer hardware manufacturer, including Vice President of
Manufacturing, Vice President of Quality and Service, Manager of the Network
Division and Group Manager of Service. Everex filed
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for Chapter 11 bankruptcy protection in January 1993. Mr. Hayes received B.S.
and M.C.E. degrees in Civil Engineering from Rice University.
LARSH M. JOHNSON is a co-founder of the Company and has served in several
vice presidential positions from October 1984 to December 1994 and, since
January 1995, as Vice President and Chief Technology Officer. While at CellNet
and prior to co-founding the Company in 1984, he was a self-employed product
design consultant from May 1983 to June 1985 and Director of Product Development
at Interactive Communications Corporation, a video systems company, from
February 1984 to June 1985. Mr. Johnson was an Engineering Manager at Digital
Optics Corporation, a company specializing in electro-optical systems, from
March 1981 to April 1983 and an electrical engineer at Systems Control
Corporation, a computer hardware company, from June 1980 to April 1981. He
received his B.S. and M.S. degrees in Mechanical Engineering from Stanford
University.
PAUL G. MANCA joined the Company in May 1995 as Vice President and Chief
Financial Officer. From March 1993 to May 1995, he was the Managing Director and
Group Head of the Communications Group at BZW/Barclays Bank. Mr. Manca joined
BZW/Barclays as Vice President, Merchant Banking Division in February 1987. From
June 1980 to February 1987, Mr. Manca was employed in the corporate finance
group of the Canadian Imperial Bank of Commerce. He received a B.A. degree in
Economics from the University of California, Berkeley and an M.B.A. degree in
Finance from Golden Gate University.
PHILIP H. MALLORY joined the Company in January 1995 as Vice President and
General Manager, Services. From June 1996 until April 1997, he assumed the
additional duties of Vice President, Operations. From June 1992 to January 1995,
Mr. Mallory held various positions at CAE-Link Corporation, a defense
contractor, including Director of Strategic Planning, Director-Product
Management and Director-Department of Defense Marketing. Mr. Mallory served as a
career officer in the United States Army from June 1961 to August 1991,
attaining the rank of Major General prior to his retirement. During his army
career he held a number of posts, including Commanding General of the 2nd
Armored Division, NATO Advisor to the Secretary of Defense, and the Commanding
General of the 7th Army Training Command. Mr. Mallory holds a B.S. degree in
Engineering from the United States Military Academy and an M.S. degree in
Engineering-Applied Science from the University of California, Davis. Mr.
Mallory also attended the Industrial College of the Armed Forces in Washington,
D.C., where he attained the equivalent of a master's degree in Resource
Management.
DAVID L. PERRY joined the Company in November 1994 as Vice President,
General Counsel and Secretary, and was appointed Chief Administrative Officer in
February 1996. In March 1998, he resigned as General Counsel. From January 1992
through November 1994, Mr. Perry was engaged as an attorney in private practice.
From January 1984 through December 1991, Mr. Perry was Vice President and
General Counsel of Kaiser Aluminum Corporation. From August 1969 through
December 1983, Mr. Perry served in a variety of capacities in Kaiser Aluminum's
Law Department. Mr. Perry received a B.A. degree from Amherst College and a J.D.
degree from the Boalt Hall School of Law, University of California, Berkeley.
BEN H. LYON joined the Company as of February 1998 and was elected Vice
President, General Counsel in April 1998. From May 1, 1995 until April 1998, Mr.
Lyon was a senior counsel for Pacific Telesis Legal Group and Pacific Bell
Mobile Services. Prior to May 1995, he served as an attorney and senior counsel
in various positions at Pacific Telesis Legal Group and Pacific Bell. Since 1990
he has periodically served as an adjunct professor at the University of San
Francisco School of Law. Mr. Lyon has a B.A. from the University of California,
Davis and a J.D. from Loyola University School of Law, Los Angeles.
PAUL M. COOK has been a director of the Company continuously since August
1990. Mr. Cook became Chief Executive Officer of the Company in August 1990, and
assumed the additional title of President in 1992. He relinquished the positions
of President and Chief Executive Officer in September 1994. Since June 1995, Mr.
Cook has been the Chief Executive Officer and Chairman of the Board of DIVA
Systems Corp., a company developing video-on-demand products. Until his
retirement in April 1990, Mr. Cook was Chief Executive Officer of Raychem
Corporation, a plastics and insulation manufacturer, which he
73
<PAGE>
founded in 1957. Since September 1994, Mr. Cook has served as Chairman of the
Board of SRI International, Inc., and as a director of Raychem Corporation.
Currently, Mr. Cook is also a director of Chemfab Corporation. He received a
B.S. degree from the Massachusetts Institute of Technology.
NEAL M. DOUGLAS has been a director of the Company since October 1993. Since
January 1993 he has been a general partner of AT&T Ventures Company, L.P., a
venture capital firm. From May 1989 to January 1993, he was a partner of New
Enterprise Associates, another venture capital firm. Mr. Douglas also serves as
director of two privately-held companies.
E. LINN DRAPER, JR. has been a director of the Company since April 1997.
Since May 1993, he has been Chairman, President and Chief Executive Officer of
American Electric Power Company, Inc. ("AEP") and since March 1992, he has been
the President of AEP. Dr. Draper is also Chairman, President and Chief Executive
Officer of the American Electric Power Service Corporation, the management and
technology arm of the AEP system, President of Ohio Valley Electric Corporation
and its subsidiary, Indiana-Kentucky Electric Corporation and Chairman of the
Edison Electric Institute. From 1987 to 1992, Dr. Draper was Chairman, President
and Chief Executive Officer of Gulf States Utility Company. He is a member of
the National Academy of Engineering and serves as a director of Nuclear Energy
Institute, the Institute of Nuclear Power Operations, and the Greater Columbus
Chamber of Commerce.
WILLIAM C. EDWARDS has been a director of the Company from October 1985 to
April 1986 and has been a director continuously since March 1991. Since October
1968 he has been a general partner of Bryan & Edwards, an investment
partnership. Mr. Edwards also serves as a director of Western Atlas, Inc. and
two privately-held companies.
WILLIAM HART has been a director of the Company since October 1992. He has
been a general partner of Technology Partners West Fund IV, L.P. ("Technology
Partners"), a venture capital firm, since its founding in 1979. Mr. Hart also
serves as a director of Trimble Navigation, Ltd., Silicon Gaming, Inc. and
several privately-held corporations.
74
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Company's
Common Stock as of February 16, 1998, as to (i) each person who is known by the
Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each of the chief executive
officer of the Company and the four other highest compensated executive officers
of the Company and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER SHARES PERCENT BENEFICIALLY
BENEFICIAL OWNER BENEFICIALLY OWNED(1) OWNED(1)(2)
- --------------------------------------------- --------------------- --------------------
<S> <C> <C>
William C. Edwards(3) ....................... 3,891,850 9.3%
3000 Sand Hill Road
Bldg. 1, Suite 190
Menlo Park, CA 94025
Alan R. Brudos(4) ........................... 2,742,524 6.5
3000 Sand Hill Road
Bldg. 1, Suite 190
Menlo Park, CA 94025
Odyssey Partners, L.P ....................... 2,724,508 6.5
31 West 52nd Street
New York, NY 10019
Banner Partners(5) .......................... 2,590,780 6.2
3000 Sand Hill Road
Bldg. 1, Suite 190
Menlo Park, CA 94025
John M. Seidl(6)............................. 1,126,350 2.7
Paul M. Cook(7).............................. 1,928,274 4.6
Neal M. Douglas(8)........................... 1,614,526 3.9
William Hart(9).............................. 405,282 1.0
Paul G. Manca(10)............................ 191,100 *
Phillip Mallory(11).......................... 182,500 *
Robert A. Hayes(12).......................... 174,000 *
David L. Perry(13)........................... 158,300 *
E. Linn Draper, Jr.(14)...................... 10,000 *
All directors and executive officers as a 11,578,516 27.3
group (14 persons)(15).......................
</TABLE>
- ----------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. In computing the
number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of Common Stock subject to options or
warrants held by that person that are currently exercisable or exercisable
within 60 days of February 16, 1998 are deemed outstanding. Such shares,
however, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person. The persons named in this table
have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them, subject to community property
laws where applicable and except as indicated in the other footnotes to
this table.
(2) Percentage of beneficial ownership is based on 41,880,068 shares of Common
Stock outstanding as of February 16, 1998.
75
<PAGE>
(3) Includes 2,037,492 shares, 553,298 shares, and 313,022 shares of Common
Stock beneficially owned by Banner Partners, Banner Partners/Minaret, and
Carson, a partnership, certain members of Mr. Edwards's family and certain
foundations and trusts of which Mr. Edwards is a trustee, respectively. Mr.
Edwards, a director of the Company, may be deemed to be a beneficial owner
of shares held by such family members, foundations and trusts. Mr. Edwards
and Alan R. Brudos are the general partners of Banner Partners and Banner
Partners/ Minaret and each exercises sole voting and dispositive power over
the shares held by Banner Partners and Banner Partners/Minaret.
(4) Includes 2,037,492 shares, 553,298 shares, and 151,734 shares of Common
Stock beneficially owned by Banner Partners, Banner Partners/Minaret, and a
trust of which Mr. Brudos is the settlor, respectively. Mr. Brudos and
William C. Edwards are the general partners of Banner Partners and Banner
Partners/Minaret and each exercises sole voting and dispositive power over
the shares held by Banner Partners and Banner Partners/ Minaret. Mr. Brudos
exercises shared voting and dispositive power over the shares held by the
trust.
(5) Includes 553,298 shares held by Banner Partners/Minaret which is wholly
owned by Banner Partners.
(6) Includes 250,000 shares of Common Stock that the Company had the right to
repurchase at cost as of February 16, 1998, which right lapses based upon
continued performance of services by Mr. Seidl, and 9,100 shares of Common
Stock which are held by Mr. Seidl as a trustee of a trust for a family
member who shares Mr. Seidl's household. Mr. Seidl disclaims all beneficial
ownership of all securities held in trust for such family member. Also
includes 2,800 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of February 16, 1998 held by Mr. Seidl.
(7) Includes 1,808,274 shares of Common Stock beneficially owned by the Paul
and Marcia Cook Living Trust dated April 21, 1992 and 120,000 shares of
Common Stock beneficially owned by two trusts of which Mr. Cook is trustee.
(8) Includes 1,613,476 shares of Common Stock beneficially owned by AT&T
Ventures Company, L.P. Mr. Douglas, a director of the Company, is a general
partner of AT&T Ventures Company, L.P. and may be deemed to be the
beneficial owner of such shares. Mr. Douglas disclaims beneficial ownership
of the shares except to the extent of his proportionate partnership
interest therein.
(9) Includes 331,862 shares of Common Stock beneficially owned by Technology
Partners West Fund IV, L.P. Mr. Hart, a director of the Company, is a
general partner of Technology Partners West Fund IV, L.P. and may be deemed
to be the beneficial owner of such shares. Mr. Hart disclaims beneficial
ownership of the shares except to the extent of his proportionate
partnership interest therein.
(10) Includes 81,000 shares of Common Stock that the Company had the right to
repurchase at cost as of February 16, 1998, which right lapses based upon
continued performance of services by Mr. Manca. Also includes 11,100
shares of Common Stock issuable upon exercise of options exercisable
within 60 days of February 16, 1998 held by Mr. Manca.
(11) Includes 68,000 shares of Common Stock that the Company had the right to
repurchase at cost as of February 16, 1998, which right lapses based on
continued performance of services by Mr. Mallory. Also includes 12,000
shares of Common Stock issuable upon exercise of options exercisable
within 60 days of February 16, 1998 held by Mr. Mallory.
(12) Includes 164,000 shares issuable upon the exercise of options exercisable
within 60 days of February 16, 1998 held by Mr. Hayes.
(13) Includes 45,750 shares of Common Stock that the Company had the right to
repurchase at cost as of February 16, 1998, which right lapses based upon
continued performance of services by Mr. Perry. Also includes 22,100
shares of Common Stock issuable upon exercise of options exercisable
within 60 days of February 16, 1998 held by Mr. Perry.
(14) Consists of 10,000 shares issuable upon the exercise of options
exercisable within 60 days of February 16, 1998 held by Mr. Draper.
(15) Includes 635,678 shares of Common Stock that the Company had the right to
repurchase at cost as of February 16, 1998, which right lapses based upon
continued performance of services by the executive officers. Also includes
562,406 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of February 16, 1998.
76
<PAGE>
DESCRIPTION OF THE PREFERRED SECURITIES
The following summary of certain material terms and provisions of the
Preferred Securities does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the Certificate of Formation, the
Operating Agreement and the Written Action of the Manager of CellNet Funding,
LLC (the "Written Action") with respect to the terms of the Preferred
Securities, copies of which are available upon request to CellNet. Capitalized
terms not otherwise defined herein have the meanings assigned to them in the
Operating Agreement of Funding.
GENERAL
Funding is authorized to issue 3,000,000 shares of Preferred Securities
(3,450,000 if the Underwriter's over-allotment option is exercised in full). The
Preferred Securities do not have any subscription or preemptive rights related
thereto. The Bank of New York is transfer agent and registrar (the "Transfer
Agent") for the Preferred Securities.
RANKING
The Preferred Securities, with respect to dividend distributions and
distributions upon the liquidation, winding-up or dissolution of Funding, rank
senior to all classes of Common Securities of Funding. The Operating Agreement
of Funding does not permit Funding to incur any indebtedness or liabilities or
issue any securities except for the issuance of Common Securities to CellNet,
the issuance of the Preferred Securities and the incurrence of certain
obligations pursuant to the terms thereof.
ESCROW
Pursuant to an Escrow Agreement dated as of the Closing Date (the "Escrow
Agreement"), among Funding, CellNet and The Bank of New York, as escrow agent
(the "Escrow Agent"), on the Closing Date, Funding will use a portion of the
proceeds from the Offering to purchase Treasury Strips in an amount anticipated
to be sufficient to fund the cash payment of the first 13 dividends. The
Treasury Strips will be pledged to the Escrow Agent for the benefit of the
holders of the Preferred Securities pursuant to the Escrow Agreement and will be
held by the Escrow Agent in the Escrow Account (as defined below). Pursuant to
the Escrow Agreement, immediately prior to a Dividend Payment Date (through and
including August 1, 2001) the Escrow Agent will release from the Escrow Account
amounts sufficient to pay the dividend then due on the Preferred Securities.
Under the Escrow Agreement, once Funding makes the dividend payments on the
Preferred Securities through and including August 1, 2001 (or, in the event of
an Automatic Exchange, upon the making of the Dividend Make-Whole Payment), all
of the remaining Treasury Strips, if any, will be released from the Escrow
Account. See "Use of Proceeds." "Escrow Account" means the account established
with the Escrow Agent pursuant to the terms of the Escrow Agreement for the
deposit of the Treasury Strips (and earnings thereon and proceeds thereof)
purchased by Funding with a portion of the net proceeds from the sale by Funding
of the Preferred Securities. The summary does not purport to be complete and is
subject in all respects to, and is qualified in its entirety by reference to,
the Escrow Agreement, a copy of which is available from CellNet upon request.
DIVIDENDS
Holders of Preferred Securities will be entitled to receive dividends on the
Preferred Securities at the rate per annum of the liquidation preference of
Preferred Securities set forth on the cover page of this Prospectus, payable
quarterly. All dividends will be cumulative, whether or not earned or declared,
on a daily basis from the Closing Date and will be payable quarterly in arrears
on February 1, May 1, August 1 and November 1 of each year, commencing August 1,
1998 (to holders of record at the close of business on January 15, April 15,
July 15 and October 15 immediately preceding the corresponding Dividend Payment
77
<PAGE>
Date). The first dividend payment of $ per Preferred Security will be for the
period from the Closing Date to and including July 31, 1998 and will be payable
on August 1, 1998. Through and including August 1, 2001, dividends on the
Preferred Securities will be payable in cash. Thereafter, dividends on the
Preferred Securities will be payable at Funding's option, in (i) cash, (ii)
shares of Common Stock, valued at 90% of the Average Market Value of the Common
Stock or (iii) any combination of cash or Common Stock; provided that any
dividend payment must be made in cash to the extent Funding shall have
sufficient cash legally available to make all or any portion of such dividend
payment with respect to the Preferred Securities. The Indenture restricts
CellNet's ability to distribute cash to Funding. See "Risk Factors--No
Operations of Funding." If any dividend (or portion thereof) payable in cash on
any Dividend Payment Date is not declared or paid in full in cash on such
Dividend Payment Date, the amount of such dividend that is payable and that is
not paid in cash on such date will accumulate at the dividend rate, compounding
quarterly, until declared and paid in full.
Dividends on the Preferred Securities will be paid to the extent that
Funding has funds legally available for the payment of such dividends. Amounts
available to Funding for dividends to the holders of the Preferred Securities
will be limited to shares of Common Stock (or at CellNet's option, cash or any
combination of cash and Common Stock) received by Funding from CellNet as
dividends on the CellNet Preferred Stock (and proceeds from any sales of such
Common Stock by Funding) and the interest on and principal of the Treasury
Strips that are held in the Escrow Account. The terms governing the CellNet
Preferred Stock provide that CellNet shall pay dividends to Funding, payable in
Common Stock (or at CellNet's option, cash or any combination of cash and Common
Stock), in an amount sufficient to allow Funding to pay dividends on the
Preferred Securities in full. Any such Common Stock received by Funding may be
paid as a dividend to the holders of the Preferred Securities or sold in the
open market to generate cash proceeds to pay cash dividends on the Preferred
Securities.
EXCHANGE RIGHTS
GENERAL. The Preferred Securities are exchangeable at any time, in whole or
in part, prior to the Mandatory Redemption Date (unless earlier redeemed or
automatically exchanged for Common Stock), at the option of the holder thereof
and in the manner described below, into shares of Common Stock at an initial
exchange rate of shares of Common Stock for each Preferred Security
(equivalent to an exchange price of $ per share of Common Stock), subject to
adjustment as described under "--Exchange Rights--Exchange Rate Adjustments"
below, or an aggregate of shares of Common Stock (based on the exchange rate
on the Closing Date) representing approximately % of CellNet's outstanding
shares of Common Stock on a fully diluted basis as of , 1998.
A holder of a Preferred Security wishing to exercise its exchange right
shall (i) deliver an exchange notice to the Exchange Agent, (ii) if required,
furnish appropriate endorsements and transfer documents and (iii) if required,
pay all transfer or similar taxes, and the Exchange Agent shall, on behalf of
such holder, exchange such Preferred Securities with Funding for shares of
Common Stock and deliver such shares of Common Stock to such holder. Generally,
such exchange with Funding, in whole or in part, should not be a taxable event
to the holder. CellNet will initially act as Exchange Agent. Holders may obtain
copies of the required form of the exchange notice from the Exchange Agent.
Holders of Preferred Securities at the close of business on a dividend
record date will be entitled to receive the dividends payable on such Preferred
Securities on the corresponding Dividend Payment Date notwithstanding the
exchange of such Preferred Securities following such dividend record date but
prior to such Dividend Payment Date. Except as provided in the immediately
preceding sentence, neither Funding nor CellNet will make, or be required to
make, any payment, allowance or adjustment for accumulated and unpaid dividends,
whether or not in arrears, on exchanged Preferred Securities. Each exchange will
be deemed to have been effected immediately prior to the close of business on
the day on which the related exchange notice was received by the Exchange Agent.
Following any exchange at the election of a holder of such holder's Preferred
Securities into Common Stock, dividends will cease to accrue on such Preferred
78
<PAGE>
Securities and such holder will not be entitled to participate in the proceeds
from the Treasury Strips held by Funding.
No fractional shares of Common Stock will be issued as a result of exchange,
but in lieu thereof such fractional interest will be paid by Funding in cash
based on the last reported sale price of Common Stock on the date Preferred
Securities are surrendered for exchange. From time to time, Funding will sell
shares of Common Stock in the open market and will use proceeds from such sales
to pay cash on the fractional interests described in the prior sentence.
EXCHANGE RATE ADJUSTMENTS. The exchange rate is subject to adjustment upon
certain events occurring after the Closing Date, including (i) the issuance of
Common Stock as a dividend or distribution on the Common Stock; (ii) certain
subdivisions and combinations of the Common Stock; (iii) the issuance to holders
of Common Stock of certain rights or warrants entitling them to subscribe for or
purchase Common Stock at less than the Average Market Value; (iv) the
distribution to all holders of Common Stock of capital stock (other than Common
Stock) or evidences of indebtedness of CellNet or of assets (other than cash
distributions covered by clause (v) below) or rights or warrants to subscribe
for or purchase any of its securities (excluding rights or warrants to purchase
Common Stock referred to in clause (iii) above); (v) distributions consisting of
cash, excluding any quarterly cash dividend on the Common Stock to the extent
that the aggregate cash dividend per share of Common Stock in any quarter does
not exceed the greater of (x) the amount per share of Common Stock of the next
preceding quarterly dividend on the Common Stock to the extent that such
preceding quarterly dividend did not require an adjustment of the exchange rate
pursuant to this clause (v) (as adjusted to reflect subdivisions or combinations
of the Common Stock), and (y) 3.75 percent of the average of the last reported
sales price of the Common Stock during the ten trading days immediately prior to
the date for declaration of such dividend and excluding any dividend or
distribution in connection with the liquidation, dissolution or winding up of
CellNet; (vi) payment in respect of a tender or exchange offer by CellNet or any
subsidiary of CellNet for the Common Stock to the extent that the cash and value
of any other consideration included in such payment per share of Common Stock
exceeds the Average Market Value per share of Common Stock on the Trading Day
next succeeding the last date on which tenders or exchanges may be made pursuant
to such tender or exchange offer; and (vii) payment in respect of a tender offer
or exchange offer by a person other than CellNet or any subsidiary of CellNet in
which, as of the closing date of the offer, the Board of Directors is not
recommending rejection of the offer. If any adjustment is required to be made as
set forth in clause (v) above as a result of a distribution that is a quarterly
dividend, such adjustment would be based upon the amount by which such
distribution exceeds the amount of the quarterly cash dividend permitted to be
excluded pursuant to such clause (v). If an adjustment is required to be made as
set forth in clause (v) above as a result of a distribution that is not a
quarterly dividend, such adjustment would be based upon the full amount of the
distribution. The adjustment referred to in clause (vii) above will only be
required if the tender offer or exchange offer is for an amount which causes
that person's ownership of Common Stock to exceed 25% of the total shares of
Common Stock outstanding and, if the cash and value of any other consideration
included in such payment per share of Common Stock, exceeds the Average Market
Value per share of Common Stock on the business day next succeeding the last
date on which tenders or exchanges may be made pursuant to such tender or
exchange offer. The adjustment referred to in clause (vii) above will not be
required, however, if, as of the closing of the offer, the offering documents
with respect to such offer disclose a plan or an intention to cause CellNet to
engage in a consolidation or merger of CellNet or a sale of all or substantially
all of CellNet's assets. Notwithstanding the foregoing, no adjustment will be
required as a result of (a) the issuance of shares of Common Stock as a result
of any of the following (i) the grant, exercise or issuance of stock or stock
options under the Company's employee, director or consultant stock plans, (ii)
the exercise of outstanding warrants or conversion or exchange of existing notes
and securities, and (iii) in satisfaction of CellNet's obligations under its
Employee Stock Purchase Plan as amended from time to time or (b) the issuance of
Common Stock as a dividend on or upon exchange of the Preferred Securities.
Common Stock issued in connection with acquisitions of
79
<PAGE>
businesses or assets from persons that are not Affiliates of CellNet will be
deemed to have been issued for a price at least equal to Average Market Value.
The Certificate of Designation, Rights and Preferences with respect to the
CellNet Preferred Stock (the "Certificate of Designation") provides that if
CellNet implements a stockholders' rights plan, such rights plan must provide
that upon exchange of the Preferred Securities into Common Stock the holders
will receive, in addition to the Common Stock issuable upon such exchange, such
rights whether or not such rights have separated from the Common Stock at the
time of such exchange. In addition, no adjustment to the exchange rate will
occur as a result of the issuance of the rights if CellNet adopts such plan.
No adjustment in the exchange rate will be required unless such adjustment
would require a change of at least one percent in the exchange rate then in
effect; provided that any adjustment that would otherwise be required to be made
shall be carried forward and taken into account in any subsequent adjustment.
CellNet reserves the right to make such increase in the exchange rate in
addition to those required in the foregoing provisions as CellNet in its
discretion shall determine to be advisable in order that certain stock-related
distributions hereafter made by CellNet to its stockholders shall not be
taxable. Except as stated above, the exchange rate will not be adjusted for the
issuance of Common Stock or any securities convertible into or exchangeable for
Common Stock or carrying the right to purchase any of the foregoing.
In the case of (i) any reclassification of the Common Stock (other than
changes in par value or resulting from a subdivision or combination) or (ii) a
consolidation or merger involving CellNet or a sale or conveyance to another
corporation of the property and assets of CellNet as an entirety or
substantially as an entirety, in each case as a result of which holders of
Common Stock shall be entitled to receive stock, securities or other property or
assets (including cash) with respect to or in exchange for such Common Stock,
the holders of the Preferred Securities then outstanding will be entitled
thereafter to exchange such Preferred Securities into the kind and amount of
shares of stock, other securities or other property, assets or cash which they
would have owned or been entitled to receive upon such reclassification,
consolidation, merger, sale or conveyance had such Preferred Securities been
exchanged immediately prior to such reclassification, consolidation, merger,
sale or conveyance, assuming that a holder of Preferred Securities would not
have exercised any rights of election as to the stock, other securities or other
property, assets or cash receivable in connection therewith.
In the event of a taxable distribution to holders of Common Stock or in
certain other circumstances requiring an adjustment to the exchange rate, the
holders of Preferred Securities may, in certain circumstances, be deemed to have
received a distribution subject to United States income tax as a dividend.
CellNet from time to time may, to the extent permitted by law, increase the
exchange rate (thus increasing the number of shares of Common Stock that would
be issued in exchange for each Preferred Security) by any amount for any period
of at least 20 days, in which case CellNet shall give at least 15 days' notice
of such increase if CellNet's Board of Directors has made a determination that
such increase would be in the best interests of CellNet, which determination
shall be conclusive. CellNet may, at its option, make such increases in the
exchange rate, in addition to those set forth above, as the Board of Directors
deems advisable to avoid or diminish any income tax to holders of Common Stock
resulting from any dividend or distribution of stock (or rights to acquire
stock) or from any event treated as such for income tax purposes. CellNet does
not intend to reduce the exchange price to an amount below the fair market value
of the Common Stock.
MANDATORY REDEMPTION BY FUNDING
Unless earlier redeemed or exchanged, the Preferred Securities must be
redeemed, out of funds legally available therefor, by Funding at a redemption
price of 100% of the liquidation preference of the Preferred Securities plus
accrued and unpaid dividends, if any, on the Mandatory Redemption Date.
80
<PAGE>
AUTOMATIC EXCHANGE
The Preferred Securities will be automatically exchanged for Common Stock at
any time after the Closing Date, and on or prior to May 1, 2001, at an exchange
price of $ per share in the event that the Current Market Value of the Common
Stock equals or exceeds the following Trigger Percentages of the exchange price
then in effect for at least 20 trading days in any consecutive 30-day trading
period during the 12 month period ending on May 1 of the indicated year (an
"Exchange Event"):
<TABLE>
<CAPTION>
YEAR TRIGGER PERCENTAGES
- --------- -------------------
<S> <C>
1999 170%
2000 160%
2001 150%
</TABLE>
In any consecutive 30 day trading period that includes trading days before
and after May 1, 1999 or May 1, 2000, the applicable Trigger Percentage for each
trading day in the trading period shall be used in order to determine whether an
Exchange Event has occurred.
Upon any Automatic Exchange, Funding will make a Dividend Make-Whole Payment
with respect to the Preferred Securities in an amount equal to any remaining
Treasury Strips held by Funding. Funding will be obligated to make the Dividend
Make-Whole Payment on all Preferred Securities which are automatically
exchanged. The Dividend Make-Whole Payment must be paid in cash. Following any
Automatic Exchange, dividends will cease to accrue on the Preferred Securities.
OPTIONAL REDEMPTION BY FUNDING
The Preferred Securities are also subject to optional redemption by Funding
on any date (the "Optional Redemption Date") on or after May 1, 2001 (the
"Initial Redemption Date"). At any time and from time to time on or after the
Initial Redemption Date and until the Mandatory Redemption Date, Funding will
have the right to redeem, in whole or in part, the Preferred Securities at a
redemption price equal to the percentage of the liquidation preference set forth
below, together with accrued and unpaid dividends, if any, to the Optional
Redemption Date, if redeemed in the 12 month period beginning on May 1 of the
indicated year:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- --------- ----------------
<S> <C>
2001 %
2002
2003
2004
2005
2006
2007
2008
2009
2010 100.000
</TABLE>
METHOD OF PAYMENT OF REDEMPTION
The redemption price pursuant to an Optional Redemption or the Mandatory
Redemption will be payable, in each case at Funding's option, in (i) cash, or
(ii) Common Stock, based upon 90% of the Average Market Value of the Common
Stock in the case of the Optional Redemption and 100% of the Average Market
Value of the Common Stock in the case of the Mandatory Redemption or (iii) any
combination of cash and Common Stock; provided that Funding, in its notice of
such redemption, must state whether the redemption price will be paid in cash,
Common Stock or both, and provided that any
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payment must be made in cash to the extent Funding shall have sufficient cash
legally available to make all or any portion of such payment with respect to the
Preferred Securities.
FUNDAMENTAL CHANGE EXCHANGE RATE ADJUSTMENT
If CellNet or Funding makes an announcement of the occurrence or an imminent
occurrence of a Fundamental Change (as defined below) at any time prior to the
Mandatory Redemption Date, there will be an adjustment to the exchange rate of
the Preferred Securities (the "Fundamental Change Exchange Rate") such that such
exchange rate will thereafter equal the liquidation preference of the Preferred
Securities, divided by the Fundamental Change Average Market Price (as defined
below), unless the Fundamental Change Exchange Rate is lower than the then
current exchange rate of the Preferred Securities as calculated in the manner
described in "--Exchange Rights" (in which case there will be no such adjustment
to the exchange rate).
The term "Fundamental Change" means the occurrence of any transaction or
event in connection with which all or substantially all of the outstanding
Common Stock shall be exchanged for, converted into, acquired for or constitute
the right to receive stock, securities, other property or assets (including
cash) of another entity or person (whether by means of an exchange offer,
liquidation, tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise). "Fundamental Change Average Market Price" of the
Common Stock means the arithmetic average of the Current Market Value for the
ten trading days ending on the fifth business day prior to the date of the
closing of the Fundamental Change.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary liquidation, dissolution,
winding-up or termination of Funding (each a "Liquidation"), the then holders of
the Preferred Securities will be entitled to receive out of the assets of
Funding (which will include the CellNet Preferred Stock, any interest on and
principal of the Treasury Strips that are held in the Escrow Account, any Common
Stock that Funding received from CellNet as a dividend (or otherwise) and has
not distributed as a dividend on the Preferred Securities or sold in the open
market, and any other assets of Funding), after satisfaction of liabilities to
creditors, if any, distributions in an amount equal to the aggregate of the
stated liquidation preference of $25 of Preferred Security plus accrued and
unpaid dividends thereon to the date of payment (the "Liquidation
Distribution").
If, upon any such Liquidation, the Liquidation Distribution can be paid only
in part because Funding has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable by Funding on the
Preferred Securities shall be paid on a pro rata basis. CellNet will be
obligated to pay dividends, consisting of CellNet Preferred Stock, to Funding so
that it will be able to make the Liquidation Distribution in full.
VOTING RIGHTS
The holders of Preferred Securities have no voting rights, except as
otherwise required by law and except as set forth below. The Operating Agreement
provides that Funding may not amend the Operating Agreement so as to affect
adversely the specific rights, preferences, privileges or voting rights of
holders of Preferred Securities, cause the dissolution, winding-up or
termination of Funding, issue any additional securities or increase the
authorized number of Preferred Securities, without the affirmative vote or
consent of the holders of at least a majority of the outstanding Preferred
Securities, voting or consenting, as the case may be, separately as one class.
Furthermore, the Certificate of Designation provides that CellNet may not,
without the approval of the holders of a majority of the CellNet Preferred
Stock, amend the Certificate of Incorporation of CellNet so as to have a
material adverse effect on the specific rights, preferences, privileges or
voting rights of the holders of the CellNet Preferred Stock with respect to the
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CellNet Preferred Stock, or cause the dissolution, winding-up or termination of
Funding. Funding will initially be the sole holder of the CellNet Preferred
Stock. Funding has agreed not to grant such approval without the consent of the
holders of a majority of the Preferred Securities then outstanding.
THE GUARANTEE; LACK OF PRACTICAL BENEFIT TO HOLDERS FROM THE GUARANTEE
Set forth below is a summary of information concerning the guarantee of the
Preferred Securities (the "Guarantee") by CellNet for the benefit of the holders
of Preferred Securities. The summary does not purport to be complete and is
subject in all respects to the respective provisions of, and is qualified in its
entirety by reference to, the Guarantee Agreement between CellNet and Funding, a
copy of which is available from CellNet upon request.
GENERAL. Pursuant to and to the extent set forth in the Guarantee, CellNet
has agreed to pay in full to the holders of the Preferred Securities (except to
the extent paid by Funding), as and when due, regardless of any defense, right
of set off or counterclaim which Funding may have or assert, the following
payments (the "Guarantee Payments"), without duplication: (i) any accrued and
unpaid distributions that are required to be paid on the Preferred Securities,
to the extent Funding has funds sufficient and legally available therefor, (ii)
the redemption price, with respect to any Preferred Securities called for
redemption by Funding, to the extent Funding has funds sufficient and legally
available therefor and (iii) upon a voluntary or involuntary dissolution,
winding-up or termination of Funding, the lesser of (a) the aggregate of the
liquidation preference and all accrued and unpaid dividends on the Preferred
Securities to the date of payment to the extent Funding has funds sufficient and
legally available therefor and (b) the amount of assets of Funding remaining
available for distribution to holders of Preferred Securities upon the
liquidation of Funding. The Guarantee may also be subject to contractual
restrictions under agreements governing future indebtedness of CellNet.
Because the obligations supported by the Guarantee are limited by the amount
of the funds in Funding, if CellNet were to default on its obligation to pay
amounts payable on the CellNet Preferred Stock, Funding would lack available
funds for the payment of dividends or amounts payable on redemption of the
Preferred Securities or otherwise, and, in such event, holders of the Preferred
Securities would not be able to rely upon the Guarantee for payment of such
amounts. In addition, upon the initiation of any proceedings by or against
Funding under bankruptcy, insolvency or similar laws, or upon the occurrence of
certain other events, funds held by Funding may not be legally available for
distribution to the holders of the Preferred Securities and the holders would
then not be able to rely on the Guarantee for payment of such amounts. Instead,
holders of the Preferred Securities would rely upon the enforcement of Funding's
rights as a registered holder of the CellNet Preferred Stock against CellNet
pursuant to the terms of the CellNet Preferred Stock. See "Risk Factors--No
Practical Benefit to Holders from the Guarantee."
Because the obligations supported by the Guarantee are limited to the amount
of the funds held by Funding that are legally available to make the payments
described above and because the Guarantee is subordinated to CellNet's existing
and future obligations not expressly subordinated to the Guarantee obligations,
the Guarantee is of no practical benefit to holders of the Preferred Securities.
AMENDMENTS AND ASSIGNMENT. Except with respect to any changes that do not
materially adversely affect the rights of holders of Preferred Securities (in
which case no vote will be required), the Guarantee may be amended only with the
prior approval of the holders of at least a majority in liquidation preference
of all the outstanding Preferred Securities. All guarantees and agreements
contained in the Guarantee shall bind the successors, assigns, receivers,
trustees and representatives of CellNet and shall inure to the benefit of the
holders of the Preferred Securities then outstanding. Except in connection with
any permitted merger or consolidation of CellNet with or into another entity or
any permitted sale, transfer or lease of CellNet's assets to another entity,
CellNet may not assign its rights or delegate its obligations under the
Guarantee without the prior approval of the holders of at least a majority in
liquidation preference of the Preferred Securities then outstanding.
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TERMINATION OF THE GUARANTEE. The Guarantee will terminate as to each
holder of the Preferred Securities upon (i) full payment of the redemption price
of all Preferred Securities held by such holder (ii) distribution to such holder
of the Preferred Securities of all of such holder's pro rata share of the assets
of Funding, including the CellNet Preferred Stock, any interest on and principal
of the Treasury Strips that are held in the Escrow Account and any Common Stock
that Funding received from CellNet as dividend (or otherwise) and has not
distributed as dividend on the Preferred Securities or sold in the open market
or (iii) the exchange of all of such holder's Preferred Securities into Common
Stock.
STATUS OF THE GUARANTEE; SUBORDINATION. The Guarantee constitutes an
unsecured obligation of CellNet and ranks subordinate and junior to all existing
and future other liabilities and obligations (including subordinated debt not
expressly subordinated to the Guarantee and general unsecured obligations such
as trade payables) of CellNet and senior to the Common Stock.
MERGER, CONSOLIDATION OR SALE OF ASSETS OF FUNDING
Funding may not consolidate with, merge with or into, or be replaced by, or
convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety to, any entity, except as described below. Funding
may, in order to avoid federal income tax or Investment Company Act of 1940 (the
"1940 Act") considerations adverse to CellNet or Funding or the holders of the
Preferred Securities, without the consent of the holders of the Preferred
Securities, consolidate with, merge with or into, or be replaced by a limited
partnership or trust organized as such under the laws of any state of the United
States of America, provided that (i) such successor entity either (x) expressly
assumes all of the obligations of Funding under the Preferred Securities or (y)
substitutes for the Preferred Securities other securities having substantially
the same terms as the Preferred Securities (the "Successor Securities") so long
as the Successor Securities rank, with respect to participation in the profits
or assets of the successor entity, at least as high as the Preferred Securities
rank with respect to payment of dividends and distribution of assets upon the
liquidation, dissolution or winding-up of Funding, (ii) CellNet expressly
acknowledges such successor entity as the holder of the CellNet Preferred Stock
and its obligations under the Guarantee with respect to the Successor
Securities, (iii) such merger, consolidation or replacement does not cause the
Preferred Securities (or any Successor Securities) to be delisted by any
national securities exchange or other organization on which the Preferred
Securities are then listed, (iv) such merger, consolidation or replacement does
not cause the Preferred Securities (or any Successor Securities) to be
downgraded by any nationally recognized statistical rating organization, (v)
such merger, consolidation or replacement does not adversely affect the powers,
preferences and other special rights of the holders of the Preferred Securities
(or any Successor Securities) in any material respect (other than with respect
to any dilution of the holders' interest in the new entity), and (vi) prior to
such merger, consolidation or replacement, CellNet has received an opinion of
nationally recognized independent counsel to Funding experienced in such matters
to the effect that (x) such successor entity will be treated as a partnership or
as a trust, as appropriate, for federal income tax purposes, (y) following such
merger, consolidation or replacement, CellNet and such successor entity will be
in compliance with the 1940 Act without registering thereunder as an investment
company and (z) such merger, consolidation or replacement will not adversely
affect the limited liability of the holders of the Preferred Securities or
Successor Securities.
MISCELLANEOUS
The manager of Funding is authorized and directed to conduct its affairs and
to operate in such a way that Funding will not be deemed to be an "investment
company" required to be registered under the 1940 Act or taxed as a corporation
for federal income tax purposes. In this connection, the manager of Funding is
authorized to take any action not inconsistent with applicable law or the
Operating Agreement that does not adversely affect the interests of the holders
of the Preferred Securities and that the manager of Funding determines in its
discretion to be necessary or desirable for such purposes.
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DESCRIPTION OF CELLNET PREFERRED STOCK
Set forth below is a description of the specific terms of the CellNet
Preferred Stock in which Funding will invest part of the proceeds from the
Offering. See "Use of Proceeds." The following summary of certain material terms
and provisions does not purport to be complete and is subject to, and qualified
in its entirety by reference to the Certificate of Designation. The CellNet
Preferred Stock will be issued pursuant to the Certificate of Designation.
GENERAL. CellNet is authorized to issue 15,000,000 shares of preferred
stock, $.001 par value per share. On the date of this Prospectus, no shares of
preferred stock are outstanding. The board of directors of CellNet has
authorized the issuance of up to 8,625 shares of a series of exchangeable
preferred stock (the "CellNet Preferred Stock"). The CellNet Preferred Stock
will be fully paid and nonassessable, and the holders thereof will not have any
subscription or preemptive rights related thereto. The CellNet Preferred Stock
will be issued in denominations of $10,000 liquidation preference and any
integral multiple thereof.
RANKING. The CellNet Preferred Stock will rank, with respect to dividend
distributions and distributions upon the liquidation, winding-up and dissolution
of CellNet, (i) senior to all classes of Common Stock of CellNet and to each
other class of capital stock or series of preferred stock established after the
date of this Prospectus by CellNet's board of directors, the terms of which do
not expressly provide that it ranks senior to or on a parity with the CellNet
Preferred Stock as to dividend distributions and distributions upon the
liquidation, winding-up and dissolution of CellNet (collectively referred to
with the common stock of CellNet as "CellNet Junior Securities"); (ii) on a
parity with any class of capital stock or series of preferred stock issued by
CellNet established after the date of this Prospectus by CellNet's board of
directors, the terms of which expressly provide that such class or series will
rank on a parity with the CellNet Preferred Stock as to dividend distributions
and distributions upon the liquidation, winding-up and dissolution of CellNet
(collectively referred to as "CellNet Parity Securities") and (iii) junior to
each class of capital stock or series of preferred stock issued by CellNet
established after the date of this Prospectus by CellNet's board of directors,
the terms of which expressly provide that such class or series will rank senior
to the CellNet Preferred Stock as to dividend distributions and distributions
upon liquidation, winding-up and dissolution of CellNet (collectively referred
to as "CellNet Senior Securities"). The CellNet Preferred Stock will be subject
to the issuance of series of CellNet Junior Securities, CellNet Parity
Securities and CellNet Senior Securities, and the issuance of any new class of
CellNet Junior Securities and/or CellNet Parity Securities pursuant to any
stockholder rights plan adopted by the Company shall not require the approval of
the holders of the CellNet Preferred Stock. CellNet, however, may not issue any
new class of CellNet Senior Securities without the approval of the holders of at
least a majority of the shares of the CellNet Preferred Stock then outstanding,
voting or consenting, as the case may be, separately as one class.
DIVIDENDS. Dividends on the CellNet Preferred Stock will be payable
quarterly until August 1, 2001, in additional shares of CellNet Preferred Stock.
After August 1, 2001, through May 1, 2010, the dividends will be payable in
shares of Common Stock (or, at CellNet's option in cash, or any combination of
cash and Common Stock) such that the number of shares of Common Stock (plus any
cash) paid as dividends will (i) enable Funding to transfer such shares to the
holders of the Preferred Securities in payment of dividends on the Preferred
Securities or (ii) be sufficient, when sold in the open market by Funding for
Funding to make its dividend payments on the Preferred Securities on the
relevant Dividend Payment Date. However, the Indenture restricts the payment of
cash dividends by CellNet, and future agreements may provide for restrictions on
the payment of cash dividends.
VOTING RIGHTS. The holders of shares of CellNet Preferred Stock will have
no voting rights, except as otherwise required by law and except as set forth
below. The Certificate of Designation governing the CellNet Preferred Stock
provides that CellNet may not, without the approval of the holders of a majority
of the CellNet Preferred Stock, amend such Certificate of Designation or the
Certificate of Incorporation of CellNet so as to have a material adverse effect
on the specific rights, preferences, privileges or voting
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rights of holders of shares of the CellNet Preferred Stock, or cause the
dissolution, winding-up or termination of Funding. The Certificate of
Designation also provides that CellNet may not amend the provision which
obligates CellNet, in the event it elects not to redeem the CellNet Preferred
Stock on the Final Dividend Date (as defined), to make an investment in Funding
sufficient to enable Funding to redeem all of the Preferred Securities on the
Mandatory Redemption Date at 100% of the aggregate liquidation preference of the
Preferred Securities, plus any accrued and unpaid dividends thereon, without the
consent of each holder of Preferred Securities affected thereby. Funding is
expected to be the sole holder of the CellNet Preferred Stock. Funding will not
grant such approval without the consent of the holders of a majority of the
shares of the Preferred Securities then outstanding.
EXCHANGE OF THE CELLNET PREFERRED STOCK. The CellNet Preferred Stock will
be exchangeable into Common Stock at the option of Funding (upon request by a
holder of the Preferred Securities) to exchange Preferred Securities for Common
Stock at any time prior to the business day immediately preceding the date of
repayment of such CellNet Preferred Stock based on the exchange rate of the
Preferred Securities as described under "Description of the Preferred
Securities--Exchange Rights."
LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding-up of CellNet, holders of CellNet Preferred Stock will be
entitled to be paid, out of the assets of CellNet available for distribution,
$10,000 per share of CellNet Preferred Stock, plus an amount in cash equal to
accumulated and unpaid dividends thereon to the date fixed for liquidation,
dissolution or winding-up (including an amount equal to a prorated dividend for
the period from the last dividend payment date to the date fixed for
liquidation, dissolution or winding-up), before any distribution is made on any
CellNet Junior Securities, including, without limitation, Common Stock. If, upon
any voluntary or involuntary liquidation, dissolution or winding-up of CellNet,
the amounts payable with respect to the CellNet Preferred Stock and all other
CellNet Parity Securities are not paid in full, the holders of the CellNet
Preferred Stock and the CellNet Parity Securities will share equally and ratably
in any distribution of assets of CellNet with respect to the CellNet Preferred
Stock and CellNet Parity Securities, in proportion to the full liquidation
preference and accumulated and unpaid dividends to which each is entitled. After
payment of the full amount of the liquidation preferences and accumulated and
unpaid dividends to which they are entitled, the holders of shares of CellNet
Preferred Stock will not be entitled to any further participation in any
distribution of assets of CellNet.
OPTIONAL REDEMPTION ON FINAL DIVIDEND DATE. CellNet may, at its option,
redeem the CellNet Preferred Stock on the date which is two business days prior
to May 1, 2010 (the "Final Dividend Date") at 100% of its liquidation
preference, plus any accrued and unpaid dividends thereon. If CellNet elects not
to so redeem the CellNet Preferred Stock, then CellNet will be required to make
an investment in Funding sufficient to enable Funding to redeem the Preferred
Securities at 100% of the aggregate liquidation preference of the Preferred
Securities, plus any accrued and unpaid dividends thereon, two business days
prior to May 1, 2010. The Certificate of Designation will provide that CellNet's
obligation to make this investment in the event it elects not to redeem the
CellNet Preferred Stock on the Final Dividend Date shall inure to the benefit of
the holders of Preferred Securities and that such holders will be able to
enforce such obligation directly as third-party beneficiaries. CellNet may at
its option make such redemption or investment in cash or Common Stock, or any
combination of cash and Common Stock. Any Common Stock shall be valued at 100%
of the Average Market Value of such Common Stock for the purposes of such
redemption or payment.
BOOK-ENTRY AND SETTLEMENT
If distributed to holders of the Preferred Securities in connection with a
dissolution, winding-up or liquidation of Funding, the CellNet Preferred Stock
will be issued in a form corresponding to the form of the Preferred Securities.
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DESCRIPTION OF CELLNET CAPITAL STOCK
THE AUTHORIZED CAPITAL STOCK OF THE COMPANY CONSISTS OF 100,000,000 SHARES
OF COMMON STOCK AND 15,000,000 SHARES OF PREFERRED STOCK. THE FOLLOWING SUMMARY
OF CERTAIN PROVISIONS OF THE TERMS OF THE COMPANY'S COMMON AND PREFERRED STOCK
DOES NOT PURPORT TO BE COMPLETE AND ITS SUBJECT TO, AND QUALIFIED BY, THE
PROVISIONS OF THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION.
