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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(Mark [X] Annual Report pursuant to Section 13 or 15(d) of the Securities
One) Exchange Act of 1934 for the fiscal year ended December 31, 1997
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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Commission File Number 0-21409
CELLNET DATA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2951096
(State or other jurisdiction incorporation or organization) (I.R.S. Employer
Identification Number)
125 Shoreway Road, San Carlos, California 94070 (Address of principal executive
offices)
Registrant's telephone number, including area code: (650) 508-6000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001
par value (Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] YES [ ] NO.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 27, 1998 was approximately $256,364,351 based upon the
last sales price reported for such date on the Nasdaq National Market. For
purposes of this disclosure, shares of Common Stock held by persons who hold
more than 5% of the outstanding shares of Common Stock and shares held by
officers and directors of the registrant, have been excluded in that such
persons may be deemed to be affiliates. This determination is not necessarily
conclusive.
At February 27, 1998 registrant had outstanding 41,896,797 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of this Form 10-K is incorporated by
reference to the definitive proxy statement for the annual meeting of
stockholders of the Company which will be filed no later than 120 days after
December 31, 1997.
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PART I
Item 1. Business 3
Item 2. Properties 22
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 23
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 24
Item 6. Selected Consolidated Financial Data 24
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 47
Item 8. Financial Statements and Supplementary Data 48
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 66
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PART III
Item 10. Directors and Executive Officers of the Registrant 67
Item 11. Executive Compensation 67
Item 12. Security Ownership of Certain Beneficial Owners and Management 67
Item 13. Certain Relationships and Related Transactions. 67
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 68
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SIGNATURES 71
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PART I
ITEM 1. BUSINESS
THIS ITEM CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS SET FORTH IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" UNDER "RISK FACTORS THAT MAY AFFECT FUTURE
OPERATING PERFORMANCE" AND ELSEWHERE IN THIS REPORT.
GENERAL
CellNet has designed, developed and is now 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 December 31, 1997, the Company had approximately 3,365,000 meters under
long-term contracts, of which a total of approximately 774,000 meters were
generating revenues ("in revenue service") for the Company. CellNet also
currently provides certain network distribution automation services to electric
utility customers including monitoring and control of power distribution
equipment. 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
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enterprises. While regulatory initiatives vary from state to state, many involve
a shift from rate-of-return ratemaking, in which a utility's rates are
determined by its return on assets, to performance-based ratemaking, 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 power marketers, brokers and aggregators, systems 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 (collectively "energy service providers") 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 energy service providers to
respond effectively to regulatory changes, reduce costs and enhance their
operating efficiencies, defer capital spending and implement customer retention
plans for established electric utilities 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
energy service providers 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 has begun to accelerate purchasing
decisions by established utilities. See "Risk Factors That May Affect Future
Operating Performance -- Dependence on and Uncertainty of Market Acceptance."
The Company is evaluating new opportunities arising from deregulation. CellNet's
open architecture is designed for deployment strategies focused either on
established utilities or new power market participants, or both, without
requiring significant modifications to the 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, 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 774,000 meters were in revenue service as of
December 31, 1997. Each of these contracts stem 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")
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concurrently. The network begins generating revenue as meters come on-line, and
new meters can be added incrementally. The Company has on-going discussions
concerning additional contracts of a similar kind with other utilities in the
United States.
The Company also has contracts with energy service providers, including Energy
Pacific, New West Energy, The Montana Power Group and DukeSolutions, for the
provision of NMR services in California for a majority of their respective
California clients as those clients are obtained and served in California's
deregulated energy market. The Company expects to enter into similar
arrangements with additional energy service providers and other 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 stem 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 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, and to offer
sub-metering NMR services to industrial and commercial customers who desire to
monitor 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 home security, remote status monitoring of 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."
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
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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
service comparable to what they provide themselves, and (iii) take power
transmission service under the same tariffs offered to other buyers and sellers.
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 April 1, 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 250 parties have registered with the CPUC as Registered
Energy Service Providers to provide electric services in California commencing
April 1, 1998. The
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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 energy service providers, 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.
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.
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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 new power market participants will seek to capture
market share in the post-deregulation retail market. CellNet's system will allow
established utilities and new power market participants to respond effectively
to regulatory changes and enhance their performance in the competitive markets.
CellNet's system will facilitate accomplishment of established utilities' and
new power market participants' 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, 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.
RESPOND TO REGULATORY INITIATIVES. If retail wheeling is adopted, consumers
will contract to buy electricity from specific energy service providers, but all
such energy service providers will supply electricity 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
energy service providers to determine aggregate usage, but not to determine time
of use. Time-of-use data is a critical requirement of retail wheeling, since the
cost of power to energy service providers 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, 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,
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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 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,
energy service providers 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, 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 energy service providers 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
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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 energy service
providers 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. These MSAs also offer the
greatest potential markets for non-utility applications. The Company is also
pursuing selected energy service providers outside of the largest MSAs.
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
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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 two-way wireless 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 first quarter of 1998 at residences
in St. Louis to help refine the system design and further gauge consumer demand.
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, the first solid
state residential metering system designed for domestic energy service
providers.
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
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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 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
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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 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.
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 energy service providers rather than from
individual subscribers. As a result, the Company experiences less credit risk
and generally lower billing expenses than other wireless communication
providers.
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<PAGE>
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 primary customer, CellNet has access to utility poles,
transmission towers, and various properties for 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 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.
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.
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
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<PAGE>
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 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 Controller provides customized gateways to
integrate with client data systems. As
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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 300 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
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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 able to operate its wide area networks in the
spectral equivalent of approximately a single voice channel. CellNet has
obtained 83 spectrum licenses in 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 already
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 That May Affect
Future Performance -- Dependence on Third-Party Manufacturers; Exposure to
Component Shortages."
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
17 CELLNET
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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.
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
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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 an energy service provider's 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 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.
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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 That May Affect Future Performance -- 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 presently employs more than 132
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, 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
That May Affect Future Performance -- 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
20 CELLNET
<PAGE>
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 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
21 CELLNET
<PAGE>
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 That May Affect Future Performance --
Access to RF Spectrum; Regulation by the FCC."
EMPLOYEES
As of December 31, 1997, CellNet had 708 employees, including 132 in product
development, 146 in materials and manufacturing, 47 in sales and marketing, 345
in field service and support, and 38 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.
ITEM 2. PROPERTIES
The Company's administrative, sales and marketing, product development and
production facilities are located in San Carlos, California, where the Company
leases approximately 104,000 square feet in three buildings under lease and
sublease agreements expiring as to portions of the space at various times
commencing February 1998 through December 2000. Subsidiaries of the Company
lease approximately 85,000 square feet of additional warehouse, manufacturing
and office space to support field operations in California and various other
states. The Company anticipates that it will be able to acquire additional space
as required for its operations on acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
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 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. A second
complaint, also filed in the same Court, of HOWARD FIENMAN AND GERALD SAPSOWITZ
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
22 CELLNET
<PAGE>
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
23 CELLNET
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "CNDS". The following table sets forth, for the periods indicated, the
range of the low and high sales prices for the Company's Common Stock as
reported on the Nasdaq National Market beginning in the third quarter of fiscal
year 1996.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
HIGH LOW
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Fiscal 1996
Third Quarter $ 21.375 $ 15.500
Fourth Quarter 18.500 11.500
- ---------------------------------------------------------------------------------------
Fiscal 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
- ---------------------------------------------------------------------------------------
Fiscal 1998
First Quarter (through February 27, 1998) $ 10.250 $ 7.4375
- ---------------------------------------------------------------------------------------
</TABLE>
As of February 27, 1998, there were approximately 963 holders of record of the
Company's Common Stock. On February 27, 1998, the last reported sale price on
the Nasdaq National Market for the Common Stock was $8.570. The market for the
Company's Common Stock is highly volatile. See "Risk Factors That May Affect
Future Operating Performance -- Possible Volatility of Stock Price."