COMMON STOCK
As of March 31, 1998, there were 41,917,026 shares of Common Stock
outstanding which were held of record by 951 stockholders.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders, except that, in the election of
directors, the holders are entitled to cumulative voting. Under the terms of the
Shareholders' Agreement, so long as certain parties to the Shareholders'
Agreement continue to hold not less than 700,000 shares of Common Stock (as such
number is adjusted for stock splits, consolidations or other similar events),
the Company is obligated to nominate for election certain stockholders as
directors at each meeting of the Company's stockholders at which a vote for
directors will be taken, so long as each stockholder holds a minimum number of
shares of Common Stock. The intent of the Shareholders' Agreement is to give
certain stockholders greater influence over the management of the Company than
they would otherwise have and to provide certain stockholders with, among other
things, certain registration, first refusal, co-sale and other rights. See
"Management."
Subject to preferences that may be applicable to any outstanding series of
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available for that purpose. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior distribution rights of
Preferred Stock, if any, then outstanding. The Common Stock has no pre-emptive
or conversion or other subscription rights. See "--Rights of First Refusal" and
"--Other Rights." There are no redemption or sinking fund provisions applicable
to the Common Stock. All outstanding shares of Common Stock are fully paid and
non-assessable.
PREFERRED STOCK
The Company is authorized to issue 15,000,000 shares of undesignated
Preferred Stock, none of which is outstanding. The Board of Directors has the
authority, without further action by the stockholders, to issue the undesignated
Preferred Stock in one or more series, to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
shares of undesignated Preferred Stock and to fix the number of shares
constituting any series and the designation of such series. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders, may
discourage bids for the Company's Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price of and the
voting and other rights of the holders of Common Stock. With the exception of
the CellNet Preferred Stock to be issued to Funding, the Company currently has
no plans to issue any additional Preferred Stock. See "Description of CellNet
Preferred Stock."
WARRANTS
As of March 31, 1998, the Company had outstanding warrants to purchase an
aggregate of 8,992,517 shares of Common Stock. Such outstanding warrants consist
of (i) warrants to purchase 50,000 shares of Common Stock at an exercise price
of $2.00 per share, which warrants will expire on February 24, 1999 and (ii)
warrants to purchase 8,942,517 shares of Common Stock at an exercise price of
$14.30 per share, which
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were granted in connection with the issuance and sale of the 1997 Notes (the
"1997 Warrants"). The 1997 Warrants are exercisable commencing on September 29,
1998 and expire on October 1, 2007.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of 9,802,732 shares of Common Stock and their transferees are
entitled to certain rights with respect to the registration of such shares under
the Securities Act pursuant to the Shareholders' Agreement. Under the
Shareholders' Agreement, if the Company proposes to register any of its
securities under the Securities Act, the holders are entitled to notice of such
proposed registration and the opportunity to include their shares therein,
subject to certain conditions and limitations including the right of the
underwriters of an offering to limit the number of shares included in such
registration to 25% of the total number of shares to be registered in certain
circumstances. The holders may also require that the Company file up to two
registration statements under the Securities Act with respect to underwritten
public offerings of their shares at any time. Furthermore, the holders may
require the Company to register their shares on Form S-3 if such form is
available to the Company. In addition, holders who purchased Series CC Preferred
Stock are entitled to initiate two separate demand registrations with respect to
an underwritten public offering of the shares of Common Stock issued upon
conversion of the Series CC Preferred Stock, subject to certain other conditions
and limitations. Other holders may participate in such registration, provided
that in the event of an underwriters' cutback, the number of shares that may be
included in such registration would be subject to certain allocations. The
Company will pay certain expenses in connection with the exercise of the
foregoing rights. All registration rights will terminate as to any holder upon
the later to occur of (i) one year after the Company's initial public offering
or (ii) such time as such holder may sell all or part of his or her shares under
Rule 144 of the Securities Act in any three month period. Prior to the
consummation of this Offering the Company will obtain waivers from holders of
the foregoing registration rights as to the exercise of such rights in
conjunction with this Offering.
Under the terms of a Warrant Registration Rights Agreement dated September
29, 1997 (the "1997 Warrant Registration Rights Agreement"), the Company is
required to use its best efforts to cause to be declared effective under the
Securities Act, by no later than September 29, 1998, a shelf registration
statement relating to the 1997 Warrants. The Company is required to use
reasonable efforts to maintain the effectiveness of such shelf registration
statement until such time as all 1997 Warrants have been exercised and the 1997
Warrants have been resold. The Company is obligated to pay all expenses
associated with such registration.
The Company has also agreed to register up to one-half of the 1,579,404
shares of Common Stock purchased by NSP, UE and BEn in private placements upon
request at any time.
RIGHTS OF FIRST REFUSAL
Under the Shareholders' Agreement, certain holders who purchased Series CC
Preferred Stock have a right of first refusal to purchase, at the same price and
on the same general terms, a pro rata portion of equity securities that the
Company proposes to issue in certain transactions, including equity securities
proposed to be issued to any public or private utility or an affiliate of such
utility, and have a right of first refusal to purchase a pro rata portion of any
equity securities that any Subsidiary of the Company proposes to issue to any
public or private utility or an affiliate of such utility if the Subsidiary's
business is unrelated to the market area of such utility or if such securities
are convertible into equity securities of the Company. Such pro rata portion is
based on the ratio of the number of shares of Common Stock held by such holder
to the total number of shares of Common Stock then outstanding, including shares
of Common Stock issuable upon the exercise of "in the money" options and
warrants, at the time of issuance of such equity securities. This right of first
refusal terminates three years after the closing date of the Company's initial
public offering.
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OTHER RIGHTS
Under the Shareholders' Agreement, holders who purchased Series CC Preferred
Stock have the right to co-invest on similar terms and conditions in any foreign
investments, partnerships, or joint ventures involving the Company which include
financing from purely financial (as compared to strategic) investors. The
co-investment rights terminate three years after the closing date of the
Company's initial public offering.
Under the Shareholders' Agreement, in the event that any holder of shares of
the Company's equity securities who is a party to such agreement intends to
transfer (other than to an affiliate) any such shares to a buyer who owns or
will acquire as a result of the sale voting stock equal to 20% or more of the
Company's outstanding equity securities, the parties to the Shareholders'
Agreement will have the right to sell a pro rata portion of their shares to the
buyer in such transaction. In the event that any holder of shares of the
Company's equity securities who is a party to the Shareholders' Agreement
intends to acquire (other than from an affiliate) additional voting stock, and
such holder owns or will acquire as a result of such purchase 20% or more of the
Company's voting stock, the parties to the Shareholders' Agreement also have the
right to sell to such purchasing holder a pro rata portion of the voting stock
proposed to be acquired in such transaction. This co-sale right terminates three
years after the closing date of the Company's initial public offering.
In addition, NSP has a right to participate in future public offerings of
newly issued shares of Common Stock by the Company. NSP will be entitled to
purchase a pro rata portion of the shares that the Company proposes to offer to
the public based on the ratio of the number of shares originally purchased by
NSP in the private placement and owned on the date of such public offering to
the total number of shares of Common Stock then outstanding before giving effect
to such public offering. However, NSP may not exercise such participation rights
to the extent that NSP's percentage ownership of the Common Stock after such new
offering would exceed the percentage ownership of NSP as of the closing date of
the Company's initial public offering (after giving effect to the release to NSP
of any shares previously subject to escrow). NSP's participation shall be on the
same terms and conditions as the public investors in such public offering. NSP's
participation right terminates two years after the effective date of the
Company's initial public offering. The Company intends to obtain a waiver from
NSP of its participation right with respect to this Offering.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless (with
certain exceptions) the "business combination" or the transaction in which the
person became an interested stockholder is approved in a prescribed manner.
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the stockholder.
Generally, an "interested stockholder" is a person who, together with affiliates
and associates, owns (or within three years prior, did own) 15% or more of a
corporation's voting stock. The existence of this provision would be expected to
have an anti-takeover effect with respect to transactions not approved in
advance by the Board of Directors, including discouraging attempts that might
result in a premium over the market price for the shares of Common Stock held by
stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The Bank of New
York.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes certain material anticipated United States
federal income tax considerations arising from the purchase, ownership and
disposition of the Preferred Securities. Except where noted, it deals only with
Preferred Securities held as capital assets by United States Holders who
purchased such securities upon original issuance and does not address a holder's
particular circumstances (such as liability for alternative minimum tax) or
special situations, such as those of dealers in securities or currencies,
financial institutions, life insurance companies, foreign corporations, persons
who are not citizens or residents of the United States or persons who hold
Preferred Securities as a part of a hedging or conversion transaction or a
straddle, constructive sale or other risk reduction transaction. In addition,
the following discussion does not address the tax consequences of the laws of
any state, locality or foreign jurisdiction. Furthermore, the discussion below
is based upon the provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), and regulations, rulings and judicial decisions thereunder as of
the date hereof, and such authorities may be repealed, revoked, modified, or
interpreted so as to result in federal income tax consequences different from
those discussed below. In addition, the discussion below includes (and is based
on) certain matters as to which CellNet has made determinations which it
believes are accurate. Nevertheless, some of the tax consequences are uncertain.
ALL PROSPECTIVE PURCHASERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED SECURITIES.
As used herein, a "United States Holder" means a beneficial owner of
Preferred Securities that is a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate the
income of which is subject to United States federal income taxation regardless
of its source, or a trust the administration of which is subject to the primary
supervision of a court within the United States and for which one or more United
States persons have the authority to control all substantial decisions. A
foreign individual may, subject to certain exceptions, be deemed to be a
resident (as opposed to a non-resident alien) of the United States by virtue of
being present in the United States on at least 31 days in the calendar year and
for an aggregate of at least 183 days during a three-year period ending in the
current calendar year (counting for such purposes all of the days present in the
current year, one-third of the days present in the immediately preceding year,
and one-sixth of the days present in the second preceding year).
A non-United States Holder may be subject to certain significant tax
consequences not applicable to United States Holders, including certain
withholding requirements, which are not discussed herein. Thus, all prospective
purchasers that would be non-United States Holders should consult their own tax
advisors regarding the tax consequences to them of the purchase, ownership and
disposition of the Preferred Securities.
PARTNERSHIP STATUS OF FUNDING
An entity that is classified and treated as a partnership for federal income
tax purposes is not a taxable entity and incurs no federal income tax liability.
Instead, each partner is required to take into account its allocable share of
items of income, gain, loss and deduction of the partnership in computing the
partner's federal income tax liability, regardless of whether cash distributions
are made. Distributions by a partnership to a partner are generally not taxable
unless the amount of any cash distributed is in excess of the partner's adjusted
tax basis in its partnership interest.
No ruling has been or will be sought from the IRS as to the status of
Funding as a partnership for federal income tax purposes. Instead Funding has
relied on the opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, that it will be classified and treated as a partnership for United
States federal income tax purposes. Such opinion is based upon the Code, the
regulations thereunder, published revenue rulings and court decisions and upon,
among other things, Funding's representations that (i) it will
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not earn income other than from the CellNet Preferred Stock and from the
Treasury Strips and (ii) it will not elect to be treated as a corporation. This
opinion is not binding on the IRS.
TAX CONSEQUENCES TO UNITED STATES HOLDERS
FLOW-THROUGH OF TAXABLE INCOME
No federal income tax will be paid by Funding. Instead, each Preferred
Securityholder will be required to report on its income tax return its allocable
share of the income, gains, losses and deductions of Funding without regard to
whether corresponding cash distributions are received by such Preferred
Securityholder. Consequently, a Preferred Securityholder may be allocated income
from Funding even if such Preferred Securityholder has not received a cash
distribution. Each Preferred Securityholder will be required to include in
income its allocable share of income, gains, losses and deduction of Funding for
the taxable year of Funding ending with or within the taxable year of the
Preferred Securityholder. The taxable income of Funding will generally be
dividend income from, and capital gains recognized with respect to, the CellNet
Preferred Stock and interest income on, and capital gain recognized with respect
to, the Treasury Strips.
The Preferred Securityholders will first be allocated income and gain of
Funding in an amount so that all cumulative allocations of taxable income and
gain equals all cumulative dividend distributions to the Preferred
Securityholders. Any remaining taxable income and gain generally will then be
allocated to CellNet (except for deemed dividends resulting from the optional
redemption or because of the adjustment in the exchange rate, which dividends
will generally be allocated to the Preferred Securityholders). These allocation
provisions are designed to reconcile tax allocations to economic allocations.
However, these allocations may not in all circumstances comply with the
technical requirements set forth in the Treasury regulations. Consequently, no
assurance can be given that the IRS will not challenge these allocations. If
these allocations are successfully challenged by the IRS, the amount of taxable
income or loss allocated to Preferred Securityholders for federal income tax
purposes may be increased and/or reduced or the character of such income may be
modified.
Funding does not presently intend to make an election under Section 754 of
the Code. As a result, a purchaser of Preferred Securities will not be permitted
to adjust its allocable share of taxable income and gain from Funding to reflect
any difference between its purchase price for the Preferred Securities and
Funding's underlying tax basis for its assets.
TREATMENT OF DISTRIBUTIONS BY FUNDING
Distributions by Funding to a Preferred Securityholder generally will not be
taxable to the Preferred Securityholder for federal income tax purposes to the
extent of such Preferred Securityholder's tax basis in its Preferred Securities
immediately before the distribution. Cash distributions in excess of a Preferred
Securityholder's tax basis in its Preferred Securities generally will be
considered to be gain from the sale or exchange of the Preferred Securities,
taxable in accordance with the rules described under "--Disposition of Preferred
Securities" below. To the extent Funding distributes Common Stock other than in
liquidation of such Preferred Securities, the Preferred Securityholder will
recognize no gain or loss and will have a tax basis in such stock equal to the
lesser of (i) tax basis of such stock in the hands of Funding or (ii) such
Preferred Securityholder's tax basis in its Preferred Securities reduced by the
amount of any cash distributed in the non-liquidating distribution. If the
Common Stock distribution is in liquidation of such Preferred Securities, the
Preferred Securityholder will recognize no gain or loss and will have a tax
basis in the Common Stock received equal to its tax basis in its Preferred
Securities reduced by the amount of any cash distributed in liquidation of its
Preferred Securities.
TAX BASIS OF PREFERRED SECURITIES
A Preferred Securityholder's initial tax basis for its Preferred Securities
will be the amount it paid for the Preferred Securities. That basis generally
will be increased by its share of Funding's income and
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generally will be decreased (but not below zero) by distributions from Funding
and by the Preferred Securityholder's share of Funding's losses, if any.
Non-liquidating distributions of Common Stock by Funding will reduce the
Preferred Securityholder's tax basis in the Preferred Securities (but not below
zero) by the amount of Funding's tax basis in such distributed stock. In
addition, pursuant to Section 1059 of the Code, a Preferred Securityholder's tax
basis in its Preferred Securities may be reduced by its share of any
"extraordinary" dividends received by Funding. See "--Dividends on the CellNet
Preferred Stock" below.
INTEREST ON TREASURY STRIPS
Funding will purchase interest portions of stripped United States Treasury
Obligations which are treated as bonds that were originally issued at a discount
("original issue discount"). Original issue discount represents interest for
federal income tax purposes and can generally be defined as the difference
between the price at which a bond was issued and its stated redemption price at
maturity. For purposes of the preceding sentence, stripped obligations, such as
the Treasury Strips, which consist of a right to receive interest, will be
treated by Funding as originally issued on their purchase date at an issue price
equal to their respective purchase prices thereof. Original issue discount on
stripped Treasury Obligations (which were issued or treated as issued on or
after July 2, 1982) is deemed earned based on a compounded, constant yield to
maturity over the life of such obligation, taking into account the compounding
of accrued interest at least annually, resulting in an increasing amount of
original issue discount includible in income each year. If the stripped Treasury
Obligation has a maturity of one year or less, the original issue discount may,
in certain circumstances, be treated as interest income upon maturity or
disposition rather than over the term of the obligation. Each Preferred
Securityholder is required to include in income its allocable share of original
issue discount which accrues each year.
DIVIDENDS ON THE CELLNET PREFERRED STOCK
Distributions of cash or of additional CellNet Preferred Stock or Common
Stock on the CellNet Preferred Stock will generally be treated as dividends to
Funding (and, in turn, to the Preferred Securityholders) to the extent of
CellNet's current and accumulated earnings and profits as determined under
United States federal income tax principles. The amount of CellNet's earnings
and profits at any time will depend upon the future actions and financial
performance of CellNet. The amount of a distribution of additional CellNet
Preferred Stock or Common Stock will equal the fair market value of the
additional CellNet Preferred Stock or Common Stock distribution on the date of
the distribution.
CellNet believes that it does not presently have any current or accumulated
earnings and profits. Consequently, unless CellNet generates earnings and
profits in the future, distributions with respect to the CellNet Preferred Stock
will exceed CellNet's current and accumulated earnings and profits. Such
distributions will be treated as a nontaxable return of capital and will be
applied against and reduce (by the then fair market value of the distributed
CellNet Preferred Stock or Common Stock) the tax basis of the CellNet Preferred
Stock in the hands of Funding with respect to which such distributions are made
(but not below zero), thus increasing the amount of any gain or reducing any
loss which would otherwise be realized by Funding upon a redemption or other
disposition of such CellNet Preferred Stock. The amount of any such distribution
which exceeds the tax basis of the CellNet Preferred Stock in the hands of
Funding will be treated as capital gain to Funding (and, in turn, to the
Preferred Securityholders) and should be either long-term or short-term capital
gain depending on Funding's holding period in the CellNet Preferred Stock. The
CellNet Preferred Stock or Common Stock received by Funding as a dividend will
have a tax basis to Funding equal to its fair market value on the date of
distribution.
Under Section 243 of the Code, corporate Preferred Securityholders generally
will be able to deduct 70% of the amount of their pro-rata share of any
distributions received by Funding that constitute dividends. There are, however,
many exceptions and restrictions relating to the availability of such
dividends-received deduction. Section 246A of the Code reduces the
dividends-received deduction allowed
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to a corporate stockholder that has incurred indebtedness "directly
attributable" to its investment in portfolio stock. Section 246(c) of the Code
requires that, in order to be eligible for the dividends-received deduction, a
corporate stockholder must generally hold the share of stock for a 46-day
minimum holding period during the 90-day period beginning on the date which is
45 days before the date on which such share becomes ex-dividend with respect to
such dividend, or, in certain circumstances, for a 91-day minimum holding period
during the 180-day period beginning on the date which is 90 days before the date
on which such shares become ex-dividend with respect to such dividend. A
taxpayer's holding period for these purposes is suspended during any period in
which a stockholder has certain options or contractual obligations with respect
to substantially identical stock or holds one or more other positions with
respect to substantially identical stock that diminishes the risk of loss from
holding the stock. The IRS may take the position that these restrictions
relating to the availability of the dividends-received deduction apply to a
Preferred Securityholder who indirectly owns the CellNet Preferred Stock held by
Funding by applying these restrictions based on the Preferred Securityholder's
holding period in the Preferred Securities (rather than upon Funding's holding
period in the CellNet Preferred Stock).
Under Section 1059 of the Code, a corporate stockholder is required to
reduce its tax basis (but not below zero) in stock by the nontaxed portion
(including by reason of the dividends received deduction) of any "extraordinary
dividend" if such stock has not been held for more than two years before the
earliest of the date such dividend is declared, announced or agreed to. A
distribution on the CellNet Preferred Stock generally would be an extraordinary
dividend if it (i) equals or exceeds 5% of the corporate stockholder's adjusted
tax basis in the CellNet Preferred Stock, treating all dividends having
ex-dividend dates within an 85-day period as one dividend or (ii) exceeds 20% of
the corporate stockholder's adjusted tax basis in such stock, treating all
dividends having ex-dividend dates within a 365-day period as one dividend. In
determining whether a dividend paid on preferred stock is an extraordinary
dividend, a corporate stockholder may elect to substitute the fair market value
of the preferred stock for such stockholder's tax basis for purposes of applying
these tests, provided that such fair market value is established to the
satisfaction of the Secretary of Treasury as of the day before the ex-dividend
date. An extraordinary dividend also currently includes any amount treated as a
dividend in the case of a redemption that is either non-pro-rata as to all
stockholders or in partial liquidation of CellNet, regardless of the
stockholder's holding period and regardless of the size of the dividend. Section
1059, if applicable, is applied to Funding by treating each Preferred
Securityholder as the owner of its share of the CellNet Preferred Stock held by
Funding and thereby having Funding adjust its tax basis in the CellNet Preferred
Stock and having each Preferred Securityholder make a corresponding adjustment
to its tax basis in the Preferred Securities. If any part of the nontaxed
portion of an extraordinary dividend is not applied to reduce the corporate
Preferred Securityholder's tax basis as a result of the limitation on reducing
such basis below zero, such part will be treated as gain for the taxable year in
which the extraordinary dividend is received.
Special rules exist with respect to extraordinary dividends for "qualified
preferred dividends." A qualified preferred dividend is any fixed dividend
payable with respect to any share of stock which (i) provides for fixed
preferred dividends payable not less frequently than annually and (ii) is not in
arrears as to dividends at the time the holder acquires such stock. A qualified
preferred dividend does not include any dividend payable with respect to any
share of stock if the actual rate of return on such stock exceeds 15%. Section
1059 does not apply to qualified preferred dividends if the corporate
stockholder holds such stock for more than five years. If the stockholder
disposes of such stock before it has been held for more than five years, the
amount subject to extraordinary dividend treatment with respect to qualified
preferred dividends is limited to the qualified preferred dividends paid with
respect to such stock during the period the taxpayer held such stock, over the
qualified preferred dividends which would have been paid during such period on
the basis of the stated rate of return. Actual or stated rates of return are the
actual or stated dividends expressed as a percentage of the lesser of (1) the
stockholder's tax basis in such stock or (2) the liquidation preference of such
stock. CORPORATE PREFERRED SECURITYHOLDERS ARE
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URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE POSSIBLE APPLICATION OF
SECTION 1059 TO THEIR OWNERSHIP AND DISPOSITION OF THE PREFERRED SECURITIES.
A corporate Preferred Securityholder's liability for alternative minimum tax
may be affected by the portion of the dividends received which such corporate
Preferred Securityholder deducts in computing taxable income. This results from
the fact that corporate stockholders are required to increase alternative
minimum taxable income by 75% of the excess of current earnings and profits
(with certain adjustments) over alternative minimum taxable income (determined
without regard to earnings and profits adjustments or the alternative tax net
operating loss deduction).
REDEMPTION PREMIUM
Under Section 305(c) of the Code and the applicable Treasury regulations
thereunder, if the redemption price of CellNet Preferred Stock exceeds its issue
price, the difference ("redemption premium") may be taxable as a constructive
distribution of additional CellNet Preferred Stock to Funding (treated as a
dividend to the extent of CellNet's current and accumulated earnings and profits
and otherwise subject to the treatment described above for distributions) over a
certain period. Because the CellNet Preferred Stock provides for an optional
right of redemption by CellNet at a price in excess of the issue price, Funding
could be required to recognize such redemption premium under a constant interest
rate method if, based on all of the facts and circumstances, the optional
redemption is more likely than not to occur. If stock may be redeemed at more
than one time, the time and price at which such redemption is most likely to
occur must be determined based on all of the facts and circumstances. However,
the Treasury regulations provide that such redemption premium is not taxable as
a constructive distribution if it is solely in the nature of a penalty for
premature redemption. A redemption premium is solely in the nature of a penalty
for premature redemption if it is paid as a result of changes in economic or
market conditions over which neither the issuer nor the holder has control.
Regardless of whether the optional redemption is more likely than not to occur
or whether the redemption premium is solely in the nature of a penalty for
premature redemption, constructive dividend treatment will not result if the
redemption premium does not exceed a de minimis amount. Treatment of the CellNet
Preferred Stock under Section 305 is unclear. Nevertheless, CellNet intends to
take the position that the existence of CellNet's optional redemption right will
not result in a constructive distribution to Funding. If the IRS were to assert
successfully that a constructive distribution occurred, any resulting income
would be allocated to the Preferred Securityholders without the receipt of any
cash related thereto.
ADJUSTMENT OF EXCHANGE RATE
Treasury regulations promulgated under Section 305 of the Code would treat
Funding as having received a constructive distribution from CellNet in the event
the exchange ratio for the CellNet Preferred Stock is adjusted if (i) as a
result of such adjustment, the proportionate interest (measured by the quantum
of Common Stock into which the CellNet Preferred Stock is exchangeable) of
Funding in the assets or earnings and profits of CellNet is increased, and (ii)
the adjustment is not made pursuant to a bona fide and reasonable antidilution
formula. An adjustment in the exchange rate would not be considered made
pursuant to such a formula if the adjustment is made to compensate for certain
taxable distributions with respect to the Common Stock. Thus, under certain
circumstances, an adjustment in the exchange rate of the CellNet Preferred Stock
may result in a deemed distribution (which would constitute dividend income to
Funding to the extent of the current or accumulated earnings and profits of
CellNet). Funding (and, in turn, the Preferred Securityholders) may be required
to include such deemed dividend income in gross income but would not receive any
cash related thereto.
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REDEMPTION OF CELLNET PREFERRED STOCK
A redemption of the CellNet Preferred Stock, in whole or in part, for cash
will be a taxable transaction on which Funding (and, in turn, the Preferred
Securityholders) will generally recognize capital gain or loss equal to the
difference between the cash received and its adjusted tax basis in the redeemed
stock (except to the extent of amounts received on the exchange that are
attributable to declared dividends, which will be treated in the same manner as
distributions described above or to the extent the redemption were considered
essentially equivalent to a dividend under Section 302(b)(1) of the Code). Such
gain or loss will be long-term if Funding's holding period in the CellNet
Preferred Stock exceeds one year. To the extent that CellNet redeems the CellNet
Preferred Stock, in whole or in part, utilizing Common Stock plus cash, Funding
(and, in turn, the Preferred Securityholders) should recognize gain equal to the
lesser of (i) the gain that would have been recognized if only cash had been
utilized in the redemption (as described above) and (ii) the amount of cash
actually utilized in such redemption. If only Common Stock is utilized by
CellNet in the redemption, no gain or loss should be recognized by Funding.
Funding should have a tax basis in the Common Stock received equal to its tax
basis in the CellNet Preferred Stock redeemed increased by any gain recognized
as a result of any cash given in the redemption and decreased by the amount of
cash received. The holding period in the CellNet Preferred Stock should be
tacked to the Common Stock received. The tax effect of the resulting redemption
of the Preferred Securities is discussed below under "--Disposition of Preferred
Securities."
To the extent that the Preferred Securities convert into Common Stock
pursuant to the Automatic Exchange, or a holder of Preferred Securities
exercises its exchange right, CellNet will redeem CellNet Preferred Stock from
Funding in certain circumstances, exchange Common Stock for a portion of the
Treasury Strips held by Funding. The tax consequences associated with the
redemption of CellNet Preferred Stock for Common Stock are described above. The
tax consequences associated with a liquidating distribution by Funding of Common
Stock to a Preferred Securityholder are described above. See "--Treatment of
Distributions by Funding." The exchange by Funding of Treasury Strips for Common
Stock should constitute a taxable purchase of such shares by Funding. Funding
and, in turn, the Preferred Securityholders should recognize gain on such
purchase to the extent that the fair market value of the Treasury Strips exceeds
the tax basis allocable to that portion of the Treasury Strips being exchanged
and should recognize loss to the extent the tax basis allocable to that portion
of the Treasury Strips exceeds the fair market value of the Treasury Strips
being exchanged. In addition, the Common Stock acquired through the exchange of
Treasury Strips should have a tax basis equal to its fair market value on the
date of such exchange.
DISPOSITION OF PREFERRED SECURITIES
Gain or loss generally will be recognized on a sale of Preferred Securities,
including a redemption for cash (but not including an exchange with Funding of
Preferred Securities for Common Stock), equal to the difference between the
amount realized and the Preferred Securityholder's adjusted tax basis for the
Preferred Securities sold. The Preferred Securityholder's adjusted tax basis in
its Preferred Securities will be adjusted prior to the sale to reflect such
holder's pro-rata share of Funding's income, gains, losses or deductions that
flowed through prior to such disposition (including gain or loss resulting from
a redemption of the CellNet Preferred Stock). Gain or loss recognized by a
Preferred Securityholder on the sale or exchange of Preferred Securities held
for more than one year will generally be taxable as long-term capital gain or
loss. Generally, the maximum effective United States federal corporate income
tax rate for all types of income, including dividends (after the application of
the dividends-received deduction), interest income and capital gains, is 35%.
The maximum effective United States federal individual income tax rate
applicable (i) to interest and dividend income is 39.6% and (ii) to gains
resulting from the sale of capital assets held for longer than one year but less
than 18 months is 28%. The maximum effective United States federal individual
income tax rate on long-term capital gains will decrease to 20% if the Preferred
Securities are held for more than 18 months.
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Although not free from doubt, a Preferred Securityholder should not
recognize gain or loss upon the exchange with Funding of Preferred Securities
for Common Stock (whether pursuant to an exchange initiated by the holder or
following redemption by CellNet of the CellNet Preferred Stock) except to the
extent the holder receives cash or to the extent of a gain or loss realized by
Funding on its resulting exchange of its Treasury Strips for Common Stock. A
Preferred Securityholder should only recognize gain upon the receipt of cash to
the extent such cash received exceeds the Preferred Securityholder's tax basis
in its Preferred Securities. See "--Treatment of Distributions by Funding." A
Preferred Securityholder's tax basis in the Common Stock received upon exchange
would be equal to such holder's tax basis in the Preferred Securities delivered
for exchange reduced by any cash which is received upon such exchange. Inasmuch
as a Preferred Securityholder who exchanges its Preferred Securities prior to a
redemption remains entitled to receive a Dividend Make-Whole Payment (to the
extent of a subsequent Automatic Exchange by Funding on or before May 1, 2001),
it is unclear how such holder should allocate its tax basis in the Preferred
Security exchanged to the Common Stock received. Funding intends to take the
position that the contingent right to receive Dividend Make-Whole Payments does
not affect the calculation of its tax basis in the Common Stock (as described
above). Consequently, based on this position, to the extent such exchanging
holder subsequently receives a Dividend Make-Whole Payment, such payment should
result in capital gain of an equal amount. A Preferred Securityholder's holding
period in the Common Stock received upon exchange should include the Preferred
Securityholder's holding period in the Preferred Securities delivered.
Preferred Securityholders should be aware that the IRS might challenge the
tax-free nature of an exchange of Preferred Securities for Common Stock. For
example, the IRS might argue that, for tax purposes, Funding's exchange of
CellNet Preferred Stock into Common Stock (and Funding's subsequent distribution
of such stock to a holder) should be treated as an exchange by the Preferred
Securityholder of its Preferred Securities against CellNet directly for Common
Stock. If this argument or another similar argument were asserted and sustained,
the conversion of the Preferred Securities by a Preferred Securityholder for
Common Stock would be a taxable transaction in which a Preferred Securityholder
would recognize capital gain or loss.
PREFERRED SECURITYHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES TO THEM OF AN EXCHANGE OF A PREFERRED SECURITY
FOR COMMON STOCK.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, Funding's taxable income and losses will be determined annually,
and Funding currently intends to prorate such income on a monthly basis and
apportion it among the holders of the Preferred Securities in proportion to the
number of Preferred Securities owned by each of them as of the first business
day of such month. As a result, a holder of Preferred Securities may be
allocated income, gain, loss and deduction accrued after the date of transfer.
The use of this method is not expressly sanctioned under existing Treasury
regulations. If the IRS successfully asserts that this method is not allowed
under the Treasury regulations (or only applies to transfers of less than all of
the holder's interest), taxable income or losses of Funding might be reallocated
among the holders of the Preferred Securities (including transferors and
transferees). As a result of an adverse IRS determination, or otherwise, Funding
may, in its sole discretion, adopt an allocation method different from that
described above.
A holder who owns Preferred Securities during a quarter and who disposes of
such Preferred Securities prior to the record date set for a distribution with
respect to such quarter may be allocated items of income, gain, loss and
deductions attributable to such quarter even though such holder will not be
entitled to receive that distribution.
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INFORMATION TO SECURITYHOLDERS AND AUDIT REQUIREMENTS
Funding will furnish each Preferred Securityholder with an information
statement each year setting forth such Preferred Securityholder's allocable
share of income for the prior calendar year. Funding is required to furnish this
statement as soon as practicable following the end of the year, but in any event
prior to March 31.
Any person who holds Preferred Securities as a nominee for another person is
required to furnish to Funding (a) the name, address and taxpayer identification
number of the beneficial owner and the nominee; (b) information as to whether
the beneficial owner is (i) a person that is not a United States person, (ii) a
foreign government, an international organization or any wholly-owned agency or
instrumentality of either of the foregoing or (iii) a tax-exempt entity; (c) the
amount and description of Preferred Securities held, acquired or transferred for
the beneficial owner; and (d) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers and acquisition
cost for purchases, as well as the amount of net proceeds from sales. Brokers
and financial institutions are required to furnish additional information,
including whether they are United States persons and certain information on
Preferred Securities they acquire, hold or transfer for their own accounts. A
penalty of $50.00 per failure (up to a maximum of $100,000 per calendar year) is
imposed by the Code for the failure to report such information to Funding. The
nominee is required to supply the beneficial owners of the Preferred Securities
with the information furnished to Funding.
CellNet, as the tax matters partner for Funding, will be responsible for
representing the Preferred Securityholders in any dispute with the IRS. The Code
provides for administrative examination of a partnership as if the partnership
were a separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years since the later of the
filing or the last date for filing of the partnership information return. Any
adverse determination following an audit of the return of Funding by the
appropriate tax authorities could result in an adjustment of the returns of the
Preferred Securityholders, and, under certain circumstances, a Preferred
Securityholder may be precluded from separately litigating a proposed adjustment
to the items of Funding. An adjustment could also result in an audit of a
Preferred Securityholder's return and adjustments of items not related to the
income and losses of Funding.
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THE UNDERWRITER
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), Morgan Stanley &
Co. Incorporated (the "Underwriter") has agreed to purchase, and Funding has
agreed to sell to it, all of the Preferred Securities.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of the Preferred Securities offered hereby is
subject to the approval of certain legal matters by its counsel and to certain
other conditions. The Underwriter is obligated to take and pay for all of the
Preferred Securities offered hereby if any are taken.
The Underwriter initially proposes to offer part of the Preferred Securities
directly to the public at the public offering price set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $ per Preferred Security under the public offering price. The
Underwriter may allow, and such dealers may reallow, a concession not in excess
of $ per Preferred Security to certain dealers. After the initial offering of
the Preferred Securities, the offering price and other selling terms may from
time to time be varied by the Underwriter.
Pursuant to the Underwriting Agreement, Funding has granted to the
Underwriter an option to purchase up to 450,000 additional Preferred Securities
at the Price to Public set forth on the cover page hereof, less underwriting
discounts and commissions. The Underwriter may exercise such option solely for
the purpose of covering over-allotments, if any, made in connection with the
Offering of the Preferred Securities. To the extent such option is exercised,
the Underwriter will become obligated, subject to certain conditions, to
purchase such additional Preferred Securities.
The Company and its directors and executive officers have each agreed that,
without the prior written consent of the Underwriter, they will not, during the
period ending 90 days after the date of this Prospectus, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer, lend or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or (ii) enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership
of the Common Stock, whether any such transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The restrictions described in this paragraph
do not apply to any transactions relating to securities acquired in open market
transactions after the completion of this Offering.
In order to facilitate this Offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Preferred Securities. Specifically, the Underwriter may overallot in connection
with this Offering, creating a short position in the Preferred Securities for
its own account. In addition, to cover over-allotments or to stabilize the price
of the Preferred Securities, the Underwriter may bid for, and purchase,
Preferred Securities in the open market. Finally, the Underwriter may reclaim
selling concessions allowed to a dealer for distributing the Preferred
Securities in this Offering, if the Underwriter purchases previously distributed
Preferred Securities in transactions to cover short positions, in stabilizing
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the Preferred Securities above independent market levels. The
Underwriter is not required to engage in these activities, and may end any of
these activities at any time.
The Underwriter and dealers may engage in passive market making transactions
in the Common Stock in accordance with Rule 103 of Regulation M promulgated by
the Securities and Exchange Commission. In general, a passive market maker may
not bid for, or purchase, the Common Stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed 30% of its average daily trading volume in the
Common Stock during a specified two month prior period, or 200 shares, whichever
is greater. A passive market maker
98
<PAGE>
must identify passive market making bids as such on the Nasdaq electronic
inter-dealer reporting system. Passive market making may stabilize or maintain
the market price of the Common Stock above independent market levels. The
Underwriter and dealers are not required to engage in passive market making and
may end passive market making activities at any time.
Application will be made for quotation of the Preferred Securities on the
Nasdaq National Market. The Common Stock is quoted on the Nasdaq National Market
under the symbol "CNDS." The shares of Common Stock payable as dividends on the
Preferred Securities, payable in connection with a redemption of the Preferred
Securities or issuable in connection with an Automatic Exchange will be quoted
on the Nasdaq National Market.
The Company, Funding and the Underwriter have agreed to indemnify each other
against certain liabilities under the Securities Act.
From time to time, Morgan Stanley & Co. Incorporated has provided, and
continues to provide, investment banking services to the Company for which it
has received customary compensation.
LEGAL MATTERS
The validity of the Preferred Securities, the CellNet Preferred Stock, the
Guarantee and the Common Stock offered hereby and certain tax matters will be
passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Certain members of such firm hold in the
aggregate shares of Common Stock. Certain legal matters will be passed
upon for the Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997 included and
incorporated by reference in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which are included
and incorporated by reference herein, and have been so included and incorporated
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
99
<PAGE>
CELLNET DATA SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996............................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1997, 1996 and
1995................................................................................................... ' F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
Condensed Consolidated Balance Sheets as of March 31, 1998 (Unaudited) and December 31, 1997 (Unaudited)... F-21
Condensed Consolidated Statement of Operations for the three months ended March 31, 1998 and 1997
(Unaudited).............................................................................................. F-22
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997
(Unaudited).............................................................................................. F-23
Notes to Condensed Consolidated Financial Statements....................................................... F-24
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
CellNet Data Systems, Inc.:
We have audited the accompanying consolidated balance sheets of CellNet Data
Systems, Inc. and subsidiaries (the Company) as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of CellNet Data Systems, Inc. and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
San Jose, California
February 2, 1998
F-2
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $111,112 $124,232
Short-term investments.............................................. 36,946 54,643
Accounts receivable--trade.......................................... 1,519 850
Accounts receivable--other.......................................... 5,123 1,264
Prepaid expenses and other.......................................... 2,060 1,124
-------- --------
Total current assets.............................................. 156,760 182,113
-------- --------
Network components and inventory...................................... 24,225 11,211
Networks in progress--net............................................. 92,308 48,426
Property--net......................................................... 16,061 12,236
Debt issuance costs and other--net.................................... 4,631 5,565
-------- --------
Total assets.......................................................... $293,985 $259,551
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 11,706 $ 8,133
Accrued compensation and related benefits........................... 2,189 2,371
Accrued liabilities................................................. 2,655 950
Current portion of capital lease obligations........................ 466 308
-------- --------
Total current liabilities......................................... 17,016 11,762
-------- --------
Senior notes--1997, 14% and 1996, 13%................................. 268,673 207,178
Deferred revenue...................................................... 5,620 --
Capital lease obligations--net........................................ 412 366
Commitments and contingencies (Notes 9 and 10)........................
Stockholders' equity:
Preferred stock--$.001 par value; 15,000,000 shares authorized; no
shares outstanding................................................ -- --
Common stock--$.001 par value; 100,000,000 shares authorized; shares
outstanding: 1997, 41,845,475; 1996, 38,537,517................... 209,996 205,793
Notes receivable from sale of common stock.......................... (676) (814)
Warrants............................................................ 74,546 2,984
Accumulated deficit................................................. (281,599) (167,715)
Net unrealized loss on short-term investments....................... (3) (3)
-------- --------
Total stockholders' equity........................................ 2,264 40,245
-------- --------
Total liabilities and stockholders' equity............................ $293,985 $259,551
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Network service revenues............................................ $ 5,060 $ 1,210 $ 35
Product revenues.................................................... 493 368 1,663
Other revenues...................................................... 289 91 428
-------- -------- --------
Total revenues.................................................... 5,842 1,669 2,126
-------- -------- --------
Costs and expenses:
Cost of network operations.......................................... 18,322 8,100 3,671
Cost of product and other revenues.................................. 585 329 1,294
Research and development............................................ 27,524 25,394 20,883
Marketing and sales................................................. 10,148 6,021 4,114
General and administrative.......................................... 15,670 12,036 6,258
Depreciation and amortization....................................... 11,973 6,123 2,295
-------- -------- --------
Total costs and expenses.......................................... 84,222 58,003 38,515
-------- -------- --------
Loss from operations.................................................. (78,380) (56,334) (36,389)
Equity in loss of unconsolidated affiliate............................ (2,834) -- --
Other income (expense):
Interest income..................................................... 8,190 7,372 4,590
Interest expense, net of capitalized interest....................... (29,334) (23,823) (9,320)
Other--net.......................................................... (108) 96 166
-------- -------- --------
Total other income (expense).......................................... (21,252) (16,355) (4,564)
-------- -------- --------
Loss before income taxes and extraordinary loss on early
extinguishment of 1995 Senior Notes................................. (102,466) (72,689) (40,953)
Provision for income taxes............................................ 1 5 3
-------- -------- --------
Loss before extraordinary loss on early extinguishment of 1995 Senior
Notes............................................................... (102,467) (72,694) (40,956)
Extraordinary loss on early extinguishment of 1995 Senior Notes....... (11,417) -- --
-------- -------- --------
Net loss.............................................................. $(113,884) $(72,694) $(40,956)
-------- -------- --------
-------- -------- --------
Basic and diluted earnings per share:
Loss per share before extraordinary loss on early extinguishment of
1995 Senior Notes................................................... $ (2.59) $ (6.08) $ (13.93)
Extraordinary loss on early extinguishment of 1995 Senior Notes....... (0.29) -- --
-------- -------- --------
Net loss per share.................................................... $ (2.88) $ (6.08) $ (13.93)
-------- -------- --------
-------- -------- --------
Shares used in computing net loss per share........................... 39,506 11,963 2,939
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES
RECEIVA- NET UNREAL-
CONVERTIBLE PRE- BLE FROM IZED GAIN
FERRED STOCK COMMON STOCK SALE OF (LOSS) ON
--------------------- -------------------- COMMON ACCUMULATED SHORT-TERM
SHARES AMOUNT SHARES AMOUNT STOCK WARRANTS DEFICIT INVESTMENTS TOTAL
----------- -------- ---------- -------- --------- -------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1995.... 9,008,518 $ 25,990 2,716,166 $ 26,790 $(284) $ 10 $ (54,065) $ (5) $ (1,564)
Sale of Series DD preferred
stock (net of issuance
costs of $31).............. 128,157 1,205 -- -- -- -- -- -- 1,205
Common stock issued under
stock plans................ -- -- 2,318,096 818 (628) -- -- -- 190
Common stock warrants issued
in connection with 1995
Senior Notes............... -- -- -- -- -- 2,974 -- -- 2,974
Collection of notes
receivable................. -- -- -- -- 46 -- -- -- 46
Net unrealized gain on short-
term investments........... -- -- -- -- -- -- -- 2 2
Net loss..................... -- -- -- -- -- -- (40,956) -- (40,956)
----------- -------- ---------- -------- --------- -------- ----------- ----- ---------
BALANCES, December 31,
1995....................... 9,136,675 27,195 5,034,262 27,608 (866) 2,984 (95,021) (3) (38,103)
Sale of common stock in
public offering (net of
issuance costs of
$7,841).................... -- -- 5,000,000 92,159 -- -- -- -- 92,159
Exercise of Series BB
warrants................... 1,410,600 1,179 -- -- -- -- -- -- 1,179
Conversion of Series CC
redeemable preferred stock
upon public offering....... -- -- 6,431,536 29,486 -- -- -- -- 29,486
Conversion of Series AA, BB,
and DD preferred stock upon
public offering............ (10,547,275) (28,374) 19,683,950 28,374 -- -- -- -- --
Common stock issued under
stock plans................ -- -- 866,775 186 -- -- -- -- 186
Sale of common stock in pri-
vate placements............ -- -- 1,579,404 28,000 -- -- -- -- 28,000
Repurchase of common stock... -- -- (58,410) (20) -- -- -- -- (20)
Collection of notes
receivable................. -- -- -- -- 52 -- -- -- 52
Net loss..................... -- -- -- -- -- -- (72,694) -- (72,694)
----------- -------- ---------- -------- --------- -------- ----------- ----- ---------
BALANCES, December 31,
1996....................... -- -- 38,537,517 205,793 (814) 2,984 (167,715) (3) 40,245
Exercise of common stock war-
rants issued in connection
with 1995 Senior Notes..... -- -- 2,599,986 2,987 -- (2,974) -- -- 13
Expiration of common stock
warrants................... -- -- -- 9 -- (9) -- -- --
Common stock issued under
stock plans................ -- -- 707,972 1,207 -- -- -- -- 1,207
Common stock warrants issued
in connection with 1997
Senior Notes............... -- -- -- -- -- 74,545 -- -- 74,545
Collection of notes
receivable................. -- -- -- -- 138 -- -- -- 138
Net loss..................... -- -- -- -- -- -- (113,884) -- (113,884)
----------- -------- ---------- -------- --------- -------- ----------- ----- ---------
BALANCES, December 31,
1997....................... -- $ -- 41,845,475 $209,996 $(676) $74,546 $(281,599) $ (3) $ 2,264
----------- -------- ---------- -------- --------- -------- ----------- ----- ---------
----------- -------- ---------- -------- --------- -------- ----------- ----- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $(113,884) $ (72,694) $(40,956)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization..................................... 11,973 6,123 2,295
Accretion on senior notes......................................... 28,631 23,113 9,207
Write-off of remaining 1995 Senior Note debt issuance costs....... 4,791 -- --
Accelerated accretion on 1995 Senior Notes........................ 3,127 -- --
1997 Senior Notes issued as non-cash consent fees................. 912 -- --
Amortization of debt issuance costs............................... 566 600 256
Loss (gain) on disposition of property............................ 59 (1) 57
Equity in loss of unconsolidated affiliate........................ 2,834 -- --
Changes in:
Accounts receivable--trade...................................... (669) 310 (457)
Accounts receivable--other...................................... (3,859) (306) (958)
Prepaid expenses and other...................................... (936) (184) (692)
Accounts payable................................................ 3,573 892 5,191
Accrued compensation and related benefits....................... (182) 1,018 951
Accrued liabilities and deferred revenue........................ 5,969 (31) 92
--------- --------- --------
Net cash used for operating activities........................ (57,095) (41,160) (25,014)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Network components and inventory.................................... (13,014) 453 (9,518)
Purchase of property................................................ (10,668) (9,012) (6,222)
Proceeds from sale of property...................................... 20 11 --
Networks in progress................................................ (45,391) (35,944) (10,811)
Investment in unconsolidated affiliate.............................. (1,478) -- --
Purchase of short-term investments.................................. (43,139) (329,674) (285,802)
Proceeds from sales and maturities of short-term investments........ 60,836 370,810 202,030
Other assets........................................................ (419) (309) --
--------- --------- --------
Net cash used for investing activities........................ (53,253) (3,665) (110,323)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Senior Notes and warrants............................... 100,324 -- 175,837
Debt issuance costs for Senior Notes................................ (4,004) (210) (5,902)
Repayment of capital lease obligations.............................. (450) (307) (524)
Proceeds from sale of preferred stock and warrants.................. -- 1,179 1,205
Proceeds from sale of common stock, net of repurchases.............. 1,220 120,325 190
Collection of note receivable from sale of common stock............. 138 52 46
--------- --------- --------
Net cash provided by financing activities..................... 97,228 121,039 170,852
--------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... (13,120) 76,214 35,515
CASH AND CASH EQUIVALENTS, Beginning of year.......................... 124,232 48,018 12,503
--------- --------- --------
CASH AND CASH EQUIVALENTS, End of year................................ $ 111,112 $ 124,232 $ 48,018
--------- --------- --------
--------- --------- --------
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property under capital leases........................ $ 654 $ 161 $ 798
Sale of common stock for notes receivable........................... $ -- $ -- $ 628
Conversion of preferred stock into common stock..................... $ -- $ 57,860 $ --
Capitalized interest on networks in progress........................ $ 3,047 $ 1,537 $ 458
Exchange of 1995 Senior Notes for 1997 Senior Notes................. $ 231,039 $ -- $ --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.............................. $ 113 $ 110 $ 113
Cash paid for income taxes.......................................... $ 1 $ 5 $ 3
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. Since 1993, CellNet Data Systems, Inc. and
subsidiaries (the Company) has focused all of its resources and efforts on the
development and deployment of its CellNet wireless data communication system to
provide automated network meter reading and other services to the utility
industry and to providers of non-utility services. The Company's primary
activities since 1993 have included research and development, prototype product
development, field testing, commercial network installation, provision of
wireless data communication services, and raising the financing required to
support the development and deployment of its CellNet wireless data
communication system. In August 1996, the Company was reincorporated in the
State of Delaware.