The Company has not declared or paid any dividends on its capital stock since
its inception. The Company currently anticipates that it will retain all of its
future earnings, if any, for use in the operation and expansion of its business
and does not anticipate paying any cash dividends in the foreseeable future. In
addition, the Company's existing financing arrangements restrict the payment of
any dividends.
ITEM 6. 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.
24 CELLNET
<PAGE>
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
- ------------------------------------------------------------------------------------------------------------------------
Revenues $ 5,842 $ 1,669 $ 2,126 $ 1,651 $ 1,757
Costs and expenses:
Cost of revenues 18,907 8,429 4,965 1,109 1,741
Research and development 27,524 25,394 20,883 9,091 4,979
Marketing and sales 10,148 6,021 4,114 3,179 1,408
General and administrative 15,670 12,036 6,258 2,353 1,206
Depreciation and amortization 11,973 6,123 2,295 992 665
- ------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 84,222 58,003 38,515 16,724 9,999
- ------------------------------------------------------------------------------------------------------------------------
Loss from operations (78,380) (56,334) (36,389) (15,073) (8,242)
Equity in loss of unconsolidated affiliate (2,834) -- -- -- --
Other income (expense) (21,252) (16,355) (4,564) 441 (148)
- ------------------------------------------------------------------------------------------------------------------------
Loss before income taxes and extraordinary loss on early
extinguishment of 1995 Senior Notes (102,466) (72,689) (40,953) (14,632) (8,390)
Provision for income taxes 1 5 3 2 1
- ------------------------------------------------------------------------------------------------------------------------
Loss before extraordinary loss on early extinguishment of 1995 Senior
Notes (102,467) (72,694) (40,956) (14,634) (8,391)
Extraordinary loss on early extinguishment of 1995 Senior Notes (11,417) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Net loss ($113,884) ($72,694) ($40,956) ($14,634) ($8,391)
- ------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per share:
Loss per share before extraordinary loss on early extinguishment of
1995 Senior Notes ($ 2.59) ($ 6.08) ($ 13.93) ($ 13.02) ($13.38)
Extraordinary loss on early extinguishment of 1995 Senior Notes (0.29) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Net loss per share ($ 2.88) ($ 6.08) ($ 13.93) ($ 13.02) ($13.38)
- ------------------------------------------------------------------------------------------------------------------------
Shares used in computing net loss per share 39,506 11,963 2,939 1,124 627
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
- ------------------------------------------------------------------------------------------------------------------------
Cash, cash equivalents and short-term investments $148,058 $178,875 $143,797 $ 24,508 $ 8,884
Total assets 293,985 259,551 184,306 31,809 11,510
Long-term obligations, including current portion 269,551 207,852 183,348 546 825
Series CC redeemable convertible preferred stock -- -- 29,486 29,486 --
Total stockholders' equity (deficit) 2,264 40,245 (38,103) (1,564) 8,011
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
25 CELLNET
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS ITEM CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS SET FORTH IN "RISK FACTORS THAT MAY AFFECT FUTURE OPERATING
PERFORMANCE" HEREUNDER AND ELSEWHERE IN THIS REPORT.
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 who desire to
monitor 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.
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
26 CELLNET
<PAGE>
may be prolonged periods during which the Company does not 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 That May
Affect Future Performance -- 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 only existing contracts are
with established utilities. During 1997, approximately 88% of the Company's
revenues were derived from its contracts with KCPL and UE. 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 would
build out its networks, at least in part, before the capacity is fully
committed. 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 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
27 CELLNET
<PAGE>
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.
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 December 31, 1997, the Company had
approximately 3,365,000 meters under long-term contracts, of which approximately
774,000 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 382,000 meters on the network
by December 31, 1997. The Company expects to add an additional 33,000 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
5,000 meters under contract with KCPL may be automated or read manually. As of
December 31, 1997, the Company completed the on-line deployment of approximately
517,000 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 December 31, 1997, had an accumulated deficit of
$281.6 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 That May Affect Future Performance -- History and Continuation of
Operating Losses" and "-- Substantial Leverage and Ability to Service Debt;
Substantial Future Capital Needs."