The Company provides its services to utility companies, energy service
providers and other customers pursuant to contract. The contracts vary in
length, generally, from 5 to 20 years. Utilities have up to two 5-year renewal
options in certain instances on substantially similar terms. Utilities also have
the option in certain instances to terminate their contracts early at various
times during the initial term, commencing as early as the seventh contract year
under the longer term contracts, upon payment of specified amounts which are
intended to allow the Company to recover its then unamortized network endpoint
costs based upon agreed prices for such equipment. No assurance can be given
that any such renewal and/or early termination options will or will not be
exercised.
The Company completed the installation of a network to provide network meter
reading and other services to Kansas City Power & Light Company in 1996,
installed additional meters on the network in 1997 and expects to install
additional meters on the network in 1998. The Company has also installed a
network for Pacific Gas & Electric Company and is in the process of
substantially expanding a network installed for Puget Sound Energy, Inc. The
Company is currently installing networks for Union Electric Company and for
Northern States Power Company and has entered into a services agreement with
Indianapolis Power & Light Company for the installation of a network in its
service area. The Company is also beginning to install a network in California
to serve the needs of various energy service providers in that market.
The Company does not expect to receive revenues sufficient to meet
anticipated operating costs and expenses during 1998. Management plans to
significantly increase operations through the installation of additional
networks for other utility companies and other nonutility clients and intends to
fund these operations through additional debt and equity financing.
CONSOLIDATION. The accompanying consolidated financial statements include
the accounts of CellNet Data Systems, Inc. and its wholly-owned subsidiaries.
All material intercompany accounts and transactions are eliminated in
consolidation.
FINANCIAL STATEMENT ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses during the reporting period. Such estimates
include the level of inventory reserves for obsolete, slow moving or nonsalable
network components and inventory, evaluation of network assets for impairment,
accrued liabilities and a valuation allowance against net deferred tax assets.
Actual results could differ from those estimates.
F-7
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS. Cash equivalents are highly liquid debt instruments
acquired with an original maturity of three months or less. The recorded
carrying amounts of the Company's cash equivalents approximate their fair market
value.
SHORT-TERM INVESTMENTS. Short-term investments represent debt and equity
securities which are stated at fair value. All short-term investments are
classified as available-for-sale. Any temporary difference between an
investment's amortized cost and its market value is recorded as a separate
component of stockholders' equity until such gains or losses are realized. Gains
or losses on the sale of securities are computed using the specific
identification method.
STOCK-BASED COMPENSATION. The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially
subject the Company to credit risk consist principally of cash and cash
equivalents, short-term investments and accounts receivable. The Company sells
its products and services and installs its networks primarily to utility
companies in the United States. To reduce credit risk related to accounts
receivable, the Company periodically evaluates its customers' financial
condition. Collateral is generally not required. Two customers accounted for 57%
and 31% of trade accounts receivable at December 31, 1997 and for 47% and 41% of
revenues for the year then ended. The same two customers accounted for 33% and
22% of trade accounts receivable at December 31, 1996 and for 69% and 21% of
revenues for the year then ended. Two customers accounted for 64% and 29% of
revenues for the year ended December 31, 1995. Concentration of credit risk is
expected to decrease as the Company deploys additional networks and provides its
services to an increasing number of customers.
The Company invests in a variety of financial instruments such as commercial
paper, debt securities of the U.S. government, foreign debt securities and
preferred stock. The Company, by policy, limits the amount of credit exposure
with any one financial instrument or commercial issuer. All such instruments are
rated by Standard & Poor's as A- or higher. The Company also places its
investments for safekeeping with high-credit-quality financial institutions.
NETWORK COMPONENTS AND INVENTORY. Network components and inventory are
stated at the lower of cost (first-in, first-out method) or market. At December
31, 1997, network components and inventories consist primarily of purchased and
in-process materials to be included in the Company's installed networks. Once
the assembly process is complete, the inventory item is transferred to a
particular network location.
NETWORKS IN PROGRESS, NET. Networks in progress, which are stated at cost,
include both equipment assembled at the Company and systems partially installed
at customer sites. Interest is capitalized using the Company's cost of debt
until the point in the installation at which each network begins generating
revenue. (Accordingly, $3,047,000, $1,537,000 and $458,000 of interest was
capitalized during 1997, 1996 and 1995, respectively.) Depreciation is computed
on a straight-line basis over the shorter of the estimated useful lives of the
network assets or the contract's life from initial revenue generation until
contract termination. Depreciation commences when the network begins generating
significant revenue, typically when network installation is approximately 50%
complete. At December 31, 1997 and 1996, accumulated depreciation was $6,212,000
and $1,657,000, respectively.
F-8
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This statement requires the Company
to review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recovered. Implementation did not have a material impact on the Company's
financial statements.
PROPERTY. Property and leasehold improvements are stated at cost.
Depreciation and amortization are computed on a straight-line basis over
estimated useful lives of three to five years or the capital lease term, if
shorter.
INVESTMENT IN UNCONSOLIDATED AFFILIATE. The investment is accounted for
using the equity method. Equity in loss of unconsolidated affiliate is based
upon the Company's beneficial interest.
DEBT ISSUANCE COSTS. Debt issuance costs associated with the senior notes
(see Note 6) are capitalized and amortized using the effective interest method
over the lives of the related debt.
RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1997, the Financial
Accounting Standards Board adopted Statement of Financial Accounting Standards
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
which establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas and major customers. Adoption of this statement will not impact
the Company's consolidated financial position, results of operations or cash
flows. The Company will adopt this statement in fiscal 1998.
REVENUE RECOGNITION. Network service revenue, associated with installed
networks, is recognized in the period of service. Product revenue is recognized
upon product shipment.
The Company and a utility customer have entered into a joint marketing and
licensing agreement for the purpose of jointly developing and marketing utility
automation and utility management services utilizing the Company's wireless data
communications network deployed in the customer's service area. The Company has
received a license fee of $6,000,000 for the use of certain of the Company's
network interface technology and has agreed to pay the customer certain
marketing service and incentive fees based upon network revenues and upon
revenues received from the sale of the services being developed and marketed.
The customer has the right to terminate the agreement at any time prior to
January 1, 2000 and to require the Company to refund the license fee less the
amount of any marketing service and incentive fees previously paid. The amount
of the license fee is recorded as deferred revenue and is being recognized over
the term of the agreement.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The recorded carrying amounts of the
Company's financial instruments, namely cash and cash equivalents and short-term
investments, approximate their fair value. The estimated fair value of the
Company's 1997 Senior Notes was approximately $223,350,000 at December 31, 1997.
The estimated fair value of the Company's 1995 Senior Notes was approximately
$224,250,000 at December 31, 1996. The fair values of cash equivalents and
short-term investments are based on quoted market prices, and the estimated fair
value of the Senior Notes is based on information provided by the initial
purchaser of the original notes.
F-9
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE. During the fourth quarter of 1997, the Company adopted
Statement of Financial Accounting Standards No. 128 (SFAS 128), EARNINGS PER
SHARE and, retroactively, restated the 1996 and 1995 earnings per share (EPS)
for the change. SFAS 128 requires a dual presentation of basic and diluted EPS.
Basic EPS for all periods presented is computed by dividing net loss by the
weighted average of common shares outstanding (excluding shares subject to
repurchase -- see Note 7). Diluted EPS for all periods presented was computed
the same as basic EPS since all other potential dilutive securities are excluded
as they are anti-dilutive.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1996 and
1995 amounts to conform to the 1997 presentation.
2. SHORT-TERM INVESTMENTS
The fair value and the amortized cost of short-term investments at December
31, 1997 and 1996 are presented below. Fair values are based on quoted market
prices obtained from the Company's broker. All of the Company's short-term
investments are classified as available-for-sale, since the Company intends to
sell them as needed for operations. The tables present the unrealized holding
gains and losses related to each category of investment security (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED LOSS ON GAIN ON MARKET
COST INVESTMENT INVESTMENT VALUE
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Certificates of deposit.................... $ 7,298 $ (4) $ -- $ 7,294
Auction-rate preferred stock............... 27,700 -- -- 27,700
Corporate debt securities.................. 113,016 -- 1 113,017
----------- ----- ----- -----------
Total...................................... 148,014 (4) 1 148,011
Less amounts included in cash and
equivalents.............................. (111,065) -- -- (111,065)
----------- ----- ----- -----------
$ 36,949 $ (4) $ 1 $ 36,946
----------- ----- ----- -----------
----------- ----- ----- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED LOSS ON GAIN ON MARKET
COST INVESTMENT INVESTMENT VALUE
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Certificates of deposit.................... $ 2,002 $ -- $ -- $ 2,002
Auction-rate preferred stock............... 33,550 -- -- 33,550
Corporate debt securities.................. 141,107 (4) 1 141,104
----------- ----- ----- -----------
Total...................................... 176,659 (4) 1 176,656
Less amounts included in cash and
equivalents.............................. (122,013) -- -- (122,013)
----------- ----- ----- -----------
$ 54,646 $ (4) $ 1 $ 54,643
----------- ----- ----- -----------
----------- ----- ----- -----------
</TABLE>
F-10
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2. SHORT-TERM INVESTMENTS (CONTINUED)
The final maturity periods of short-term investments at December 31, 1997
are as follows (in thousands):
<TABLE>
<CAPTION>
MARKET VALUE OF MATURITIES
----------------------------------------------
FIVE TO GREATER
WITHIN TEN THAN
ONE YEAR YEARS 10 YEARS TOTAL
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
Certificates of deposit.............. $ 7,294 $ -- $ -- $ 7,294
Auction-rate preferred stock......... -- 12,700 15,000 27,700
Corporate debt securities............ 113,017 -- 113,017
----------- --------- --------- -----------
Total................................ 120,311 12,700 15,000 148,011
Less amounts included in cash and
cash equivalents................... (111,065) -- -- (111,065)
----------- --------- --------- -----------
$ 9,246 $ 12,700 $ 15,000 $ 36,946
----------- --------- --------- -----------
----------- --------- --------- -----------
</TABLE>
All short-term investments with final maturities exceeding one year have
provisions requiring their repurchase at par at the option of the holder and for
adjustment to market rates of interest on at least an annual basis. The Company
treats such investments as having a maturity of one year or less for purposes of
compliance with investment limitations provided in its Senior Note Indenture
(see Note 6).
3. INVESTMENT IN UNCONSOLIDATED AFFILIATE
In 1996, the Company entered into a joint venture with Bechtel Enterprises,
Inc. to deploy the Company's technology outside the United States. The Company
participates in a joint venture, BCN Data Systems L.L.C. (BCN), and generally is
allocated 50% of BCN's net income or loss. The investment in BCN is accounted
for using the equity method. For the year ended December 31, 1997, the Company
recognized $2,834,000 as its share of BCN's losses. In 1997, the Company made
capital contributions of $1,478,000, and the Company's share of BCN's losses in
excess of such capital contributions is recorded in accrued liabilities (see
Note 5).
Under a license and consulting services agreement completed in 1997, BCN has
agreed to reimburse the Company for certain costs incurred by the Company in
adapting the Company's technology for use by BCN outside the United States. In
1997, the Company recorded $2,755,000 as an offset to research and development
expenses for such reimbursable costs, and at December 31, 1997, the Company had
a receivable from BCN for the same amount, which is included in accounts
receivable--other. In addition, the Company sold its operating subsidiary, DAC
(UK) Limited, at cost to BCN.
F-11
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
4. PROPERTY
Property consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Office furniture and equipment......................................... $ 14,944 $ 9,129
Manufacturing equipment and tools...................................... 11,338 8,065
Engineering equipment.................................................. 4,969 2,942
Vehicles............................................................... 231 204
---------- ---------
Total.................................................................. 31,482 20,340
Accumulated depreciation and amortization.............................. (15,421) (8,104)
---------- ---------
Total.................................................................. $ 16,061 $ 12,236
---------- ---------
---------- ---------
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Loss in excess of investment in unconsolidated affiliate (see Note
3)................................................................... $ 1,356 $ --
Deferred revenue....................................................... 620 150
Professional services.................................................. 332 276
Accrued contractual obligations........................................ 195 277
Other.................................................................. 152 247
---------- ---------
Total.................................................................. $ 2,655 $ 950
---------- ---------
---------- ---------
</TABLE>
6. SENIOR NOTES
1995 NOTES. In 1995, the Company received $175,837,000 in gross proceeds
from the issuance and private placement of $325,000,000 aggregate principal
amount at maturity of its 13% Senior Notes due June 15, 2005 and related
warrants to purchase 2,600,000 shares of common stock at $0.005 per share (the
Notes and 1995 Warrants). Aggregate proceeds of $2,974,000 were attributed to
the 1995 Warrants. The unregistered Notes were subsequently exchanged for an
equal number of Series B 13% Senior Notes with identical terms (the 1995 Notes)
registered under the Securities Act of 1933, as amended (the Securities Act).
1997 NOTES. On September 29, 1997, the Company raised $100,324,000 in gross
proceeds from the sale and issuance of 14% Senior Notes due 2007 (the 1997
Notes). All holders of outstanding 1995 Notes tendered and exchanged their 1995
Notes for 1997 Notes having an initial accreted value of $231,039,000. All
outstanding 1995 Warrants were exercised prior to expiration in 1997. Warrants
to purchase 8,942,517 shares of the Company's Common Stock (the 1997 Warrants)
with an exercise price of $14.30 per share were attached to the 1997 Notes.
Aggregate proceeds of $74,545,000 were attributed to the 1997 Warrants. The 1997
Notes were issued at an initial accreted value of $257,730,000 and will fully
accrete to a face
F-12
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. SENIOR NOTES (CONTINUED)
value of $654,133,000 on October 1, 2002. From and after October 1, 2002, the
1997 Notes will begin to accrue interest payable in cash at an annual rate of
14% payable each April 1 and October 1, commencing April 1, 2003.
The 1997 Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after October 1, 2002 at specified redemption prices for
the relevant year of redemption, plus accrued and unpaid interest to the date of
redemption. In addition, the Company may redeem in cash at its option at any
time prior to October 1, 2000 up to 25% of the aggregate principal amount of the
1997 Notes at 114% of the accreted value thereof on the date of redemption plus
accrued and unpaid interest, if any, from the proceeds of a public equity
offering (as defined) provided that after any such redemption at least
$490,599,750 aggregate principal amount at maturity of the 1997 Notes remains
outstanding. There are no sinking fund requirements. In the event of a change of
control (as defined), each holder of the 1997 Notes has the option to require
the Company to repurchase such holder's 1997 Notes at 101% of the accreted value
thereof on the date of repurchase (if prior to October 1, 2002) or 101% of the
aggregate principal face amount thereof, plus accrued and unpaid interest, if
any, to the repurchase date (if on or after October 1, 2002).
The 1997 Notes rank senior in right of payment to all existing and future
subordinated indebtedness of the Company and PARI PASSU with all existing and
future senior indebtedness of the Company. The Indenture pursuant to which the
1997 Notes were issued contains certain covenants that, among other things,
limit the ability of the Company to make dividend payments, make investments
(including investments in affiliates), repurchase outstanding shares of stock,
prepay other debt obligations, incur additional indebtedness, effect asset
dispositions, engage in sale and leaseback transactions, consolidate, merge or
sell all or substantially all of the Company's assets, or engage in transactions
with affiliates, or effect certain transactions by its restricted subsidiaries
(as defined). The Company was in compliance with the financial covenants of the
Indenture at December 31, 1997.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT. On September 29, 1997,
the Company exchanged $654,133,000 aggregate value at maturity 1997 Notes and
1997 Warrants for $100,324,000 of new proceeds and the extinguishment of its
$325,000,000 aggregate value at maturity of the 1995 Notes. The exchange of the
1995 Notes was accounted for as an early extinguishment of debt, resulting in an
extraordinary charge of $11,417,000, consisting of the unamortized portion of
the debt issuance cost of the 1995 Notes of $4,791,000, $3,499,000 attributable
to consent fees and other costs related to the extinguishment of the 1995 Notes
and accelerated accretion of interest on the 1995 Notes of $3,127,000.
In December 1997, the Company exchanged the unregistered 1997 Notes for an
equal number of Series B 14% Senior Discount Notes with identical terms (the New
1997 Notes) registered under the Securities Act. Costs associated with the
Company's registration of the New 1997 Notes under the Securities Act have been
capitalized as part of debt issue costs.
7. STOCKHOLDERS' EQUITY
All shares and per-share amounts have been adjusted to reflect a two-for-one
split effected in 1996.
F-13
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
7. STOCKHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK. In conjunction with the initial public
offering of the Company's common stock, all outstanding shares of convertible
preferred stock were converted into common stock upon the closing of the
offering.
COMMON STOCK. At December 31, 1997, the Company had reserved shares of
common stock for issuance as follows:
<TABLE>
<S> <C>
Issuance under employee stock purchase plan..................... 1,036,899
Issuance upon exercise of common stock warrants................. 8,992,517
Issuance under stock option plans............................... 3,594,986
---------
Total........................................................... 13,624,402
---------
---------
</TABLE>
RESTRICTED STOCK. Certain officers, employees and consultants exercised
stock options with cash or full recourse notes. The related shares of common
stock continue to vest in accordance with the terms of the stock option. The
related notes bear interest at rates ranging from 6.04% to 7.92% and are due in
1999 through 2000. At December 31, 1997, 768,028 outstanding shares of such
stock were subject to repurchase.
1996 EMPLOYEE STOCK PURCHASE PLAN. In 1996, the Company adopted an Employee
Stock Purchase Plan (the Plan). A total of 1,200,000 shares of common stock are
reserved for issuance under the Plan. Under the Plan, the Company withholds a
specified percentage of each salary payment to participating employees over
certain offering periods. Unless the Board of Directors determines otherwise,
each offering period runs for six months, from November 1 to April 30 and from
May 1 to October 31, except that the first offering period commenced on
September 26, 1996 and ended on April 30, 1997. The price at which common stock
may be purchased under the Plan is equal to 85% of the fair market value of the
common stock on the first or last day of the applicable offering period,
whichever is lower. In 1997, 163,101 shares were issued under the Plan at a
weighted average price of $6.38 per share. At December 31, 1997, 1,036,899
shares remain available for issuance under the Plan.
WARRANTS. At December 31, 1997, the following warrants to purchase common
stock were outstanding:
Warrants to purchase 50,000 shares of common stock at $2.00 per share. The
warrants expire on February 24, 1999, or, with written notice from the Company,
two days prior to (a) the merger of the Company with or into a corporation as a
result of which the stockholders of the Company hold less than 50% of the equity
securities of the surviving corporation or its parent (unless the securities
received are freely tradable and listed on a national securities exchange or on
the NASDAQ National Market System), (b) the sale, conveyance or disposition of
all or substantially all of the assets of the Company or (c) the liquidation,
dissolution or winding up of the Company.
Warrants to purchase 8,942,517 shares of common stock at $14.30 per share
were granted in connection with the issuance and sale in 1997 of the Company's
14% Senior Notes (see Note 6). The warrants are exercisable commencing on
September 29, 1998 and expire on October 1, 2007.
STOCK OPTION PLANS. The Company has stock option plans (the Plans) under
which shares are reserved for issuance to officers, directors, employees and
consultants. Under the Plans, both incentive and
F-14
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
7. STOCKHOLDERS' EQUITY (CONTINUED)
nonstatutory stock options to purchase common stock may be granted or restricted
common stock may be sold at prices not less than the fair market value of the
common stock at the date of grant. The fair market value and terms of exercise
are determined by the Board of Directors. Options outstanding at December 31,
1997 generally become exercisable over five years, commencing six months from
the date of the individual's employment or the date of grant and expire ten
years from the date of grant. At December 31, 1997, there were 187,742 shares
available for future grant under the Plans.
A summary of stock option activity under the Plans on a combined basis is as
follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Balances, January 1, 1995.................................. 5,240,628 $ 0.574
Granted (weighted average fair value $0.129 per share)..... 514,600 1.182
Exercised.................................................. (2,318,096) 0.706
Cancelled.................................................. (163,498) 0.784
----------- ------
Balances, December 31, 1995................................ 3,273,634 0.565
Granted (weighted average fair value $1.486 per share)..... 889,910 3.827
Exercised.................................................. (866,775) 0.214
Cancelled.................................................. (109,679) 0.683
----------- ------
Balances, December 31, 1996................................ 3,187,090 1.278
Granted (weighted average fair value $6.060 per share)..... 942,600 11.052
Exercised.................................................. (544,871) 0.307
Cancelled.................................................. (177,575) 4.865
----------- ------
Balances, December 31, 1997................................ 3,407,244 $ 3.948
----------- ------
----------- ------
</TABLE>
Additional information regarding options outstanding as of December 31, 1997
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------- OPTIONS EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.05 - $ 0.50..... 1,703,799 6.27 $ 0.324 1,119,234 $ 0.281
$ 1.00 - $ 2.00..... 638,135 8.15 $ 1.895 205,705 $ 1.886
$ 3.00 - $10.00..... 226,250 9.36 $ 7.661 29,693 $ 5.571
$11.50 - $11.50..... 673,810 9.60 $ 11.500 3,170 $11.500
$12.81 - $13.63..... 165,250 8.91 $ 13.355 35,805 $13.400
----------- ----------- ----------- ----------- --------
$0.05 - $13.63...... 3,407,244 7.61 $ 3.948 1,393,607 $ 0.993
----------- ----------- ----------- ----------- --------
----------- ----------- ----------- ----------- --------
</TABLE>
F-15
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
7. STOCKHOLDERS' EQUITY (CONTINUED)
ADDITIONAL STOCK PLAN INFORMATION. The Company accounts for its stock-based
awards using the intrinsic value method in accordance with Accounting Principles
Board No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and its related
interpretations. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED Compensation (SFAS 123), requires the disclosure of pro forma net
loss and loss per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and estimated term. These
calculations were made using the minimum value method prior to the Company's
initial public offering and the Black-Scholes option pricing model with the
following weighted average assumptions for stock option grants: expected life,
12 months following vesting in 1997 and 21.3 months following vesting in 1996
and 1995; stock volatility, 71% in 1997 and 60% in 1996, subsequent to the
Company's initial public offering; risk free interest rates, 5.5% in 1997, and
6.0% in 1996 and 1995; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur.
The weighted average fair value of purchase rights under the 1996 Employee
Stock Purchase Plan was $3.67 and $7.45 in 1997 and 1996, respectively. The
Company's calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions in 1997 and 1996, respectively:
expected term, six months after grant; stock volatility, 71% in 1997 and 60% in
1996, subsequent to the Company's initial public offering; risk free interest
rates, 5.5% in 1997 and 6.0% in 1996; and no dividends during the expected term.
If the computed fair values of the 1997, 1996 and 1995 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
would have been $115,946,000 ($2.93 per share) in 1997, $73,314,000 ($6.13 per
share) in 1996 and $40,986,000 ($13.95 per share) in 1995. However, the impact
of outstanding nonvested stock options granted prior to 1995 has been excluded
from the pro forma calculation; accordingly, the 1997, 1996 and 1995 pro forma
adjustments are not indicative of future period pro forma adjustments, when the
calculation will apply to all applicable stock options.
EARNINGS PER SHARE. The computation of basic EPS excludes 768,028 shares of
common stock subject to repurchase at December 31, 1997. Options and warrants to
purchase 3,407,244 and 8,992,517 shares of common stock at a weighted average
exercise price of $3.948 and $14.23 per share, respectively, and 768,028 shares
of common stock subject to repurchase were outstanding at December 31, 1997 but
were not included in the computation of diluted EPS as the Company has a net
loss for all periods presented and, therefore, they are anti-dilutive.
8. INCOME TAXES
No federal income taxes were provided in 1997, 1996 or 1995 due to the
Company's net losses. The provisions for income taxes for these periods
represent various state minimum income and franchise taxes.
F-16
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
8. INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount computed by applying the
federal statutory income tax rate to income before income taxes and
extraordinary item as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Taxes computed at federal statutory rate............ $ (35,863) $ (25,441) $ (14,334)
State income taxes, net of federal effect........... (1,578) (2,544) (1,843)
Research tax credits................................ (349) 3,760 (399)
Disqualified yield on debt issued................... 2,006 -- --
Change in valuation allowance....................... 35,714 23,349 18,120
Other............................................... 71 881 (1,541)
---------- ---------- ----------
Total provision..................................... $ 1 $ 5 $ 3
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The tax effects of temporary differences that give rise to deferred taxes
were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
Deferred tax assets:
Tax net operating loss and credit carryforwards.................... $ 78,280 $ 48,778
Senior note original issue discount................................ 21,754 13,263
Research and development expenses capitalized for tax purposes..... 657 1,138
Expenses not currently deductible for tax purposes................. 3,300 724
----------- ----------
Total deferred tax assets............................................ 103,991 63,903
Valuation allowance on deferred tax assets........................... (103,991) (63,903)
----------- ----------
Net deferred income taxes............................................ $ -- $ --
----------- ----------
----------- ----------
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $206,000,000 and $56,000,000 available to offset future federal
and state taxable income, respectively. Such federal carryforwards expire in
2001 through 2012. Such state carryforwards expire in 1998 through 2012. The
extent to which the loss carryforwards can be used to offset future taxable
income may be limited, depending on the extent of ownership changes within any
three-year period as provided in the Tax Reform Act of 1986 and the California
Conformity Act of 1987. Equity issuances in April 1991 and the initial public
offering in 1996 triggered such limitations on loss carryforwards. As of
December 31, 1997, approximately $70,000,000 of net operating losses remain
limited to an annual usage of approximately $36,000,000 for federal income tax
purposes.
Research and development tax credit carryforwards of approximately
$2,900,000 and $1,700,000 are also available to offset future federal and
California income taxes payable, respectively.
A valuation allowance has been recorded against tax assets for which
realization is uncertain. Based upon the Company's history of operating losses
and the expiration dates of the loss carryforwards, the Company has recorded a
valuation allowance to the full extent of its net deferred tax assets.
F-17
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
9. COMMITMENTS AND LEASES
At December 31, 1997 and 1996, equipment with a net book value of $1,027,000
and $878,000 (net of accumulated amortization of $1,180,000 and $708,000,
respectively), has been leased under capital leases.
The Company leases its principal manufacturing and office facilities under
noncancelable operating lease and sublease agreements expiring as to portions of
the space at various times commencing February 1998 through November 2007.
Future minimum annual rental payments under capital and operating leases are
as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER
31,
----------------------
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
1998.................................................................. $ 455 $ 2,205
1999.................................................................. 294 1,875
2000.................................................................. 192 1,803
2001.................................................................. 76 622
2002.................................................................. 14 550
Thereafter............................................................ -- 3,316
--------- -----------
Total minimum lease payments.......................................... 1,031 $ 10,371
-----------
-----------
Amount representing interest.......................................... (153)
---------
Present value of minimum lease payments............................... 878
Current portion....................................................... 466
---------
Long-term lease obligations........................................... $ 412
---------
---------
</TABLE>
Facilities rent expense was $2,146,000, $1,301,000 and $901,000 for 1997,
1996 and 1995, respectively.
10. LITIGATION
The industry in which the Company operates is characterized by frequent
litigation regarding patent and other intellectual property rights. The Company
is party to two such suits of this nature. Although the ultimate outcome of
these matters is not presently determinable, management believes that the
resolution will not have a material effect on the Company's results of
operations or financial condition.
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 opinion of management, the ultimate outcome of the lawsuit is not
expected to have a material adverse effect on the Company's results of
operations or financial condition.
In April 1997, the Company filed a patent infringement suit against Itron in
the Federal District Court for the Northern District of California, claiming
that Itron's use of its electric meter reading Encoder
F-18
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
10. LITIGATION (CONTINUED)
Receiver Transmitter ("ERT-Registered Trademark-") device infringes 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 those purchasing the Company's stock from the period
beginning on September 26, 1996 and ending on October 31, 1996, 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 SAPSOWITZ 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 FIENMAN
action was voluntarily dismissed with prejudice. The Company believes that the
allegations in these complaints are without merit and intends to defend the
actions vigorously. The Company has filed demurrers seeking dismissal of these
complaints. The motions were assigned by the Court to a special master, who
recommended that the cases be dismissed with prejudice. Plaintiffs have objected
to the special master's recommendation, which is currently under submission
before the Court. In the opinion of management, the ultimate outcome of these
lawsuits is not expected to have a material adverse effect on the Company's
results of operations or financial condition.
11. QUARTERLY RESULTS (UNAUDITED)
The following summarized unaudited results of operations for the quarters in
the years ended December 31, 1997 and 1996 have been accounted for using
generally accepted accounting principles for interim reporting purposes and
reflect adjustments (consisting of normal recurring adjustments) which the
F-19
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
11. QUARTERLY RESULTS (UNAUDITED) (CONTINUED)
Company considers necessary for the fair presentation of results of operations
for these interim periods (in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1997 1997 1997 1997 1996 1996 1996 1996
------------ ------------- -------- --------- ------------ ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $ 1,816 $ 1,533 $ 1,514 $ 979 $ 734 $ 515 $ 251 $ 169
Loss from
operations.......... (22,214) (19,899) (18,576 ) (17,691) (16,352) (15,574) (13,154 ) (11,254)
Loss before
extraordinary loss
on early
extinguishment of
1995 Senior Notes... (31,333) (25,208) (23,922 ) (22,004) (19,927) (20,454) (17,247 ) (15,066)
Extraordinary loss on
early extinguishment
of
1995 Senior Notes... -- (11,417) -- -- -- -- -- --
Net loss.............. (31,333) (36,625) (23,922 ) (22,004) (19,927) (20,454) (17,247 ) (15,066)
Basic and diluted
earnings per share:
Loss per share
before
extraordinary loss
on early
extinguishment of
1995 Senior
Notes............. (0.77) (0.61) (0.62 ) (0.59) (0.54) (4.67) (5.08 ) (4.70)
Net loss per
share............. $ (0.77) $ (0.90) $ (0.62 ) $ (0.59) $ (0.54) $ (4.67) $ (5.08 ) $ (4.70)
Shares used in
computing net loss
per share........... 40,965 40,624 38,734 37,701 36,875 4,378 3,396 3,204
</TABLE>
During the fourth quarter of 1997, the Company adopted SFAS 128 (see Note
1), which requires a dual presentation of basic and diluted earnings per share.
Prior period earnings per share amounts have been restated accordingly. The sum
of the quarterly loss per share for 1996 does not agree with the net loss per
share calculated for the year ended December 31, 1996, resulting from certain
dilutive events occurring in the fourth quarter of 1996 in connection with the
Company's initial public offering on October 2, 1996.
* * * * *
F-20
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 72,106 $ 111,112
Short-term investments.............................................................. 37,754 36,946
Accounts receivable--trade.......................................................... 2,076 1,519
Accounts receivable--other.......................................................... 6,501 5,123
Prepaid expenses and other.......................................................... 2,110 2,060
----------- ------------
Total current assets.............................................................. 120,547 156,760
Network components and inventory...................................................... 27,686 24,225
Networks in progress--net............................................................. 109,965 92,308
Property--net......................................................................... 15,973 16,061
Debt issuance and other costs--net.................................................... 4,588 4,631
----------- ------------
Total assets...................................................................... $ 278,759 $ 293,985
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................................... $ 14,138 $ 11,706
Accrued compensation and related benefits........................................... 3,500 2,189
Accrued liabilities................................................................. 2,185 2,655
Current portion of capital lease obligations........................................ 448 466
----------- ------------
Total current liabilities......................................................... 20,271 17,016
----------- ------------
Senior notes--14%..................................................................... 279,952 268,673
Deferred revenue...................................................................... 5,583 5,620
Capital lease obligations............................................................. 593 412
Commitments and Contingencies (Note 3)
Stockholders' equity (deficit):
Preferred stock--$.001 par value; 15,000,000 shares authorized; no shares
outstanding....................................................................... -- --
Common stock--$.001 par value; 100,000,000 shares authorized; shares outstanding,
1998: 41,917,026; 1997: 41,845,475................................................ 210,302 209,996
Notes receivable from sale of common stock.......................................... (668) (676)
Warrants............................................................................ 74,546 74,546
Accumulated deficit................................................................. (311,815) (281,599)
Net unrealized loss on short-term investments....................................... (5) (3)
----------- ------------
Total stockholders' equity (deficit).............................................. (27,640) 2,264
----------- ------------
Total liabilities and stockholders' equity (deficit).................................. $ 278,759 $ 293,985
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-21
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Network service revenues................................................................ $ 1,971 $ 859
Product revenues........................................................................ 166 64
Other revenues.......................................................................... 132 56
---------- ----------
Total revenues........................................................................ 2,269 979
---------- ----------
Costs and expenses:
Cost of network operations.............................................................. 5,145 3,565
Cost of product and other revenues...................................................... 84 78
Research and development................................................................ 7,024 6,396
Marketing and sales..................................................................... 3,051 1,739
General and administrative.............................................................. 3,624 4,427
Depreciation and amortization........................................................... 4,179 2,465
---------- ----------
Total costs and expenses.............................................................. 23,107 18,670
---------- ----------
Loss from operations...................................................................... (20,838) (17,691)
Equity in loss of unconsolidated affiliate................................................ (351) (358)
Other income (expense):
Interest income......................................................................... 1,934 2,291
Interest expense, net of capitalized interest........................................... (10,782) (6,311)
Other--net.............................................................................. (179) 66
---------- ----------
Total other income (expense).............................................................. (9,027) (3,954)
---------- ----------
Loss before income taxes.................................................................. (30,216) (22,003)
Provision for income taxes................................................................ -- 1
---------- ----------
Net loss.................................................................................. $ (30,216) $ (22,004)
---------- ----------
---------- ----------
Basic and diluted earnings per share:
Net loss per share........................................................................ $ (0.73) $ (0.59)
---------- ----------
---------- ----------
Shares used in computing net loss per share............................................... 41,139 37,701
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-22
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................................. $ (30,216) $ (22,004)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization.......................................................... 4,179 2,465
Accretion on senior notes.............................................................. 10,652 6,132
Amortization of debt issuance costs.................................................... 101 155
Equity in loss of unconsolidated affiliate............................................. 351 358
Other non-cash expenses................................................................ 276 --
Changes in:
Accounts receivable--trade........................................................... (557) (370)
Accounts receivable--other........................................................... (1,378) 114
Prepaid expenses and other........................................................... (50) (103)
Accounts payable..................................................................... 2,432 93
Accrued compensation and related benefits............................................ 1,311 315
Accrued liabilities and deferred revenue............................................. (25) (119)
--------- ---------
Net cash used for operating activities............................................. (12,924) (12,964)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Network components and inventory......................................................... (3,461) (2,894)
Purchase of property..................................................................... (1,648) (3,310)
Networks in progress..................................................................... (19,123) (9,107)
Investment in unconsolidated affiliate................................................... (833) (516)
Purchase of short-term investments....................................................... (25,509) (11,590)
Proceeds from sales and maturities of short-term investments............................. 24,699 31,934
Other assets............................................................................. (58) (10)
--------- ---------
Net cash provided by (used for) investing activities............................... (25,933) 4,507
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations................................................... (187) (78)
Proceeds from sale of common stock, net of repurchases................................... 38 57
Collection of note receivable from sale of common stock.................................. -- 96
--------- ---------
Net cash provided by (used for) financing activities............................... (149) 75
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................................. (39,006) (8,382)
CASH AND CASH EQUIVALENTS, Beginning of period............................................. 111,112 124,232
--------- ---------
CASH AND CASH EQUIVALENTS, End of period................................................... $ 72,106 $ 115,850
--------- ---------
--------- ---------
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property under capital leases............................................. $ 350 $ 23
Capitalization of interest into networks in progress..................................... $ 627 $ 586
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest................................................... $ 26 $ 22
Cash paid for income taxes............................................................... $ -- $ 1
Repurchase of unvested common stock and cancellation of related notes receivable......... $ 8 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-23
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 1998 and the results of operations and cash flows for the three months
ended March 31, 1998 and 1997. 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, 1997.
Operating results for the three months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998.
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME, which requires than an
enterprise report, by major components and as a single total, the change in net
assets during the period from nonowner sources. Adoption of SFAS No. 130 did not
impact the Company's consolidated financial position, results of operations or
cash flows. The reconciliation of net loss to comprehensive net loss is as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Net loss.............................................................. $ (30,216) $ (22,004)
Other comprehensive loss--net unrealized gain (loss) on short-term
investments......................................................... (2) 3
---------- ----------
Total comprehensive loss.............................................. $ (30,218) $ (22,001)
---------- ----------
---------- ----------
</TABLE>
In June 1997, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
Adoption of this statement will not impact the Company's consolidated financial
position, results of operations or cash flows. The Company will adopt this
statement in its financial statements for the year ending December 31, 1998.
Certain reclassifications have been made to the 1997 amounts to conform to
the 1998 presentation.
2. NET LOSS PER SHARE. During December 1997, the Company adopted Statement
of Financial Accounting Standard No. 128 (SFAS 128), EARNINGS PER SHARE and,
retroactively, restated prior period earnings per share (EPS) for the change.
SFAS 128 requires a dual presentation of basic and diluted EPS. Basic EPS for
the period presented is computed by dividing net loss by the weighted average of
common shares outstanding (excluding shares subject to repurchase). Diluted EPS
for all periods presented is the same as basic EPS since all other potential
dilutive securities are excluded as they are antidilutive.
3. COMMITMENTS AND CONTINGENCIES. In October 1996, Itron, 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 in
the Federal District Court for the Northern District of California, claiming
that Itron's use of its electric meter reading Encoder
F-24
<PAGE>
CELLNET DATA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Receiver Transmitter (ERT-Registered Trademark-) device infringes CellNet's U.S.
Patent No. 4,783,623. The Company seeks an injunction, damages and other relief.
The consolidated complaint of JERE SETTLE AND KAREN ZULLY V. JOHN M. SEIDL,
ET AL., No. 398464 filed in the Superior Court of California for the County of
San Mateo was dismissed on February 9, 1998, without leave to amend. Counsel for
the plaintiffs in the SETTLE/ZULLY action have filed a notice of their intention
to appeal this dismissal to the California Court of Appeal. A second complaint,
also filed in the same Court, of HOWARD FIENMAN AND GERALD SLAPSOWITZ V. CELLNET
DATA SYSTEMS, INC., ET AL., No. 398560, was earlier voluntarily dismissed with
prejudice. These complaints, purported class actions filed on behalf of the
Company's stockholders against the Company, certain of its officers and
directors and underwriters of the Company's initial public offering, sought
unspecified damages and rescission for alleged liability under various
provisions of the federal securities law and California state law. The
plaintiffs alleged generally that the Prospectus and Registration Statement
dated September 26, 1996, pursuant to which 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 was likely to ensue.
In 1995, Century Telephone Enterprises, Inc. ("Century Telephone") filed a
petition before the Trademark Trial and Appeal Board of the U.S. Patent and
Trademark Office for cancellation of the Company's "CellNet" trademark
registration. The parties have agreed to settle the matter under arrangements
whereby Century Telephone will withdraw its petition for cancellation and the
Company will purchase from Century Telephone their rights to the "CellNet"
trademark now registered in Century Telephone's name. The settlement is pending
execution of settlement documents.
F-25
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses payable by the Registrants in
connection with the issuance and distribution of the securities to be
registered, other than underwriting discounts and commissions. All the amounts
shown are estimates, except the SEC registration fee and Nasdaq National Market
listing fee.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 25,444
Nasdaq NMS Fee.................................................... 17,500
Accounting Fees and Expenses*..................................... 75,000
NASD Filing Fee................................................... 9,125
Blue Sky Fees and Expenses*....................................... 15,000
Legal Fees and Expenses*.......................................... 200,000
Printing and Engraving Expenses*.................................. 75,000
Miscellaneous*.................................................... 22,931
Total............................................................. $ 440,000
---------
---------
</TABLE>
- ---------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
INDEMNIFICATION BY CELLNET OF ITS DIRECTORS AND OFFICERS
The Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") of CellNet Data Systems, Inc. ("CellNet") provides that CellNet
will to the fullest extent permitted by the General Corporation Law of the State
of Delaware (the "GCL"), as amended from time to time, indemnify all persons
whom it may indemnify pursuant thereof. CellNet's Bylaws contain a similar
provisions requiring indemnification of CellNet's directors and officers to the
fullest extent authorized by the GCL. The GCL permits a corporation to indemnify
its directors and officers (among others) against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by them in connection with any action, suit or proceeding brought (or
threatened to be brought) by third parties, if such directors or officers acted
in good faith and in a manner they reasonably believe to be in or not opposed to
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe their conduct was unlawful. In
a derivative action, i.e., one by or in the right of CellNet indemnification may
be made for expenses (including attorneys' fees) actually and reasonably
incurred by directors and officers in connection with the defense or settlement
of such action if they had acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of CellNet, except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged liable to CellNet unless and only to
the extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses. The GCL further
provides that, to the extent any director or officer has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to in
this paragraph, or in defense of any claim, issue or matter therein, such person
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith. In addition, CellNet's
Certificate of Incorporation contains a provision limiting the personal
liability of CellNet's directors for monetary damages for certain breaches of
their
II-1
<PAGE>
fiduciary duty. CellNet has indemnification insurance under which directors and
officers are insured against certain liability that may incur in their capacity
as such.
Article 6 of the Company's Bylaws provides for the indemnification of
officers, directors, employees and agents of the corporation if such person
acted in good faith and in a manner reasonably believed to be in and not opposed
to the best interest of the corporation, and, with respect to any criminal
action or proceeding the indemnified party had no reason to believe his conduct
was unlawful.
INDEMNIFICATION BY FUNDING OF ITS MANAGER
CellNet is the Manager of Funding and, therefore, officers and directors of
CellNet engaging in activities on behalf of Funding would be entitled to
benefits of the indemnification rights of CellNet described above.
Pursuant to the Operating Agreement of Funding, the Manager will be entitled
to indemnification from Funding to the fullest extent permitted by applicable
law, for any loss, damage or claim incurred by the Manager by reason of any act
or omission performed or omitted by the Manager in good faith on behalf of
Funding and in a manner reasonably believed to be within the scope of authority
conferred on the Manager by the Operating Agreement; provided, however, that any
indemnity under Section - of the Operating Agreement will be provided out of
and to the extent of Funding's assets only, and no member of Funding will have
any personal liability on account thereof. The right of indemnification pursuant
to Section - of the Operating Agreement will include the right to be paid, in
advance, or reimbursed by Funding for the reasonable expenses incurred by the
Manager who was, is, or is threatened to be made a named defendant or respondent
in a proceeding.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits: The following exhibits are filed as a part of this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- --------------------------------------------------------------------------
<C> <S>
*1.1: Form of Underwriting Agreement.
+4.1: Certificate of Incorporation of CellNet Data Systems, Inc. filed on
February 10, 1998.
+4.2: By-Laws of CellNet Data Systems, Inc.
*4.3: Certificate of Formation of CellNet Funding, LLC filed April 21, 1998 with
the Secretary of State of the State of Delaware.
*4.4: Form of Amended and Restated Limited Liability Company Agreement of
CellNet Funding, LLC, dated as of April , 1998.
*4.6: Form of Guarantee Agreement, dated April , 1998, between CellNet Data
Systems, Inc. and CellNet Funding, LLC.
*4.7: Form of Escrow and Security Agreement, dated April , 1998, among CellNet
Data Systems, Inc., CellNet Funding, LLC and The Bank of New York.
*4.8: Form of Written Action of the Manager of CellNet Funding, LLC, dated as of
April , 1998, with respect to the terms of the -% Exchangeable Limited
Liability Company Preferred Securities.
*4.9: Form of Certificate of Designation, Rights and Preferences of the
Preferred Stock Mandatorily Redeemable 2010 of CellNet Data Systems, Inc.
filed April , 1998 with the Secretary of State of the State of Delaware.
*5.1: Opinion of Wilson Sonsini Goodrich & Rosati.
*8.1: Opinion of Wilson Sonsini Goodrich & Rosati as to certain tax matters.
*23.1: Independent Auditors' Consent.
*23.2: Consents of Wilson Sonsini Goodrich & Rosati (included in Exhibits 5.1 and
8.1).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- --------------------------------------------------------------------------
<C> <S>
*24.1: Power of Attorney with respect to CellNet Data Systems, Inc. (included on
the signature page hereto).
*24.2: Power of Attorney with respect to CellNet Funding, LLC (included on the
signature page hereto).
*27.2 Financial Data Schedule.
*27.3 Financial Data Schedule.
</TABLE>
(b) Financial Statement Schedules:
All schedules are omitted because they are either not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
- ---------
+ Incorporated by reference to the Company's Report on Form 10-K filed on
March 9, 1998.
* Filed herewith.
ITEM 17. UNDERTAKINGS.
The undersigned Registrants hereby undertake:
(1) To deliver or cause to be delivered with the Prospectus, to each person
to whom the Prospectus is sent or given, the latest annual report to security
holders that is incorporated by reference in the Prospectus and furnished
pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the
Securities Exchange Act of 1934; and, where interim financial information
required to be presented by Article 3 of Regulation S-X are not set forth in the
Prospectus, to deliver, or cause to be delivered to each person to whom the
Prospectus is sent or given, the latest quarterly report that is specifically
incorporated by reference in the Prospectus to provide such interim financial
information.
(2) Funding hereby undertakes to provide to the Underwriter at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriter to permit prompt
delivery to each purchaser.
(3) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the provisions described in Item 15 (other than the
provisions relating to insurance), or otherwise, the Registrants have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrants of expenses incurred
or paid by a director, officer or controlling person of the Registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(4)(a) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrants pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrants
certify that they have reasonable grounds to believe that they meet all of the
requirements for filing on Form S-3 and have duly caused this Registration
Statement to be signed on their behalf by the undersigned, thereunto duly
authorized, in the City of San Carlos, State of California on April 22, 1998.
CellNet Data Systems, Inc.
By: /s/ JOHN M. SEIDL
------------------------------------
John M. Seidl
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
CellNet Funding, LLC
By: CELLNET DATA SYSTEMS, INC., Its
Manager
------------------------------------
By: /s/ JOHN M. SEIDL
------------------------------------
John M. Seidl
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below under the heading "Signature" constitutes and appoints John M. Seidl and
Paul G. Manca, each as his or her true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution, for him or her and in his or
her name, place and stead, in any and all capacities, to sign any or all
amendments (including post-effective amendments) and supplements to this
Registration Statement and any related Registration Statement filed pursuant to
Rule 462(b) of the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and to perform each and
every act and thing requisite and necessary to be done in connection with the
above premises, as fully for all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or his, her or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------------- ------------------------------------ --------------
<C> <S> <C>
Chairman of the Board of CellNet
/s/ JOHN M. SEIDL Data Systems, Inc., President and
------------------------------- Chief Executive Officer of each April 22, 1998
John M. Seidl Registrant (Principal Executive
Officer)
Vice President and Chief Financial
/s/ PAUL G. MANCA Officer of each Registrant
------------------------------- (Principal Financial and April 22, 1998
Paul G. Manca Accounting Officer) and Director
of CellNet Funding, LLC
/s/ DAVID L. PERRY
------------------------------- Vice President, Secretary and April 22, 1998
David L. Perry Director of CellNet Funding, LLC
/s/ PAUL M. COOK
------------------------------- Director of CellNet Data Systems, April 22, 1998
Paul M. Cook Inc.
/s/ NEAL M. DOUGLAS
------------------------------- Director of CellNet Data Systems, April 22, 1998
Neal M. Douglas Inc.
------------------------------- Director of CellNet Data Systems, April 22, 1998
E. Linn Draper, Jr. Inc.
------------------------------- Director of CellNet Data Systems, April 22, 1998
William C. Edwards Inc.