28 CELLNET
<PAGE>
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 and for general and administrative purposes. As
such funds are expended, interest income is expected to decrease.
RESULTS OF OPERATIONS
REVENUES
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. 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 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
For the years ended December 31, 1997, 1996 and 1995 cost of revenues primarily
consisted of network operations costs. Cost of revenues were $18.9 million, $8.4
million and $5.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase in cost of revenues was driven by increasing costs of
providing network services, due primarily to growth in the number of employees
and associated costs necessary for network monitoring operations at customer
sites and at the Company's headquarters, network deployment management and
customer training. Costs of network services also include the increased
installation, applications and RF engineering staffing at the Company's
headquarters to support anticipated additional utility contracts. Network
services do not currently generate a profit as the Company has not yet achieved
a scale of services sufficient to cover network costs. The Company will incur
significant and increasing costs primarily attributable to network operation and
depreciation. Once a network has been fully installed, costs associated with
generating network revenues will consist primarily of maintaining a monitoring
center for such network, network depreciation and miscellaneous maintenance and
operating expenses.
OPERATING EXPENSES
Operating expenses, consisting of research and development, marketing and sales,
general and administrative costs and depreciation and amortization 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
29 CELLNET
<PAGE>
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 expected to increase
moderately for the next few years in connection with the planned installation of
a new enterprise information system commencing 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
$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 in 1997, 1996 and 1995 reflect primarily additions to the
Company's engineering staff and costs associated with development of processes
to retrofit utility meters for use in the CellNet network. 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 $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
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 $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.
DEPRECIATION AND AMORTIZATION. 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 year-to-year.
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 year ended December 31, 1997, the Company
recognized $2.8 million as its share of BCN's losses. The
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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. On
October 2, 1996, the Company completed an initial public offering (the "Initial
Public Offering") in which it sold 5,000,000 shares of its Common Stock at an
offering price of $20 per share for aggregate net proceeds of $92.2 million
after deducting underwriting discounts and commissions and offering expenses
payable by the Company. In connection with the Initial Public Offering, the
Company also received $1.2 million in proceeds from the cash exercise of the
1995 Warrants (the "Warrant Exercise") to purchase 495,918 shares of CellNet's
Common Stock. In addition, on October 2, 1996, the Company completed certain
direct placements (the "Direct Placements") in which it sold 1,579,404 shares of
its Common Stock for proceeds of 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 14% Senior Notes due 2007 (the "1997 Notes") and
warrants (the "1997 Warrants") 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 1997 Warrants was issued in exchange for
all of the Company's 1995 Notes. The Company has earned interest income on the
invested proceeds from the 1995 Notes, 1997 Notes, the Initial Public Offering,
Warrant Exercise and Direct Placements. The Company has also incurred
significant interest expense from the amortization of the original issue
discount on the 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 issuance of 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 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 is payable prior to April 1, 2003. Thereafter,
until maturity on October 1, 2007, interest will 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 $29.3 million, $23.8 million and $9.3 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
PROVISION FOR INCOME TAXES
The Company has not provided for or paid federal income taxes due to the
Company's net losses. A nominal provision has been recorded for various state
minimum income and franchise taxes.
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
31 CELLNET
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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 1997 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 networks are 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 legacy computer 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 enterprise
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 enterprise information system, which are estimated at
approximately $1.5 million for 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.
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 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
32 CELLNET
<PAGE>
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 1995 Warrants,
together with interest income of $7.4 million. On October 2, 1996, the Company
completed its Initial Public Offering in which it sold 5,000,000 shares of its
Common Stock at an offering price of $20 per share for net proceeds of $92.2
million after deducting underwriting discounts and commissions and offering
expenses payable by the Company. In addition, on October 2, 1996, the Company
completed the Direct Placements in which it sold 1,579,404 shares of its Common
Stock for proceeds of $28.0 million. On September 24, 1997, the Company received
an aggregate of approximately $332.3 million from the sale of the 1997 Notes and
1997 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. 1997 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 the 1997
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.