/s/ WILLIAM HART
------------------------------- Director of CellNet Data Systems, April 22, 1998
William Hart Inc.
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.: DESCRIPTION OF EXHIBITS
- -------- --------------------------------------------------------------------------
<C> <S>
*1.1: Form of Underwriting Agreement.
+4.1: Certificate of Incorporation of CellNet Data Systems, Inc. filed on
February 10, 1998.
+4.2: By-Laws of CellNet Data Systems, Inc.
*4.3: Certificate of Formation of CellNet Funding, LLC filed April 21, 1998 with
the Secretary of State of the State of Delaware.
*4.4: Amended and Restated Limited Liability Company Agreement of CellNet
Funding, LLC, dated as of April , 1998.
*4.6: Form of Guarantee Agreement, dated April , 1998, between CellNet Data
Systems, Inc. and CellNet Funding, LLC.
*4.7: Form of Escrow and Security Agreement, dated April , 1998, among CellNet
Data Systems, Inc., CellNet Funding, LLC and The Bank of New York.
*4.8: Form of Written Action of the Manager of CellNet Funding, LLC, dated as of
April , 1998, with respect to the terms of the % Exchangeable Limited
Liability Company Preferred Securities.
*4.9: Form of Certificate of Designation, Rights and Preferences of the
Preferred Stock Mandatorily Redeemable 2010 of CellNet Data Systems, Inc.
filed April , 1998 with the Secretary of State of the State of Delaware.
*5.1: Opinion of Wilson Sonsini Goodrich & Rosati.
*8.1: Opinion of Wilson Sonsini Goodrich & Rosati as to certain tax matters.
*23.1: Independent Auditors' Consent.
*23.2: Consents of Wilson Sonsini Goodrich & Rosati (included in Exhibits 5.1 and
8.1).
*24.1: Power of Attorney with respect to CellNet Data Systems, Inc. (included on
the signature page hereto).
*24.2: Power of Attorney with respect to CellNet Funding, LLC (included on the
signature page hereto).
*27.2 Financial Data Schedule.
*27.3 Financial Data Schedule.
</TABLE>
- ---------
+ Incorporated by reference to the Company's Report on Form 10-K filed on
March 9, 1998.
* Filed herewith.
<PAGE>
3,000,000 SHARES
CELLNET FUNDING, LLC
CELLNET DATA SYSTEMS, INC.
___% EXCHANGEABLE LIMITED LIABILITY
COMPANY PREFERRED SECURITIES
UNDERWRITING AGREEMENT
__________, 1998
<PAGE>
_____________, 1998
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
CellNet Funding, LLC, a Delaware limited liability corporation
("FUNDING"), and CellNet Data Systems, Inc. (the "COMPANY"), propose to issue
and sell to Morgan Stanley & Co. Incorporated (the "UNDERWRITER") 3,000,000
shares of Funding's ___% Exchangeable Limited Liability Company Preferred
Securities, liquidation preference $25.00 per preferred security (the "FIRM
PREFERRED SECURITIES") which will be mandatorily redeemable on May 1, 2010,
as set forth in the Agreement of Limited Liability Company of Funding (the
"LLC AGREEMENT"). Funding and the Company also propose to issue and sell to
you not more than an additional 450,000 shares of Funding's ___% Exchangeable
Limited Liability Company Preferred Securities, liquidation preference $25.00
per preferred security (the "ADDITIONAL PREFERRED SECURITIES"), which will be
mandatorily redeemable on May 1, 2010, if and to the extent that you shall
have determined to exercise the right to purchase such Additional Preferred
Securities granted to you in Section 2 hereof. The Firm Preferred Securities
and the Additional Preferred Securities are hereinafter collectively referred
to as the "PREFERRED SECURITIES." The Preferred Securities will be
exchangeable at the option of the holder thereof into shares of Common Stock,
par value $.001 per share (the "COMMON STOCK"), of the Company.
The Preferred Securities will be guaranteed by the Company (the
"GUARANTEE"), to the extent set forth in the Prospectus (as defined below), with
respect to distributions and amounts payable upon liquidation or redemption
pursuant to the Guarantee Agreement (the "GUARANTEE AGREEMENT") to be dated as
of the Closing Date (as defined below). Funding will purchase, with a portion
of the proceeds of the issuance and sale of the Preferred Securities, and pledge
pursuant to an Escrow Agreement (the "ESCROW AGREEMENT") to be dated as of the
Closing Date among Funding, the Company and The Bank of New York, as escrow
agent (the "ESCROW AGENT"), U.S. Treasury strips (the "TREASURY STRIPS") as
security for payment in full of the dividends on the Preferred Securities
through and including August 1, 2001. From the Closing Date to a date (the
"FUNDING DATE") that is no more than six months after the Closing Date, Funding
will invest the entire proceeds of the issuance and sale of the Preferred
Securities, less the amount used to purchase Treasury Strips, in U.S. government
securities. On the Funding Date, Funding will use the earnings on and principal
of such U.S. government securities to pay the purchase price of $_____ million
(plus an amount equal to 85% of the aggregate liquidation preference of any
Additional Preferred Securities purchased by you pursuant to Section 2 hereof)
of preferred stock of the Company, par
2
<PAGE>
value $_____ per share (the "ORIGINAL CELLNET PREFERRED STOCK" and, together
with the Additional CellNet Preferred Stock (as defined below), the "CELLNET
PREFERRED STOCK"), which will be mandatorily redeemable at the option of
Funding two business days prior to May 1, 2010, as set forth in the
Certificate of Designation, Rights and Preferences of the CellNet Preferred
Stock (the "CERTIFICATE OF DESIGNATION"). In the event such earnings and
principal do not equal $______ million (plus an amount equal to 85% of the
aggregate liquidation preference of any Additional Preferred Securities
purchased by you pursuant to Section 2 hereof), the Company [will distribute
shares of Common Stock to Funding in a number that will be sufficient, when
sold by Funding in the open market, to eliminate such cash shortfall]. The
Preferred Securities and the shares of Common Stock issuable upon exchange of
the Preferred Securities (the "CELLNET EXCHANGE COMMON SHARES") are
collectively referred to herein as the "SECURITIES."
The Company has filed with the Securities and Exchange Commission
(the "COMMISSION") a registration statement, including a prospectus, relating
to the Securities and the Guarantee. The registration statement as amended
at the time it becomes effective, including (x) the exhibits thereto and the
documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the Securities Act and (y) the information (if any) deemed to be part
of the registration statement at the time of effectiveness pursuant to Rule
430A under the Securities Act of 1933, as amended (the "SECURITIES ACT"), is
hereinafter referred to as the "REGISTRATION STATEMENT"; the prospectus in
the form first used to confirm sales of Preferred Securities is hereinafter
referred to as the "PROSPECTUS." If the Company has filed an abbreviated
registration statement to register additional Preferred Securities pursuant
to Rule 462(b) under the Securities Act (the "RULE 462 REGISTRATION
STATEMENT"), then any reference herein to the term "REGISTRATION STATEMENT"
shall be deemed to include such Rule 462 Registration Statement.
1. REPRESENTATIONS AND WARRANTIES. Each of Funding and the Company, jointly
and severally, represents and warrants to and agrees with you that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or to the
knowledge of Funding or the Company, threatened by the Commission.
(b) (i) Each of Funding and the Company meets the requirements
for use of Form S-3 under the Securities Act, (ii) the Registration
Statement, when it became effective, did not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, (iii)
the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder and (iv) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit
3
<PAGE>
to state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this
paragraph do not apply to statements or omissions in the Registration
Statement or the Prospectus based upon information relating to you
furnished to the Company in writing by you expressly for use therein.
(c) The documents incorporated by reference in the Prospectus
pursuant to Item 12 of Form S-3 under the Securities Act, at the time they
were filed with the Commission, complied in all material respects with the
requirements of the Securities Exchange Act of 1934, as amended, and the
rules and regulations of the Commission thereunder.
(d) Funding has been duly organized, is validly existing as a limited
liability company in good standing under the laws of the State of Delaware
and has the power and authority to own its property and to conduct its
business as described in the Prospectus.
(e) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware, has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole, or any Subsidiary (as defined
below), singly.
(f) Each of CellNet Data Services, Inc., a Delaware corporation,
CellNet Data Services (KC), Inc., a Delaware corporation, CellNet Data
Services (MSP), Inc., a Delaware corporation, CellNet Data Services (SL),
Inc., a Delaware corporation, CN Frequency (KC), Inc., a Delaware
corporation, CN Frequency (SL), Inc., a Delaware corporation, and CN WAN
Corp., a Delaware corporation (each, a "SUBSIDIARY" and, collectively, the
"SUBSIDIARIES"), which are the only significant subsidiaries of the Company
as defined in Rule 1-02 of Regulation S-X, has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to
own its property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(g) This Agreement has been duly authorized, executed and
delivered by each of Funding and the Company.
4
<PAGE>
(h) The Escrow Agreement has been duly authorized by each of Funding
and the Company and, when executed and delivered by each of Funding and the
Company, will be a valid and binding agreement of each of Funding and the
Company, enforceable against each of them in accordance with its terms,
except as (x) the enforceability thereof may be limited by the effect of
any applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws now or hereafter in effect relating to or affecting creditors'
rights generally and (y) the availability of equitable remedies may be
limited by equitable principles of general applicability.
(i) Upon the delivery to the Escrow Agent of the certificates or
instruments, if any, representing the Treasury Strips, the pledge and grant
of a security interest in the Treasury Strips for the benefit of the Escrow
Agent and the holders of the Preferred Securities will constitute a
perfected security interest in the Treasury Strips with first priority
against all creditors of the Company and Funding.
(j) The Preferred Securities are duly authorized by the LLC Agreement
and, when issued and delivered to and paid for by you in accordance with
the terms of this Agreement and the LLC Agreement, will be validly issued
and fully paid, and will not be subject to any preemptive or similar
rights.
(k) Once duly and validly issued in accordance with the LLC
Agreement, the Preferred Securities will entitle the holders of the
Preferred Securities to the benefits of the LLC Agreement.
(l) The holders of the Preferred Securities are members of Funding
and as such have no liability for the obligations of Funding in excess of
(a) their respective obligations to pay for their Preferred Securities, (b)
their respective obligations to make other payments as members as provided
for in the LLC Agreement, (c) their respective obligations to repay to
Funding (1) any distribution received by any of the holders of the
Preferred Securities in violation of the Delaware Limited Liability Company
Act and (2) any amount arising out of an obligation or liability under
other applicable law, and (d) their respective shares of the assets and
undistributed profits of Funding.
(m) The Certificate of Formation of Funding (the "CERTIFICATE OF
FORMATION") has been duly filed with the Secretary of State of the State of
Delaware and with all other offices, if any, where such filings are
required and copies of such Certificate of Formation have been delivered to
you.
(n) The LLC Agreement has been duly executed and is a valid and
binding agreement of the Company, in its capacity as manager and holder of
the common limited liability company securities, and _________________, in
his capacity as provisional member, enforceable against the Company, in its
capacity as manager and holder of the common limited liability company
securities, and _____________, in his capacity as
5
<PAGE>
provisional member, in accordance with its terms, and copies of such LLC
Agreement have been delivered to you.
(o) The CellNet Preferred Stock has been duly authorized by the
Company and, when issued and delivered to and paid for in accordance with
the terms of the Certificate of Designation and this Agreement, will be
validly issued, fully paid and non-assessable and will not be subject to
any preemptive or similar rights.
(p) The additional shares of the CellNet Preferred Stock (the
"ADDITIONAL CELLNET PREFERRED STOCK") that may be issued in payment of
dividends in respect of the CellNet Preferred Stock have been duly
authorized and reserved by the Company and, when issued and delivered in
accordance with the terms of the Certificate of Designation, will be
validly issued, fully paid and non-assessable and will not be subject to
any preemptive or similar rights.
(q) The terms of the CellNet Preferred Stock as specified in the
Certificate of Designation are legal, valid and enforceable against the
Company.
(r) The Certificate of Designation creating the CellNet Preferred
Stock will have been duly filed with the Secretary of State of the State of
Delaware and with all other offices where such filings are required, on or
before the Closing Date (as defined below).
(s) The authorized capital stock and securities of the Company or
Funding, as the case may be, conform as to legal matters to the
descriptions thereof in the Prospectus.
(t) The shares of Common Stock outstanding on the date hereof have
been duly authorized and are validly issued, fully paid and non-assessable.
(u) The CellNet Exchange Common Shares and the shares of the Common
Stock payable as dividends on the Preferred Securities or as dividends on
the CellNet Preferred Stock (together with the CellNet Exchange Common
Shares, the "CELLNET COMMON SHARES") have been duly authorized and validly
reserved for issuance upon exchange of the Preferred Securities or payment
as dividends on the Preferred Securities by all necessary corporate action
of the Company and, when duly issued by the Company upon such exchange or
payment, will be validly issued, fully paid and non-assessable and will not
be subject to preemptive or similar rights.
(v) The Guarantee Agreement has been duly authorized by the Company
and Funding and, when validly executed and delivered by the Company and
Funding, will be a valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as (x) the
enforceability thereof may be limited by the effect of any applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws now or
hereafter in effect relating to or affecting creditors' rights generally
and (y) the
6
<PAGE>
availability of equitable remedies may be limited by equitable principles
of general applicability.
(w) The execution and delivery by Funding and the Company of, and the
performance by Funding and the Company of their respective applicable
obligations under, this Agreement, the Escrow Agreement, the Guarantee
Agreement, the Preferred Securities (in the case of Funding), the LLC
Agreement, the CellNet Preferred Stock (in the case of the Company) and the
Certificate of Designation (in the case of the Company) (all of the
foregoing being referred to herein collectively as the "TRANSACTION
DOCUMENTS") and the issuance, sale and delivery of the Preferred
Securities, the Original CellNet Preferred Stock, the Additional CellNet
Preferred Stock, when issued, and the CellNet Common Shares, when issued,
will not contravene any provision of applicable law or the certificate of
incorporation or by-laws or the Certificate of Formation or the LLC
Agreement, as the case may be, either of Funding or the Company, or any
agreement or other instrument binding upon Funding or the Company or any of
its subsidiaries that is material to the Company and its subsidiaries,
taken as a whole, or any judgment, order or decree of any governmental
body, agency or court having jurisdiction over Funding, the Company or any
of its subsidiaries, and no consent, approval, authorization or order of,
or qualification with, any governmental body or agency is required for the
performance by Funding or the Company of their respective obligations under
the Transaction Documents and the issuance, sale and delivery of the
Preferred Securities, the Original CellNet Preferred Stock, the Additional
CellNet Preferred Stock, when issued, and the CellNet Common Shares, when
issued, except such as may be required by the securities or Blue Sky laws
of the various states in connection with the offer and sale of the
Preferred Securities.
(x) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act, complied
when so filed in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder.
(y) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of Funding or the Company and its subsidiaries, taken as a
whole, from that set forth in the Prospectus (exclusive of any amendments
or supplements thereto subsequent to the date of this Agreement) except for
any such change which has been disclosed to you and to the disclosure of
which in the Prospectus you have agreed.
(z) There are no legal or governmental proceedings pending or, to the
knowledge of the Company or Funding, threatened to which Funding, the
Company or any of its subsidiaries is a party or to which any of the
properties of Funding, the Company or any of its subsidiaries is subject
that are required to be described in the Registration Statement or the
Prospectus and are not so described and none of such proceedings is
reasonably likely
7
<PAGE>
to have a material adverse effect on the Company and its subsidiaries,
taken as a whole, or on the power or ability of Funding or the Company to
perform their respective obligations under the Transaction Documents or
to consummate the transactions contemplated by the Prospectus.
(aa) Neither Funding nor the Company is, and after giving effect to
the offering and sale of the Preferred Securities and the application of
the proceeds thereof as described in the Prospectus, neither Funding nor
the Company will be, an "investment company," as such term is defined in
the Investment Company Act of 1940, as amended.
(ab) Each of Funding, the Company and its subsidiaries has all
necessary consents, authorizations, approvals, orders, certificates and
permits of and from, and has made all declarations and filings with, all
federal, state, local and other governmental authorities, all
self-regulatory organizations and all courts and other tribunals, to own,
lease, license and use its properties and assets and to conduct its
business in the manner described in the Prospectus, except to the extent
that the failure to obtain such consents, authorizations, approvals,
orders, certificates or permits or make such declarations or filings would
not have a material adverse effect on Funding or the Company and its
subsidiaries, taken as a whole, or any Subsidiary, singly.
(ac) Each of Funding, the Company and its subsidiaries (i) are in
compliance with any and all applicable foreign, federal, state and local
laws and regulations relating to the protection of human health and safety,
the protection of the environment, hazardous or toxic substances or wastes,
pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws, failure
to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or approvals
would not, singly or in the aggregate, have a material adverse effect on
Funding or the Company and its subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectus.
(ad) Each of Funding and the Company has reasonably concluded that the
costs and liabilities associated with the Environmental Laws (including,
without limitation, any capital or operating expenditures required for
clean-up, closure of properties or compliance with Environmental Laws or
any permit, license or approval, any related constraints on operating
activities and any potential liabilities to third parties) would not,
singly or in the aggregate, have a material adverse effect on Funding or
the Company and its subsidiaries, taken as a whole.
(ae) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) neither Funding
nor the Company and its
8
<PAGE>
subsidiaries has incurred any material liability or obligation, direct
or contingent, or entered into any material transaction not in the
ordinary course of business; (2) neither Funding nor the Company has
purchased (except, in the case of the Company, for the repurchase of
shares of Common Stock from employees, officers, directors, consultants
or other persons providing services to the Company or any of its
subsidiaries pursuant to agreements under which the Company has the
option to repurchase such shares of Common Stock upon the occurrence of
certain events such as the termination of employment or other
service-providing relationship) any of its outstanding capital stock,
nor declared, paid or otherwise made any dividend or distribution of
any kind on its capital stock other than ordinary and customary
dividends; and (3) there has not been any material change in the
capital stock, short-term debt or long-term debt of Funding or the
Company and its consolidated subsidiaries taken as a whole, except in
each case as described in the Prospectus.
(af) The Company and its Subsidiaries have good and
marketable title in fee simple to all real property and good and
marketable title to all personal property owned by them which is
material to the business of the Company and its subsidiaries, in each
case free and clear of all liens, encumbrances and defects except such
as are described in the Prospectus or such as do not materially affect
the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by
the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company and its subsidiaries, in
each case except as described in or contemplated by the Prospectus.
(ag) The Company and its subsidiaries own or possess, or can acquire
on reasonable terms, all licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names, and to the Company's knowledge,
all patents and patent rights, necessary to carry on its business in all
material respects as described in the Prospectus and, except as set forth
in the Prospectus, neither the Company nor any of its subsidiaries has
received any correspondence relating to any of the foregoing or notice of
infringement of or conflict with asserted rights of others with respect to
any of the foregoing which the Company believes would, singly or in the
aggregate, result in any material adverse change in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company and its subsidiaries, taken as a whole.
(ah) No material labor dispute with the employees of the Company or
any of its subsidiaries exists, except as described in or contemplated by
the Prospectus, or, to the knowledge of the Company, is imminent; and the
Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that could result in any material adverse
change in the
9
<PAGE>
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole.
(ai) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; neither the Company nor any such
subsidiary has been refused any insurance coverage sought or applied
for; and neither the Company nor any such subsidiary has any reason to
believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the
condition, financial or otherwise, or the earnings, business or
operations of the Company and its subsidiaries, taken as a whole,
except as described in or contemplated by the Prospectus.
(aj) Each of Funding and the Company and its subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their
respective businesses, except to the extent that the failure to possess
such certificates, authorizations and permits would not have a material
adverse effect on Funding or the Company and its subsidiaries, taken as a
whole, or any Subsidiary singly, and neither Funding, the Company nor any
such subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would result in a material adverse change in
the condition, financial or otherwise, or in the earnings, business or
operations of Funding or the Company and its subsidiaries, taken as a
whole, except as described in or contemplated by the Prospectus.
(ak) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (1) transactions are executed in accordance with management's general
or specific authorizations; (2) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (3)
access to assets is permitted only in accordance with management's general
or specific authorization; and (4) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(al) The terms of the Preferred Securities and the CellNet Preferred
Stock conform in all material respects to the descriptions thereof
contained in the Prospectus under the headings "Description of the
Preferred Securities" and "Description of CellNet Preferred Stock,"
respectively.
10
<PAGE>
(am) Each of Funding and the Company is, and immediately after the
Closing Date will be, solvent. As used herein, the term "solvent" means,
with respect to Funding or the Company, as the case may be, on a particular
date, that on such date (A) the fair market value of the assets of Funding
or the Company, as the case may be, is greater than the respective total
amount of liabilities (including contingent liabilities) of Funding or the
Company, as the case may be, (B) the present fair salable value of the
assets of Funding or the Company, as the case may be, is greater than the
amount that will be required to pay the respective probable liabilities of
Funding or the Company, as the case may be, on its debts as they become
absolute and matured, (C) Funding or the Company, as the case may be, is
able to pay its debts and other liabilities, including contingent
obligations, as they mature and (D) Funding or the Company, as the case may
be, does not have an unreasonably small capital.
(an) There are no holders of securities (debt or equity) of the
Company or any of its subsidiaries, or holders of rights, options, or
warrants to obtain securities of the Company or any of its subsidiaries,
who have the right, during the [90] day period after the date of this
Agreement, to require the Company to register securities held by them under
the Securities Act, other than holders who have waived such right for the
[90] day period after the date of the Prospectus and who have waived their
rights with respect to the inclusion of their securities in the
Registration Statement.
(ao) Each of Funding and the Company has complied with all provisions
of Section 517.075, Florida Statutes relating to doing business with the
Government of Cuba or with any person or affiliate located in Cuba.
2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees to
sell to you, and upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, you agree to
purchase from the Company 3,000,000 shares of Preferred Securities at $______
per Preferred Security (the "PURCHASE PRICE").
On the basis of the representations and warranties contained in
this Agreement, and subject to its terms and conditions, the Company agrees
to sell to you the Additional Preferred Securities, and you shall have a one
time right to purchase up to 450,000 Additional Preferred Securities at the
Purchase Price. If you elect to exercise such option, you shall so notify the
Company in writing not later than 30 days after the date of this Agreement,
which notice shall specify the number of Additional Preferred Securities to
be purchased by you and the date on which such shares are to be purchased.
Such date may be the same as the Closing Date (as defined below) but not
earlier than the Closing Date nor later than ten business days after the date
of such notice. Additional Preferred Securities may be purchased as provided
in Section 4 hereof solely for the purpose of covering overallotments made in
connection with the offering of the Firm Preferred Securities.
11
<PAGE>
The Company hereby agrees that, without your prior written consent,
it will not, during the period ending [90] days after the date of the
Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend, or otherwise transfer or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii)
enter into any swap or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (i) or (ii) above is
to be settled by delivery of Common Stock or such other securities, in cash
or otherwise. The foregoing sentence shall not apply to (A) the issuance of
the CellNet Exchange Common Shares pursuant to the Certificate of
Designation, (B) the issuance by the Company of shares of Common Stock upon
the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof of which the Underwriter has been advised in
writing, (C) transactions relating to shares of Common Stock or other
securities acquired in open market transactions after the completion of the
offering of the Preferred Securities hereunder or (D) shares or options to
acquire shares of Common Stock which may be issued or granted from time to
time by the Company pursuant to the Company's 1992 Stock Option Plan, the
Company's 1994 Stock Plan or the Company Employee Stock Purchase Plan.
3. TERMS OF PUBLIC OFFERING. The Company is advised by you that you
propose to make a public offering of the Preferred Securities as soon after the
Registration Statement and this Agreement have become effective as in your
judgment is advisable. The Company is further advised by you that the Preferred
Securities are to be offered to the public initially at $_____________ per
Preferred Security (the "PUBLIC OFFERING PRICE") and to certain dealers selected
by you at a price that represents a concession not in excess of $______ per
Preferred Security under the Public Offering Price, and that you may allow, and
such dealers may reallow, a concession, not in excess of $_____ per Preferred
Security, to you or to certain other dealers.
4. PAYMENT AND DELIVERY. Payment for the Firm Preferred Securities
shall be made to Funding in Federal or other funds immediately available in New
York City against delivery of such Firm Preferred Securities for your account at
10:00 a.m., New York City time, on ____________, 1998, or at such other time on
the same or such other date, not later than _________, 1998, as shall be
designated in writing by you. The time and date of such payment are hereinafter
referred to as the "CLOSING DATE."
Payment for any Additional Preferred Securities shall be made to
Funding in Federal or other funds immediately available in New York City against
delivery of such Additional Preferred Securities for your account at 10:00 a.m.,
New York City time, on the date specified in the notice described in Section 2
or at such other time on the same or on such other date, in any event not later
than _______, 1998, as shall be designated in writing by you. The time and date
of such payment are hereinafter referred to as the "OPTION CLOSING DATE."
Certificates for the Firm Preferred Securities and Additional
Preferred Securities shall be in definitive form and registered in such names
and in such denominations as you shall request
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<PAGE>
in writing not later than one full business day prior to the Closing Date or
the Option Closing Date, as the case may be. The certificates evidencing the
Firm Preferred Securities and Additional Preferred Securities shall be
delivered to you on the Closing Date or the Option Closing Date, as the case
may be, with any transfer taxes payable in connection with the transfer of
the Preferred Securities to you duly paid, against payment of the Purchase
Price therefor.
5. CONDITIONS TO YOUR OBLIGATION. The obligations of Funding and
the Company to sell the Preferred Securities to you and your obligation to
purchase and pay for the Preferred Securities on the Closing Date are subject to
the condition that the Registration Statement shall have become effective not
later than [_____] (New York City time) on the date hereof.
Your obligation is subject to the following further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor
shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not
indicate the direction of the possible change, in the rating accorded
any of Funding or the Company's securities, as the case may be, by any
"nationally recognized statistical rating organization," as such term
is defined for purposes of Rule 436(g)(2) under the Securities Act;
and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations of
Funding or the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement) that, in
your judgment, is material and adverse and that makes it, in your
judgment, impracticable to market the Preferred Securities on the
terms and in the manner contemplated in the Prospectus.
(b) You shall have received on the Closing Date certificates,
dated the Closing Date and signed by an executive officer of Funding and
the Company, to the effect set forth in Section 5(a)(i) above and to the
effect that the representations and warranties of each of Funding and the
Company contained in this Agreement are true and correct as of the Closing
Date and that each of Funding and the Company have complied with all of the
agreements and satisfied all of the conditions on their respective parts to
be performed or satisfied hereunder on or before the Closing Date.
The officers signing and delivering such certificates may rely
upon the best of their knowledge as to proceedings threatened.
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<PAGE>
(c) You shall have received on the Closing Date an opinion of
Wilson Sonsini Goodrich & Rosati, outside counsel for Funding and the
Company, dated the Closing Date, in the form of Exhibit B hereto.
(d) You shall have received on the Closing Date an opinion of
Wilkinson, Barker, Knauer & Quinn, regulatory counsel for the Company,
dated the Closing Date, in the form of Exhibit C hereto.
(e) You shall have received on the Closing Date an opinion of
Fish & Richardson, intellectual property counsel for the Company, dated the
Closing Date, in the form of Exhibit D hereto.
(f) You shall have received on the Closing Date an opinion of
Shearman & Sterling, counsel for the Underwriter, dated the Closing Date,
with respect to the Prospectus and such other related matters as you may
reasonably request, and such counsel shall have received such documents and
information as they may reasonably request to enable them to pass upon such
matters.
(g) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to you, from Deloitte &
Touche LLP, independent public accountants, containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and
the Prospectus; PROVIDED that the letter delivered on the Closing Date
shall use a "cut-off date" not earlier than the date hereof.
(h) The "lockup" agreements, each substantially in the form of
Exhibit A hereto, between you and certain securityholders, officers and
directors of the Company relating to sales and certain other dispositions
of Common Stock or certain other securities, delivered to you on or before
the date hereof, shall be in full force and effect on the Closing Date.
(i) You shall have received written waivers from each holder of
securities (debt or equity) of the Company or any of its subsidiaries, or
holders of rights, options, or warrants to obtain securities of the Company
or any of its subsidiaries, who have the right, during the [90] day period
after the date of this Agreement, to require the Company to register
securities held by them under the Securities Act waiving such right for the
[90] day period after the date of the Prospectus.
(j) The LLC Agreement, the Certificate of Designation and each
other Transaction Document relating to the Preferred Securities or the
CellNet Preferred Stock shall be completely satisfactory, in form and
substance, to you.
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<PAGE>
(k) No stop order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings for such
purpose shall be pending before, or to the knowledge of Funding or the
Company or to your knowledge, threatened by the Commission.
(l) The Preferred Securities have received approval for listing,
subject to official notice of issuance, on Nasdaq by the Nasdaq Stock
Market, Inc.
Your obligation to purchase Additional Preferred Securities hereunder
is subject to the delivery to you on the Option Closing Date of such documents
as you may reasonably request with respect to the good standing of Funding and
the Company, the due authorization and issuance of the Additional Preferred
Securities and other matters related to the issuance of the Additional Preferred
Securities.
6. COVENANTS OF FUNDING AND THE COMPANY. In further consideration
of the agreements of the Underwriter herein contained, the Company covenants
with each Underwriter as follows:
(a) To furnish to you, without charge, two signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
Section 6(c) below, as many copies of the Prospectus and any supplements
and amendments thereto or to the Registration Statement as you may
reasonably request.
(b) Before amending or supplementing the Registration Statement
or the Prospectus, to furnish to you a copy of each such proposed amendment
or supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Preferred Securities as in the opinion of your counsel the
Prospectus is required by law to be delivered in connection with sales by
you or a dealer, any event shall occur or condition exist as a result of
which it is necessary to amend or supplement the Prospectus in order to
make the statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of your counsel, it is necessary to amend or supplement the
Prospectus to comply with applicable law, forthwith to prepare, file with
the Commission and furnish, at its own expense, to you and to the dealers
(whose names and addresses you will furnish to the Company) to which
Preferred Securities may have been sold by you and to any other dealers
upon request, either amendments or supplements to the Prospectus so that
the statements in the Prospectus as so amended or supplemented will not,
15
<PAGE>
in the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law.
(d) To endeavor to qualify the Preferred Securities for offer
and sale under the securities or Blue Sky laws of such jurisdictions as you
shall reasonably request.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earning statement covering the
twelve month period ending July 1, 1999 that satisfies the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
(f) Not to agree to amend or waive the "lock-up" period as
provided for in the "lock-up agreements" to be entered into pursuant to
Section 5(h).
(g) Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or cause
to be paid all expenses incident to the performance of its obligations
under this Agreement, including: (i) the fees, disbursements and expenses
of the Company's and Funding's counsel and the Company's accountants in
connection with the registration and delivery of the Preferred Securities
under the Securities Act and all other fees or expenses in connection with
the preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the
mailing and delivery of copies thereof to you and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to
the transfer and delivery of the Preferred Securities to you, including any
transfer or other taxes payable thereon and all costs and expenses related
to the preparation, issuance and delivery of the CellNet Preferred Stock,
(iii) the cost of printing or producing any Blue Sky or Legal Investment
memorandum in connection with the offer and sale of the Preferred
Securities under state securities laws and all expenses in connection with
the qualification of the Preferred Securities for offer and sale under
state securities laws as provided in Section 6(d) hereof, including filing
fees and the reasonable fees and disbursements of your counsel in
connection with such qualification and in connection with the Blue Sky or
Legal Investment memorandum, (iv) all filing fees and the reasonable fees
and disbursements of your counsel incurred in connection with the review
and qualification of the offering of the Preferred Securities by the
National Association of Securities Dealers, Inc., (v) all fees and expenses
in connection with the preparation and filing of the registration statement
on Form 8-A relating to the Preferred Securities and all costs and expenses
incident to listing the Preferred Securities and Exchange Common Shares on
the Nasdaq National Market, (vi) the cost of printing certificates
representing the Preferred Securities, (vii) the costs and charges of any
transfer agent, Escrow Agent, registrar or depositary, (viii) the costs and
expenses of the Company and Funding relating to investor presentations on
any "road show" undertaken in connection with the marketing of the offering
of the Preferred Securities, including, without limitation, expenses
associated with the production of road show slides and graphics, fees and
expenses of any consultants
16
<PAGE>
engaged in connection with the road show presentations with the prior
approval of the Company or Funding, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and
the cost of any aircraft chartered in connection with the road show, and
(ix) all other costs and expenses incident to the performance of the
obligations of the Company hereunder for which provision is not otherwise
made in this Section. It is understood, however, that as provided in this
Section, Section 7 entitled "Indemnity and Contribution", and the last
paragraph of Section 9 below, you will pay all of your costs and expenses,
including fees and disbursements of your counsel, stock transfer taxes
payable on resale of any of the Preferred Securities by them and any
advertising expenses connected with any offers you may make.
7. INDEMNITY AND CONTRIBUTION. (a) Each of Funding and the Company
agrees to indemnify and hold harmless the Underwriter and each person, if any,
who controls the Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented if
Funding or the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information relating to the Underwriter
furnished to Funding or the Company in writing by the Underwriter expressly for
use therein; PROVIDED, HOWEVER, that the foregoing indemnity agreement with
respect to any preliminary prospectus shall not inure to the benefit of the
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased Preferred Securities, or any person controlling the
Underwriter, if a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not sent
or given by the Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of the Preferred
Securities to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such loss, claim, damage or
liability.
(b) The Underwriter agrees to indemnify and hold harmless Funding,
the Company, their respective directors and officers who sign the Registration
Statement and each person, if any, who controls Funding and the Company, as the
case may be, within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act to the same extent as the foregoing indemnity
from Funding and the Company to the Underwriter, but only with reference to
information relating to the Underwriter furnished to Funding or the Company in
writing by the Underwriter expressly for use in the Registration Statement, any
preliminary prospectus, the Prospectus or any amendments or supplements thereto.
17
<PAGE>
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to Section 7(a) or 7(b), such person (the "INDEMNIFIED PARTY")
shall promptly notify the person against whom such indemnity may be sought (the
"INDEMNIFYING PARTY") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated, in the case of
parties indemnified pursuant to Section 7(a), and by the Company or Funding, in
the case of parties indemnified pursuant to Section 7(b). The indemnifying
party shall not be liable for any settlement of any proceeding effected without
its written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by the second
and third sentences of this paragraph, the indemnifying party agrees that it
shall be liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 30 days after
receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(d) To the extent the indemnification provided for in Section 7(a) or
7(b) is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by Funding and the Company on the one hand and the Underwriter
on the other hand from the offering of the Preferred Securities or (ii) if the
allocation provided by clause 7(d)(i) above is not permitted by applicable law,
in such proportion
18
<PAGE>
as is appropriate to reflect not only the relative benefits referred to in
clause 7(d)(i) above but also the relative fault of Funding and the Company
on the one hand and of the Underwriter on the other hand in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by Funding and the Company on the one hand and the
Underwriter on the other hand in connection with the offering of the
Preferred Securities shall be deemed to be in the same respective proportions
as the net proceeds from the offering of the Preferred Securities (before
deducting expenses) received by Funding and the Company and the total
underwriting discounts and commissions received by the Underwriter, in each
case as set forth in the table on the cover of the Prospectus, bear to the
aggregate Public Offering Price of the Preferred Securities. The relative
fault of Funding and the Company on the one hand and the Underwriter on the
other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
Funding or the Company or by the Underwriter and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
(e) Funding, the Company and the Underwriter agree that it would
not be just or equitable if contribution pursuant to this Section 7 were
determined by PRO RATA allocation (even if the Underwriter were treated as
one entity for such purpose) or by any other method of allocation that does
not take account of the equitable considerations referred to in Section 7(d).
The amount paid or payable by an indemnified party as a result of the
losses, claims, damages and liabilities referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations
set forth above, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 7, the
Underwriter shall not be required to contribute any amount in excess of the
amount by which the total price at which the Preferred Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that the Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Section 7
are not exclusive and shall not limit any rights or remedies which may
otherwise be available to any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of Funding
and the Company contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of the Underwriter or any person controlling
the Underwriter or by or on behalf of Funding, the Company, their respective
officers or directors or any person controlling Funding or the Company and (iii)
acceptance of and payment for any of the Preferred Securities.
19
<PAGE>
8. TERMINATION. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 8(a)(i) through 8(a)(iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Preferred Securities on the terms and in the manner contemplated in
the Prospectus.
9. EFFECTIVENESS; REIMBURSEMENT. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If this Agreement shall be terminated by you because of any failure
or refusal on the part of Funding or the Company to comply with the terms or
to fulfill any of the conditions of this Agreement, or if for any reason
Funding or the Company shall be unable to perform their respective
obligations under this Agreement, Funding and the Company will severally
reimburse you for all out-of-pocket expenses (including the fees and
disbursements of your counsel) reasonably incurred by you in connection with
this Agreement or the offering contemplated hereunder.
10. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
11. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
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12. HEADINGS. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
Very truly yours,
CELLNET DATA SYSTEMS, INC.
By:
------------------------------------
Name:
Title:
CELLNET FUNDING, LLC
By:
------------------------------------
Name:
Title:
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
By:
------------------------------------
Name:
Title:
21
<PAGE>
EXHIBIT A
FORM OF LOCK-UP LETTER
_____________, 1998
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned [stockholder] [warrantholder] of CellNet Data Systems,
Inc., a Delaware corporation ("CELLNET"), understands that CellNet and CellNet
Funding, LLC, a newly formed Delaware limited liability company ("FUNDING"),
propose to enter into an underwriting agreement (the "UNDERWRITING AGREEMENT")
with you providing for the issuance and sale to you of an aggregate of 3,000,000
of Funding's ___% Exchangeable Limited Liability Company Preferred Securities,
liquidation preference $25.00 per Preferred Security (the "FIRM PREFERRED
SECURITIES"), which will be mandatorily redeemable on May 1, 2010, and, at your
election, solely to cover over-allotments, if any, in connection with the
offering (the "OFFERING") of the Firm Preferred Securities, up to an additional
450,000 of Funding's ___% Exchangeable Limited Liability Company Preferred
Securities, liquidation preference $25.00 per Preferred Security (together with
the Firm Preferred Securities, the "PREFERRED SECURITIES"), which will be
mandatorily redeemable on May 1, 2010. The Preferred Securities will be
exchangeable at the option of the holder thereof into shares of Common Stock,
par value $.001 per share (the "COMMON STOCK"), of CellNet.
To induce you to continue your efforts in connection with the Public
Offering, the undersigned hereby agrees that, without your written consent, it
will not, during the period commencing on the date hereof and ending [90 days
after the date of the final prospectus relating to the Public Offering (the
"PROSPECTUS"), (1) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock (provided that such shares
or securities are either now owned by the undersigned or are hereafter acquired
prior to or in connection with the offering of Preferred Securities) or
(2) enter into any swap or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to transactions relating to
shares of Common Stock or other
<PAGE>
A-2
securities acquired in open market transactions after the completion of the
offering of the Preferred Securities hereunder. In addition, the undersigned
agrees that, without your prior written consent, it will not, during the
period commencing on the date hereof and ending [90] days after the date of
the Prospectus, make any demand for or exercise any right with respect to,
the registration of any shares of Common Stock or any security convertible
into or exercisable or exchangeable for Common Stock.
Very truly yours,
_________________________
(Name)
_________________________
(Address)
<PAGE>
EXHIBIT B
FORM OF OPINION OF
WILSON SONSINI GOODRICH & ROSATI
Pursuant to Section 5(c) of the Underwriting Agreement, Wilson Sonsini
Goodrich & Rosati, counsel for Funding and the Company, shall furnish an opinion
to the effect that:
(i) Funding has been duly organized, is validly existing as a limited
liability company in good standing under the laws of the State of Delaware
and has the power and authority to own its property and to conduct its
business as described in the Prospectus.
(ii) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware, has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its subsidiaries taken as a whole, or any Subsidiary, singly.
(iii) Each of CellNet Data Services, Inc., a Delaware corporation,
CellNet Data Services (KC), Inc., a Delaware corporation, CellNet Data
Services (MSP), Inc., a Delaware corporation, CellNet Data Services (SL),
Inc., a Delaware corporation, CN Frequency (KC), Inc., a Delaware
corporation, CN Frequency (SL), Inc., a Delaware corporation, and CN WAN
Corp., a Delaware corporation, has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to
own its property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries taken as a
whole.
(iv) This Agreement has been duly authorized, executed and delivered
by each of Funding and the Company.
(v) The Escrow Agreement has been duly authorized by each of Funding
and the Company and, when executed and delivered by each of Funding and the
Company, will be a valid and binding agreement of each of Funding and the
Company, enforceable against each of them in accordance with its terms,
except as (x) the enforceability thereof may be
<PAGE>
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limited by the effect of any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws now or hereafter in effect
relating to or affecting creditors' rights generally and (y) the
availability of equitable remedies may be limited by equitable principles
of general applicability.
(vi) The pledge and grant of a security interest in the Treasury
Strips for the benefit of the Escrow Agent and the holders of the Preferred
Securities constitutes a perfected security interest in the Treasury Strips
with first priority against all creditors of the Company and Funding.
(vii) The Preferred Securities are duly authorized by the LLC
Agreement and, when issued and delivered to and paid for by the Underwriter
in accordance with the terms of this Agreement and the LLC Agreement, will
be validly issued and fully paid, and will not be subject to any preemptive
or similar rights.
(viii) Once duly and validly issued in accordance with the LLC
Agreement, the Preferred Securities will entitle the holders of the
Preferred Securities to the benefits of the LLC Agreement.
(ix) The holders of the Preferred Securities are members of Funding
and as such have no liability for the obligations of Funding in excess of
(a) their respective obligations to pay for their Preferred Securities, (b)
their respective obligations to make other payments as members as provided
for in the LLC Agreement, (c) their respective obligations to repay to
Funding (1) any distribution received by any of the holders of the
Preferred Securities in violation of the Delaware Limited Liability Company
Act and (2) any amount arising out of an obligation or liability under
other applicable law, and (d) their respective shares of the assets and
undistributed profits of Funding.
(x) The Certificate of Formation of Funding has been duly filed with
the Secretary of State of the State of Delaware and with all other offices,
if any, where such filings are required and copies of such Certificate have
been delivered to you.
(xi) The LLC Agreement has been duly executed and is a valid and
binding agreement of the Company, in its capacity as manager and holder of
the common limited liability company securities, and _________________, in
his capacity as provisional member, enforceable against the Company, in its
capacity as manager and holder of the common limited liability company
securities, and _____________, in his capacity as provisional member, in
accordance with its terms, and copies of such Agreement have been delivered
to you.
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(xii) The CellNet Preferred Stock has been duly authorized by the
Company and, when issued and delivered to and paid for in accordance with
the terms of the Certificate of Designation and this Agreement, will be
validly issued, fully paid and non-assessable and will not be subject to
any preemptive or similar rights.
(xiii) The additional shares of the CellNet Preferred Stock that
may be issued in payment of dividends in respect of the CellNet Preferred
Stock, have been duly authorized and reserved by the Company and, when
issued and delivered in accordance with the terms of the Certificate of
Designation, will be validly issued, fully paid and non-assessable and will
not be subject to any preemptive or similar rights.
(xiv) The terms of the CellNet Preferred Stock as specified in the
Certificate of Designation are legal, valid and enforceable against the
Company.
(xv) The Certificate of Designation creating the CellNet Preferred
Stock has been duly filed with the Secretary of State of the State of
Delaware and with all other offices where such filings are required, on or
before the Closing Date.
(xvi) The authorized capital stock and securities of the Company
or Funding, as the case may be, conform as to legal matters to the
descriptions thereof in the Prospectus.
(xvii) The shares of Common Stock outstanding on the date hereof
have been duly authorized and are validly issued, fully paid and
non-assessable.
(xviii) The CellNet Exchange Common Shares and the shares of the
Common Stock payable as dividends on the Preferred Securities or as
dividends on the CellNet Preferred Stock have been duly authorized and
validly reserved for issuance upon exchange of the Preferred Securities or
payment as dividends on the Preferred Securities by all necessary corporate
action of the Company and, when duly issued by the Company upon such
exchange or payment, will be validly issued, fully paid and non-assessable
and will not be subject to preemptive or similar rights.
(xix) The Guarantee Agreement has been duly authorized by the
Company and Funding and, when validly executed and delivered by the Company
and Funding, will be a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except as
(x) the enforceability thereof may be limited by the effect of any
applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws now or hereafter in effect relating to or affecting creditors' rights
generally and (y) the availability of equitable remedies may be limited by
equitable principles of general applicability.
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(xx) The execution and delivery by Funding and the Company of, and the
performance by Funding and the Company of their respective applicable
obligations under, this Agreement, the Escrow Agreement, the Guarantee
Agreement, the Preferred Securities (in the case of Funding), the LLC
Agreement, the CellNet Preferred Stock (in the case of the Company) and the
Certificate of Designation (in the case of the Company) and the issuance,
sale and delivery of the Preferred Securities, the Original CellNet
Preferred Stock, the Additional CellNet Preferred Stock, when issued, and
the CellNet Common Shares, when issued, will not contravene any provision
of applicable law or the certificate of incorporation or by-laws or the
Certificate of Formation or the LLC Agreement, as the case may be, either
of Funding or the Company, or any agreement or other instrument binding
upon Funding or the Company or any of its subsidiaries that is material to
the Company and its subsidiaries, taken as a whole, or any judgment, order
or decree of any governmental body, agency or court having jurisdiction
over Funding, the Company or any of its subsidiaries, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by Funding or
the Company of their respective obligations under the Transaction Documents
and the issuance, sale and delivery of the Preferred Securities, the
Original CellNet Preferred Stock, the Additional CellNet Preferred Stock,
when issued, and the CellNet Common Shares, when issued, except such as may
be required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Preferred Securities.
(xxi) The statements (1) in the Prospectus under the captions
"Risk Factors -- Possible Termination of Contracts", "Risk Factors -- Risk
Factors Related to Certain United States Federal Income Tax
Considerations", "Business -- Proprietary Rights", "Business -- Current
Utility Service Agreements", "Business -- Recent Developments",
"Description of the Preferred Securities", "Description of CellNet
Preferred Stock", "Description of Capital Stock" and "Certain United States
Federal Income Tax Considerations", (2) in the Form 10-K under "Management
-- Incentive Stock Plans", "Management -- Employment Contracts and Change
of Control Arrangements" and "Certain Transactions", and (3) in the
Registration Statement in Items 14 and 15, in each case insofar as such
statements constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly present the information called for
with respect to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein in all material respects.
(xxii) To such counsel's knowledge, there is no legal or
governmental proceeding pending or threatened to which Funding or the
Company or any of its subsidiaries is a party or to which any of the
properties of Funding or the Company or any of its subsidiaries is subject
that are required to be described in the Registration Statement or the
Prospectus and are not so described, and none of such proceedings is
reasonably likely to have a material adverse effect on the Company and its
subsidiaries, taken as a whole, or on the power or ability of Funding or
the Company to perform their respective obligations under the
<PAGE>
B-5
Transaction Documents or to consummate the transactions contemplated by the
Prospectus and, to such counsel's knowledge there is no statute,
regulation, contract or other document that is required to be described in
the Registration Statement or the Prospectus or, in the case of any such
contract or document, to be filed as an exhibit to the Registration
Statement, that is not described or filed as required.
(xxiii) Neither Funding nor the Company is, and after giving effect
to the offering and sale of the Preferred Securities and the application of
the proceeds thereof as described in the Prospectus, neither Funding nor
the Company will be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(xxiv) The terms of the Preferred Securities and the CellNet
Preferred Stock conform in all material respects to the descriptions
thereof contained in the Prospectus under the headings "Description of
Preferred Securities" and "Description of CellNet Preferred Stock",
respectively.
(xxv) (x) Such counsel is of the opinion that (a) the Registration
Statement and Prospectus and (b) documents incorporated by reference in the
Prospectus (except in each case for financial statements, financial data
and schedules included therein as to which such counsel need not express
any opinion) comply as to form in all material respects, respectively, with
the Securities Act and the rules and regulations of the Commission
thereunder and the Securities and Exchange Act of 1934 and the rules and
regulations of the Commission thereunder, as of the dates they were filed
with the Commission. In addition, while such counsel has not performed any
independent check or verification of the information contained in the
Registration Statement, such counsel has participated in the drafting and
preparation of the Registration Statement and nothing has come to the
attention of such counsel that leads them to believe that (i) except for
financial statements, financial data and schedules as to which such counsel
need not express any belief, the Registration Statement and the prospectus
included therein at the time the Registration Statement became effective
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading and (ii) the Prospectus contains any
untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; (y) such counsel
does not know of any contract or other document of a character required to
be filed as an exhibit to the Registration Statement that is not so filed.
With respect to subparagraph (xxv) above, Wilson Sonsini Goodrich &
Rosati may state that its opinion and belief is based upon their participation
in the preparation of the Registration Statement and Prospectus and any
amendments or supplements thereto and review and discussion of the contents
thereof, but are without independent check or verification except as specified.
<PAGE>
C-1
EXHIBIT C
FORM OF OPINION OF WILKINSON, BARKER, KNAUER & QUINN
Pursuant to Section 5(d) of the Underwriting Agreement, Wilkinson,
Barker, Knauer & Quinn, regulatory counsel for the Company, shall furnish an
opinion to the effect that:
The statements in the Form 10-K and the Prospectus under the captions
"Risk Factors -- Access to Radio Frequency Spectrum; Regulation by the
Federal Communications Commission," "Business -- Recent Developments" and
"Business -- Spectrum Regulation," in each case insofar as such statements
constitute summaries of the legal matters, documents or proceedings
referred to therein, fairly present and summarize such legal matters,
documents and proceedings.
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D-1
EXHIBIT D
FORM OF OPINION OF FISH & RICHARDSON
Pursuant to Section 5(e) of the Underwriting Agreement, Fish &
Richardson, intellectual property counsel for the Company, shall furnish an
opinion to the effect that:
(i) there are no legal or governmental actions, claims or proceedings
pending or threatened against the Company relating to patent rights of the
Company or alleging that the Company is infringing or otherwise violating any
patents or trade secrets owned by others and the Company has not received any
communication in which it is alleged that the Company is infringing or violating
the patent rights of third parties; and
(ii) the statements in the Form 10-K and the Prospectus under the
captions "Risk Factors -- Uncertainty of Protection of Copyrights, Patents and
Proprietary Rights", "Business -- Proprietary Rights" and "Business -- Legal
Proceedings," in each case insofar as such statements constitute summaries of
the legal matters, documents or proceedings referred to therein, fairly present
and summarize such legal matters, documents and proceedings.
<PAGE>
Exhibit 4.3
CERTIFICATE OF FORMATION OF CELLNET FUNDING, LLC
This Certificate of Formation of CellNet Funding, LLC (the "LLC") dated
April 20, 1998, is being duly executed and filed by CellNet Data Systems, Inc.,
as an authorized person, to form a limited liability company under the
Delaware Limited Liability Company Act, 6 Del. C. Section 18-101, et seq.
FIRST: The name of LLC formed hereby is:
CellNet Funding, LLC
SECOND: The address of the registered office of the LLC in the State of
Delaware:
The Corporation Trust Company
Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
THIRD: The name and address of the registered agent for service of
process on the LLC in the State of Delaware are:
The Corporation Trust Company
Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
IN WITNESS WHEREOF, the undersigned has caused this Certificate of
Formation to be executed as of the date first above written.
CELLNET DATA SYSTEMS, INC.
An Authorized person
By: /s/ John M. Seidl
--------------------------------
Name: John M. Seidl
Title: President and Chief
Executive Officer
<PAGE>
Exhibit 4.4
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
CELLNET FUNDING, LLC
DATED AS OF APRIL __, 1998
<PAGE>
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF CELLNET FUNDING, LLC
This Amended and Restated Limited Liability Company Agreement of CellNet
Funding, LLC (the "Company") is made as of April __, 1998, among CellNet Data
Systems, Inc. ("CellNet") and Ben H. Lyon ("Lyon"), as current Members (as
defined below) of the Company and the Persons (as defined below) who become
Members of the Company in accordance with the provisions hereof.
WHEREAS, CellNet and Lyon have heretofore formed a limited liability
company pursuant to the Delaware Limited Liability Company Act, 6 Del. C.
Section 18-101, et seq., as amended from time to time, by filing a
Certificate of Formation of the Company with the office of the Secretary of
State of the State of Delaware on April 21, 1998, and entering into a Limited
Liability Company Agreement of the Company dated as of April 21, 1998 (the
"Original Limited Liability Company Agreement");
WHEREAS, the Members desire to continue the Company as a limited liability
company under the Delaware Act and to amend and restate the Original Limited
Liability Company Agreement in its entirety;
WHEREAS, it is a condition to closing under the Underwriter Agreement,
dated ______, among CellNet and certain other parties to so amend and restate
the Original Limited Liability Company Agreement in its entirety; and
WHEREAS, Lyon desires to resign as the provisional Member of the Company.
NOW, THEREFORE, in consideration of the agreements and obligations set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Members hereby amend and
restate the Original Limited Liability Company Agreement, as amended, in its
entirety and agree as follows:
ARTICLE I
DEFINED TERMS
SECTION 1.1 DEFINITIONS. The terms defined in this Article I shall, for
the purposes of this Agreement, have the meanings herein specified.
"Adjusted Capital Account" means the Capital Account established for a
Member, as the same is specially computed to reflect the adjustments required or
permitted by the Treasury Regulations under Section 704(b) of the Code to be
taken into account in applying the second sentence of section
1.704-1(b)(2)(ii)(d) of the Treasury Regulations.
"Affiliate" means with respect to a specified Person, any Person that
directly or indirectly controls, is controlled by, or is under common control
with, the specified Person. As used in this definition, the term "control" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through ownership
of voting securities, by contract or otherwise.
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<PAGE>
"Agreement" means this Amended and Restated Limited Liability Company
Agreement of the Company, as amended, modified, supplemented or restated from
time to time.
"Capital Account" shall have the meaning set forth in Section 4.5 of this
Agreement.
"CellNet" means CellNet Data Systems, Inc., a Delaware corporation.
"CellNet Common Stock" means the Common Stock, $.001 par value per share,
of CellNet.
"CellNet Preferred Stock" means the Preferred Stock Redeemable 2010, par
value $.001 per share, of CellNet.
"Certificate" means the Certificate of Formation referred to in the first
recital of this Agreement and any and all amendments thereto and restatements
thereof filed on behalf of the Company with the office of the Secretary of State
of the State of Delaware pursuant to the Delaware Act.
"Closing Date" shall have the meaning set forth in Article III of this
Agreement.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any corresponding federal tax statute enacted after the date of this
Agreement. A reference to a specific section (Section) of the Code refers not
only to such specific section but also to any corresponding provision of any
federal tax statute enacted after the date of this Agreement, as such specific
section or corresponding provision is in effect on the date of application of
the provisions of this Agreement containing such reference.
"Common Member" means a Member that holds one or more Common Securities.
"Common Securities" means the Interests in the Company which represent
common limited liability company interests in the Company and are described as
such in this Agreement.
"Company" means CellNet Funding, LLC, a Delaware limited liability company.
"Company Dividend Junior Securities" shall have the meaning set forth in
Section 9.3 of this Agreement.
"Company Dividend Parity Securities" shall have the meaning set forth in
Section 9.3 of this Agreement.
"Company Liquidation Parity Securities" shall have the meaning set forth in
Section 15.5 of this Agreement.
"Covered Person" means the Manager, any Affiliate of the Manager or any
officers, directors, managers, shareholders, partners, members, employees,
representatives or agents of the Manager, or any employee or agent of the
Company or its Affiliates.
"Delaware Act" means the Delaware Limited Liability Company Act, 6 Del. C.
Section 18-101, et seq., as amended from time to time.
"Dividend Payment Date" shall have the meaning set forth in Section 9.1(c)
of this Agreement.
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<PAGE>
"Escrow Account" shall have the meaning set forth in Section 4.4 of this
Agreement.
"Escrow Agent" shall have the meaning set forth in Section 4.4 of this
Agreement.
"Escrow Agreement" shall have the meaning set forth in Section 4.4 of this
Agreement.
"Exchange Agent" means CellNet Data Systems, Inc.
"Fiscal Period" means a calendar month.
"Funding Date" shall have the meaning set forth in Article III of this
Agreement.
"Guarantee" means the Guarantee Agreement to be entered into between
CellNet and the Company for the benefit of the Preferred Members, as amended
from time to time.
"Indemnified Person" means the Common Member, any Affiliate of the Common
Member or any officers, directors, managers, shareholders, partners, members,
employees, representatives or agents of the Common Member, or any employee or
agent of the Company or its Affiliates.
"Interest" means a limited liability company interest in the Company,
together with the right of the holder thereof to any and all benefits to which
such holder as a Member may be entitled as provided in this Agreement, together
with the obligations of such holder as a Member to comply with all of the terms
and provisions of this Agreement.
"Liquidation Distribution" shall have the meaning set forth in Section 15.5
of this Agreement.
"Majority in Liquidation Preference" means Preferred Members who are the
record owners of Preferred Securities whose aggregate liquidation preferences
represent more than 50% of the aggregate liquidation preference of all Preferred
Securities of any particular series or all series, as the context requires, then
outstanding.
"Manager" means CellNet, in its capacity as the manager of the Company and
as the Member that holds Common Securities.
"Member" means any Person that holds an Interest in the Company and is
admitted as a member of the Company pursuant to the provisions of this
Agreement, in its capacity as a member of the Company. For purposes of the
Delaware Act, the Common Member and the Preferred Members shall constitute
separate classes or groups of Members.
"Net Income" and "Net Loss", respectively, for any Fiscal Period means the
income and loss, respectively, of the Company for such Fiscal Period as
determined in accordance with the method of accounting followed by the Company
for federal income tax purposes, including, for all purposes, any tax-exempt
income and any expenditures of the Company which are described in Section
705(a)(2)(B) of the Code (or treated as so described under Section
1.704-1(b)(2)(iv)(i) of the Treasury Regulations); provided,
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<PAGE>
however, that any item allocated under Section 4.7 shall be excluded from the
computation of Net Income and Net Loss.
"Notice of Exchange" means a notice to the Exchange Agent given by a
Preferred Member of such Member's desire to exercise its exchange right under
the Preferred Securities Designation.
"Offering" shall have the meaning set forth in Article III.
"Person" means any individual, corporation, association, partnership
(general or limited), joint venture, trust, estate, limited liability company,
or other legal entity or organization.
"Preferred Certificate" means a certificate evidencing the Preferred
Securities held by a Preferred Member.
"Preferred Member" means a Member that holds one or more Preferred
Securities.
"Preferred Securities" means the Interests which represent preferred
limited liability company interests in the Company and are described as such in
this Agreement.
"Preferred Securities Designation" means any written action of the Manager
pursuant to Section 7.1(b) of this Agreement providing for the issue of a series
of Preferred Securities.
"Successor Securities" shall have the meaning set forth in Section 2.8 of
this Agreement.
"Tax Matters Partner" means the Manager designated as such in Section
11.1(b) of this Agreement.
"Treasury Regulation" means a regulation issued by the United States
Department of the Treasury and relating to a matter arising under the Code.
"U.S. Government Securities" mean instruments which evidence any security
issued or guaranteed as to principal or interest by the United States, or by a
person controlled or supervised by and acting as an instrumentality of the
government of the United States pursuant to authority granted by the Congress of
the United States, or any certificate of deposit for any of the foregoing.
SECTION 1.2 HEADINGS. The headings and subheadings in this Agreement are
included for convenience and identification only and are in no way intended to
describe, interpret, define or limit the scope, extent or intent of this
Agreement or any provision hereof.
ARTICLE II
CONTINUATION AND TERM; ADMISSION OF MEMBERS
SECTION 2.1 CONTINUATION; WITHDRAWAL OF MEMBER.
(a) The Members hereby agree to continue the Company as a limited
liability company under and pursuant to the provisions of the Delaware Act and
agree that the rights, duties and liabilities of the Members shall be as
provided in the Delaware Act, except as otherwise provided herein.
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<PAGE>
(b) Upon the execution of this Agreement, CellNet shall continue to be a
Member and shall be designated as the Common Member and shall be the holder of
all of the Common Securities and Lyon shall resign and withdraw as a provisional
Member of the Company upon the admission of any other Member in the Company and,
at such time, all of Lyon's interest in the Company shall be cancelled. Lyon
shall not be entitled to any distribution upon his withdrawal and resignation.
(c) The Manager, as an authorized person within the meaning of the
Delaware Act, shall execute, deliver and file any and all amendments to and
restatements of the Certificate.
SECTION 2.2 NAME. The name of the Company heretofore formed and
continued hereby is CellNet Funding, LLC. The business of the Company may be
conducted upon compliance with all applicable laws under any other name
designated by the Manager.
SECTION 2.3 TERM. The term of the Company commenced on the date the
Certificate was filed in the office of the Secretary of State of the State of
Delaware and the Original Limited Liability Company Agreement was entered into,
and shall continue until December 31, 2050, unless the Company is dissolved
before such date in accordance with the provisions of this Agreement.
SECTION 2.4 REGISTERED AGENT AND OFFICE. The Company's registered
agent and office in Delaware shall be The Corporation Trust Company, 1209
Orange Street, Wilmington, DE 19801. At any time, the Manager may designate
another registered agent and/or registered office.
SECTION 2.5 PRINCIPAL PLACE OF BUSINESS. The principal place of business
of the Company shall be at 125 Shoreway Road, San Carlos, California 94070. The
Manager may change the location of the Company's principal place of business.
SECTION 2.6 QUALIFICATION IN OTHER JURISDICTIONS. The Manager shall
cause the Company to be qualified, formed or registered under assumed or
fictitious name statutes or similar laws in any jurisdiction in which the
Company conducts business and in which such qualification, formation or
registration is required by law or deemed advisable by the Manager. The Manager,
as an authorized person within the meaning of the Delaware Act, shall execute,
deliver and file any certificates (and any amendments and/or restatements
thereof) necessary for the Company to qualify to do business in a jurisdiction
in which the Company may wish to conduct business.
SECTION 2.7 ADMISSION OF MEMBERS.
(a) A Person shall be admitted as a Member and shall become bound by the
terms of this Agreement, without execution of this Agreement, if such Person (or
a representative authorized by such Person orally, in writing or by other action
such as payment for an Interest) complies with the conditions for becoming a
Member as set forth in Section 2.7(b) and requests (which request shall be
deemed to have been made upon acquisition of an Interest directly from the
Company or upon an assignment of an Interest from another Person) that the
records of the Company reflect such admission. The Company shall be promptly
notified of any assignment of an Interest.
The Company will reflect the admission of a Member in the records of the
Company as soon as is reasonably practicable after either of the following
events: (i) in the case of a Person acquiring an Interest directly from the
Company, at the time of payment therefor, and (ii) in the case of an assignment,
upon
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notification thereof (the Company being entitled to assume, in the absence of
knowledge to the contrary, that proper payment has been made by the assignee).
(b) Subject to the restrictions on transfer of Common Securities set forth
in Sections 7.1(e) and 14.1 of this Agreement, whether acquiring an Interest
directly from the Company or by assignment, a Person shall be admitted as a
Member upon the acquisition or assignment, as the case may be, of such Interest
and the reflection of such Person's admission as a Member on the registration
books maintained by or on behalf of the Company. The consent of any other Member
or the Manager shall not be required for the admission of a Member.
SECTION 2.8 MERGER, CONSOLIDATION, ETC. OF THE COMPANY. The Company may
not consolidate with, merge with or into, or be replaced by, or convey, transfer
or lease its properties and assets as an entirety or substantially as an
entirety to any Person, except with the prior approval of Preferred Members
holding not less than a Majority in Liquidation Preference of the outstanding
Preferred Securities of each series or except as set forth in this Section 2.8.
The Company may, without the consent of Preferred Members, consolidate with,
merge with or into, or be replaced by, or convey, transfer or lease its assets
as an entirety or substantially as an entirety to, a limited liability company,
limited partnership or trust organized as such under the laws of any state of
the United States of America or the District of Columbia, provided that (i) such
successor entity either (x) expressly assumes all of the obligations of the
Company under the Preferred Securities or (y) substitutes for the Preferred
Securities of each series other securities having substantially the same terms
as such Preferred Securities of each series (the "Successor Securities") so long
as the Successor Securities rank, with respect to participation in the profits
or assets of the successor entity, at least as high as the Preferred Securities
of the related series rank with respect to payment of dividends and distribution
of assets upon the liquidation, dissolution or winding-up of the Company, (ii)
CellNet expressly acknowledges such successor entity as the holder of the
CellNet Preferred Stock relating to such Preferred Securities and its
obligations under the Guarantee with respect to the Successor Securities, (iii)
such merger, consolidation, replacement, conveyance, transfer or lease does not
cause the Preferred Securities or the Successor Securities, if any, to be
delisted (or, in the case of any Successor Securities, to fail to be listed) by
any national securities exchange or other organization on which such Preferred
Securities are then listed, (iv) such merger, consolidation, replacement,
conveyance, transfer or lease does not cause the Preferred Securities or
Successor Securities, if any, to be downgraded (or put on a "watch list" for
possible downgrading) by any "nationally recognized statistical rating
organization," as that term is defined by the Securities and Exchange Commission
for purposes of Rule 436(g)(2) under the Securities Act of 1933, as amended, (v)
such merger, consolidation, replacement, conveyance, transfer or lease does not
adversely affect the powers, preferences and other special rights of Preferred
Members or the holders of the Successor Securities, if any, in any material
respect (other than with respect to any dilution of the holders' interest in the
new entity) and (vi) prior to such merger, consolidation, replacement,
conveyance, transfer or lease, CellNet has received an opinion of nationally
recognized independent legal counsel to the Company experienced in such matters
to the effect that (x) such successor entity will be treated as a partnership or
as a grantor trust, as appropriate, for federal income tax purposes, (y)
following such merger, consolidation, replacement, conveyance, transfer or
lease, CellNet and such successor entity will be in compliance with the
Investment Company Act of 1940, as amended, without registering thereunder as an
investment company and (z) such merger, consolidation, replacement, conveyance,
transfer or lease will not adversely affect the limited liability of the
Preferred Members or the holders of the Successor Securities, if any, or result
in federal income tax liability to such Preferred Members or holders other than
with respect to any fractional share interests converted into cash.
ARTICLE III
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PURPOSE AND POWERS OF THE COMPANY
The purposes of the Company are (a) to issue Interests and to use at least
85% all of the proceeds from the issuance thereof (the "Offering") and the
related capital contributions to purchase shares of CellNet Preferred Stock from
CellNet, (b) to invest up to 15% of such proceeds in Treasury strips and other
U.S. Government Securities and (c) except as otherwise limited herein, to enter
into, make and perform all contracts and other undertakings, and to take any and
all actions necessary, appropriate, proper, advisable, incidental or convenient
to or for the furtherance of the purposes of the Company as set forth herein.
On the closing date of the issuance of the Preferred Securities (the "Closing
Date"), the Manager, on behalf of the Company shall purchase, and place in
escrow, Treasury strips in an amount sufficient to fund the cash payment of the
first 13 dividends on the Preferred Securities. From the Closing Date to a date
selected by the Manager, on behalf of the Company (the "Funding Date") that is
no more than six months after the Closing Date, the entire proceeds of the
Offering, less the amount used to purchase Treasury strips, shall be invested by
the Manager, on behalf of the Company, in U.S. Government Securities. On the
Funding Date, the Manager, on behalf of the Company shall use the earnings and
principal of such U.S. Government Securities to pay $___ million to CellNet as
consideration for CellNet Preferred Stock. In the event such earnings and
principal do not equal $___ million, CellNet will make a contribution of cash or
other property to the Company in an amount sufficient to eliminate such cash
shortfall. Dividends on the CellNet Preferred Stock will, at the option of
CellNet, be payable either in cash or in shares of CellNet Common Stock. Such
shares of CellNet Common Stock may, at the option of the Manager, on behalf of
the Company, be used to pay dividends on the Preferred Securities or sold to
raise funds to pay cash dividends on the Preferred Securities. The Company may
not conduct any other business or operations or voluntarily incur any
obligations except as contemplated by this Agreement.
ARTICLE IV
CAPITAL CONTRIBUTIONS, ALLOCATIONS AND DISTRIBUTIONS
SECTION 4.1 FORM OF CONTRIBUTION. The contribution of a Member to the
Company may, as determined by the Manager in its discretion, be in cash, a
promissory note or other legal consideration.
SECTION 4.2 CONTRIBUTION BY THE COMMON MEMBER. The Common Member shall
make an initial contribution to the Company in connection with the purchase of
one Common Security equal to $10,000.00. The Common Member may make additional
contributions to the Company of cash or stock of the Common Member at such times
and in such amounts as it may determine in its sole discretion.
SECTION 4.3 CONTRIBUTIONS BY THE PREFERRED MEMBERS. The Preferred
Members shall make contributions to the Company in accordance with the
applicable terms of Section 7.1 of this Agreement. Preferred Members, in their
capacity as Members of the Company, shall not be required to make any additional
contributions to the Company and shall have no additional liability solely by
reason of being Preferred Members (subject to their obligation to return
distributions wrongfully distributed to them as required by applicable law).
SECTION 4.4 INVESTMENT OF CAPITAL CONTRIBUTIONS. On the Closing Date,
the Manager shall establish an escrow account (the "Escrow Account") with The
Bank of New York, as escrow agent (the "Escrow Agent"), pursuant to the terms of
an escrow agreement (the "Escrow Agreement"), dated the Closing Date, between
the Company and the Escrow Agent. The Manager shall deposit with the Escrow
Agent, in accordance with the Escrow Agreement, the Treasury strips purchased
pursuant to Article III and the
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Manager on behalf of the Company shall pledge the Treasury strips to the
Escrow Agent for the benefit of the Preferred Members pursuant to the terms
of the Escrow Agreement.
SECTION 4.5 CAPITAL ACCOUNTS. An individual capital account (a "Capital
Account") shall be established and maintained on the books of the Company for
each Member in compliance with Treasury Regulation Sections 1.704-1(b)(2)(iv)
and 1.704-2, as amended. Subject to the preceding sentence, each Capital
Account will be increased by the amount of the capital contributions made by,
and the Net Income allocated to, such Member and reduced by the amount of
distributions made by the Company and Net Losses allocated to the Member. In
addition, a Member's Capital Account shall be increased or decreased, as the
case may be, for any items specially allocated to such Member under Section 4.7
of this Agreement.
SECTION 4.6 GENERAL ALLOCATIONS. After giving effect to the special
allocations set forth in Section 4.7 of this Agreement:
(a) Except as provided in Sections 4.6(d), the Company's Net Income for
each Fiscal Period shall be allocated, as of the close of business on the last
day of such Fiscal Period, as follows:
(i) First, to the Preferred Members, in proportion to the
number of Preferred Securities held by each such Member, in an amount equal
to the excess of (x) the aggregate amount of all dividends accrued on each
such Preferred Member's Preferred Securities from the issuance of such
Preferred Securities through the close of business on the last day of such
Fiscal Period (whether or not paid), over (y) the amount of Net Income
allocated to such Preferred Members (and their predecessors in interest) in
respect of such Preferred Securities pursuant to this Section 4.6(a)(i) for
all prior Fiscal Periods.
(ii) Second, to each Preferred Member, in an amount equal to
the excess of (x) the amount of all Net Losses allocated to such Preferred
Member from the date of issuance of such Preferred Member's Preferred
Securities through the close of business for such Fiscal Period pursuant to
Section 4.6(b)(ii) over (y) the amount of Net Income allocated to such
Preferred Member (and his predecessors in interest) in respect of such
Preferred Securities pursuant to this Section 4.6(a)(ii) for all prior Fiscal
Periods.
(iii) Third, to the Common Member, in an amount equal to the
excess of (x) the aggregate amount of all dividends accrued on the Common
Member's Common Securities from the issuance of such Common Securities
through the close of business on the last day of such Fiscal Period (whether
or not paid), over (y) the amount of Net Income allocated to such Common
Member in respect of such Common Security pursuant to this Section
4.6(a)(iii) for all prior Fiscal Periods.
(iv) Any remaining Net Income shall be allocated to the Common
Member.
(b) Except as provided in Section 4.6(d), the Company's Net Loss for each
Fiscal Period shall be allocated, as of the close of business on the last day of
such Fiscal Period, as follows:
(i) First, to the Common Member until the balance of the Common
Member's Adjusted Capital Account is reduced to zero.
(ii) Second, to the Preferred Members (in proportion to their
respective aggregate Adjusted Capital Account balances) until their Adjusted
Capital Account balances are reduced to zero.
(iii) Any remaining Net Loss shall be allocated to the Common
Member.
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(c) [This section intentionally left blank.]
(d) The Manager may make such changes to the allocations in Sections
4.6(a) and 4.6(b) as it deems reasonably necessary so that, immediately prior to
the Company's liquidation (or the exchange of Preferred Securities for shares of
CellNet Common Stock), the positive balances in the Capital Accounts of the
Preferred Members shall, to the maximum extent possible, equal their respective
Liquidation Distributions; PROVIDED, HOWEVER, that no allocation pursuant to
this Section 4.6(d) may result in the Manager being required to make a capital
contribution pursuant to this Agreement or otherwise, other than that set forth
in Section 4.2.
(e) Notwithstanding any other provision of this Agreement to the contrary,
the allocation of Net Losses to any Preferred Member shall not reduce the
Liquidation Distribution of the Preferred Securities held by such Preferred
Member.
SECTION 4.7 SPECIAL ALLOCATIONS.
(a) If a Preferred Member delivers a Notice of Exchange to the Exchange
Agent pursuant to the appropriate Preferred Securities Designation, which
instructs the Exchange Agent to exchange Preferred Securities for shares of
CellNet Common Stock, such Preferred Member shall be allocated its pro rata
share of any dividend income accruing on a daily basis on the CellNet Preferred
Stock pursuant to Section 305(c) of the Code or original issue discount accruing
on a daily basis until the date of such exchange, but only to the extent such
income was not previously allocated to the Members under Section 4.6 of this
Agreement or this Section 4.7.
(b) If the Exchange Agent exchanges all of the Preferred Securities of a
particular series for shares of CellNet Common Stock, pursuant to the
appropriate Preferred Securities Designation, the Preferred Members of such
series shall be allocated (in proportion to the liquidation preferences of such
Preferred Securities held by each such Preferred Member) any dividend income
accruing on a daily basis on the CellNet Preferred Stock pursuant to Section
305(c) of the Code or original issue discount accruing on a daily basis so
exchanged until the date of such exchange, but only to the extent such income
was not previously allocated to the Members under Section 4.6 of this Agreement
or this Section 4.7.
(c) If the Company is deemed to receive a dividend under Section 305 of
the Code with respect to any series of CellNet Preferred Stock or original issue
discount with respect to debt obligations it is holding, the Preferred Members
holding Preferred Securities of the related series shall be allocated (in
proportion to the liquidation preferences of such Preferred Securities held by
each such Preferred Member) such income.
(d) All items of loss and deduction in respect of expenses incurred by or
on behalf of the Company and paid by the Common Member (or out of the Common
Member's share of distributions) shall be allocated entirely to the Common
Member.
(e) Net Income, Net Loss and any such other items shall be determined on a
daily, monthly or other basis, as determined by the Manager using any method
that is permissible under Section 706 of the Code and the Treasury Regulations
promulgated thereunder.
(f) [This section intentionally left blank.]
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(g) Notwithstanding any other provision of this Agreement to the contrary,
the allocation of Net Losses to any Preferred Member shall not reduce the
Liquidation Distribution of the Preferred Securities held by such Preferred
Member.
SECTION 4.8 ALLOCATIONS FOR INCOME TAX PURPOSES. Subject to the
requirements of Code Section 704(b), the income, gains, losses, deductions and
credits of the Company shall be allocated in the same manner as the items
entering into the computation of Net Income and Net Loss are allocated under
Section 4.6 of this Agreement or as such items are otherwise allocated under
Section 4.7 of this Agreement; PROVIDED, HOWEVER, that solely for federal, state
and local income and franchise tax purposes, but not for book or Capital Account
purposes, income, gain, loss and deductions with respect to any property
properly carried on the Company's books at a value other than the tax basis of
such property shall be allocated in a manner determined in the Manager's
discretion, so as to take into account (consistently with the principles of
Section 704(c) of the Code) the difference between such property's book value
and its tax basis.
SECTION 4.9 WITHHOLDING. The Manager, on behalf of the Company, shall
comply with withholding requirements under federal, state and local law and
shall remit amounts withheld to and file required forms with applicable
jurisdictions. To the extent that the Company is required to withhold and pay
over any amounts to any authority with respect to distributions or allocations
to any Member, the amount withheld shall be deemed to be a distribution in the
amount of the withholding to the Member. In the event of any claimed
over-withholding, Members shall be limited to an action against the applicable
jurisdiction. If the amount withheld was not withheld from actual distributions,
the Manager, on behalf of the Company, may reduce subsequent distributions by
the amount of such withholding. Each Member agrees to furnish the Company with
such representations and forms as shall reasonably be requested by the Company
to assist it in determining the extent of, and in fulfilling, its withholding
obligations.
SECTION 4.10 ALLOCATION OF DISTRIBUTIONS. The distributions of the
Company shall, subject to the applicable terms of Sections 7.1, 9.1, 9.2, 9.3,
15.4 and 15.5 of this Agreement and of any series of Preferred Securities
(including the preferential allocation of distributions, if any), be allocated
entirely to the Common Member.
SECTION 4.11 INTERESTS AS PERSONAL PROPERTY. Each Member hereby agrees
that its Interest shall for all purposes be personal property. A Member has no
interest in specific Company property.
ARTICLE V
MEMBERS
SECTION 5.1 POWERS OF MEMBERS. The Members shall have the power to
exercise any and all rights or powers granted to the Members pursuant to the
express terms of this Agreement and the terms of the interests held by such
Members.
SECTION 5.2 PARTITION. Each Member waives any and all rights that it may
have to maintain an action for partition of the Company's property.
SECTION 5.3 RESIGNATION. The Common Member shall have no right to
withdraw from the Company. Any other Member may withdraw from the Company prior
to the liquidation, dissolution or winding up of the Company only upon the
assignment of its Interest (including any redemption, repurchase, exchange or
other acquisition by the Company of such Interest) in accordance with the
provisions of this Agreement. A
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withdrawing Member shall not be entitled to receive any distribution and
shall not otherwise be entitled to receive the fair value of its Interest
except as otherwise expressly provided for in this Agreement.
ARTICLE VI
MANAGEMENT
SECTION 6.1 MANAGEMENT OF THE COMPANY. Except as otherwise provided
herein, the business and affairs of the Company shall be managed, and all
actions required under this Agreement shall be determined, solely and
exclusively by the Manager, which shall have all rights and powers on behalf and
in the name of the Company to perform all acts necessary and desirable to the
objects and purposes of the Company (subject to Article III). Without limiting
the generality of the foregoing, the Manager shall have (subject to Article III)
the power on behalf of the Company to:
(a) authorize and engage in transactions and dealings on behalf of the
Company, including transactions and dealings with any Member (including the
Common Member) or any Affiliate of any Member;
(b) call meetings of Members or any class or series thereof;
(c) issue Interests, including Common Securities, Preferred Securities and
classes and series thereof, in accordance with this Agreement;
(d) pay all expenses incurred in forming the Company;
(e) lend money, with or without security, to CellNet or any Affiliate
thereof;
(f) determine and make distributions (sometimes referred to herein as
"dividends"), in cash or otherwise, on Interests, in accordance with the
provisions of this Agreement, the Delaware Act and, if applicable, each
Preferred Securities Designation;
(g) establish a record date with respect to all actions to be taken
hereunder that require a record date to be established, including with respect
to allocations, dividends and voting rights;
(h) redeem, repurchase or exchange, on behalf of the Company, Interests
which may be so redeemed, repurchased or exchanged;
(i) appoint (and dismiss from appointment) attorneys and agents on behalf
of the Company, and employ (and dismiss from employment) any and all persons
providing legal, accounting or financial services to the Company, or such other
employees or agents as the Manager deems necessary or desirable for the
management and operation of the Company, including, without limitation, any
Member (including the Common Member) or any Affiliate of any Member;
(j) open accounts and deposit, maintain and withdraw funds in the name of
the Company in banks, savings and loan associations, brokerage firms or other
financial institutions;
(k) effect a dissolution of the Company and act as liquidating trustee or
the Person winding up the Company's affairs, all in accordance with the
provisions of this Agreement, the Delaware Act and, if applicable, each
Preferred Securities Designation;
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(l) bring and defend on behalf of the Company actions and proceedings at
law or equity before any court or governmental, administrative or other
regulatory agency, body or commission or otherwise;
(m) prepare and cause to be prepared reports, statements and other
relevant information for distribution to Members as may be required or
determined to be necessary or desirable by the Manager from time to time;
(n) prepare and file all necessary returns and statements and pay all
taxes, assessments and other impositions applicable to the assets of the
Company; and
(o) execute all other documents or instruments, perform all duties and
powers and do all things for and on behalf of the Company in all matters
necessary or desirable or incidental to the foregoing.
The Manager is authorized and directed to conduct its affairs and to
operate the Company in such a way that the Company will not be deemed to be an
"investment company" required to be registered under the Investment Company Act
of 1940, as amended. In this connection, the Manager is authorized to take any
action not inconsistent with applicable law, this Agreement and the applicable
Preferred Securities Designation and that the Manager determines in its
discretion to be necessary or desirable for such purposes.
The expression of any power or authority of the Manager in this Agreement
shall not in any way limit or exclude any other power or authority of the
Manager which is not specifically or expressly set forth in this Agreement.
The duties and authority of Company officers, if any, shall be determined
by the Manager in its sole discretion. John M. Seidl initially shall be the
chief executive officer of the Company, and Paul G. Manca initially shall be the
chief financial officer of the Company. Such persons may be removed or replaced
as Company officers by the Manager at any time in its sole discretion.
SECTION 6.2 RELIANCE BY THIRD PARTIES. Persons dealing with the Company
are entitled to rely conclusively upon the power and authority of the Manager
herein set forth.
SECTION 6.3 NO MANAGEMENT BY ANY PREFERRED MEMBERS OR CELLNET. Except as
otherwise expressly provided herein, no Preferred Member shall take part in the
day-to-day management, operation or control of the business and affairs of the
Company. Neither the Preferred Members, in their capacity as Preferred Members
of the Company, nor CellNet, in its capacity as the Common Member, shall be
agents of the Company or have any right, power or authority to transact any
business in the name of the Company or to act for or on behalf of or to bind the
Company.
SECTION 6.4 BUSINESS TRANSACTIONS OF THE MANAGER WITH THE COMPANY. The
Manager or its Affiliates may lend money to, act as surety, guarantor or
endorser for, guarantee or assume one or more obligations of, provide collateral
for, and transact other business with, the Company and, subject to applicable
law, shall have the same rights and obligations with respect to any such matter
as a Person who is not the Manager or an Affiliate thereof.
SECTION 6.5 OUTSIDE BUSINESSES. Any Member and/or the Manager in its
capacity as same may possess an interest in other business ventures of any
nature or description, independently or with others, similar or dissimilar to
the business of the Company, and the Company and the Members shall have no
rights by virtue of this Agreement in and to such independent ventures or the
income or profits derived therefrom,
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and the pursuit of any such venture, even if competitive with the business of
the Company, shall not be deemed wrongful or improper. No Member or Affiliate
thereof shall be obligated to present any particular investment opportunity
to the Company even if such opportunity is of a character that, if presented
to the Company, could be taken by the Company, and any Member or Affiliate
thereof shall have the right to take for its own account (individually or as
a partner or fiduciary) or to recommend to others any such particular
investment opportunity.
ARTICLE VII
COMMON SECURITIES AND PREFERRED SECURITIES
SECTION 7.1 COMMON SECURITIES AND PREFERRED SECURITIES.
(a) The Interests in the Company shall initially be divided into two
classes, Common Securities and Preferred Securities.
(b) The Preferred Securities may be issued from time to time in one or
more series with such relative rights, powers, preferences, limitations and
restrictions as may from time to time be established in a written action or
actions of the Manager providing for the issue of such series of Preferred
Securities as hereinafter provided. Authority is hereby expressly granted to
the Manager, subject to the provisions of this Agreement, to authorize the issue
of one or more series of Preferred Securities and to establish each such series
by a written action or actions (including without limitation an amendment of
this Agreement) providing for the issue of such series:
(i) the number of Preferred Securities to constitute such
series and the distinctive designation thereof;
(ii) whether the Preferred Securities of such series shall
have voting rights in addition to those set forth in this Agreement or
required by law and, if so, the terms of such voting rights;
(iii) the annual dividend rate (or method of calculation
thereof), if any, on the Preferred Securities of such series, the conditions
and dates upon which such dividends shall be payable and the ability of the
Company, if any, to defer the dividend payment period for the Preferred
Securities of such series, the dates from which such dividends shall accrue,
the preference or relation, if other than pari passu, which such dividends
have with respect to dividends payable on any other class or classes of
Interests or on any other series of Preferred Securities, and whether such
dividends shall be cumulative or noncumulative;
(iv) whether the Preferred Securities of such series shall be
subject to redemption by the Company, and, if made subject to redemption, the
times and other terms and conditions of such redemption (including the
mandatory or optional nature of such redemption, whether such redemption
shall be in whole and/or in part, and the amount and kind of consideration to
be received upon such redemption);
(v) the amount or amounts which shall be paid out of the
assets of the Company to Preferred Members holding the Preferred Securities
of such series upon voluntary or involuntary liquidation, dissolution or
winding up of the Company, and any rights in addition to those set forth in
this Agreement of the Preferred Members that hold Preferred Securities of
such series upon the liquidation, dissolution or winding up of the Company;
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(vi) whether or not the Preferred Securities of such series
shall be subject to the operation of a retirement or sinking fund, and, if
so, the extent to and manner in which any such retirement or sinking fund
shall be applied to the purchase or redemption of the Preferred Securities of
such series for retirement and the terms and provisions relative to the
operation thereof;
(vii) whether or not the Preferred Securities of such series
shall be convertible into, or exchangeable for, Interests of any other class
or classes, or of any other series of Preferred Securities, or securities of
any other kind, including those issued by CellNet or any of its Affiliates,
and if so convertible or exchangeable, the terms and conditions of such
conversion or exchange, including the price or prices or the rate or rates of
conversion or exchange; the method, if any, of adjusting the same and the
terms of any right to terminate such conversion or exchange privilege;
(viii) any limitations and restrictions in addition to those
set forth in this Agreement to be effective while any Preferred Securities of
such series are outstanding upon the payment of dividends or other
distributions on, and upon the purchase, redemption or other acquisition by
the Company of, Common Securities or any other series of Preferred Securities;
(ix) any conditions or restrictions in addition to those set
forth in this Agreement upon the issue of any additional Interests (including
additional Preferred Securities of such series or Interests of any other
series ranking pari passu with or senior to the Preferred Securities of such
series as to the payment of dividends or distribution of assets on
dissolution);
(x) the times, prices and other terms and conditions for the
offering of the Preferred Securities of such series; and
(xi) any other relative rights, powers, preferences,
limitations and restrictions as shall not be inconsistent with this Section 7.1.
In connection with the foregoing and without limiting the generality
thereof, the Manager is hereby expressly authorized, without the vote or
approval of any other Member, to take any action to create under the provisions
of this Agreement a series of Preferred Securities that was not previously
outstanding. Without the vote or approval of any other Member, the Manager may
execute, swear to, acknowledge, deliver, file and record whatever documents may
be required in connection with the issue from time to time of Preferred
Securities in one or more series as shall be necessary, convenient or desirable
to reflect the issue of such series. The Manager shall do all things it deems to
be appropriate or necessary to comply with the Delaware Act and is authorized
and directed to do all things it may deem to be necessary or permissible in
connection with any future issuance, including compliance with any statute,
rule, regulation or guideline of any federal, state or other governmental agency
or any securities exchange.
Any action or actions taken by the Manager pursuant to the provisions of
this paragraph (b) shall be deemed an amendment and supplement to and part of
this Agreement.
(c) All Preferred Securities shall rank senior to the Common Securities in
respect of the right to receive dividends and the right to receive payments out
of the assets of the Company upon voluntary or involuntary liquidation,
dissolution or winding up of the Company. All Preferred Securities redeemed,
purchased or otherwise acquired by the Company (including Preferred Securities
surrendered for conversion or exchange) shall be cancelled and thereupon
restored to the status of authorized but unissued Preferred Securities
undesignated as to series.
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(d) No Member shall be entitled as a matter of right to subscribe for or
purchase, or have any preemptive right with respect to, any part of any new or
additional issue of Common Securities or Preferred Securities of any series
whatsoever, or of securities convertible into any Common Securities or Preferred
Securities of any series whatsoever, whether now or hereafter authorized and
whether issued for cash or other consideration or by way of dividend.
(e) Common Securities shall not be evidenced by any certificate or other
written instrument, but shall only be evidenced by this Agreement. Common
Securities shall be non-assignable and non-transferable, and may only be issued
to and held by CellNet (or a successor of CellNet in accordance with the
provisions of the Guarantee). Any transfer or purported transfer of any Common
Security shall be null and void. Preferred Securities shall be freely assignable
and transferable.
(f) Any Person purchasing Preferred Securities (whether from the Company
or upon assignment) shall be admitted to the Company as a Preferred Member upon
compliance with Section 2.7 of this Agreement.
SECTION 7.2 PERSONS DEEMED PREFERRED MEMBERS. The Company may treat the
Person in whose name any Preferred Certificate shall be registered on the books
and records of the Company as a Preferred Member and the sole holder of such
Preferred Certificate for purposes of receiving dividends and for all other
purposes whatsoever and, accordingly, shall not be bound to recognize any
equitable or other claims to or interest in such Preferred Certificate on the
part of any other Person, whether or not the Company shall have actual or other
notice thereof.
ARTICLE VIII
VOTING AND MEETINGS
SECTION 8.1 VOTING RIGHTS OF HOLDERS OF PREFERRED SECURITIES.
(a) Except as shall be otherwise provided in this Agreement, including
without limitation, Section 16.1 of this Agreement, or in the Preferred
Securities Designation for any series of Preferred Securities and except as
otherwise required by the Delaware Act, the Preferred Members holding Preferred
Securities shall have, with respect to such Preferred Securities, no right or
power to vote on any question or matter or in any proceeding or to be
represented at, or to receive notice of, any meeting of Members.
(b) If any proposed amendment to this Agreement or the Preferred
Securities Designation for any series of Preferred Securities provides for, or
the Manager otherwise proposes to effect:
(i) any action that would have a material adverse effect on the
powers, preferences or special rights of the Preferred Securities of such
series, whether by way of amendment of this Agreement, such Preferred Securities
Designation or otherwise (including, without limitation, the authorization or
issuance of any Interests in the Company purporting to rank, as to payment of
dividends or distribution of assets upon liquidation, dissolution or winding up
of the Company, senior to the Preferred Securities of such series), or
(ii) the liquidation, dissolution or winding up of the Company
(in any case other than in connection with the exchange of Preferred Securities
of such series for other securities pursuant to the terms of such series of
Preferred Securities),
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then the Preferred Members holding outstanding Preferred Securities of such
series, together with, if any such amendment or action described in clause (i)
above would materially adversely affect the powers, preferences or special
rights of any Company Dividend Parity Securities or any Company Liquidation
Parity Securities, the holders of such Company Dividend Parity Securities or
such Company Liquidation Parity Securities, as the case may be, or, with respect
to any such amendment or action described in clause (ii) above, the holders of
all Company Liquidation Parity Securities, will be entitled to vote together as
a class on such resolution or action of the Manager (but not any other
resolution or action) and such amendment or action shall not be effective except
with the approval of the Preferred Members holding at least a Majority in
Liquidation Preference of such outstanding securities including, if applicable,
the holders of either or both of the Company Dividend Parity Securities and the
Company Liquidation Party Securities, as the case may be; provided, however,
that no such approval shall be required if (1) the liquidation, dissolution or
winding-up of the Company is proposed or initiated upon the occurrence of any of
the events specified in Section 15.2 (except Section 15.2(c)) or (2) this
Agreement is amended pursuant to Section 16.1.
The Manager shall not, without the approval of the holders of at least a
Majority in Liquidation Preference of the Preferred Securities, vote such
CellNet Preferred Stock with respect to proposed actions that would have an
adverse effect on the specific rights, preferences, privileges or voting rights
of the Company with respect to the CellNet Preferred Stock, or cause the
dissolution, winding-up or termination of the Company. Notwithstanding any
other provision of this Agreement to the contrary, the Preferred Members shall
be entitled to vote in connection with any solicitation by the Manager for the
consent of the Preferred Members to the voting by the Manager of the Company's
CellNet Preferred Stock. The powers, preferences or special rights of the
Preferred Securities of any series will be deemed not to be adversely affected
by the creation or issuance of, and no vote will be required for the creation or
issuance of, any further Interests in the Company ranking junior to or pari
passu with the Preferred Securities of such series with respect to voting rights
or rights to payment of dividends or distributions of assets upon liquidation,
dissolution or winding-up of the Company.
(c) Notwithstanding any provision to the contrary herein, the first
sentence of Section 14.1 of this Agreement may only be amended with the consent
of each Preferred Member; provided that, to the fullest extent permitted by
applicable law, any such amendment shall not permit the Preferred Members to
approve any transferee of Common Securities.
(d) Notwithstanding that Preferred Members holding Preferred Securities of
any series are entitled to vote or consent under any of the circumstances
described in this Agreement, any of the Preferred Securities of any series that
are owned by CellNet or by any entity more than 50% of which is owned by
CellNet, either directly or indirectly, shall not be entitled to vote or consent
and shall, for the purposes of such vote or consent, be treated as if they were
not outstanding.
SECTION 8.2 VOTING RIGHTS OF HOLDER OF COMMON SECURITIES. Except as
otherwise provided herein or in the Preferred Securities Designation for any
series of Preferred Securities and except as otherwise required by the Delaware
Act, all voting rights of the Company shall be vested exclusively in the Common
Member. The Common Securities shall entitle the Common Member to vote upon all
matters upon which the Common Member has the right to vote. The Common Member
shall have the right to vote separately as a class on any matter on which the
Common Member has the right to vote regardless of the voting rights of any other
Member.
SECTION 8.3 MEETINGS OF THE MEMBERS.
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(a) Meetings of the Members of any class or series or of all classes or
series of Interests may be called at any time by the Manager or as provided by
any applicable Preferred Securities Designation. Except to the extent otherwise
provided, the following provisions shall apply to meetings of Members.
(b) Members may vote in person or by proxy at such meeting. Whenever a
vote, consent or approval of Members is permitted or required under this
Agreement or any applicable Preferred Securities Designation, such vote, consent
or approval may be given at a meeting of Members or by written consent.
(c) Each Member may authorize any Person to act for it by proxy on all
matters in which a Member is entitled to vote, including waiving notice of any
meeting, or voting or participating at a meeting. Every proxy must be signed by
the Member or its attorney-in-fact and shall be revocable at the pleasure of the
Member executing it at any time before it is voted.
(d) Each meeting of Members shall be conducted by the Manager or by such
other Person that the Manager may designate.
(e) Any required approval of Preferred Members holding Preferred
Securities of a series may be given at a separate meeting of such Preferred
Members convened for such purpose or at a meeting of Members of the Company or
pursuant to written consents. The Manager will cause a notice of any meeting at
which Preferred Members holding Preferred Securities of a series are entitled to
vote, or of any matter upon which action by written consent of such Preferred
Members is to be taken, to be mailed to each Preferred Member holding Preferred
Securities of such series. Each such notice will include a statement setting
forth (i) the date of such meeting or the date by which such action is to be
taken, (ii) a description of any matter on which such Preferred Members are
entitled to vote or of such matter upon which written consent is sought and
(iii) instructions for the delivery of proxies or consents.
(f) Subject to Section 8.3(e) and the applicable Preferred Securities
Designation, the Manager, in its sole discretion, shall establish all other
provisions relating to meetings of Members, including notice of the time, place
or purpose of any meeting at which any matter is to be voted on by any Members,
waiver of any such notice, action by consent without a meeting, the
establishment of a record date, quorum requirements (but in no event higher than
a Majority in Liquidation Preference of the Preferred Securities of any series),
voting in person or by proxy or any other matter with respect to the exercise of
any such right to vote.
ARTICLE IX
DIVIDENDS
SECTION 9.1 DIVIDENDS.
(a) Preferred Members shall receive periodic dividends, if any, in
accordance with the Preferred Securities Designation for the Preferred
Securities of any particular series, as and when declared by the Manager, and
the Common Member shall receive periodic and cumulative dividends of $500 per
annum, subject to Section 9.3 of this Agreement, the applicable terms of any
series of Preferred Securities and the provisions of the Delaware Act, as and
when declared by the Manager, in its discretion out of funds of the Company
legally available therefor.
(b) Dividends on the Preferred Securities shall be declared by the Manager
to the extent that the Manager reasonably anticipates that at the time of
payment the Company will have, and must be paid by the
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<PAGE>
Company to the extent that at the time of proposed payment it has, funds
legally available for the payment of such dividends.
(c) A Preferred Member shall not be entitled to receive any dividend with
respect to the Preferred Securities of any series, irrespective of whether such
dividend has been declared by the Manager, prior to the date on which such
dividend is payable as set forth in the Preferred Securities Designation (the
"Dividend Payment Date") and until such time as the Company has received the
dividend payment on the CellNet Preferred Stock of the related series for the
dividend payment date corresponding to such Divided Payment Date and such monies
or other property are available for distribution to the Preferred Member
pursuant to the terms of this Agreement and the Delaware Act.
SECTION 9.2 LIMITATIONS ON DISTRIBUTIONS. Notwithstanding any provision
to the contrary contained in this Agreement, the Company shall not make a
distribution (including a dividend) to any Member on account of its Interest if
such distribution would violate Sections 18-607 or 18-804 of the Delaware Act or
other applicable law.
SECTION 9.3 CERTAIN RESTRICTIONS ON THE PAYMENT OF DIVIDENDS. If
accumulated dividends have not been paid in full on the Preferred Securities of
any series then outstanding, the Company shall not:
(i) pay, or declare and set aside for payment, any dividends on
the Preferred Securities of any other series or any other Interests in the
Company ranking pari passu with the Preferred Securities of such series as to
the payment of dividends ("Company Dividend Parity Securities"), unless the
amount of any dividends declared on such Company Dividend Parity Securities is
paid on such Company Dividend Parity Securities and the Preferred Securities of
such series on a pro rata basis on the date such dividends are paid on such
Company Dividend Parity Securities, so that the ratio of
(x) (A) the aggregate amount paid as dividends on the
Preferred Securities of such series to (B) the aggregate amount paid as
dividends on the Company Dividend Parity Securities is the same as the ratio of
(y) (A) the aggregate amount of all accumulated arrears of
unpaid dividends on the Preferred Securities of such series to (B) the aggregate
amount of all accumulated arrears of unpaid dividends on the Company Dividend
Parity Securities;
(ii) pay, or declare and set aside for payment, any dividends on
any Interests in the Company ranking junior to the Preferred Securities of such
series as to the payment of dividends ("Company Dividend Junior Securities"); or
(iii) redeem, purchase or otherwise acquire any Company
Dividend Parity Securities or Company Dividend Junior Securities (other than
purchases or acquisitions resulting from the reclassification of such
Securities or the exchange or conversion of any Company Dividend Parity
Security or Company Dividend Junior Security pursuant to the terms thereof or
the purchase of fractional interests therein upon such conversion or
exchange); until, in each case, such time as all accumulated and unpaid
dividends on all of the Preferred Securities of such series shall have been
paid in full or have been irrevocably set aside for payment in full for all
dividend periods terminating on or prior to, in the case of clauses (i) and
(ii), the date of such payment, and in the case of clause (iii), the date of
such redemption, purchase or other acquisition.
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<PAGE>
ARTICLE X
BOOKS AND RECORDS
SECTION 10.1 BOOKS AND RECORDS; ACCOUNTING. The Manager shall keep or
cause to be kept at the address of the Manager (or at such other place as the
Manager shall advise the other Members in writing) true and full books and
records regarding the status of the business and financial condition of the
Company.
SECTION 10.2 FISCAL YEAR. The fiscal year of the Company for federal
income tax and accounting purposes shall, except as otherwise required in
accordance with the Code, end on December 31 of each year.
SECTION 10.3 LIMITATION ON ACCESS TO RECORDS. Notwithstanding any
provision of this Agreement, the Manager may, to the maximum extent permitted by
law, keep confidential from the Preferred Members any information the disclosure
of which the Manager reasonably believes is not in the best interest of the
Company or could damage the Company or its business or which the Company or the
Manager is required by law or by an agreement with any Person to keep
confidential.
ARTICLE XI
TAX MATTERS
SECTION 11.1 COMPANY TAX RETURNS.
(a) The Manager shall cause to be prepared and timely filed all tax
returns required to be filed for the Company. The Manager may, in its
discretion, make or refrain from making any federal, state or local income or
other tax elections for the Company that it deems necessary or advisable,
including, without limitation, any election under Section 754 of the Code or any
successor provision.
(b) The Manager is hereby designated as the Company's "Tax Matters
Partner" under Code Section 6231(a)(7) and shall have all the powers and
responsibilities of such position as provided in the Code. The Manager is
specifically directed and authorized to take whatever steps the Manager, in its
discretion, deems necessary or desirable to perfect such designation, including
filing any forms or documents with the Internal Revenue Service and taking such
other action as may from time to time be required under the regulations issued
under the Code. Expenses incurred by the Tax Matters Partner, in its capacity as
such, will be borne by the Company.
SECTION 11.2 TAX REPORTS. The Manager shall, as promptly as practicable
and in any event within 90 days after the end of each fiscal year, cause to be
prepared and mailed to each Preferred Member of record federal income tax form
K-1 and any other forms which are necessary or advisable.
SECTION 11.3 TAXATION AS PARTNERSHIP. The Members recognize that the
Company will be treated as a partnership for U.S. federal income tax purposes.
The Manager shall operate the Company in such a manner and shall take all
necessary action as will establish and preserve the Company's treatment as a
partnership for U.S. federal income tax purposes. The Company shall not make
any election to be treated as other than a partnership for U.S. federal income
tax purposes.
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<PAGE>
SECTION 11.4 INVESTMENT PARTNERSHIP. The Manager shall cause the Company
not to "engage in a trade or business" or make any investments or take any
action that would cause the Company to fail to qualify as an "investment
partnership" as such term is defined in Section 731(c)(3)(C) of the Code.
ARTICLE XII
EXPENSES
Except as otherwise provided in this Agreement, the Company shall be
responsible for and shall pay all expenses out of funds of the Company
determined by the Manager to be available for such purpose, provided that such
expenses or obligations are those of the Company or are otherwise incurred by
the Manager in connection with this Agreement, including, without limitation:
(a) all costs and expenses related to the business of the Company and all
routine administrative expenses of the Company, including the maintenance of
books and records of the Company, the preparation and dispatch to the Members of
checks, financial reports, tax returns and notices required pursuant to this
Agreement and the holding of any meetings of the Members;
(b) all expenses incurred in connection with any litigation involving the
Company (including the cost of any investigation and preparation) and the amount
of any judgment or settlement paid in connection therewith (other than expenses
incurred by the Manager in connection with any litigation brought by or on
behalf of any Member against the Manager);
(c) all expenses for indemnity or contribution payable by the Company to
any Person;
(d) all expenses incurred in connection with the collection of amounts due
to the Company from any Person;
(e) all expenses incurred in connection with the preparation of amendments
to this Agreement; and
(f) all expenses incurred in connection with the liquidation, dissolution
or winding-up of the Company.
ARTICLE XIII
LIABILITY
SECTION 13.1 LIABILITY OF COMMON MEMBER. Except as otherwise specifically
required by the Delaware Act, (i) the debts, obligations and liabilities of the
Company, whether arising by contract, tort, statute, operation of law or
otherwise, shall be solely the debts, obligations and liabilities of the Company
and (ii) the Common Member shall not be obligated personally for any such debt,
obligation or liability of the Company solely by reason of being the Common
Member of the Company.
SECTION 13.2 LIABILITY OF PREFERRED MEMBERS. Except as otherwise
specifically required by the Delaware Act, (i) the debts, obligations and
liabilities of the Company, whether arising by contract, tort, statute,
operation of law or otherwise, shall be solely the debts, obligations and
liabilities of the Company and (ii) no Preferred Member shall be obligated
personally for any such debt, obligation or liability of the Company solely by
reason of being a Preferred Member of the Company.
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<PAGE>
ARTICLE XIV
ASSIGNMENT OF INTERESTS
SECTION 14.1 ASSIGNMENT OF INTERESTS. Notwithstanding anything to the
contrary in this Agreement, after the date hereof Common Securities shall be
non-assignable and non-transferable (other than pursuant to a merger or
consolidation of the Common Member), and may only be issued to and held by
CellNet or its successor. Preferred Securities shall be freely assignable and
transferable, subject to the provisions of Section 2.7 of this Agreement.
SECTION 14.2 RIGHT OF ASSIGNEE TO BECOME A MEMBER. An assignee of a
Preferred Security shall become a Preferred Member upon compliance with the
provisions of Section 2.7 of this Agreement.
SECTION 14.3 EVENTS OF CESSATION OF MEMBERSHIP. A Person shall cease to
be a Member upon (i) the assignment of its Interests in accordance with this
Agreement, such assignment to be effective immediately after the admission of
its transferee; (ii) any redemption, exchange or other repurchase by the Company
or the Common Member; or (iii) as otherwise provided herein.
ARTICLE XV
DISSOLUTION, LIQUIDATION AND TERMINATION
SECTION 15.1 NO DISSOLUTION. The Company shall not be dissolved by the
admission of Members in accordance with the terms of this Agreement. Except as
provided in Sections 15.2(b) of this Agreement, the death, retirement,
resignation, expulsion, bankruptcy or dissolution of a Member, or the occurrence
of any other event which terminates the continued membership of a Member in the
Company, shall not cause the Company to be dissolved and its affairs wound up so
long as the Company at all times has at least two Members. Upon the occurrence
of any such event, the business of the Company shall be continued without
dissolution.
SECTION 15.2 EVENTS CAUSING DISSOLUTION. The Company shall be dissolved
and its affairs shall be wound up upon the earliest to occur of any of the
following events:
(a) the expiration of the term of the Company, as provided in Section 2.3
of this Agreement;
(b) the dissolution, winding-up or liquidation of the Common Member or the
occurrence of any other event that terminates the continued membership of the
Common Member under the Delaware Act;
(c) the decision made by the Manager (subject to the voting rights of
Preferred Members set forth in Section 8.1 of this Agreement) to dissolve the
Company;
(d) the entry of a decree of judicial dissolution of the Company under
Section 18-802 of the Delaware Act;
(e) the election of the Manager, in connection with the exchange of all
series of Preferred Securities outstanding (in accordance with the Preferred
Securities Designation for each such series of Preferred Securities) for the
CellNet Common Stock or the redemption of all series of Preferred Securities
outstanding (in accordance with the Preferred Securities Designation for each
such series of Preferred Securities); or
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<PAGE>
(f) the written consent of all Members.
SECTION 15.3 NOTICE OF DISSOLUTION. Upon the dissolution of the Company,
the Manager shall promptly notify the Members of such dissolution.
SECTION 15.4 LIQUIDATION. Upon dissolution of the Company, the Manager
or, in the event that the dissolution is caused by an event described in Section
15.2(b) and there is no Manager, a Person or Persons who may be approved by the
Preferred Members holding a Majority in Liquidation Preference of the Preferred
Securities, as liquidating trustees, shall immediately commence to wind-up the
Company's affairs; provided, however, that a reasonable time shall be allowed
for the orderly liquidation of the assets of the Company and the satisfaction of
liabilities to creditors so as to enable the Members to minimize the normal
losses attendant upon a liquidation. The proceeds of liquidation shall be
distributed, after satisfaction of prior claims of creditors, as follows: (i)
first, subject to Section 15.5, to the Preferred Members in an amount equal to
the aggregate Liquidation Dsitribution amounts for each series of Preferred
Securities, and (ii) next, to the Common Member.
SECTION 15.5 CERTAIN RESTRICTIONS ON LIQUIDATION PAYMENTS. In the event
of any voluntary or involuntary liquidation, dissolution or winding-up of the
Company other than in connection with the exchange of all series of Preferred
Securities outstanding (in accordance with the Preferred Securities Designation
for each such series of Preferred Securities) for the CellNet Common Stock,
Preferred Members holding Preferred Securities of each series at the time
outstanding will be entitled to receive out of the assets of the Company legally
available for distribution to Members, before any distribution of assets is made
to the Common Member or Members holding any other class of Interests in the
Company ranking junior to the Preferred Securities of such series as to the
distribution of assets upon liquidation, dissolution or winding-up of the
Company, but together with Preferred Members holding Preferred Securities of any
other series or any other Interests in the Company then outstanding ranking pari
passu with the Preferred Securities of such series as to the distribution of
assets upon liquidation, dissolution or winding-up of the Company ("Company
Liquidation Parity Securities"), an amount equal to the aggregate liquidation
preference for Preferred Securities of such series as set forth in the
applicable Preferred Securities Designation plus all accumulated and unpaid
dividends (whether or not earned or declared), to the date of payment (the
"Liquidation Distribution"). If, upon any such liquidation, dissolution or
winding-up, the Liquidation Distributions can be paid only in part because the
Company has insufficient assets available to pay in full the aggregate
Liquidation Distributions and the aggregate maximum liquidation distributions on
the Company Liquidation Parity Securities, then the amounts payable by the
Company on the Preferred Securities of such series and on such Company
Liquidation Parity Securities shall be paid on a pro rata basis, so that the
ratio of
(i) (x) the aggregate amount paid as Liquidation Distributions
on the Preferred Securities of such series to (y) the aggregate amount paid as
Liquidation Distributions on the Company Liquidation Parity Securities, is the
same as the ratio of
(ii) (x) the aggregate Liquidation Distributions on the
Preferred Securities of such series to (y) the aggregate Liquidation
Distributions on the Company Liquidation Parity Securities.
SECTION 15.6 TERMINATION. The Company shall terminate when all of the
assets of the Company have been distributed in the manner provided for in this
Article XV, and the Certificate shall have been cancelled in the manner required
by the Delaware Act.
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ARTICLE XVI
MISCELLANEOUS
SECTION 16.1 AMENDMENTS. Except as otherwise provided in this Agreement,
this Agreement may be amended by a written instrument executed by the Common
Member if, in the opinion of independent counsel, such amendment does not
materially adversely affect the rights, powers and preferences of the Preferred
Members; if, however, in the opinion of such counsel, such amendment would
materially adversely affect the rights, powers and preferences of the Preferred
Members, such amendment shall require the consent of the Majority in Liquidation
Preference of such Preferred Members.
SECTION 16.2 SUCCESSORS; COUNTERPARTS. This Agreement (a) shall be
binding as to the executors, administrators, estates, heirs and legal
successors, or nominees or representatives, of the Members and (b) may be
executed in several counterparts with the same effect as if the parties
executing the several counterparts had all executed one counterpart. No person
other than the Members and their respective executors, administrators, estates,
heirs and legal successors, or their nominees or representatives, shall obtain
any rights by virtue of this Agreement.
SECTION 16.3 GOVERNING LAW; SEVERABILITY. This Agreement shall be
governed by and construed in accordance with the laws of the State of Delaware
as applied to agreements solely between residents of the State of Delaware. In
particular, this Agreement shall be construed to the maximum extent possible to
comply with all of the terms and conditions of the Delaware Act. If,
nevertheless, it shall be determined by a court of competent jurisdiction that
any provisions or wording of this Agreement shall be invalid or unenforceable
under the Delaware Act or other applicable law, such invalidity or
unenforceability shall not invalidate the entire Agreement. In that case, this
Agreement shall be construed so as to limit any term or provision so as to make
it enforceable or valid within the requirements of applicable law, and, in the
event such term or provisions cannot be so limited, this Agreement shall be
construed to omit such invalid or unenforceable provisions. If it shall be
determined by a court of competent jurisdiction that any provision relating to
the distributions and allocations of the Company or to any fee payable by the
Company is invalid or unenforceable, this Agreement shall be construed or
interpreted so as (a) to make it enforceable or valid and (b) to make the
distributions and allocations as closely equivalent to those set forth in this
Agreement as is permissible under applicable law.
SECTION 16.4 FILINGS. Following the execution and delivery of this
Agreement, the Manager shall promptly prepare any documents required to be filed
and recorded under the Delaware Act, and the Manager shall promptly cause each
such document to be filed and recorded in accordance with the Delaware Act and,
to the extent required by local law, to be filed and recorded or notice thereof
to be published in the appropriate place in each jurisdiction in which the
Company may hereafter establish a place of business. The Manager shall also
promptly cause to be filed, recorded and published such statements or other
instruments required by any provision of any applicable law of the United States
or any state or other jurisdiction which governs the conduct of its business
from time to time.
SECTION 16.5 POWER OF ATTORNEY. Each Preferred Member does hereby
constitute and appoint the Manager as its true and lawful representative and
attorney-in-fact, in its name, place and stead to make, execute, sign, deliver
and file (a) any amendment of the Certificate required because of an amendment
to this Agreement or in order to effectuate any change in the membership of the
Company, (b) any amendment to this Agreement made in accordance with the terms
hereof and (c) all such other instruments, documents and certificates which may
from time to time be required by the laws of the United States of America, the
State of Delaware or any other jurisdiction, or any political subdivision of
agency thereof, to effectuate, implement and
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<PAGE>
continue the valid and subsisting existence of the Company or to dissolve the
Company or for any other purpose consistent with this Agreement and the
transactions contemplated hereby.
The power of attorney granted hereby is coupled with an interest and shall
(a) survive and not be affected by the subsequent death, incapacity, disability,
dissolution, termination or bankruptcy of the Preferred Member granting the same
or the transfer of all or any portion of such Preferred Member's Interest and
(b) extend to such Preferred Member's successors, assigns and legal
representatives.
SECTION 16.6 EXCULPATION.
(a) No Covered Person shall be liable to the Company or any Member for any
loss, damage or claim incurred by reason of any act or omission performed or
omitted by such Covered Person in good faith on behalf of the Company and in a
manner reasonably believed to be within the scope of authority conferred on such
Covered Person by this Agreement.
(b) A Covered Person shall be fully protected in relying in good faith
upon the records of the Company and upon such information, opinions, reports or
statements presented to the Company by any Person as to matters the Covered
Person reasonably believes are within such other Person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
Company, including information, opinions, reports or statements as to the value
and amount of the assets, liabilities, profits, losses, or any other facts
pertinent to the existence and amount of assets from which distributions to
Members might properly be paid.
SECTION 16.7 INDEMNIFICATION. To the fullest extent permitted by
applicable law, an Indemnified Person shall be entitled to indemnification from
the Company for any loss, damage or claim incurred by such Indemnified Person by
reason of any act or omission performed or omitted by such Indemnified Person in
good faith on behalf of the Company and in a manner reasonably believed to be
within the scope of authority conferred on such Indemnified Person by this
Agreement; provided, however, that any indemnity under this Section 16.7 shall
be provided out of and to the extent of Company assets only, and no Member shall
have any personal liability on account thereof. The right of indemnification
pursuant to this Section 16.7 shall include the right to be paid, in advance, or
reimbursed by the Company for the reasonable expenses incurred by an Indemnified
Person who was, or is, threatened to be made a named defendant or respondent in
a proceeding.
SECTION 16.8 ADDITIONAL DOCUMENTS. Each Preferred Member, upon the
request of the Manager, agrees to perform all further acts and execute,
acknowledge and deliver any documents that may be reasonably necessary to carry
out the provisions of this Agreement.
SECTION 16.9 NOTICES. All notices provided for in this Agreement shall be
in writing, duly signed by the party giving such notice, and shall be delivered,
telecopied or mailed by registered or certified mail, as follows:
(i) If given to the Company, in care of Manager at the Company's
mailing address set forth below:
c/o CellNet Data Systems, Inc.
125 Shoreway Road
San Carlos, California 94070
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<PAGE>
Facsimile No.: (650) _________
Attention: Vice President and General Counsel
with copies to:
Wilson Sonsini Goodrich & Rosati, Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Barry E. Taylor, Esq.
(ii) If given to any Member, at the address set forth on the
registration books maintained by or on behalf of the Company.
Each such notice, request or other communication shall be effective (a) if given
by telecopier, when transmitted to the number specified in such registration
books and the appropriate confirmation is received, (b) if given by mail, 72
hours after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid, or (c) if given by any other means,
when delivered at the address specified in such registration books.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above stated.
COMMON MEMBER AND MANAGER:
CELLNET DATA SYSTEMS, INC.
By:
------------------------------------
[name]
[title]
WITHDRAWING PROVISIONAL MEMBER:
------------------------------------
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<PAGE>
Exhibit 4.6
GUARANTEE AGREEMENT
THIS GUARANTEE AGREEMENT (this "Guarantee"), dated as of April __, 1998, is
executed and delivered by CellNet Data Systems, Inc., a corporation organized
under the laws of the State of Delaware ("CellNet"), and CellNet Funding, LLC, a
limited liability company organized under the laws of the State of Delaware
"Funding") for the benefit of the Holders (as hereinafter defined) from time to
time of the Preferred Securities (as hereinafter defined) of Funding.
WHEREAS, Funding intends to issue and sell exchangeable limited liability
company preferred securities ("Preferred Securities"), and, it is required for
the closing of such issuance that CellNet issue this Guarantee for the benefit
of the Holders of the Preferred Securities, as provided herein; and
WHEREAS, Funding has agreed to purchase the CellNet Preferred Stock (as
hereinafter defined) with an amount equal to -% of the proceeds received by
Funding from the issuance and sale of the Preferred Securities and its other
common limited liability company interests (the "Common Securities"); and
WHEREAS, CellNet, the holder of 100% of the Common Securities, expects to
derive substantial direct and indirect benefits from the issuance and sale by
Funding of the Preferred Securities, and therefor, desires hereby to
unconditionally and irrevocably guarantee the payment in full to the Holders of
the Guarantee Payments (as hereinafter defined) and performance of certain
obligations, as described herein.
NOW, THEREFORE, in consideration of the foregoing premises and the purchase
by each Holder of the Preferred Securities, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
CellNet executes and delivers this Guarantee for the benefit of the Holders.
ARTICLE I
DEFINITIONS
Capitalized terms used herein but not otherwise defined herein shall have
the meanings ascribed to such terms in the Amended and Restated Limited
Liability Company Agreement of Funding, dated as of April __, 1998 (the "LLC
Agreement"). As used in this Guarantee, the terms set forth below shall, unless
the context otherwise requires, have the following meanings.
<PAGE>
1.1 "Exchange Agent" shall mean CellNet and its successors (or such
substitute entity as may be designated from time to time by the Manager (as
hereinafter defined), acting as agent of the Holders in effecting the exchange
of the Preferred Securities into CellNet Common Stock in such manner as may be
set forth in the LLC Agreement and the Declaration with respect to such series
of Preferred Securities.
1.2 "Declaration" shall mean the written action adopted by the Manager
pursuant to the LLC Agreement relating to the Preferred Securities.
1.3 "Dividends" shall mean, with respect to the Preferred Securities, the
cumulative distributions from Funding with respect to the Preferred Securities,
accruing and payable in the manner set forth in the Declaration with respect to
such series of Preferred Securities.
1.4 "Guarantee Payments" shall mean the following payments, without
duplication, to the extent not paid by Funding: (i) any accrued and unpaid
distributions that are required to be paid on the Preferred Securities, to the
extent Funding has funds sufficient and legally available therefor, (ii) the
Redemption Price (as herein defined), with respect to any Preferred Securities
called for redemption by Funding, to the extent Funding has funds sufficient and
legally available therefor, (iii) upon a voluntary or involuntary dissolution,
winding-up or termination of Funding, the lesser of (a) the aggregate of the
liquidation preference and all accrued and unpaid dividends on the Preferred
Securities to the date of payment to the extent Funding has funds sufficient and
legally available therefor and (b) the amount of assets of Funding remaining for
distribution to holders of Preferred Securities upon the liquidation of Funding
and (iv) in the event that CellNet elects not to exercise its option to redeem
the CellNet Preferred Stock on the mandatory redemption date of the Preferred
Securities, the aggregate of the liquidation preference and all accrued and
unpaid dividends on the Preferred Securities on such mandatory redemption date.
1.5 "Holder" shall mean the registered holder from time to time of
Preferred Securities.
1.6 "CellNet Common Stock" shall mean the common stock of CellNet, par
value $.001 per share.
1.7 "CellNet Preferred Stock" shall mean the redeemable preferred stock -
issued by CellNet, par value $- per share.
1.8 "Manager" means CellNet, in its capacity as the manager of Funding, or
any permitted successor manager of Funding admitted as such pursuant to the
applicable provisions of the LLC Agreement.
1.9 "Redemption Price" shall mean, (i) with respect to a mandatory
redemption by Funding, 100% of the liquidation preference of the Preferred
Securities plus accumulated and unpaid dividends (whether or not earned or
declared), to the date fixed for redemption thereof, (ii) with respect to a
provisional redemption by Funding on or prior to May 1, 2001, ___% of the
liquidation
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<PAGE>
preference of the Preferred Securities to be redeemed plus accrued and unpaid
dividends, if any, to the date of redemption, in the event that the Current
Market Value of the Common Stock equals or exceeds the following Trigger
Percentages of the exchange price then in effect for at least 20 trading days
in any consecutive 30-day trading period ending on the trading day prior to
the date of mailing of the notice of Provisional Redemption, if called for
redemption in the 12-month period ending on May 1 of the indicated year:
<TABLE>
<CAPTION>
YEAR TRIGGER PERCENTAGES
---- -------------------
<S> <C>
1999 170%
2000 160%
2001 150%
</TABLE>
and (iii) with respect to an optional redemption by Funding if redeemed in the
12-month period beginning on May 1 of the indicated year:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2001 %
2002
2003
2004
2005
2006
2007
2008
2009
2010 100.000%
</TABLE>
ARTICLE II
GUARANTEE
2.1 GENERAL. CellNet irrevocably and unconditionally agrees to pay in
full to the Holders of the Preferred Securities the Guarantee Payments with
respect to the Preferred Securities, as and when due (except to the extent
previously paid by Funding), regardless of any defense, right of set-off or
counterclaim which Funding may have or assert. CellNet's obligation to make a
Guarantee Payment may be satisfied by direct payment of the required amounts by
CellNet to the Holders of the Preferred Securities or by causing Funding to pay
such amounts to such Holders.
2.2 WAIVER OF CERTAIN RIGHTS. CellNet hereby waives, to the fullest
extent permitted by applicable law, notice of acceptance of this Guarantee and
of any liability to which it applies or may apply, presentment, demand for
payment, protest, notice of nonpayment, notice of dishonor, notice of redemption
and all other notices and demands.
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<PAGE>
2.3 OBLIGATIONS NOT AFFECTED. The obligations, covenants, agreements and
duties of CellNet to make the Guarantee Payments as required by the terms hereof
shall in no way be affected or impaired by reason of the happening from time to
time of any of the following:
(a) the release or waiver, by operation of law or otherwise, of the
performance or observance by Funding of any express or implied agreement,
covenant, term of condition relating to the Preferred Securities to be performed
or observed by Funding;
(b) the extension of time for the payment by Funding of all or any
portion of the Dividends, Redemption Price, liquidation distribution or any
other sums payable under the terms of the Preferred Securities or the extension
of time for the performance of any other obligation under, arising out of, or in
connection with, the Preferred Securities;
(c) any failure, omission, delay or lack of diligence on the part of
the Holders of Preferred Securities to enforce, assert or exercise any right,
privilege, power or remedy conferred on such Holders pursuant to the terms of
the Preferred Securities, or any action on the part of Funding granting
indulgence or extension of any kind;
(d) the voluntary or involuntary liquidation, dissolution,
winding-up, sale of any collateral, receivership, insolvency, bankruptcy,
assignment for the benefit of creditors, reorganization, arrangement,
composition or readjustment of debt of, or other similar proceedings affecting,
Funding or any of the assets of Funding;
(e) any invalidity of, or defect or deficiency in, any of the
Preferred Securities;
(f) the settlement or compromise of any obligation guaranteed hereby
or hereby incurred; or
(g) to the fullest extent permitted by applicable law, any other
circumstance whatsoever that might otherwise constitute a legal or equitable
discharge or defense of a guarantor.
There shall be no obligation of any Holders of Preferred Securities to give
notice to, or obtain any consent of, CellNet with respect to the happening of
any of the foregoing.
2.4 PROCEEDING DIRECTLY AGAINST CELLNET. This Guarantee is a guarantee of
payment and not of collection. A Holder of Preferred Securities may enforce
this Guarantee with respect to the Preferred Securities directly against
CellNet, and CellNet waives any right or remedy to require that any action be
brought against Funding or any other person or entity before proceeding against
CellNet. Subject to Section 2.5 hereof, all waivers herein contained shall be
without prejudice to the right of a Holder, at its option, to proceed against
Funding, whether by separate action or by joinder. CellNet agrees that this
Guarantee shall not be discharged except by payment
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<PAGE>
of the Guarantee Payments in full (to the extent not previously paid by
Funding) and by complete performance of all obligations under this Guarantee.
2.5 SUBROGATION. CellNet shall be subrogated to all (if any) rights of
the Holders of Preferred Securities against CellNet in respect of any amounts
paid to such Holders by CellNet under this Guarantee and shall have the right to
waive payment by Funding of any amount of Dividends in respect of which payment
has been made to the Holders by it pursuant to Section 2.1 hereof; provided,
however, that CellNet shall not (except to the extent required by mandatory
provisions of law) exercise any rights which it may acquire by way of
subrogation or any indemnity, reimbursement or other agreement, in all cases as
a result of a payment under this Guarantee, if, at the time of any such payment,
any amounts are due and unpaid under this Guarantee. If any amount shall be
paid to CellNet in violation of the preceding sentence, CellNet agrees to hold
such amount in trust for the Holders and to pay over such amount promptly to the
Holders.
2.6 INDEPENDENT OBLIGATIONS. CellNet acknowledges that its obligations
hereunder are independent of the obligations of Funding with respect to the
Preferred Securities and that CellNet shall be liable as principal and sole
debtor under this Guarantee to make Guarantee Payments in full pursuant to the
terms of this Guarantee notwithstanding the occurrence of any event referred to
in subsections (a) through (g), inclusive, of Section 2.3 hereof.
2.7 TERMINATION. This Guarantee shall terminate and be of no further
force and effect as to the Preferred Securities of any series upon (a) full
payment of the Redemption Price of all outstanding Preferred Securities, or (b)
the exchange (in the manner provided in the LLC Agreement and the Declaration)
of all of the Preferred Securities for CellNet Common Stock. In addition, this
Guarantee will terminate completely upon the distribution to the holders of the
Preferred Securities of all of the assets of Funding, including the CellNet
Preferred Stock, any interest on and principal of the Treasury Strips that are
held in the Escrow Account and any CellNet Common Stock that Funding received
from CellNet as a dividend (or otherwise) and has not distributed on the
Preferred Securities or sold in the open market. Notwithstanding the foregoing,
this Guarantee shall continue to be effective or, to the fullest extent
permitted by applicable law, shall be reinstated, as the case may be, with
respect to the Preferred Securities if at any time any Holder of such Preferred
Securities must restore payment of any sums recovered on account of, or must
redeliver any securities received on account of, such Preferred Securities or
under this Guarantee for any reason whatsoever.
ARTICLE III
CERTAIN COVENANTS OF CELLNET
3.1 COVENANTS. So long as the Preferred Securities remain outstanding,
CellNet shall: (a) not cause or permit any Common Securities to be transferred
(other than in connection with a merger or consolidation); (b) maintain direct
or indirect ownership of all outstanding Common
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<PAGE>
Securities and any other limited liability company interests in Funding other
than the Preferred Securities (except as may be permitted in the LLC
Agreement); (c) not voluntarily liquidate, dissolve or wind-up itself (other
than in connection with a merger or consolidation) or cause Funding (other
than in connection with or after an exchange of all outstanding Preferred
Securities) to liquidate, dissolve or wind-up; (e) to remain the Manager and
to timely perform all of its duties as Manager (including the duty to cause
Funding to declare and pay dividends on all outstanding Preferred Securities
to the extent set forth in the LLC Agreement and the Certificate of
Designation) and (f) subject to the terms of the Preferred Securities, use
reasonable efforts to cause Funding to remain a Delaware limited liability
company and otherwise continue to be treated as a partnership for United
States federal income tax purposes.
ARTICLE IV
STATUS
4.1 STATUS. This Guarantee constitutes an unsecured obligation of CellNet
ranking subordinate and junior in right of payment to all other liabilities of
CellNet and senior to CellNet Common Stock.
ARTICLE V
EXCHANGE OF PREFERRED SECURITIES
5.1 ISSUANCE OF CELLNET COMMON STOCK. CellNet shall reserve and keep
available out of its authorized and unissued CellNet Common Stock (solely for
issuance upon the exchange of the Preferred Securities), free of any preemptive
or other similar rights, the number of full shares of CellNet Common Stock
deliverable to the Holders upon the exchange of all outstanding Preferred
Securities not theretofore converted by the Holders.
5.2 VALIDITY OF CELLNET COMMON STOCK. All shares of CellNet Common Stock
delivered by CellNet upon such exchange will be duly authorized, validly issued
and fully paid and nonassessable.
ARTICLE VI
MISCELLANEOUS
6.1 THIRD PARTY BENEFICIARIES. All of CellNet's obligations under this
Guarantee shall be directly enforceable by the Holders from time to time of the
Preferred Securities. Each Holder of Preferred Securities is an intended
third-party beneficiary of this Guarantee.
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<PAGE>
6.2 SUCCESSORS AND ASSIGNS. All provisions contained in this Guarantee
shall bind the successors, assigns, receivers, trustees and representatives of
CellNet and shall inure to the benefit of the Holders. Except in connection with
any permitted merger or consolidation of CellNet with or into another entity or
any permitted sale, transfer or lease of CellNet's assets to another entity,
CellNet may not assign its rights or delegate its obligations under this
Guarantee without the prior approval of the holders of at least a majority in
liquidation preference of the Preferred Securities then outstanding.
6.3 AMENDMENTS. Except with respect to any changes which do not have a
material adverse effect on the rights of any Holders of Preferred Securities (in
which case no vote will be required, provided that the board of directors of
CellNet makes a determination, evidenced by resolution, that such change will
not have a material adverse effect on the holders of Preferred Securities), this
Guarantee may be amended with respect to the Preferred Securities only with the
prior approval (obtained in the manner set forth in the LLC Agreement and the
applicable Declaration) of the Holders of not less than a majority of the
aggregate liquidation preference of the outstanding Preferred Securities.
6.4 NOTICE. Any notice, request of other communication required or
permitted to be given hereunder shall be given in writing by delivering the same
against receipt therefor by registered mail, hand delivery, facsimile
transmission (confirmed by registered mail)or telex, addressed to CellNet, as
follows (and if so given, shall be deemed given when mailed; upon receipt of
facsimile confirmation, if sent by facsimile transmission; or upon receipt of an
answer-back, if sent by telex):
CellNet Data Systems, Inc.
125 Shoreway Road
San Carlos, CA 94070
Attention: David Perry
Fax: (650) 508-6886
CellNet Funding, LLC
125 Shoreway Road
San Carlos, CA 94070
Attention: David Perry
Fax: (650) 508-6886
6.5 GENDERS. The masculine and neuter genders used here shall include the
masculine, feminine and neuter genders.
6.6 GUARANTEE NOT SEPARATELY TRANSFERABLE. This Guarantee is solely from
the benefit of the Holders and is not separately transferable from the Preferred
Securities.
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<PAGE>
6.7 GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK.
6.8 SEVERABILITY. In case any provision of this Guarantee shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired.
6.9 HEADINGS. The Article and section headings herein are for convenience
only and shall not affect the construction hereof.
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<PAGE>
IN WITNESS WHEREOF, CellNet has caused this Guarantee to be duly executed
to take effect as of the day and year first above written.
CellNet Data Systems, Inc.
By:
--------------------------------
Name: John M. Seidl
Title: President and Chief
Executive Officer
ATTEST:
- -----------------------------
Secretary
CellNet Funding, LLC
By: CellNet Data Systems, Inc.,
its manager
By:
--------------------------------
Name: John M. Seidl
Title: President and Chief
Executive Officer
ATTEST:
- -----------------------------
Secretary
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<PAGE>
Exhibit 4.7
ESCROW AND SECURITY AGREEMENT
This ESCROW AND SECURITY AGREEMENT (this "Escrow Agreement") is made and
entered into as of April __, 1998 among CELLNET FUNDING, LLC, a Delaware limited
liability company (the "Issuer"), CELLNET DATA SYSTEMS, INC. ("CellNet"), a
Delaware corporation, and [BANK OF NEW YORK], as escrow agent (the "Escrow
Agent") for the holders (the "Holders") of the Preferred Securities (as defined
herein) issued by the Issuer under the LLC Agreement referred to below.
W I T N E S S E T H
WHEREAS, pursuant to the Underwriting Agreement (the "Underwriting
Agreement") dated April __, 1998, among the Issuer, CellNet and Morgan
Stanley & Co. Incorporated (the "Underwriter"), the Issuer and CellNet have
agreed to sell to the Underwriter, 3,000,000 of Issuer's -% Exchangeable
Limited Liability Company Preferred Securities, liquidation preference $25
per preferred security (the "Firm Preferred Securities" and, together with
the Additional Preferred Securities (as defined herein), the "Preferred
Securities"), which will be mandatorily redeemable on May 1, 2010;
WHEREAS, pursuant to the Underwriting Agreement, the Issuer and CellNet
propose to issue and sell to the Underwriter not more than an additional
450,000 Preferred Securities (the "Additional Preferred Securities"), if and
to the extent that the Underwriter shall have determined to exercise the
right to purchase such additional Preferred Securities granted to the
Underwriter;
WHEREAS, the Issuer hereby agrees to (i) purchase or cause the purchase
of Pledged Securities (as defined herein) in an amount that will be
sufficient upon receipt of scheduled interest and principal payments in
respect thereof to provide for the payment in cash of the dividends due
quarterly in arrears on August -, November -, February - and May -,
commencing August -, 1998, on the Preferred Securities through and including
August -, 2001 and (ii) place such Pledged Securities (as defined herein) (or
cause them to be placed) in an account held by the Escrow Agent for the
benefit of Holders of the Preferred Securities; and
WHEREAS, to secure the obligations of the Issuer under the LLC Agreement
to pay in cash the first thirteen dividends on the Preferred Securities
through and including August 1, 2001 (the "Obligations"), the Issuer has
agreed to (i) pledge to the Escrow Agent for its benefit and the ratable
benefit of the Holders of the Preferred Securities, a security interest in
the Pledged Securities (as
<PAGE>
defined herein) and related collateral and (ii) execute and deliver this
Escrow Agreement in order to secure the payment and performance by the Issuer
of all the Obligations. Capitalized terms used herein and not otherwise
defined herein shall have the meanings given to such terms in the Agreement
of Limited Liability Company of the Issuer (as amended, restated,
supplemented or otherwise modified from time to time, the "LLC Agreement") or
the Preferred Securities Designation. Unless otherwise defined herein or in
the LLC Agreement, terms used in Articles 8 or 9 of the Uniform Commercial
Code as enacted and in effect in the State of New York from time to time (the
"UCC") are used herein as therein defined on the date hereof.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises herein contained,
and in order to induce the Holders of the Preferred Securities to purchase the
Preferred Securities and as a condition to the Closing of the offering of the
Preferred Securities, the Issuer hereby agrees with the Escrow Agent, for the
benefit of the Escrow Agent and for the ratable benefit of the Holders of the
Preferred Securities, as follows:
SECTION 1. PLEDGE AND GRANT OF SECURITY INTEREST.
(a) The Issuer hereby pledges to the Escrow Agent for its benefit and
for the ratable benefit of the Holders of the Preferred Securities, as their
respective interests appear, and grants to the Escrow Agent for its benefit and
for the ratable benefit of the Holders of the Preferred Securities, a continuing
first priority security interest in and to all of the Issuer's right, title and
interest in, to and under the following (hereinafter collectively referred to as
the "Collateral"), whether evidenced by or characterized as investment property,
general intangibles, documents, instruments, accounts or otherwise: (a) the
United States Treasury securities identified in Annex 1 to Exhibit A to this
Escrow Agreement (the "Firm Pledged Securities" and, together with the
Additional Pledged Securities, the "Pledged Securities"), (b) the United States
Treasury securities, if any, to be purchased pursuant to Section 1(b), (c) any
and all applicable security entitlements to the Pledged Securities, (d) The
[Bank of New York] account in the name of [The Bank of New York], as Escrow
Agent for the benefit of the holders of the -% Exchangeable Limited Liability
Company Preferred Securities mandatorily redeemable - of CellNet Funding, LLC
Collateral Escrow Account", Administrative Account No. - (the "Escrow Account")
established and maintained by the Escrow Agent pursuant to this Escrow
Agreement, (e) any and all related securities accounts in which security
entitlements to the Pledged Securities are carried, and (f) all proceeds in any
form of any and all of the foregoing Collateral (including, without limitation,
proceeds that constitute property of the types described in clauses (a) - (e) of
this Section 1) and, to the extent not otherwise included, all cash.
(b) In the event the Underwriter shall decide to exercise the
right to purchase the Additional Preferred Securities pursuant to the
Underwriting Agreement, the Issuer shall use a portion of the proceeds from
such purchase by the Underwriting to purchase and deliver to the Escrow Agent
additional United States Treasury securities (the "Additional Pledged
Securities")
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<PAGE>
in such amount as will be sufficient upon receipt of scheduled interest
and/or principal payments of all Pledged Securities thereafter held in the
Pledged Account to provide payment for the first thirteen cash dividends due
on the Preferred Securities. The Additional Pledged Securities shall be
pledged by the Issuer to the Escrow Agent for the benefit of the Holders and
shall be held by the Escrow Agent in the Pledged Account.
SECTION 2. SECURITY FOR OBLIGATION. This Escrow Agreement and the
pledge of Collateral hereunder secures the prompt and complete payment and
performance when due (whether at stated maturity, by acceleration or otherwise)
of all the Obligations.
SECTION 3. DELIVERY OF COLLATERAL; ESCROW ACCOUNT; INTEREST.
(a) The Pledged Securities shall be pledged and transferred to the
Escrow Agent and the Escrow Agent shall become the holder of a security
entitlement to the Pledged Securities, through action by the [Federal Reserve
Bank of New York] ("FRBNY") or another securities intermediary, as confirmed (in
writing or electronically or otherwise in accordance with standard industry
practice) to the Escrow Agent by FRBNY or such other securities intermediary
(i) indicating by book-entry that the Pledged Securities or a security
entitlement thereto has been credited to the Escrow Agent's account, or
(ii) acquiring the Pledged Securities or a security entitlement thereto for the
Escrow Agent and accepting the same for credit to a securities account of the
Escrow Agent.
(b) Prior to or concurrently with the execution and delivery hereof
and prior to the transfer to the Escrow Agent of the Pledged Securities (or
acquisition by the Escrow Agent of any security entitlement thereto), as
provided in subsection (a) of this Section 3, the Escrow Agent shall establish
the Escrow Account on its books as an account segregated from all other
custodial or collateral accounts at its office at - Attention: -. Upon transfer
of the Pledged Securities to the Escrow Agent (or the Escrow Agent's acquisition
of a security entitlement thereto), as confirmed to the Escrow Agent by FRBNY or
another securities intermediary, the Escrow Agent shall make appropriate book
entries indicating that the Pledged Securities and/or such security entitlement
have been credited to and are held in the Escrow Account. Subject to the other
terms and conditions of this Escrow Agreement, all funds or other property held
by the Escrow Agent pursuant to this Escrow Agreement shall be held in the
Escrow Account subject (except as expressly provided in Sections 4(a), (b) and
(c) hereof) to the exclusive dominion and control of the Escrow Agent and
exclusively for the benefit of the Escrow Agent and for the ratable benefit of
the Holders of the Preferred Securities, as their respective interests appear
and segregated from all other funds or other property otherwise held by the
Escrow Agent. No person other than the Escrow Agent shall be authorized to
issue entitlement orders with respect to the Pledged Securities.
(c) All Collateral shall be retained in the Escrow Account pending
disbursement pursuant to the terms hereof.
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<PAGE>
(d) Concurrently with the execution and delivery of this Escrow
Agreement the Escrow Agent is delivering to the Issuer and the Underwriter
a duly executed certificate, in the form of Exhibit A hereto, of an officer of
the Escrow Agent, confirming the Escrow Agent's establishment and maintenance of
the Escrow Account and its receipt and holding of the Firm Pledged Securities or
a security entitlement thereto and the crediting of the Firm Pledged Securities
or such security entitlement to the Escrow Account, all in accordance with this
Escrow Agreement.
(e) In the event the Underwriter shall decide to exercise the
right to purchase the Additional Preferred Securities pursuant to the
Underwriting Agreement, the Escrow Agent shall deliver, on the Option Closing
Date (as defined in the Underwriting Agreement), to the Issuer and the
Underwriter a duly executed certificate, substantially in the form of Exhibit
A hereto, with respect to the Additional Pledged Securities, of an officer of
the Escrow Agent, confirming the Escrow Agent's maintenance of the Escrow
Account and its receipt and holding of the Additional Pledged Securities or a
security entitlement thereto and the crediting of the Additional Pledged
Securities or such security entitlement to the Escrow Account, all in
accordance with this Escrow Agreement.
(f) Concurrently with the execution and delivery of this Escrow
Agreement, the Issuer is delivering to the Escrow Agent acknowledgment copies or
stamped receipt copies of proper financing statements, duly filed on or before
the Closing Date (as defined in the LLC Agreement) under the UCC of the State of
California, covering the Collateral described in this Escrow Agreement.
SECTION 4. DISBURSEMENTS.
(a) The Issuer hereby agrees that, three business days prior to
the date of each of the first thirteen scheduled dividend payments on the
Preferred Securities, the Escrow Agent shall release from the Escrow Account
and pay to the Holders of the Preferred Securities proceeds sufficient to
provide for payment in full of such dividend payment then due on the
Preferred Securities. The Escrow Agent will release funds in an amount
sufficient to provide for the payment of the dividend on the Preferred
Securities in accordance with the terms hereof and the payment provisions of
the LLC Agreement to the Holders of the Preferred Securities from (and to the
extent of) proceeds of the Pledged Securities in the Escrow Account.
(b) If the Issuer makes any dividend payment or portion of a dividend
payment for which the Collateral is security from a source of funds other than
the Escrow Account ("Issuer Funds"), the Issuer may deliver to the Escrow Agent,
provided the Escrow Agent has received such dividend payment, the Escrow Agent
shall pay over to the Issuer or the Issuer's Designee, as the case may be, the
requested amount from proceeds in the Escrow Account as soon as practicable to
another party at the direction of the Issuer (the "Issuer's Designee") proceeds
from the Escrow Account in an amount less than or equal to the amount of Issuer
Funds applied to such dividend payment.
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<PAGE>
(c) Upon (i) payment in full of the first thirteen scheduled dividend
payments on the Preferred Securities or (ii) exchange of all of the Preferred
Securities into shares of CellNet Common Stock, the security interest in the
Collateral (except, with respect to subsection (ii) in this Section 4(c), the
Class of Pledged Securities (as defined below), if any, that will mature within
[15 days] from the date of such exchange) evidenced by this Escrow Agreement and
held in the Escrow Account will automatically terminate and be of no further
force and effect and the Collateral (except, with respect to subsection (ii) in
this Section 4(c), the Class of Pledged Securities, if any, that will mature
within [15 days] from the date of such exchange) shall promptly be paid over and
transferred to the Issuer. Furthermore, upon the release of any Collateral from
the Escrow Account in accordance with the terms of this Escrow Agreement,
whether upon release of Collateral to Holders as payment of dividends or
otherwise, the security interest evidenced by this Escrow Agreement in such
released Collateral will automatically terminate and be of no further force and
effect. The Escrow Agent will take all steps reasonably requested by CellNet or
Funding to evidence such release of record.
(d) At least three Business Days prior to the due date of each of the
first thirteen scheduled dividend payments on the Preferred Securities, the
Issuer shall give the Escrow Agent notice as to whether such dividend payment
will be made pursuant to Section 4(a) or 4(b) and the respective amounts of the
dividend that will be paid from the Escrow Account and from Issuer Funds. Any
Issuer Funds to be used to make any dividend payment shall be delivered to the
Escrow Agent, in immediately available funds, prior to 10 a.m. one business day
prior to such dividend payment date. If no such notice is given or such Issuer
Funds have not been so delivered, the Escrow Agent will act pursuant to
Section 4(a) as if it had received an Issuer Order pursuant thereto for the
payment in full of the dividend then due from the Escrow Account.
(e) Upon any Automatic Exchange, the Escrow Agent, pursuant to a
written notice given by the Issuer to the Escrow Agent, shall release from
the Escrow Account and pay the Holders whose Preferred Securities are being
automatically exchanged for shares of CellNet Common Stock pursuant to such
Automatic Exchange, such Holders' pro rata share of the entire Collateral.
(f) The Escrow Agent shall liquidate Collateral in the Escrow Account
(pursuant to written instructions from Issuer) in order to make any scheduled
payment of dividends or payment pursuant to Section 4(e) above unless there are
sufficient funds in the Escrow Account on such dividend payment date.
(g) In the event that, prior to August 1, 2001, a holder of the
Preferred Securities exchanges such Preferred Securities with the Issuer for
shares of CellNet Common Stock in accordance with the LLC Agreement, the
Escrow Agent, pursuant to a written notice of the Issuer, shall release
[and pay to CellNet] from the Escrow Account an amount of each Class of
Pledged Securities (other than the Class of Pledged Securities, if any, that
will mature within [15 days] from the date of such exchange) that are then
held in the Escrow Account equal to all of the Pledged Securities in such
Class of Pledged Securities multiplied by a fraction, the numerator of which
is the number of Preferred Securities which are being exchanged and the
denominator of which is all of the outstanding
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<PAGE>
Preferred Securities; provided however, that the Escrow Agent shall only
release each such Class of Pledged Securities to the extent that it receives
from an officer of the Issuer a written notice stating that it is his/her
reasonable opinion that after such release, the Pledged Securities remaining
in the Escrow Account will be sufficient upon receipt of scheduled interest
and/or principal payment of all remaining Pledged Securities thereafter held
in the Pledged Account to provide payment for the remaining cash dividends
due on the Preferred Securities. Each group of Pledged Securities that will
mature on or about a dividend payment date with respect to the Preferred
Securities shall be considered, for purposes of this Section 4, a "Class of
Pledged Securities".
(h) Nothing contained in this Escrow Agreement shall (i) afford the
Issuer any right to issue entitlement orders with respect to any security
entitlement to the Pledged Securities or any securities account in which any
such security entitlement may be carried, or otherwise afford the Issuer control
of any such security entitlement or (ii) otherwise give rise to any rights of
the Issuer with respect to the Pledged Securities, any security entitlement
thereto or any securities account in which any such security entitlement may be
carried, other than the Issuer's rights under this Escrow Agreement as the
beneficial owner of Collateral pledged to and subject to the exclusive dominion
and control (except as expressly provided in Sections 4(a), (b), (c), (e) and
(g) hereof) of the Escrow Agent in its capacity as such (and not as a securities
intermediary). The Issuer acknowledges, confirms and agrees that the Escrow
Agent is an entitlement holder of the security entitlements to the Pledged
Securities solely as Escrow Agent for the Holders of the Preferred Securities
and not as a securities intermediary.
SECTION 5. REPRESENTATIONS AND WARRANTIES. The Issuer hereby
represents and warrants that:
(a) The execution and delivery by the Issuer of, and the performance
by the Issuer of its obligations under, this Escrow Agreement will not
contravene any provision of applicable law or the Certificate of Formation of
the Issuer or any material agreement or other material instrument binding upon
the Issuer or any of its subsidiaries or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Issuer or any of
its subsidiaries, or result in the creation or imposition of any lien on any
assets of the Issuer, except for the security interests granted under this
Escrow Agreement; no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required (i) for the
performance by the Issuer of its obligations under this Escrow Agreement,
(ii) for the pledge by the Issuer of the Collateral pursuant to this Escrow
Agreement or (iii) except for any such consents, approvals, authorizations or
orders required to be obtained by the Escrow Agent (or the Holders) for reasons
other than the consummation of this transaction, for the exercise by the Escrow
Agent of the rights provided for in this Escrow Agreement or the remedies in
respect of the Collateral pursuant to this Escrow Agreement.
(b) The Issuer is the beneficial owner of the Collateral, free and
clear of any Lien or claims of any person or entity (except for the security
interests granted under this Escrow
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<PAGE>
Agreement). No financing statement covering the Issuer's interest in the
Pledged Securities is on file in any public office, other than the financing
statements filed pursuant to this Escrow Agreement.
(c) This Escrow Agreement has been duly authorized, validly
executed and delivered by the Issuer and constitutes a valid and binding
agreement of the Issuer, enforceable against the Issuer in accordance with
its terms, except as (i) the enforceability hereof may be limited by
bankruptcy, insolvency, fraudulent conveyance, preference, reorganization,
moratorium or similar laws now or hereafter in effect relating to or
affecting creditors' rights or remedies generally, (ii) the availability of
equitable remedies may be limited by equitable principles of general
applicability, (iii) the exculpation provisions and rights to indemnification
hereunder may be limited by U.S. federal and state securities laws and public
policy considerations and (iv) the waiver of rights and defenses contained in
Section 11(b) and Section 14.11 hereof may be limited by applicable law.
(d) Upon the transfer to the Escrow Agent of the Pledged Securities
and the acquisition by the Escrow Agent of a security entitlement thereto, in
accordance with Section 3, the pledge of and grant of a security interest in the
Collateral securing the payment of the Obligations for the benefit of the Escrow
Agent and the Holders of the Preferred Securities will constitute a perfected
security interest in such Collateral with first priority against all creditors
of the Issuer (and any persons purporting to purchase any of the Collateral from
the Issuer).
(e) There are no legal or governmental proceedings pending or, to the
best of the Issuer's knowledge, threatened to which the Issuer or any of its
subsidiaries is a party or to which any of the properties of the Issuer or any
such subsidiary is subject that would materially adversely affect the power or
ability of the Issuer to perform its obligations under this Escrow Agreement or
to consummate the transactions contemplated hereby.
(f) The pledge of the Collateral pursuant to this Escrow Agreement is
not prohibited by law or governmental regulation (including, without limitation,
Regulations G, T, U and X of the Board of Governors of the Federal Reserve
System) applicable to the Issuer.
(g) No Event of Default exists.
SECTION 6. FURTHER ASSURANCES. The Issuer will, promptly upon
request by the Escrow Agent, execute and deliver or cause to be executed and
delivered, or use its reasonable best efforts to procure, all assignments,
instruments and other documents, all in form and substance reasonably
satisfactory to the Escrow Agent, deliver any instruments to the Escrow Agent
and take any other actions that are necessary or, in the reasonable opinion
of the Escrow Agent, desirable to perfect, continue the perfection of, or
protect the first priority of the Escrow Agent's security interest in and to
the Collateral, to protect the Collateral against the rights, claims, or
interests of third persons (other than any such rights, claims or interests
created by or arising through the Escrow Agent) or to effect the purposes of
this Escrow Agreement. The Issuer also hereby authorizes the Escrow Agent to
file any
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financing or continuation statements in the United States with respect to the
Collateral without the signature of the Issuer (to the extent permitted by
applicable law). The Issuer will promptly pay all reasonable costs incurred
in connection with any of the foregoing within 60 days of receipt of an
invoice therefor. The Issuer also agrees, whether or not requested by the
Escrow Agent, to take all actions that are necessary to perfect or continue
the perfection of, or to protect the first priority of, the Escrow Agent's
security interest in and to the Collateral, including the filing of all
necessary financing and continuation statements, and to protect the
Collateral against the rights, claims or interests of third persons (other
than any such rights, claims or interests created by or arising through the
Escrow Agent).
SECTION 7. COVENANTS. The Issuer covenants and agrees with the Escrow
Agent and the Holders of the Preferred Securities that from and after the date
of this Escrow Agreement until the earlier of payment in full in cash of the
Obligations:
(a) that (i) it will not (and will not purport to) sell or otherwise
dispose of, or grant any option or warrant with respect to, any of the
Collateral or its beneficial interest therein, and (ii) it will not create or
permit to exist any Lien or other adverse interest in or with respect to its
beneficial interest in any of the Collateral (except for the security interests
granted under this Escrow Agreement); and
(b) that it will not (i) enter into any agreement or understanding
that restricts or inhibits or purports to restrict or inhibit the Escrow Agent's
rights or remedies hereunder, including, without limitation, the Escrow Agent's
right to sell or otherwise dispose of the Collateral or (ii) fail to pay or
discharge any tax, assessment or levy of any nature with respect to its
beneficial interest in the Collateral not later than five days prior to the date
of any proposed sale under any judgment, writ or warrant of attachment with
respect to such beneficial interest.
SECTION 8. POWER OF ATTORNEY. In addition to all of the powers granted
to the Escrow Agent pursuant to the LLC Agreement, the Issuer hereby appoints
and constitutes the Escrow Agent as the Issuer's attorney-in-fact (with full
power of substitution) to exercise to the fullest extent permitted by law all of
the following powers upon and at any time after the occurrence and during the
continuance of an Event of Default: (a) collection of proceeds of any
Collateral; (b) conveyance of any item of Collateral to any purchaser thereof;
(c) giving of any notices or recording of any Liens under Section 6 hereof; and
(d) paying or discharging taxes or Liens levied or placed upon the Collateral,
the legality or validity thereof and the amounts necessary to discharge the same
to be determined by the Escrow Agent in its sole reasonable discretion, and such
payments made by the Escrow Agent to become part of the Obligations of the
Issuer to the Escrow Agent, due and payable immediately upon demand. The Escrow
Agent's authority under this Section 8 shall include, without limitation, the
authority to endorse and negotiate any checks or instruments representing
proceeds of Collateral in the name of the Issuer, execute and give receipt for
any certificate of ownership or any document constituting Collateral, transfer
title to any item of Collateral, sign the Issuer's name on all financing
statements (to the extent permitted by applicable law) or any other documents
deemed necessary or appropriate by the Escrow Agent to preserve, protect or
perfect the security interest in the Collateral and to file the same, prepare,
file and sign the Issuer's name on any notice of Lien, and
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<PAGE>
to take any other actions arising from or incident to the powers granted to
the Escrow Agent in this Escrow Agreement. This power of attorney is coupled
with an interest and is irrevocable by the Issuer.
SECTION 9. NO ASSUMPTION OF DUTIES; REASONABLE CARE. The rights and
powers granted to the Escrow Agent hereunder are being granted in order to
preserve and protect the security interest of the Escrow Agent and the Holders
of the Preferred Securities in and to the Collateral granted hereby and shall
not be interpreted to, and shall not impose any duties on the Escrow Agent in
connection therewith other than those expressly provided herein or imposed under
applicable law. Except as provided by applicable law or by the LLC Agreement,
the Escrow Agent shall be deemed to have exercised reasonable care in the
custody and preservation of the Collateral in its possession if the Collateral
is accorded treatment substantially equal to that which the Escrow Agent accords
similar property held by the Escrow Agent for similar accounts, it being
understood that the Escrow Agent in its capacity as such shall not have any
responsibility for (a) ascertaining or taking action with respect to calls,
conversions, exchanges, maturities or other matters relative to any Collateral,
whether or not the Escrow Agent has or is deemed to have knowledge of such
matters, (b) taking any necessary steps to preserve rights against any parties
with respect to any Collateral or (c) investing or reinvesting any of the
Collateral or any loss on any investment. The Escrow Agent may reasonably rely
on the written instructions of the Issuer without any further investigation on
its part. Furthermore, the Escrow Agent assumes no responsibility for the
validity of the Pledged Securities nor the sufficiency of such Pledged
Securities to cover the first thirteen dividend payments on the Preferred
Securities.
SECTION 10. INDEMNITY. The Issuer shall indemnify, hold harmless and
defend the Escrow Agent and its directors, officers, agents and employees, from
and against any and all claims, actions, obligations, liabilities and expenses,
including reasonable defense costs, reasonable investigative fees and costs, and
reasonable legal fees and damages arising from the Escrow Agent's performance as
Escrow Agent under this Escrow Agreement, except to the extent that such claim,
action, obligation, liability or expense is directly attributable to the bad
faith, gross negligence or wilful misconduct of such indemnified person.
SECTION 11. REMEDIES UPON EVENT OF DEFAULT. If any Event of Default
under the LLC Agreement or default hereunder (any such Event of Default or
default being referred to in this Escrow Agreement as an "Event of Default")
shall have occurred and be continuing:
(a) The Escrow Agent and the Holders of the Preferred Securities
shall have, in addition to all other rights given by law or by this Escrow
Agreement or the LLC Agreement, all of the rights and remedies with respect to
the Collateral of a secured party under the UCC. In addition, with respect to
any Collateral that shall then be in or shall thereafter come into the
possession or custody of the Escrow Agent, the Escrow Agent may sell or cause
the same to be sold at any broker's board or at public or private sale, in one
or more sales or lots, at such price or prices as the Escrow Agent may deem
best, for cash or on credit or for future delivery, without assumption of any
credit risk. The purchaser of any or all Collateral so sold shall thereafter
hold the same absolutely, free
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from any claim, encumbrance or right of any kind whatsoever created by or
through the Issuer. Unless any of the Collateral threatens, in the
reasonable judgment of the Escrow Agent, to decline speedily in value or is
or becomes of a type sold on a recognized market, the Escrow Agent will give
the Issuer reasonable notice of the time and place of any public sale
thereof, or of the time after which any private sale or other intended
disposition is to be made. Any sale of the Collateral conducted in
conformity with reasonable commercial practices of banks, insurance
companies, commercial finance companies, or other financial institutions
disposing of property similar to the Collateral shall be deemed to be
commercially reasonable. Any requirements of reasonable notice shall be met
if such notice is mailed to the Issuer as provided in Section 14.1 hereof at
least ten (10) days before the time of the sale or disposition. The Escrow
Agent or any Holder of Preferred Securities may, in its own name or in the
name of a designee or nominee, buy any of the Collateral at any public sale
and, if permitted by applicable law, at any private sale. All expenses
(including court costs and reasonable attorneys' fees, expenses and
disbursements) of, or incident to, the enforcement of any of the provisions
hereof shall be recoverable from the proceeds of the sale or other
disposition of the Collateral.
(b) The Issuer further agrees to use its reasonable best efforts to
do or cause to be done all such other acts as may be necessary to make such sale
or sales of all or any portion of the Collateral pursuant to this Section 11
valid and binding and in compliance with any and all other applicable
requirements of law. The Issuer further agrees that a breach of any of the
covenants contained in this Section 11 will cause irreparable injury to the
Escrow Agent and the Holders of the Preferred Securities, that the Escrow Agent
and the Holders of the Preferred Securities have no adequate remedy at law in
respect of such breach and, as a consequence, that each and every covenant
contained in this Section 11 shall be specifically enforceable against the
Issuer, and the Issuer hereby waives and agrees not to assert any defenses
against an action for specific performance of such covenants except for a
defense that no Event of Default has occurred.
SECTION 12. EXPENSES. The Issuer will within 60 days after receipt of
invoice therefore, pay to the Escrow Agent the amount of any and all reasonable
expenses, including, without limitation, the reasonable fees, expenses and
disbursements of its counsel, experts and agents retained by the Escrow Agent,
that the Escrow Agent may incur in connection with (a) the review, negotiation
and administration of this Escrow Agreement, (b) the custody or preservation of,
or the sale of, collection from, or other realization upon, any of the
Collateral, (c) the exercise or enforcement of any of the rights of the Escrow
Agent and the Holders of the Preferred Securities hereunder or (d) the failure
by the Issuer to perform or observe any of the provisions hereof.
SECTION 13. SECURITY INTEREST ABSOLUTE. All rights of the Escrow Agent
and the Holders of the Preferred Securities and security interests hereunder,
and all obligations of the Issuer hereunder, shall be absolute and unconditional
irrespective of:
(a) any lack of validity or enforceability of the LLC Agreement or
any other agreement or instrument relating thereto;
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(b) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Obligations, or any other amendment or waiver
of or any consent to any departure from the LLC Agreement;
(c) any exchange, surrender, release or non-perfection of any Liens
on any other collateral for all or any of the Obligations; or
(d) to the extent permitted by applicable law, any other circumstance
which might otherwise constitute a defense available to, or a discharge of, the
Issuer in respect of the Obligations or of this Escrow Agreement.
SECTION 14. MISCELLANEOUS PROVISIONS.
Section 14.1. NOTICES. Any notice or communication given hereunder shall
be sufficiently given if in writing and delivered in person or mailed by first
class mail, commercial courier service or telecopier communication, addressed as
follows:
if to the Issuer:
CellNet Funding, LLC
125 Shoreway Road
San Carlos, CA 94070
Fax: (650) 508-6678
Attention: Executive Vice President and Chief Financial Officer
with copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Fax: (650) 493-6811
Attention: Barry Taylor
if to CellNet:
CellNet Data Systems, Inc.
125 Shoreway Road
San Carlos, CA 94070
Fax: (650) 508-6678
Attention: David L. Perry and Ben H. Lyon
with copy to:
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Shearman & Sterling
599 Lexington Avenue
New York, NY 10022
Fax:
Attention:
if to the Escrow Agent:
Bank of New York
Fax:
Attention:
Section 14.2. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Escrow
Agreement may not be used to interpret another pledge, security or debt
agreement of the Issuer. No such pledge, security or debt agreement (other than
the LLC Agreement) may be used to interpret this Escrow Agreement.
Section 14.3. SEVERABILITY. The provisions of this Escrow Agreement are
severable, and if any clause or provision shall be held invalid, illegal or
unenforceable in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect in that jurisdiction only such clause or
provision, or part thereof, and shall not in any manner affect such clause or
provision in any other jurisdiction or any other clause or provision of this
Escrow Agreement in any jurisdiction.
Section 14.4. HEADINGS. The headings in this Escrow Agreement have been
inserted for convenience of reference only, are not to be considered a part
hereof and shall in no way modify or restrict any of the terms or provisions
hereof.
Section 14.5. COUNTERPART ORIGINALS. This Escrow Agreement may be signed
in two or more counterparts, each of which shall be deemed an original, but all
of which shall together constitute one and the same agreement.
Section 14.6. NO THIRD PARTY BENEFICIARIES. Nothing in this Escrow
Agreement, express or implied, shall give to any person, other than the parties
hereto and their successors hereunder, and the Holders of the Preferred
Securities, any benefit or any legal or equitable right, remedy or claim under
this Escrow Agreement.
Section 14.7. AMENDMENTS, WAIVERS AND CONSENTS. Any amendment or waiver
of any provision of this Escrow Agreement and any consent to any departure by
the Issuer from any provision of this Escrow Agreement shall be effective only
if made or duly given in compliance with all of the terms and provisions of the
LLC Agreement, and neither the Escrow Agent nor any Holder of Preferred
Securities shall be deemed, by any act, delay, indulgence, omission or
otherwise, to have waived any right or remedy hereunder or to have acquiesced in
any Event of Default or in any breach of any of the terms and conditions hereof.
Failure of the Escrow Agent or any Holder of
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Preferred Securities to exercise, or delay in exercising, any right, power or
privilege hereunder shall not preclude any other or further exercise thereof
or the exercise of any other right, power or privilege. A waiver by the
Escrow Agent or any Holder of Preferred Securities of any right or remedy
hereunder on any one occasion shall not be construed as a bar to any right or
remedy that the Escrow Agent or such Holder of Preferred Securities would
otherwise have on any future occasion. The rights and remedies herein
provided are cumulative, may be exercised singly or concurrently and are not
exclusive of any rights or remedies provided by law.
Section 14.8. INTERPRETATION OF AGREEMENT. To the extent a term or
provision of this Escrow Agreement conflicts with the LLC Agreement, the LLC
Agreement shall control with respect to the subject matter of such term or
provision. Acceptance of or acquiescence in a course of performance rendered
under this Escrow Agreement shall not be relevant to determine the meaning of
this Escrow Agreement even though the accepting or acquiescing party had
knowledge of the nature of the performance and opportunity for objection.
Section 14.9. CONTINUING SECURITY INTEREST; TERMINATION.
(a) This Escrow Agreement shall create a continuing security interest
in and to the Collateral and shall, unless otherwise provided in this Escrow
Agreement, remain in full force and effect until the payment in full in cash of
the Obligations. This Escrow Agreement shall be binding upon the Issuer, its
transferees, successors and assigns, and shall inure, together with the rights
and remedies of the Escrow Agent hereunder, to the benefit of the Escrow Agent,
the Holders of the Preferred Securities and their respective successors,
transferees and assigns.
(b) This Escrow Agreement (other than Issuer's obligations under
Sections 10 and 12) shall terminate upon the payment in full in cash of the
Obligations. At such time, the Escrow Agent shall, at the Issuer's request,
reassign and redeliver to the Issuer all of the Collateral hereunder that has
not been sold, disposed of, retained or applied by the Escrow Agent in
accordance with the terms of this Escrow Agreement and the LLC Agreement and
take all actions that are necessary to release the security interest created by
this Escrow Agreement in and to the Collateral, including the execution and
delivery of all termination statements necessary to terminate any financing or
continuation statements filed with respect to the Collateral. Such reassignment
and redelivery shall be without warranty by or recourse to the Escrow Agent in
its capacity as such, except as to the absence of any Liens on the Collateral
created by or arising through the Escrow Agent, and shall be at the reasonable
expense of the Issuer.
Section 14.10. SURVIVAL OF REPRESENTATIONS AND COVENANTS. All
representations, warranties and covenants of the Issuer contained herein shall
survive the execution and delivery of this Escrow Agreement, and shall terminate
only upon the termination of this Escrow Agreement.
Section 14.11. WAIVERS. The Issuer waives presentment and demand for
payment of any of the Obligations, protest and notice of dishonor or default
with respect to any of the Obligations, and
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all other notices to which the Issuer might otherwise be entitled, except as
otherwise expressly provided herein or in the LLC Agreement.
Section 14.12. AUTHORITY OF THE ESCROW AGENT.
(a) The Escrow Agent shall have and be entitled to exercise all
powers hereunder that are specifically granted to the Escrow Agent by the terms
hereof, together with such powers as are reasonably incident thereto. The
Escrow Agent may perform any of its duties hereunder or in connection with the
Collateral by or through agents or employees and shall be entitled to retain
counsel and to act in reliance upon the advice of counsel concerning all such
matters. Except as otherwise expressly provided in this Pledge Agreement or
the LLC Agreement, neither the Escrow Agent nor any director, officer, employee,
attorney or agent of the Escrow Agent shall be liable to the Issuer for any
action taken or omitted to be taken by the Escrow Agent, in its capacity as
Escrow Agent, hereunder, except for its own bad faith, gross negligence or
willful misconduct, and the Escrow Agent shall not be responsible for the
validity, effectiveness or sufficiency hereof or of any document or security
furnished pursuant hereto. The Escrow Agent and its directors, officers,
employees, attorneys and agents shall be entitled to rely on any communication,
instrument or document believed by it or them to be genuine and correct and to
have been signed or sent by the proper person or persons.
(b) The Issuer acknowledges that the rights and responsibilities of
the Escrow Agent under this Escrow Agreement with respect to any action taken by
the Escrow Agent or the exercise or non-exercise by the Escrow Agent of any
option, right, request, judgment or other right or remedy provided for herein or
resulting or arising out of this Escrow Agreement shall, as between the Escrow
Agent and the Holders of the Preferred Securities, be governed by the LLC
Agreement and by such other agreements with respect thereto as may exist from
time to time among them, but, as between the Escrow Agent and the Issuer, the
Escrow Agent shall be conclusively presumed to be acting as agent for the
Holders of the Preferred Securities with full and valid authority so to act or
refrain from acting, and the Issuer shall not be obligated or entitled to make
any inquiry respecting such authority.
Section 14.13. RIGHTS OF HOLDERS OF THE PREFERRED SECURITIES. No Holder of
Preferred Securities shall have any independent rights hereunder other than
those rights granted to individual Holders of the Preferred Securities pursuant
to the LLC Agreement; provided that nothing in this subsection shall limit any
rights granted to the Escrow Agent under the Preferred Securities or the LLC
Agreement.
Section 14.14. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY
TRIAL; WAIVER OF DAMAGES.
(A) THIS ESCROW AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED UNDER
THE LAWS OF THE STATE OF NEW YORK. NOTWITHSTANDING THE FOREGOING: THE MATTERS
IDENTIFIED IN 31 C.F.R. PART 357, 61 FED. REG. 43626
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AUG. 23, 1996), INCLUDING REVISED ARTICLE 8, SHALL BE GOVERNED SOLELY BY THE
LAWS SPECIFIED THEREIN.
(B) THE ISSUER HAS APPOINTED CELLNET DATA SYSTEMS, INC., 125 SHOREWAY
ROAD, SAN CARLOS, CA 94070 AS ITS AGENT FOR SERVICE OF PROCESS IN ANY SUIT,
ACTION OR PROCEEDING WITH RESPECT TO THIS ESCROW AGREEMENT AND FOR ACTIONS
BROUGHT UNDER U.S. FEDERAL OR STATE SECURITIES LAWS BROUGHT IN ANY FEDERAL OR
STATE COURT LOCATED IN THE CITY OF [NEW YORK] AND AGREES TO SUBMIT TO THE
JURISDICTION OF ANY SUCH COURT.
(C) THE ISSUER AGREES THAT THE ESCROW AGENT SHALL, IN ITS CAPACITY AS
ESCROW AGENT OR IN THE NAME AND ON BEHALF OF ANY HOLDER OF PREFERRED SECURITIES,
HAVE THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST
THE ISSUER OR THE COLLATERAL IN A COURT IN ANY LOCATION REASONABLY SELECTED IN
GOOD FAITH (AND HAVING PERSONAL OR IN REM JURISDICTION OVER THE ISSUER OR THE
COLLATERAL, AS THE CASE MAY BE) TO ENABLE THE ESCROW AGENT TO REALIZE ON SUCH
COLLATERAL, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF
THE ESCROW AGENT. THE ISSUER AGREES THAT IT WILL NOT ASSERT ANY COUNTERCLAIMS,
SETOFFS OR CROSSCLAIMS IN ANY PROCEEDING BROUGHT BY THE ESCROW AGENT TO REALIZE
ON SUCH PROPERTY OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE
ESCROW AGENT, EXCEPT FOR SUCH COUNTERCLAIMS, SETOFFS OR CROSSCLAIMS WHICH, IF
NOT ASSERTED IN ANY SUCH PROCEEDING, COULD NOT OTHERWISE BE BROUGHT OR ASSERTED.
THE ISSUER WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN
THE CITY OF NEW YORK ONCE THE ESCROW AGENT HAS COMMENCED A PROCEEDING DESCRIBED
IN THIS PARAGRAPH INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF
VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS.
(D) THE ISSUER AGREES THAT NEITHER ANY HOLDER OF PREFERRED SECURITIES
NOR (EXCEPT AS OTHERWISE PROVIDED IN THIS ESCROW AGREEMENT OR THE LLC AGREEMENT)
THE ESCROW AGENT IN ITS CAPACITY AS ESCROW AGENT SHALL HAVE ANY LIABILITY TO THE
ISSUER (WHETHER ARISING IN TORT, CONTRACT OR OTHERWISE) FOR LOSSES SUFFERED BY
THE ISSUER IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO, THE
TRANSACTIONS CONTEMPLATED AND THE RELATIONSHIP ESTABLISHED BY THIS ESCROW
AGREEMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH,
UNLESS IT IS DETERMINED BY A FINAL AND NONAPPEALABLE JUDGMENT OF A COURT THAT IS
BINDING ON THE ESCROW AGENT OR SUCH HOLDER OF PREFERRED SECURITIES, AS THE CASE
MAY BE, THAT SUCH LOSSES WERE THE RESULT OF ACTS OR OMISSIONS ON THE PART OF THE
ESCROW AGENT
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OR SUCH HOLDERS OF PREFERRED SECURITIES, AS THE CASE MAY BE, CONSTITUTING BAD
FAITH, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
(E) TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE ISSUER WAIVES THE
POSTING OF ANY BOND OTHERWISE REQUIRED OF THE ESCROW AGENT OR ANY HOLDER OF
PREFERRED SECURITIES IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO
ENFORCE ANY JUDGMENT OR OTHER COURT ORDER PERTAINING TO THIS ESCROW AGREEMENT OR
ANY RELATED AGREEMENT OR DOCUMENT ENTERED IN FAVOR OF THE ESCROW AGENT OR ANY
HOLDER OF PREFERRED SECURITIES, OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY
RESTRAINING ORDER OR PRELIMINARY OR PERMANENT INJUNCTION, THIS ESCROW AGREEMENT
OR ANY RELATED AGREEMENT OR DOCUMENT BETWEEN THE ISSUER ON THE ONE HAND AND THE
ESCROW AGENT AND/OR THE HOLDERS OF THE PREFERRED SECURITIES ON THE OTHER HAND.
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IN WITNESS WHEREOF, the Issuer, CellNet and the Escrow Agent have each
caused this Escrow Agreement to be duly executed and delivered as of the date
first above written.
Issuer:
CELLNET FUNDING, LLC
By:
---------------------------------
CellNet Data Systems, Inc.,
Its: Manager
By:
--------------------------------
Name:
Title:
Escrow Agent:
BANK OF NEW YORK, as Escrow Agent
By:
-------------------------------
Name:
Title:
CELLNET:
CELLNET DATA SYSTEMS, INC.
By:
-------------------------------
Name:
Title:
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EXHIBIT A
BANK OF NEW YORK OFFICER'S CERTIFICATE
Pursuant to Section 3(d) of the Escrow and Security Agreement (the
"Escrow Agreement") dated as of April __, 1998 among CellNet Funding, LLC
(the "Issuer"), CellNet Data Systems, Inc. ("CellNet") and [Bank of New York]
as escrow agent (the "Escrow Agent") for the holders of the Issuer's -%
Exchangeable Limited Liability Company Preferred Securities, liquidation
preference $25 per preferred security, which will be mandatorily redeemable
on -, the undersigned officer of the Escrow Agent, on behalf of the Escrow
Agent, makes the following certifications to the Issuer, CellNet and Morgan
Stanley & Co. Incorporated. Capitalized terms used and not defined in this
Officer's Certificate have the meanings set forth or referred to in the
Escrow Agreement.
1. Substantially contemporaneously with the execution and delivery of
this Officer's Certificate, the Escrow Agent has established a securities
account in the name of "[Bank of New York], as Escrow Agent for the benefit of
the holders of the -% Exchangeable Limited Liability Company Preferred
Securities mandatorily redeemable - of CellNet Funding, LLC Collateral Escrow
Account", Administrative Account No. - with respect to which the Escrow Agent is
the entitlement holder and through which the Escrow Agent has acquired a
security entitlement to the United States Treasury securities identified in
Annex 1 to this Officer's Certificate (the "Pledged Securities") and has made
appropriate book entries in its records establishing that the Pledged Securities
and the Escrow Agent's securities entitlement thereto have been credited to and
are held in the [Bank of New York]'s Administrative Account No. - entitled
"[Bank of New York], as Escrow Agent for the benefit of the holders of the -%
Exchangeable Limited Liability Company Preferred Securities mandatorily
redeemable - of CellNet Funding, LLC Collateral Escrow Account" (the "Escrow
Account").
2. The Escrow Agent has established and maintained and will maintain the
Escrow Account and all securities entitlements and other positions carried in
the Escrow Account solely in its capacity as Escrow Agent and has not asserted
and will not assert any claim to or interest in the Escrow Account or any such
securities entitlements or other positions except in such capacity.
3. The Escrow Agent has acquired its security entitlement to the Pledged
Securities for value and without notice to an officer of the Escrow Agent of any
adverse claim thereto. Without limiting the generality of the foregoing, the
Pledged Securities are not and the Escrow Agent's security entitlement to the
Pledged Securities is not, to the Escrow Agent's knowledge, subject to any lien
granted by the Escrow Agent in favor of any securities intermediary (including,
without limitation, the [Federal Reserve Bank of New York]) through which the
Escrow Agent derives its security entitlement to the Pledged Securities.
<PAGE>
4. The Escrow Agent has not caused or permitted the Pledged Securities or
its security entitlement thereto to become subject to any Lien created by or
arising through the Escrow Agent.
IN WITNESS WHEREOF, the undersigned officer has executed this Officer's
Certificate on behalf of The Bank of New York as Escrow Agent this ___th day
of April, 1998.
Name:
-----------------------------
Title:
-----------------------------
<PAGE>
Exhibit 4.8
TERMS OF THE EXCHANGEABLE LIMITED
LIABILITY COMPANY PREFERRED SECURITIES
DATED AS OF _______, 1998
WRITTEN ACTION OF THE MANAGER PURSUANT TO
SECTION 7.1 OF THE AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF CELLNET FUNDING, LLC
The undersigned Manager of CellNet Funding, LLC, a Delaware limited
liability company (the "Company"), pursuant to Section 7.1(b) of the Amended
and Restated Limited Liability Company Agreement of the Company (the
"Agreement") dated as of _____, 1998 by and among CellNet Data Systems, Inc.
("CellNet"), _______, the Manager and the Persons who become Members of the
Company in accordance with the provisions thereof, does hereby authorize the
issue of, and establish the relative rights, powers, preferences, limitations
and restrictions of, a series of Preferred Securities as follows:
1. DEFINITIONS. All terms defined in the Agreement and not otherwise
defined herein shall have for purposes hereof the meanings provided for therein.
The following additional terms have the respective meanings specified below:
"Average Market Value" of the CellNet Common Stock means the average of the
Current Market Value for the Ten Trading days ending on the second Business Day
prior to the applicable date of payment.
"Book-Entry Interest" means a beneficial interest in the global
certificates representing Preferred Securities, ownership and transfers of which
shall be made through the book-entry system of a Clearing Agency as described in
Section 11.
"Business Day" means any day other than a Saturday, Sunday or other day on
which banking institutions in The City of New York are authorized or obligated
by law or executive order to close.
"CellNet Common Stock" means the Common Stock, $.001 par value per share,
of CellNet.
"CellNet Preferred Stock" means the Redeemable Preferred Stock, $.001
par value per share, of CellNet with such terms and provisions as set forth
in the Certificate of Designation, Rights and Preferences of the Redeemable
Preferred Stock of CellNet.
"Clearing Agency" means an organization registered as a "Clearing Agency"
pursuant to Section 17A of the Securities Exchange Act of 1934, as amended, that
is acting as depositary for the
<PAGE>
Preferred Securities and in whose name (or nominee's name) shall be
registered one or more global certificates representing Preferred Securities
and which shall undertake to effect book-entry transfers and pledges of
interests in the Preferred Securities.
"Clearing Agency Participant" means a broker, dealer, bank, other financial
institution or other Person for whom from time to time a Clearing Agency effects
book-entry transfers and pledges of interests in securities deposited with the
Clearing Agency.
"Closing Date" shall mean _____, 1998.
"Commission" has the meaning set forth in Section 4(d) hereof.
"Current Market Value" of the CellNet Common Stock means (i) the Volume
Weighted Average Price, as reported on the Nasdaq National Market, or (ii) the
average of the high and low sale prices of the CellNet Common Stock, if reported
on any other national securities exchange.
"Distributed Securities" has the meaning set forth in Section 5(b) hereof.
"Dividend Payment Date" has the meaning set forth in Section 4(a) hereof.
"Escrow Agreement" means the Escrow and Security Agreement dated as of
______, 1998 among CellNet, the Company and The Bank of New York, for the
ratable benefit of holders of the Preferred Securities.
"Exchange Agent" has the meaning set forth in Section 5(a) hereof.
"Exchange Price" means $25 divided by the Exchange Rate.
"Exchange Rate" has the meaning set forth in Section 5 hereof
"Guarantee" means the Guarantee Agreement dated as of _______, 1998,
executed and delivered between and the Company and CellNet for the benefit of
the holders from time to time of the Preferred Securities, as amended from time
to time.
"Holder(s)" means the registered holders of the Preferred Securities as
they appear on the books and records of the Company.
"Initial Redemption Date" has the meaning set forth in Section 6(c) hereof.
"Liquidation Distribution" has the meaning set forth in Section 8 hereof.
"Mandatory Exchange" has the meaning set forth in Section 5(a) hereof.
"Mandatory Exchange Date" has the meaning set forth in Section 5(a)
hereof.
"Mandatory Redemption" has the meaning set forth in Section 6(a) hereof.
"Mandatory Redemption Date" means May 1, 2010.
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<PAGE>
"Notice of Redemption" has the meaning set forth in Section 6(a) hereof.
"Optional Redemption" has the meaning set forth in Section 6(c) hereof.
"Preferred Securities" has the meaning set forth in Section 2 hereof.
"Securities" shall be a collective reference to the Preferred Securities
and the CellNet Common Stock issuable upon exchange of the Preferred Securities
pursuant to the terms of this Written Action.
"Securities Act" means the Securities Act of 1933, as amended.
"Trigger Event" has the meaning set forth in Section 5(b)(viii).
"Trading Day" means, with respect to any security listed or admitted to
trading on the NYSE, any day on which such securities are traded on the NYSE,
or, if such security is not listed or admitted to trading on the NYSE, on the
principal national securities exchange on which such security is listed or
admitted to trading, or, if such security is not listed or admitted to trading
on a national securities exchange, on the National Market System of the National
Association of Securities Dealers, Inc., or, if such security is not quoted or
admitted to trading on such quotation system, on the principal quotation system
on which such security is listed or admitted to trading or quoted, or, if not
listed or admitted to trading or quoted on any national securities exchange or
quotation system, in the over-the-counter market.
"Written Action" shall mean this written action of the Manager.
2. DESIGNATION AND RANKING. A total of _______ securities with a
liquidation preference of $25.00 per security are hereby authorized and
designated as "Exchangeable Limited Liability Preferred Securities"
(collectively, the "Preferred Securities", and, individually, a "Preferred
Security"). The Preferred Securities will, with respect to dividend
distributions and distributions upon the liquidation, winding-up or dissolution
of the Company, rank senior to all classes of common securities of the Company.
No other classes of capital securities or series of preferred securities of the
Company will be issuable by the Company.
3. VOTING. Except as otherwise required in the Delaware Limited
Liability Company Act, 6 Del. C. Section 18-101, et seq., as amended, the
Agreement (including, without limitation, Section 8.1 thereof) or this
Written Action, Holders shall have, with respect to such Preferred
Securities, no right or power to vote on any question or matter or in any
proceeding or to be represented at, or to receive notice of, any meeting of
Members.
-3-
<PAGE>
4. DIVIDENDS.
(a) The Holders shall be entitled to receive, out of funds legally
available therefor, cumulative dividends at a rate per annum of ____% of the
liquidation preference of $25 per Preferred Security. The amount of
dividends payable for a full quarterly dividend period shall be computed on a
daily basis. Dividends shall accrue from _______, 1998, and shall be payable
quarterly in arrears on February 1, May 1, August 1 and November 1 of each
year (each a "Dividend Payment Date") commencing August 1, 1998 to Holders of
record at the close of business on January 15, April 15, July 15 and October
15 immediately preceding the corresponding Dividend Payment Date. Dividends
shall accrue and be cumulative from _______, 1998 whether or not they have
been earned or declared and whether or not there are funds of the Company
legally available for the payment of dividends. In the event that any date
on which dividends are payable on the Preferred Securities is not a Business
Day, then payment of the dividend payable on such date will be made on the
next succeeding day which is a Business Day (and without any interest or
other payment in respect of any such delay), except that if such Business Day
is in the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and
effect as if made on such date.
(b) Dividends on the Preferred Securities will be paid to the
extent that the Company has sufficient assets legally available for the
payment of such dividends. Amounts available to the Company for dividends to
the holders of the Preferred Securities will be limited to cash, shares of
CellNet Common Stock received by the Company from CellNet as dividends on the
CellNet Preferred Stock (and proceeds from any sales of such CellNet Common
Stock by the Company) and the interest on and principal of the Treasury
strips that are held in the Escrow Account. Any such CellNet Common Stock
received by the Company may be paid as a dividend to the holders of the
Preferred Securities (only after August 1, 2001) or sold in the open market
to generate cash proceeds to pay cash dividends on the Preferred Securities.
(c) Through and including August 1, 2001 dividends on the Preferred
Securities shall be paid in cash. Thereafter, dividends on the Preferred
Securities may be paid, at the Company's option, in (i) cash, (ii) CellNet
Common Stock, valued at 90% of the Average Market Value of the CellNet Common
Stock, or (iii) any combination of cash or CellNet Common Stock so valued;
provided that any dividend payment must be made in cash to the extent CellNet
shall have provided the Company with cash (whether through dividends on the
CellNet Preferred Stock or otherwise) to make all or any portion of such
dividend payment. If any dividend (or portion thereof) payable on any Dividend
Payment Date is not paid in full on such Dividend Payment Date, the amount of
such dividend that is payable and that is not paid on such date shall cumulate
at the dividend rate, compounding quarterly, until paid in full.
5. EXCHANGE.
(a) The Preferred Securities shall be exchangeable with the Company
at any time, in whole or in part, prior to May 1, 2010 (the "Mandatory
Redemption Date") (unless earlier redeemed), at the option of the holder thereof
and in the manner described below, into shares of
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<PAGE>
CellNet Common Stock at an exchange rate (the "Exchange Rate") which shall
initially be equal to _____ shares of CellNet Common Stock for each Preferred
Security, subject to adjustment as described below.
The Preferred Securities shall be automatically exchanged at any time
after the Closing Date and on or prior to May 1, 2001 (a "Mandatory
Exchange"), at the applicable exchange rate without any action on the part of
the Company or the holder on the next business day (the "Mandatory
Exchange Date") after the Current Market Value equals or exceeds the
following Trigger Percentages of the Exchange Price then in effect for at
least 20 Trading Days in any consecutive 30-day Trading Day period during the
12 month period ending on May 1 of the indicated year.
<TABLE>
<CAPTION>
TRIGGER
YEAR PERCENTAGES
<S> <C>
1999 170%
2000 160
2001 150
</TABLE>
In any consecutive 30 day trading period that includes trading days
before and after May 1, 1999 or May 1, 2000, the applicable Trigger
Percentage for each trading day in the trading period shall be used in order
to determine whether an Exchange event has occurred.
Upon any Mandatory Exchange, the Company will make an additional payment
in cash (the "Dividend Make-Whole Payment") with respect to the Preferred
Securities so exchanged in an amount equal to the pro rata portion of the
liquidation proceeds of any remaining Treasury strips held pursuant to the
Escrow Agreement. The Company will be obligated to make the Dividend
Make-Whole Payment on all Preferred Securities which are exchanged by
Mandatory Exchange. The Dividend Make-Whole Payment must be paid in cash.
A holder of a Preferred Security wishing to exercise its optional
exchange right shall (i) deliver an exchange notice to CellNet (in such
capacity, the "Exchange Agent"), (ii) if required, furnish appropriate
endorsements and transfer documents and (iii) if required, pay all transfer
or similar taxes, and the Exchange Agent shall, on behalf of such holder,
exchange such Preferred Securities with the Company for shares of CellNet
Common Stock and deliver such shares of CellNet Common Stock to such holder.
The Company shall obtain such shares of CellNet Common Stock by exchanging
shares of the CellNet Preferred Stock it holds with CellNet for CellNet
Common Stock, pursuant to the terms of the CellNet Preferred Stock.
Holders of Preferred Securities at the close of business on a dividend
record date shall be entitled to receive the dividends payable on such
Preferred Securities on the corresponding Dividend Payment Date
notwithstanding the exchange of such Preferred Securities following such
dividend record date but prior to such Dividend Payment Date. Except as
provided in the immediately preceding sentence, neither the Company nor
CellNet will make, or be required to make, any payment, allowance or
adjustment for accumulated and unpaid dividends, whether or not in arrears,
on exchanged Preferred Securities. Each exchange will be deemed to have been
effected
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<PAGE>
immediately prior to the close of business on the day on which the related
exchange notice was received by the Exchange Agent.
Following any exchange at the election of a holder of such holder's
Preferred Securities into CellNet Common Stock, dividends will cease to
accrue on such Preferred Securities and such holder will not be entitled to
participate in the proceeds from the Treasury strips held by Funding.
No fractional shares of CellNet Common Stock shall be issued as a result of
exchange, but in lieu thereof such fractional interest shall be paid by the
Company in cash based on the last reported sale price of CellNet Common Stock on
the date the affected Preferred Securities are surrendered for exchange.
(b) The Exchange Rate shall be adjusted from time to time by the
Company as follows:
(i) In case CellNet shall pay a dividend or make a distribution,
in shares of CellNet Common Stock, on CellNet Common Stock, the Exchange Rate in
effect at the opening of business on the date following the date fixed for the
determination of stockholders entitled to receive such dividend or other
distribution shall be increased by multiplying such Exchange Rate by a fraction
of which the denominator shall be the number of shares of CellNet Common Stock
outstanding at the close of business on the date fixed for such determination
and the numerator shall be the sum of such number of shares and the total number
of shares constituting such dividend or other distribution, such increase to
become effective immediately after the opening of business on the day following
the date fixed for such determination. CellNet will not pay any dividend or
make any distribution on shares of CellNet Common Stock held in the treasury of
CellNet. If any dividend or distribution of the type described in this Section
5(b)(i) is declared but is not so paid or made and not required to be so paid or
made, the Exchange Rate shall again be adjusted to the Exchange Rate which would
then be in effect if such dividend or distribution had not been declared.
(ii) In case CellNet shall issue rights or warrants to all
holders of CellNet Common Stock entitling them (for a period expiring within
45 days after the date fixed for determination of stockholders entitled to
receive such rights or warrants) to subscribe for or purchase CellNet Common
Stock at a price per share less than the Average Market Value per share at
the record date for the determination of stockholders entitled to receive
such rights or warrants, the Exchange Rate in effect immediately prior
thereto shall be adjusted so that the same shall equal the rate determined by
multiplying the Exchange Rate in effect immediately prior to the date fixed
for determination of stockholders entitled to receive such rights or warrants
by a fraction the denominator of which shall be the number of shares of
CellNet Common Stock outstanding at the close of business on the date fixed
for determination of stockholders entitled to receive such rights or warrants
plus the number of shares which the aggregate offering price of the total
number of shares so offered would purchase at such Average Market Value and
the numerator of which shall be the number of shares of CellNet Common Stock
outstanding on the date fixed for determination of stockholders entitled to
receive such rights or warrants plus the number of additional shares of
CellNet Common Stock offered for subscription or purchase. Such adjustment
shall be made successively whenever any such rights or warrants are issued,
and shall become effective immediately after the opening of business on the
day following the record date for the determination of the stockholders
entitled to receive such rights or warrants. In determining whether any
rights or warrants entitle the holders to subscribe for or purchase shares of
CellNet Common Stock at less
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<PAGE>
than such Average Market Value, and in determining the aggregate offering
price of such shares of CellNet Common Stock, there shall be taken into
account any consideration received by the CellNet for such rights or
warrants, the value of such consideration, if other than cash, to be
determined by the board of directors. To the extent that shares of CellNet
Common Stock are not delivered or required to be delivered after the
expiration of such rights or warrants, the Exchange Rate shall be readjusted
to the Exchange Rate which would then be in effect had the adjustments made
upon the issuance of such rights or warrants been made on the basis of
delivery of only the number of shares of CellNet Common Stock actually
delivered. If such rights or warrants are not so issued and not required to
be so issued, the Exchange Rate shall again be adjusted to be the Exchange
Rate which would then be in effect if such record date for the determination
of stockholders entitled to receive such rights or warrants had not been
fixed.
(iii) In case outstanding shares of CellNet Common Stock shall
be subdivided into a greater number of shares of CellNet Common Stock, the
Exchange Rate in effect at the opening of business on the day following the
day upon which such subdivision becomes effective shall be proportionately
increased, and conversely, in case outstanding shares of CellNet Common Stock
shall be combined into a smaller number of shares of CellNet Common Stock,
the Exchange Rate in effect at the opening of business on the day following
the day upon which such combination becomes effective shall be
proportionately reduced, such reduction or increase, as the case may be, to
become effective immediately after the opening of business on the day
following the day upon which such subdivision or combination becomes
effective.
(iv) In case CellNet shall distribute to all holders of
CellNet Common Stock any shares of any class of capital stock of CellNet
(other than CellNet Common Stock) or evidences of its indebtedness or assets
(excluding cash dividends or other distributions to the extent paid from
retained earnings of CellNet) or rights or warrants to subscribe for or
purchase any of its securities (excluding those referred to in subsection (c)
above) (any of the foregoing hereinafter in this subsection the "Distributed
Securities"), then in each such case the Exchange Rate shall be adjusted so
that the same shall equal the rate determined by multiplying the Exchange
Rate in effect on the record date with respect to such distribution by a
fraction of which the denominator shall be the Average Market Value on such
record date less the fair market value on such record date (as determined by
the board of directors of CellNet, whose determination shall be conclusive)
of the Distributed Securities applicable to one share of CellNet Common Stock
and the numerator of which shall be the Average Market Value per share on the
record date for the determination of shareholders entitled to receive such
distribution; such adjustment shall become effective immediately prior to the
opening of business on the day following such record date. Notwithstanding
the foregoing, in the event the then fair market value (as so determined) of
the portion of the Distributed Securities applicable to one share of CellNet
Common Stock is equal to or greater than the Average Market Value on the
relevant record date, in lieu of the foregoing adjustment, adequate provision
shall be made so that each Holder shall have the right to receive upon
exchange the amount of Distributed Securities such holder would have received
had such holder exchanged each Preferred Security on such record date. In
the event that such distribution is not so paid or made, the Exchange Rate
shall again be adjusted to the Exchange Rate which would then be in effect if
such distribution had not been declared. If the board of directors of
CellNet determines the fair market value of any
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<PAGE>
distribution for purposes of this subsection by reference to the actual or
when issued trading market for any securities, it must in doing so consider
the prices in such market over the same period used in computing the Average
Market Value.
Notwithstanding the foregoing provisions of this subsection, no adjustment
shall be made hereunder for any distribution of Distributed Securities if
CellNet makes proper provision so that each Holder who exchanges a Preferred
Security (or any portion thereof) after the record date for such distribution
shall be entitled to receive upon such exchange, in addition to the shares of
CellNet Common Stock issuable upon such exchange, the amount and kind of
Distributed Securities that such holder would have been entitled to receive if
such holder had, immediately prior to such record date, exchanged such Preferred
Security for CellNet Common Stock, provided that, with respect to any
Distributed Securities that are convertible, exchangeable or exercisable, the
foregoing provision shall only apply to the extent (and so long as) the
Distributed Securities receivable upon exchange of such Preferred Security would
be convertible, exchangeable or exercisable, as applicable, without any loss of
rights or privileges for a period of at least 60 days following exchange of such
Preferred Security.
(v) In case CellNet shall, by dividend or otherwise, distribute to
all holders of CellNet Common Stock cash (excluding (x) any quarterly cash
dividend on the CellNet Common Stock to the extent the aggregate cash
dividend per share of CellNet Common Stock in any fiscal quarter does not
exceed the greater of (A) the amount per share of CellNet Common Stock of the
next preceding quarterly cash dividend on the CellNet Common Stock to the
extent such preceding quarterly dividend did not require any adjustment of
the Exchange Rate pursuant to this subsection (as adjusted to reflect
subdivisions or combinations of the CellNet Common Stock), and (B) 3.75% of
the average of the last reported sales price of the CellNet Common Stock
(determined as provided below) during the ten Trading Days next preceding the
date of declaration of such dividend and (y) any dividend or distribution in
connection with the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary), then, in such case, unless CellNet elects
to reserve such cash for distribution to the Holders upon the exchange of the
Preferred Securities so that any such Holder exchanging Preferred Securities
will receive upon such exchange, in addition to the shares of CellNet Common
Stock to which such Holder is entitled, the amount of cash which such holder
would have received if such Holder had, immediately prior to the record date
for such distribution of cash, exchanged its Preferred Securities for CellNet
Common Stock, the Exchange Rate shall be adjusted so that the same shall
equal the rate determined by multiplying the Exchange Rate in effect
immediately prior to the close of business on such record date by a fraction
of which the denominator shall be such Average Market Value on the record
date less the amount of cash so distributed (and not excluded as provided
above) applicable to one share of CellNet Common Stock and the numerator of
which shall be the Average Market Value on such record date; such adjustment
to be effective immediately prior to the opening of business on the day
following the record date; provided, however, that in the event the portion
of the cash so distributed applicable to one share of CellNet Common Stock is
equal to or greater than the Average Market Value on the record date, in lieu
of the foregoing adjustment, adequate provision shall be made so that each
Holder shall have the right to receive upon exchange the amount of cash such
Holder would have received had such Holder exchanged each Preferred Security
on the record date. If such dividend or distribution is not so paid
-8-
<PAGE>
or made, the Exchange Rate shall again be adjusted to be the Exchange Rate
which would then be in effect if such dividend or distribution had not been
declared.
If any adjustment is required to be made as set forth in this subsection as
a result of a distribution that is a quarterly dividend, such adjustment shall
be based upon the amount by which such distribution exceeds the amount of the
quarterly cash dividend permitted to be excluded pursuant hereto. If an
adjustment is required to be made as set forth in this subsection above as a
result of a distribution that is not a quarterly dividend, such adjustment shall
be based upon the full amount of the distribution.
(vi) In case a tender or exchange offer made by CellNet or any
subsidiary of CellNet for all or any portion of the CellNet Common Stock
shall expire and such tender or exchange offer shall involve the payment by
CellNet or such subsidiary of consideration per share of CellNet Common Stock
having a fair market value (as determined by the board of directors of
CellNet or, to the extent permitted by applicable law, a duly authorized
committee thereof, whose determination shall be conclusive, and described in
a resolution of the board of directors of CellNet or such duly authorized
committee thereof, as the case may be), at the last time (the "Expiration
Time") tenders or exchanges may be made pursuant to such tender or exchange
offer (as it shall have been amended), that exceeds the Average Market Value
on the Trading Day next succeeding the Expiration Time, the Exchange Rate
shall be adjusted so that the same shall equal the rate determined by
multiplying the Exchange Rate in effect immediately prior to the Expiration
Time by a fraction of which the denominator shall be the number of shares of
CellNet Common Stock outstanding (including any tendered or exchanged shares)
on the Expiration Time multiplied by the Average Market Value on the Trading
Day next succeeding the Expiration Time and the numerator of which shall be
the sum of (x) the fair market value (determined as aforesaid) of the
aggregate consideration payable to stockholders based on the acceptance (up
to any maximum specified in the terms of the tender or exchange offer) of all
shares validly tendered or exchanged and not withdrawn as of the Expiration
Time (the shares deemed so accepted up to any such maximum, being referred to
in this subsection as the "Purchased Shares") and (y) the product of the
number of shares of CellNet Common Stock outstanding (less any Purchased
Shares) on the Expiration Time and the Average Market Value on the Trading
Day next succeeding the Expiration Time; such adjustment to become effective
immediately prior to the opening of business on the day following the
Expiration Time. If CellNet is obligated to purchase shares pursuant to any
such tender or exchange offer, but CellNet is permanently prevented by
applicable law from effecting any such purchases or all such purchases are
rescinded, the Exchange Rate shall again be adjusted to be the Exchange Rate
which would then be in effect if such tender or exchange offer had not been
made.
(vii) The "fair market value" shall mean the amount which a
willing buyer under no compulsion to buy would pay a willing seller under no
compulsion to sell in an arm's length transaction. The "record date" shall
mean, with respect to any dividend, distribution or other transaction or event
in which the holders of CellNet Common Stock have the right to receive any cash,
securities or other property or in which the CellNet Common Stock (or other
applicable security) is exchanged for or converted into any combination of cash,
securities or other property, the
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<PAGE>
date fixed for determination of stockholders entitled to receive such cash,
securities or other property (whether such date is fixed by the board of
directors of CellNet or by statute, contract or otherwise).
(viii) Rights or warrants distributed by CellNet to all
holders of CellNet Common Stock entitling the holders thereof to subscribe for
or purchase shares of CellNet's capital stock (either initially or under certain
circumstances), which rights or warrants, until the occurrence of a specified
event or events ("Trigger Event"):
1. are deemed to be transferred with such shares of
CellNet Common Stock,
2. are not exercisable, and
3. are also issued in respect of future issuances of
CellNet Common Stock,
shall not be deemed distributed for purposes of this Section 5 until the
occurrence of the earliest Trigger Event. In addition, in the event of any
distribution of rights or warrants, or any Trigger Event with respect thereto,
that shall have resulted in an adjustment to the Exchange Rate under this
Section 5, (1) in the case of any such rights or warrants which shall all have
been redeemed or repurchased without exercise by any holders thereof, the
Exchange Rate shall be readjusted upon such final redemption or repurchase to
give effect to such distribution or Trigger Event, as the case may be, as though
it were a cash distribution, equal to the per share redemption or repurchase
price received by a holder of CellNet Common Stock with respect to such rights
or warrants (assuming such holder had retained such rights or warrants), made to
all holders of CellNet Common Stock as of the date of such redemption or
repurchase, and (2) in the case of any such rights or warrants all of which
shall have expired without exercise by any holder thereof, the Exchange Rate
shall be readjusted as if such issuance had not occurred.
(ix) No adjustment to the Exchange Rate shall be required
unless such adjustment would require an increase or decrease of at least 1%
in such rate; provided, however, that any adjustments which by reason of this
subsection (ix) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 5 shall be made by the Company and shall be made to the nearest cent
or to the nearest one hundredth of a share, as the case may be. Anything in
this Section 5 to the contrary notwithstanding, the Company and CellNet shall
be entitled to make such increases in the Exchange Rate, in addition to those
required by this Section 5, as they in their discretion shall determine to be
advisable in order that any stock dividends, subdivision of shares,
distribution of rights to purchase stock or securities, or any distribution
of securities convertible into or exchangeable for stock hereafter made by
the Company to its stockholders shall not be taxable. To the extent
permitted by applicable law, the Company and CellNet from time to time may
increase the Exchange Rate by any amount for any period of time if the period
is at least 20 days, the increase is irrevocable during the period and the
board of directors of CellNet shall have made a determination that such
increase would be in the best interests of the Company and CellNet, which
determination shall be conclusive. Whenever the
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<PAGE>
Exchange Rate is so increased, the Company shall mail to Holders a notice of
the increase. The Company shall mail the notice at least 15 days before the
date the increased Exchange Rate takes effect. The notice shall state the
increased Exchange Rate and the period it will be in effect.
(x) Whenever the Exchange Rate is adjusted, as herein provided,
CellNet shall promptly prepare an officers' certificate setting forth the
Exchange Rate after such adjustment and setting forth a brief statement of the
facts requiring such adjustment. Promptly after the preparation of such
certificate, the Company shall prepare a notice of such adjustment of the
Exchange Rate setting forth the adjusted Exchange Rate and the date on which
such adjustment becomes effective and shall mail such notice of such adjustment
of the Exchange Rate to each Holder.
(xi) In any case in which this Section 5 provides that an
adjustment shall become effective immediately after a record date for an event,
the Company may defer until the occurrence of such event (i) issuing to any
Holder of a Preferred Security exchanged after such record date and before the
occurrence of such event the additional shares of CellNet Common Stock issuable
upon such exchange by reason of the adjustment required by such event over and
above the CellNet Common Stock issuable upon such exchange before giving effect
to such adjustment and (ii) paying to such holder any amount in cash or
additional shares in lieu of any fractional share.
(xii) In case of a tender or exchange offer made by a person
other than CellNet or any subsidiary for an amount which increases the offeror's
ownership of CellNet Common Stock to more than 25% of the CellNet Common Stock
outstanding and shall involve the payment by such person of consideration per
share of CellNet Common Stock having a fair market value (as determined by the
board of directors of CellNet, whose determination shall be conclusive, and
described in a resolution of the board of directors of CellNet) at the last time
(the "Expiration Time") tenders or exchanges may be made pursuant to such tender
or exchange offer (as it shall have been amended) that exceeds the Average
Market Value on the Trading Day next succeeding the Expiration Time, and in
which, as of the Expiration Time the board of directors of CellNet is not
recommending rejection of the offer, the Exchange Rate shall be increased so
that the same shall equal the price determined by multiplying the Exchange Rate
in effect immediately prior to the Expiration Time by a fraction of which the
denominator shall be the number of shares of CellNet Common Stock outstanding
(including any tendered or exchange shares) on the Expiration Time multiplied
by the Average Market Value on the Trading Day next succeeding the Expiration
Time and the numerator shall be the sum of (x) the fair market value
(determined as aforesaid) of the aggregate consideration payable to
stockholders based on the acceptance (up to any maximum specified in the
terms of the tender or exchange offer) of all shares validly tendered or
exchanged and not withdrawn as of the Expiration Time (the shares deemed so
accepted, up to any such maximum, being referred to in this subsection as the
"Purchased Shares") and (y) the product of the number of shares of CellNet
Common Stock outstanding (less any Purchased Shares) on the Expiration Time
and the Average Market Value on the Trading Day next succeeding the
Expiration Time, such increase to become effective immediately prior to the
opening of business on the day following the Expiration Time. In the event
that such person is obligated to purchase shares pursuant to any such tender
or exchange offer, but such person is permanently prevented by applicable law
from effecting
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<PAGE>
any such purchases or all such purchases are rescinded, the Exchange Rate
shall again be adjusted to be the Exchange Rate which would then be in effect
if such tender or exchange offer had not been made. Notwithstanding the
foregoing, the adjustment described in this Section 5(b)(xii) shall not be
made if, as of the Expiration Time, the offering documents with respect to
such offer disclose a plan or intention to cause the Company to engage in a
consolidation or merger of CellNet or a sale of substantially all of
CellNet's assets.
5A. EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. If any of
the following events occur, namely (i) any reclassification or change of
outstanding shares of CellNet Common Stock (other than a change in par value, or
from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination), (ii) any consolidation, merger or
combination of CellNet with another person as a result of which holders of
CellNet Common Stock shall be entitled to receive stock, securities or other
property or assets (including cash) with respect to or in exchange for such
CellNet Common Stock, or (iii) any sale or conveyance of the properties and
assets of CellNet as, or substantially as, an entirety to any other person as a
result of which holders of CellNet Common Stock shall be entitled to receive
stock, securities or other property or assets (including cash) with respect to
or in exchange for such CellNet Common Stock, then the Manager or the successor
or purchasing person, as the case may be, shall prepare and execute a supplement
to this Written Action providing that each Preferred Security shall be exchanged
for the kind and amount of shares of stock and other securities or property or
assets (including cash) receivable upon such reclassification, change,
consolidation, merger, combination, sale or conveyance by a holder of a number
of shares of CellNet Common Stock issuable upon exchange of Preferred Securities
immediately prior to such reclassification, change, consolidation, merger,
combination, sale or conveyance. Such supplement shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in Section 5 hereof. The Company shall cause notice of the
execution of such supplement to be mailed to each Holder. The above provisions
of this Section shall similarly apply to successive reclassifications,
consolidations, mergers, combinations, and sales.
5B. TAXES ON SHARES ISSUED. The issuance of stock certificates on
exchanges of Preferred Securities shall be made without charge to the
exchanging holder for any and all taxes and duties that may be payable in
respect of the issue or delivery of such stock. The Company shall not,
however, be required to pay any tax or duty which may be payable in respect
of any transfer involved in the issue and delivery of stock in any name other
than that of a Holder, and the Company shall not be required to issue or
deliver any such stock certificate unless and until the person or persons
requesting the issue thereof shall have paid to the Company the amount of
such tax or duty or shall have established to the satisfaction of the Company
that such tax or duty has been paid.
If CellNet implements a stockholders' rights plan, such rights plan must
provide that upon exchange of the Preferred Securities into CellNet Common Stock
the holders will receive, in addition to the CellNet Common Stock issuable upon
such exchange, such rights whether or not such rights have separated from the
CellNet Common Stock at the time of such exchange.
-12-
<PAGE>
5C. FUNDAMENTAL CHANGE. Notwithstanding the foregoing, but not in
addition to the adjustments set forth elsewhere herein, if CellNet or the
Company makes an announcement of the occurrence or an imminent occurrence of a
Fundamental Change at any time prior to the Mandatory Redemption Date, there
will be an adjustment to the exchange rate of the Preferred Securities (the
"Fundamental Change Exchange Rate") such that the exchange rate will thereafter
equal the liquidation preference of the Preferred Securities, divided by the
Fundamental Change Average Market Price, unless the Fundamental Change Exchange
Rate is lower than the then current exchange rate of the Preferred Securities as
calculated in the manner described above (in which case there will be no such
adjustment to the exchange rate).
The term "Fundamental Change" means the occurrence of any transaction or
event in connection with which all or substantially of all of the outstanding
shares of CellNet Common Stock shall be exchanged for, converted into, acquired
for or constitute the right to receive stock, securities, other property or
assets (including cash) of another entity or person (whether by means of an
exchange offer, liquidation, tender offer, consolidation, merger, combination,
reclassification, recapitalization or otherwise).
"Fundamental Change Average Market Value" of the CellNet Common Stock means
the arithmetic average of the Current Market Value for the ten trading days
ending on the fifth business day prior to the date of the closing of the
Fundamental Change.
5D. NO ADJUSTMENTS. Notwithstanding anything herein to the contrary, no
adjustment will be required as a result of (a) the issuance of shares of CellNet
Common Stock as a result of any of the following (i) the grant or exercise of
employee, consultant or director stock options, restricted stock, or stock
purchase rights, (ii) the exercise of outstanding warrants or conversion or
exchange of existing notes and securities, (iii) in satisfaction of CellNet's
obligations under its Employee Stock Purchase Plan, as amended from time to
time, or (b) the issuance of CellNet Common Stock as a dividend on or upon
exchange of the Preferred Securities. CellNet Common Stock issued in connection
with acquisitions of businesses or assets from persons that are not affiliates
of CellNet will be deemed to have been issued for a price at least equal to
Average Market Value.
6. REDEMPTION.
(a) Unless earlier redeemed or exchanged, the Preferred Securities
must be redeemed (the "Mandatory Redemption"), out of funds legally available
therefor, by the Company at a redemption price of 100% of the liquidation
preference of the Preferred Securities plus accrued and unpaid dividends, if
any, on the Mandatory Redemption Date.
(b) The Preferred Securities are subject to optional redemption (an
"Optional Redemption") on or after May 1, 2001 (the "Initial Redemption Date").
At any time and from time to time on or after the Initial Redemption Date and
until the Mandatory Redemption Date, the Company will have the right to redeem,
in whole or in part, the Preferred Securities at a redemption price equal to the
percentage of the liquidation preference set forth below, together with accrued
and
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<PAGE>
unpaid dividends, if any, to the date of redemption, if redeemed in the
12-month period beginning on May 1 of the indicated year:
<TABLE>
<CAPTION>
TRIGGER
YEAR PERCENTAGES
<S> <C>
2001 %
2002
2003
2004
2005
2006
2007
2008
2009
2010 100.000%
</TABLE>
(c) The redemption price pursuant to an Optional Redemption or the
Mandatory Redemption may be paid, in each case at the Company's option, in (i)
cash, (ii) CellNet Common Stock, valued at 90% of the Average Market Value of
the CellNet Common Stock in the case of the Optional Redemption and 100% of the
Average Market Value of the CellNet Common Stock in the case of the Mandatory
Redemption, or (iii) any combination of cash or CellNet Common Stock; provided
that the Company, in its notice of such redemption, must state whether the
redemption price will be paid in cash, CellNet Common Stock or a combination
thereof, and provided that any payment must be made in cash to the extent
CellNet shall have provided the Company with cash (whether through dividends on
the CellNet Preferred Stock or otherwise) to make all or any portion of such
payment with respect to such redemption.
7. REDEMPTION AND EXCHANGE PROCEDURES.
(a) Notice of any redemption (optional or mandatory) of the
Preferred Securities (a "Notice of Redemption") shall be irrevocable and
shall be given by the Company by mail not fewer than 30 nor more than 60
calendar days prior to the date fixed for redemption thereof to CellNet and
to each Holder of Preferred Securities that are being redeemed. For purposes
of the calculation of the date of redemption and the date on which notices
are given pursuant to this Section 7(a), a Notice of Redemption shall be
deemed to be given on the day such notice is first mailed by first-class
mail, postage prepaid, to each appropriate Holder of Preferred Securities. A
Notice of Redemption shall be addressed to each appropriate Holder of
Preferred Securities at the address of such Holder appearing in the books and
records of the Company. If all of the Preferred Securities are represented
by Book-Entry Interests, Notices of Redemption shall be sent to the Clearing
Agency. No defect in the Notice of Redemption or in the mailing thereof with
respect to any Preferred Security shall affect the validity of the redemption
proceedings with respect to any other Preferred Security. If fewer than all
the Preferred Securities are being redeemed, then any redemption shall be on
a pro rata basis.
-14-
<PAGE>
(b) If the Preferred Securities are represented by Book-Entry
Interests, the Company shall irrevocably deposit sufficient funds on the date
fixed for redemption with the Clearing Agency and give the Clearing Agency
irrevocable instructions and authority to pay the redemption price to the
Holders of the Preferred Securities to be redeemed, and if the Preferred
Securities are not represented by Book-Entry Interests, the Company shall
irrevocably deposit such funds with the transfer agent for the Preferred
Securities and give such transfer agent such irrevocable instructions and
authority to pay the redemption price to the Holders of the Preferred Securities
to be redeemed. If a Notice of Redemption shall have been given and sufficient
funds irrevocably deposited as required, then immediately prior to the close of
business on the date of such deposit, all rights of the Holders of such
Preferred Securities so called for redemption will cease, except the right of
such Holders to receive the redemption price, but without additional interest
from and after such redemption date. In the event that any date fixed for
redemption of Preferred Securities is not a Business Day, then payment of the
redemption price payable on such date will be made on the next succeeding day
which is a Business Day (and without any interest or other payment in respect of
any such delay), except that if such Business Day falls in the next calendar
year, such payment will be made on the immediately preceding Business Day. In
the event that payment of the redemption price is improperly withheld or refused
and not paid either by the Company or by CellNet (pursuant to the Guarantee),
dividends on the Preferred Securities called for redemption will continue to
accumulate at the then applicable rate to the date that the redemption price is
actually paid and the Holders of such Preferred Securities may exercise all of
their rights as Holders thereof.
8. LIQUIDATION RIGHTS. In the event of any voluntary or involuntary
liquidation, dissolution, winding-up or termination of the Company (each a
"Liquidation"), the then holders of the Preferred Securities shall be
entitled to receive out of the assets of the Company (which will include the
CellNet Preferred Stock, any interest on and principal of the Treasury Strips
that are held in the Escrow Account, any CellNet Common Stock that the
Company received from CellNet as a dividend (or otherwise) and have not
distributed as a dividend on the Preferred Securities or sold in the open
market, and any other assets of the Company), after satisfaction of
liabilities to creditors, if any, distributions in an amount equal to, and
not in excess of, the aggregate of the stated liquidation preference of $25
of Preferred Security plus accrued and unpaid dividends thereon to the date
of payment (the "Liquidation Distribution").
If, upon any such Liquidation, the Liquidation Distribution can be paid
only in part because the Company has insufficient assets available to pay in
full the aggregate Liquidation Distribution, then the amounts payable by the
Company on the Preferred Securities shall be paid on a pro rata basis. CellNet
is obligated to pay dividends, consisting, at CellNet's option, of any
combination of cash and CellNet Common Stock, to the Company so that it will be
able to make the Liquidation Distribution in full.
9. SINKING FUND. The Preferred Securities shall not be subject to the
operation of a retirement or sinking fund.
10. GUARANTEE OF LIABILITIES. It shall be a condition precedent to the
issuance of the Preferred Securities that CellNet execute and deliver to the
Company the Guarantee.
-15-
<PAGE>
11. BOOK-ENTRY ISSUANCE.
(a) The Depository Trust Company, New York, New York ("DTC"), will
initially act as the Clearing Agency. The Preferred Securities will be issued
only as fully-registered securities and will be initially registered in the name
of Cede & Co. (DTC's partnership nominee).
(b) DTC may discontinue providing its services as Clearing Agency
with respect to the Preferred Securities by giving reasonable notice to the
Company as provided in the agreement between the Company and DTC. Under such
circumstances, if a successor Clearing Agency is not obtained, CellNet at its
expense shall cause certificates for Preferred Securities to be printed and
delivered as promptly as practicable. If the CellNet decides to discontinue use
of the system of book-entry transfers through DTC (or a successor Clearing
Agency), CellNet at its expense shall cause certificates for Preferred
Securities to be printed and delivered to the beneficial owners of the Preferred
Securities as promptly as practicable.
(c) In the event that the Preferred Securities do not remain in
book-entry-only form, the following provisions will apply:
(i) Registration of transfers of Preferred Securities will be
effected without charge by or on behalf of the Company, but upon payment (and/or
the giving of such indemnity as the Company or the Manager may require) in
respect of any tax or other governmental charges which may be imposed in
connection therewith.
(ii) Exchanges of Preferred Securities for shares of CellNet
Common Stock shall be effected without charge by or on behalf of the Company,
but upon payment (and/or the giving of such indemnity as the Company or the
Manager may require) in respect of any tax or other governmental charges
which may be imposed in connection with the issuance of any shares of CellNet
Common Stock in the name of any person other than the Holder of the Preferred
Security for which it is being exchanged or for any reason other than such
exchange.
(iii) The Company shall not be required to register or cause
to be registered the transfer of Preferred Securities after such Preferred
Securities have been called for redemption.
12. REGISTRAR AND TRANSFER AGENT. The Company hereby appoints The Bank of
New York as its initial registrar, transfer agent and paying agent for the
Preferred Securities. The Company may at any time designate an additional or
substitute registrar, transfer agent and paying agent for the Preferred
Securities and shall promptly notify the Holders of the Preferred Securities of
any such designation.
13. GOVERNING LAW. This Written Action shall be governed by and construed
in accordance with the laws of the State of Delaware without giving effect to
the principles of conflict of laws thereof.
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<PAGE>
IN WITNESS WHEREOF, the undersigned Manager of the Company has caused this
Written Action to be executed.
CELLNET DATA SYSTEMS, INC.
By:
--------------------------------
Name:
Title:
-17-
<PAGE>
Exhibit 4.9
CERTIFICATE OF DESIGNATION, RIGHTS AND PREFERENCES
OF THE
REDEEMABLE PREFERRED STOCK
OF
CELLNET DATA SYSTEMS, INC.
PURSUANT TO SECTION 151 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
CELLNET DATA SYSTEMS, INC. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does hereby
certify that pursuant to authority conferred upon the Board of Directors of the
Corporation by its Certificate of Incorporation and pursuant to the provisions
of Section 151 of the General Corporation Law of the State of Delaware, said
Board of Directors duly approved and adopted the following resolution:
"RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by its Certificate of Incorporation (hereinafter
referred to as the "Certificate of Incorporation"), the Board of Directors
does hereby create, authorize and provide for the issue of a Preferred Stock
Redeemable 2010, par value $.001 per share, with a stated value of $10,000
per share, consisting of 8,625 shares, having the designation, preferences
and relative, participating, optional and other special rights and the
qualifications, limitations and restrictions thereof that are set forth in
the Certificate of Incorporation and in this Resolution as follows:
1. DESIGNATION AND AMOUNT. The distinctive designation of such series
is Preferred Stock Redeemable 2010 (hereinafter in this Resolution called
the "Redeemable Preferred Stock"), and the number of shares constituting such
series shall be 8,625.
2. RANK. The Redeemable Preferred Stock shall, with respect to
dividend rights and rights of liquidation, winding up and dissolution, rank
(i) senior to all classes of common stock of the Corporation and to each
other class of capital stock or series of preferred stock established after
the date of this Resolution by the Board of Directors the terms of which do
not expressly provide that it ranks senior to or on a parity with the
Redeemable Preferred Stock as to dividend distributions and distributions
upon the liquidation, winding-up or dissolution of the Corporation
(collectively referred to with the common stock of the Corporation as "Junior
Securities"); (ii) on a parity with any class of capital stock or series of
preferred stock issued by the Corporation established after the date of this
<PAGE>
Resolution by the Board of Directors, the terms of which expressly provide
that such class or series will rank on a parity with the Redeemable Preferred
Stock as to dividend distributions and distributions upon the liquidation,
winding-up or dissolution of the Corporation (collectively referred to as
"Parity Securities"); and (iii) junior to each class of capital stock or
series of preferred stock issued by the Corporation established after the
date of this Resolution by the Board of Directors, the terms of which
expressly provide that such class or series will rank senior to the
Redeemable Preferred Stock as to dividend distributions and distributions
upon liquidation, winding-up or dissolution of the Corporation (collectively
referred to as "Senior Securities"). The Redeemable Preferred Stock will be
subject to the issuance of series of Junior Securities, Parity Securities and
Senior Securities; provided that the Corporation may not issue any new class
of Senior Securities without the approval of the holders of at least a
majority of the shares of Redeemable Preferred Stock then outstanding, voting
or consenting, as the case may be, separately as one class. Notwithstanding
the foregoing, the Board of Directors may designate a new series of preferred
stock for purposes of a stockholder rights plan and any such new series of
preferred stock may be senior to the Redeemable Preferred Stock as to
dividend distributions and distributions upon liquidation, winding up or
dissolution of the Corporation without any required approval of the holders
of Redeemable Preferred Stock.
3. DIVIDENDS. The registered holder ("Holder") of shares of the
Redeemable Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors of the Corporation, out of funds legally
available therefor, dividends at the annual rate of -% of the liquidation
preference per share through and including May 1, 2001, and thereafter as
described below. Such dividends shall be cumulative, whether or not earned or
declared, on a daily basis from the date of issuance of the Redeemable
Preferred Stock, and shall be payable quarterly in arrears on or prior to
February 1, May 1, August 1, and November 1 of each year commencing on August
1, 1998 (each of such dates being a "dividend payment date") through May 1,
2001 (the "Final Dividend Date"), with respect to the period commencing with
the date of issuance of the Redeemable Preferred Stock or the immediately
preceding dividend payment date and ending on the day preceding such
respective dividend payment date (each of such periods being a "dividend
period"), to stockholders of record on the preceding January 15, April 15,
July 15, and October 15, respectively (each, a "regular record date"). Any
dividend payments made with respect to shares of Redeemable Preferred Stock
on or before August 1, 2001, shall be made in such number of additional fully
paid and nonassessable shares of Redeemable Preferred Stock having an
aggregate liquidation preference equal to the amount of such dividends and
the issuance of such Redeemable Preferred Stock issued as a dividend with
respect to the Redeemable Preferred Stock will thereupon be duly authorized,
validly issued, fully paid and nonassessable and free of all liens and
charges. After August 1, 2001, dividends on the Redeemable Preferred Stock
may be paid, in the sole discretion of the Board of Directors of the
Corporation, in shares of common stock, $.001 par value per share of the
Corporation ("Common Stock"), or in cash or any combination of cash and
Common Stock, in an amount that will enable the Holder (i) to transfer such
Common Stock to the holders of the Holder's Exchangeable Limited Liability
Company Preferred Securities (the "Funding Preferred Securities") in full
payment of dividends on the Funding Preferred Securities, valued at 90% of
the Average Market Value (as defined below) of the Common Stock, or (ii) to
sell such shares of Common Stock in the open market in order for the Holder
to make full dividend payments on the Funding Preferred Securities in cash,
in each case for the corresponding dividend period with respect to the
Funding Preferred Securities. At any time and from time to time after the
issuance of the Redeemable Preferred Stock, the Corporation may, as, when and
if declared by the Board of Directors, declare additional dividends to the
Holder in shares of Common Stock, in such amounts in order for the Holder to
have sufficient funds in cash, following a sale thereof by the Holder, to
satisfy all obligations with respect to the Funding Preferred Securities.
"Average Market Value" of the Common Stock means the average of
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<PAGE>
the Current Market Value for the ten trading days ending on the second
business day prior to the applicable date of payment. "Current Market Value"
of the Common Stock means (i) the Volume Weighted Average Price, as reported
on the Nasdaq National Market or (ii) the average of the high and low sales
prices of the Common Stock, if reported on any other national securities
exchange.
4. LIQUIDATION PREFERENCE.
Upon any voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation, holders of Redeemable Preferred Stock will be
entitled to be paid, out of the assets of the Corporation available for
distributions, $10,000 per share of Redeemable Preferred Stock, plus an
amount in cash equal to accumulated and unpaid dividends thereon to the date
fixed for liquidation, dissolution or winding-up (including an amount equal
to a prorated dividend for the period from the last dividend payment date to
the date fixed for liquidation, dissolution or winding-up), before any
distribution is made on any Junior Securities, including, without limitation,
Common Stock. If, upon any voluntary or involuntary liquidation, dissolution
or winding-up of the Corporation, the amounts payable with respect to the
Redeemable Preferred Stock and all other Parity Securities are not paid in
full, the holders of the Redeemable Preferred Stock and the Parity Securities
will share equally and ratably in any distribution of assets of the
Corporation with respect to the Redeemable Preferred Stock and the Parity
Securities, in proportion to the full liquidation preference and accumulated
and unpaid dividends to which each is entitled. After payment of the full
amount of the liquidation preferences and accumulated and unpaid dividends to
which they are entitled, the Holders will not be entitled to any further
participation in any distribution of assets of the Corporation.
5. OPTIONAL REDEMPTION ON FINAL DIVIDEND DATE.
All of the shares of Redeemable Preferred Stock shall be, at the
option of the Company, subject to redemption by the Corporation (the "Final
Dividend Date Redemption") at a redemption price equal to 100% of the
liquidation preference per share, together with accrued and unpaid dividends
thereon to the redemption date, in cash out of funds legally available
therefor without interest, two (2) business days prior to May 1, 2010. If
the Corporation elects to make a Final Dividend Date Redemption, the
Corporation will declare and pay a special dividend, or make a capital
contribution to the Holder, in an amount equal to the shortfall, if any, in
the assets of the Holder necessary for Holder to redeem the Funding Preferred
Securities in full. If the Corporation elects not to make a Final Dividend
Date Redemption, the Corporation shall make an investment in Holder in an
amount sufficient to enable Holder to redeem the Funding Preferred Securities
in full. The obligation of the Corporation to make this investment shall
inure to the benefit of the holders of the Funding Preferred Securities, may
be enforced directly by such holders as third party beneficiaries and may not
be waived or modified without the consent of each holder affected thereby.
6. OPTIONAL REDEMPTION BY THE CORPORATION.
The Redeemable Preferred Stock will also be subject to optional
redemption by the Corporation (a "CellNet Optional Redemption") on or after
May 1, 2001. In such event, the Corporation shall redeem, in whole or in
part, the Redeemable Preferred Stock at a redemption price equal to the
percentage of the liquidation preference set forth below, together with
accrued and unpaid dividends, if any, to the redemption date, if redeemed in
the 12-month period beginning on May 1 of the indicated year:
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<PAGE>
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
<S> <C>
2001 %
2002
2003
2004
2005
2006
2007
2008
2009
2010 100.000%
</TABLE>
Upon any CellNet Optional Redemption, the Corporation will declare and
pay a special dividend, or make a capital contribution, in an amount equal to
the shortfall, if any, in the assets of the Holder necessary for Holder to
complete its optional redemption of the Funding Preferred Securities.
7. METHOD OF PAYMENT OF REDEMPTION PRICE.
All payments pursuant to a CellNet Optional Redemption or a Final
Dividend Date Redemption may be paid, in each case at the Corporation's
option, in (i) cash, (ii) shares of Common Stock, valued at 90% of the
Average Market Value of the Common Stock in the case of the CellNet Optional
Redemption and 100% of the Average Market Value of the Common Stock in the
case of the Final Dividend Date Redemption, or (iii) any combination of cash
or Common Stock.
8. EXCHANGE OF PREFERRED STOCK.
The Redeemable Preferred Stock is exchangeable into Common Stock at
the option of the Holder, upon the Holder's receipt of a request from a
holder of Funding Preferred Securities to exchange such Funding Preferred
Securities for Common Stock, at an initial exchange rate of - shares of
Common Stock for each share of Redeemable Preferred Stock, subject to the
same adjustments that are made to the exchange rate of the Funding Preferred
Securities. Notwithstanding the foregoing, the number of shares of Common
Stock issuable to the Holder upon exchange of the Redeemable Preferred Stock
shall equal the number of shares of Common Stock issuable by the Holder upon
exchange of the Funding Preferred Securities.
The Redeemable Preferred Stock shall be automatically exchanged
into Common Stock in the event that the Automatic Trigger occurs (the
"Automatic Exchange"). The Automatic Trigger shall be deemed to have
occurred without any action on the part of the Corporation or the Holder on
the next business day after the Current Market Value of the Common Stock for
a total of twenty Trading Days in any consecutive period of thirty Trading
Days is (i) if such date occurs in the 12-month period beginning May 1, 1998
and ending April 30, 1999 greater than 170%, (ii) if such date occurs in the
12-month period beginning May 1, 1999 and ending April 30, 2000 greater than
160% of the Exchange Price of the Funding Preferred Securities and (iii) if
such date occurs in the 12-month period
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<PAGE>
beginning May 1, 2000 and ending April 30, 2001 greater than 150% of the
Exchange Price of the Funding Preferred Securities. In any consecutive 30 day
trading period that includes trading days before and after May 1, 1999 or May
1, 2000, the applicable Trigger Percentage for each trading day in the
trading period shall be used in order to determine whether an Exchange Event
has occurred. The Redeemable Preferred Stock shall be exchangeable into
Common Stock at an initial exchange rate of - shares of Common Stock for each
share of Redeemable Preferred Stock (the "Capital Exchange Rate"), subject to
the same adjustments that are made to the exchange rate of the Funding
Preferred Securities. The Exchange Price shall be _____ divided by the
Capital Exchange Rate. Notwithstanding the foregoing, the number of shares at
Common Stock issuable to the Holder upon the exchange of the Redeemable
Preferred Stock shall equal the number of shares of Common Stock issuable by
the Holder upon exchange of the Funding Preferred Securities. "Trading Day"
means, with respect to any security listed or admitted to trading on the
NYSE, any day on which such securities are traded on the NYSE, or, if such
security is not listed or admitted to trading on the NYSE, on the principal
national securities exchange on which such security is listed or admitted to
trading, or, if such security is not listed or admitted to trading on a
national securities exchange, on the National Market System of the National
Association of Securities Dealers, Inc., or, is such security is not quoted
or admitted to trading on such quotation system, on the principal quotation
system on which such security is listed or admitted to trading or quoted, or,
if not listed or admitted to trading or quoted on any national securities
exchange or quotation system, in the over-the-counter market.
In the event a holder of the Funding Preferred Securities wishes to
exchange such Funding Preferred Securities with the Holder prior to May 1,
2010, the Holder shall deliver to the Corporation (i) a number of shares of
Redeemable Preferred Stock equal to all of the outstanding Redeemable
Preferred Stock multiplied by a fraction, the numerator of which is the
number of Funding Preferred Securities which are presented to the Holder for
exchange and the denominator of which is all of the outstanding Funding
Preferred Securities (the "Ratio"), and (ii) an amount of each Class of
Treasury Strips (other than the Class of Treasury Strips, if any, that will
mature within 15 days from the date of such exchange) then held by Funding or
an escrow agent equal to all of the Treasury Strips in such Class multiplied
by the Ratio.
Following any exchange by a holder of such holder's Preferred
Securities into CellNet Common Stock, dividends will cease to accrue on such
Preferred Securities and such holder will not be entitled to participate in
the proceeds from the Treasury Strips (as defined herein) held by Funding,
except in the event of an Automatic Exchange as described below.
"Treasury Strips" means the U.S. Treasury strips held by Funding or
an escrow agent to secure the first 13 dividend payments on the Funding
Preferred Securities. Each group of Treasury Strips that is payable on or
about a dividend payment date shall be considered, for purposes of this
paragraph, a "Class of Treasury Strips."
If the Corporation implements a stockholders' rights plan, such
rights plan must provide that upon exchange of Redeemable Preferred Stock for
Common Stock the Holder will receive, in addition to the Common Stock
issuable upon such exchange, such rights whether or not such rights have
separated from the Common Stock at the time of such exchange.
9. VOTING RIGHTS. The holders of record of shares of Redeemable
Preferred Stock shall not be entitled to any voting rights except as
otherwise provided herein or required by law. Without the affirmative vote
of the holders of more than 50% of the then outstanding shares of Redeemable
Preferred Stock, voting as a single class, the Corporation may not:
(i) amend the Certificate of Incorporation or Certificate of
Designation so as have a material adverse effect on the specific rights,
preferences, privileges or voting powers of shares of the Redeemable
Preferred Stock; or
(ii) authorize, issue or create any class of capital stock that is
senior with respect to dividends or liquidation rights to the Redeemable
Preferred Stock. Notwithstanding the foregoing, the Corporation may amend the
Certificate of Incorporation without prior notice to or consent of the Holder
or the holders of the Funding Preferred Securities, when authorized by the
Board of Directors, if (a) the Board of Directors determines after
consultation with legal counsel that such action would not materially and
adversely affect the rights of the Holder set forth in this Certificate of
Designation.
-5-
<PAGE>
10. EXCLUSIVITY. Except as expressly set forth herein, the holders of
the Redeemable Preferred Stock shall have no rights other than those provided
by law.
"RESOLVED FURTHER, that, before the Corporation shall issue any
shares of the Redeemable Preferred Stock, a certificate pursuant to Section
151 of the General Corporation Law of the State of Delaware shall be made,
executed, acknowledged, filed and recorded in accordance with the provisions
of Sections 103 and 151 thereof, and the proper officers of the Corporation
are hereby authorized and directed to do all acts and things which may be
necessary or proper in their opinion to carry into effect the purposes and
intent of this and the foregoing resolutions."
-6-
<PAGE>
IN WITNESS WHEREOF, CellNet Data Systems, Inc. has caused this
Certificate of Designation, Rights and Preferences to be signed by John M.
Seidl, its Chief Executive Officer and President, and attested by David L.
Perry, its Secretary, on this __th day of __, 1998.
CELLNET DATA SYSTEMS, INC.
By:
---------------------------------------
John M. Seidl
Chief Executive Officer and President
Attest:
David L. Perry
Secretary
-7-
<PAGE>
EXHIBIT 5.1
[Wilson Sonsini Goodrich & Rosati letterhead]
April __, 1998
CellNet Data Systems, Inc.
125 Shoreway Road
San Carlos, California 94070
CellNet Funding, LLC
125 Shoreway Road
San Carlos, California 94070
RE: REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3 to be filed by
CellNet Data Systems, Inc. ("CellNet") and CellNet Funding, LLC ("Funding,")
pursuant to the Securities Act of 1933, as amended (the "Securities Act"),
with the Securities and Exchange Commission on or about April __, 1998 (as
such Registration Statement may thereafter be amended or supplemented, the
"Registration Statement") in connection with the registration under the
Securities Act of (i) 3,450,000 shares of Exchangeable Limited Liability
Company Preferred Securities Mandatorily Redeemable 2010, $.__ par value $25
liquidation preference (the "Preferred Securities"), (ii) - shares of
CellNet common stock, par value $.001 per share (the "Common Stock"),
issuable after August 1, 2001 upon exchange of the Preferred Securities. The
Preferred Securities are fully and unconditionally guaranteed by CellNet (the
"Guarantee") as set forth in the Prospectus, which constitutes part of the
Registration Statement. The Registration Statement also registers the
Guarantee. The Preferred Securities include 450,000 shares to be issued by
the Company pursuant to an over-allotment option granted to the Underwriter.
As your legal counsel, we have examined the proceedings being taken by you
relating to the issuance and sale of each of the above described securities.
It is our opinion that (i) the Preferred Securities and Common Stock
when issued and sold in the manner referred to in the Registration Statement
and in accordance with the resolutions adopted by the Board of Directors of
CellNet and the manager of Funding, respectively, will be legally and validly
issued, fully paid and nonassessable and (ii) that the Guarantee has been
duly authorized, legally issued and constitutes the valid and binding
obligation of CellNet.
<PAGE>
CellNet Data Systems, Inc.
CellNet Funding, LLC
April 21, 1998
Page 2
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
Exhibit 8.1
April __, 1998
CellNet Data Systems, Inc.
125 Shoreway Road
San Carlos, CA 94070
CellNet Funding, LLC
125 Shoreway Road
San Carlos, CA 94070
RE: REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We have acted as counsel to CellNet Data Systems, Inc., a Delaware
corporation ("CellNet"), and CellNet Funding, LLC, a Delaware limited
liability company ("Funding"), in connection with the offering and issuance
of Exchangeable Limited Liability Company Preferred Securities (the
"Securities") by Funding (the "Offering"). The Offering and certain proposed
transactions incident thereto are described in the Registration Statement on
Form S-3 (the "Registration Statement") of CellNet and Funding.
In connection with this opinion, we have examined and are familiar with
the Offering, the Registration Statement, and such other presently existing
documents, records and matters of law as we have deemed necessary or
appropriate for purposes of our opinion, including the Amended and Restated
Limited Liability Company Agreement of the Company attached as Exhibit 4.4 to
the Registration Statement (the "LLC Agreement") and the Written Action of
the Manager Pursuant to Section 7.1 of the Amended and Restated Limited
Liability Company Agreement of CellNet Funding, LLC attached as Exhibit 4.8
to the Registration Statement (the "Written Action"). We have also relied
upon the Certificate of Representations delivered to us by CellNet and
relating to certain matters addressed by this opinion (the "Tax
Certificate"). In addition, we have assumed that the Securities will have
such terms as set forth in, and the Offering will be consummated in the
manner contemplated by, and in accordance with, the Registration Statement,
the LLC Agreement, the Written Action and other related documents and that
all statements in such documents, including without limitation the
Registration Statement, LLC Agreement, Written Action, and Tax Certificate
are true, accurate and complete. Further, we have assumed that Funding will
not be required to register under the Investment Company Act of 1940, as
amended, 15 U.S.C. 80a-1 to 80b-2 (the "1940 Act"), and, if it were a
domestic
<PAGE>
CellNet Data Systems, Inc.
CellNet Funding, LLC
April __, 1998
Page 2
corporation at all relevant times, (i) would not be required or permitted to
register under the 1940 Act as a management company or unit investment trust;
(ii) would not be required or permitted to have in effect an election under
the 1940 Act to be treated as a business development company; and (iii) would
not be a common trust fund or similar fund excluded by section 3(c)(3) of the
1940 Act from the definition of "investment company" and would not be
included in the definition of "common trust fund" by section 584(a) of the
Internal Revenue Code of 1986, as amended.
Based upon and subject to the limitations contained herein and in the
Registration Statement, the statements contained in the Registration
Statement under the caption "Certain United States Federal Income Tax
Considerations," insofar as such statements constitute a summary of the
United States federal tax laws referred to therein, are accurate and fairly
summarize the matters referred to therein in all material respects.
This opinion merely represents our best judgment and is not binding on
the Internal Revenue Service (the "IRS"). The IRS is not precluded from
successfully asserting a contrary position. In addition, because this
opinion is being delivered prior to the closing of the Offering, it must be
considered prospective and dependent on future events (including, without
limitation, the due and effective execution of all relevant agreements,
certificates and other documents). For example, there can be no assurance
that changes in the law or its interpretation will not take place that could
affect the United States Federal income tax consequences of the Offering.
Nevertheless, we undertake no responsibility to advise you of any new
developments including, without limitation, changes in the application or
interpretation of the United States Federal income tax law.
This opinion is furnished to you solely for use in connection with
the Registration Statement. We hereby consent to the filing of this opinion
as an exhibit to the Registration Statement. We also consent to the
reference to our firm name in the Registration Statement under the caption
"Certain United States Federal Income Tax Considerations." In giving this
consent, we do not thereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange
Commission thereunder, nor do we thereby admit that we are experts with
respect to any part of such Registration Statement within the meaning of the
term "experts" as used in the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of CellNet Data Systems,
Inc. on Form S-3 of our report dated February 2, 1998, included and
incorporated by reference in the Annual Report on Form 10-K of CellNet Data
Systems, Inc. for the year ended December 31, 1997, and to the use of our
report dated February 2, 1998, appearing in the Prospectus, which is part of
this Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
San Jose, California
April 21, 1998
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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