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. As of December 31, 1997, the Company was
committed to make approximately $89.3 million in capital expenditures for
saturation deployment network installations during 1998. In addition, the
Company anticipates that it may spend as much as $37.0 million in capital
expenditures relating to the installation of its broad deployment network in
California, although 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 that may be offered on the CellNet system. The Company expects that
cash used for the construction and installation of networks and for the purchase
of property and equipment will increase substantially as and when the Company
obtains new services agreements or enters into other arrangements for the
installation of its networks, and that the Company will require significant
amounts of additional capital from external sources. Sources of additional
capital for the Company and its subsidiaries may include project or conventional
33 CELLNET
<PAGE>
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, cash equivalents, anticipated interest
income, other revenues and expected sources of project financing of
approximately $90.0 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 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 or that may be contained in any
additional financing arrangements. The Indenture governing the 1997 Notes
contains certain covenants that limit the Company's ability to incur additional
indebtedness. Future financings may be dilutive to existing stockholders.
Failure to obtain such financing could result in the delay or abandonment of
some or all of the Company's development and expansion plans and expenditures,
which could limit the ability of the Company to meet its debt service
requirements and could have a material adverse effect on its business and on the
value of the Common Stock. See "Risk Factors That May Affect Future Operating
Performance -- Substantial Leverage and Ability to Service Debt; Substantial
Future Capital Needs."
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE
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 have selected
competing systems to perform services offered by the Company, and other parties,
including energy service providers, may from time to time select competing
services in the future. See "Business -- Competition."
During 1997, approximately 88% of the Company's revenues were derived from its
contracts with KCPL and UE. Any decision by a utility to utilize the Company's
services will involve a significant organizational, technological and
34 CELLNET
<PAGE>
financial commitment. 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 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 -- 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 and 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
35 CELLNET
<PAGE>
than six months after the execution of the applicable services contract. The
Company's results of operations may be adversely affected by delays or
difficulties arising in the network installation process. The cost of network
deployments will be highly variable and depend upon a wide variety of factors,
including radio frequency characteristics, the size of a service territory and
density of endpoints within such territory, the nature and sophistication of
services being provided, 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. 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, 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. 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 currently has no services
contracts which provide for the implementation of such services, and the Company
has not yet 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.
DEPENDENCE ON BUSINESSES RELATIONSHIPS
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."
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<PAGE>
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: (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 the 1997 Notes. 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 on the 1997 Notes.
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 December 31, 1997, the Company had $148.1 million in cash, cash
equivalents and short-term investments. The Company intends to raise a
substantial amount of additional capital in 1998 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
37 CELLNET
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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 would have certain enforcement rights, including the right to
accelerate such debt and the right to commence an involuntary bankruptcy
proceeding against the Company.
HISTORY AND CONTINUATION OF OPERATING LOSSES
The Company has incurred substantial and increasing operating losses since
inception. As of December 31, 1997, the Company had an accumulated deficit of
$281.6 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 revenues to exceed 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
38 CELLNET
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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 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,
39 CELLNET
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advanced data digitization technology, cellular and satellite communications
capabilities and personal communications systems ("PCS") have radically expanded
communications capabilities and market opportunities. Future advances may render
the Company's technology obsolete or less cost effective than competitive
systems or erode the Company's market position. Many companies from diverse
industries are seeking solutions for the transmission of data over traditional
communications media, including radio 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."
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
December 31, 1997, the Company had acquired 83 spectrum licenses in 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. In order to obtain a
license to operate the Company's network equipment in the 928/952 MHz band,
license applicants may need to obtain a waiver of various sections of the FCC's
rules. There can be no assurance that the Company will be able to obtain such
waivers on a timely basis or to obtain them at all. In addition, as the amount
of spectrum in the 928/952 MHz band is limited, issuance of these licenses is
contingent upon the availability of spectrum in the area(s) for which the
licenses are requested. The Company might not be able to obtain licenses to the
spectrum it needs in every area in which it has prospective customers. The FCC's
current rules, subject to a number of limited exceptions, permit third parties
such as CellNet to operate on spectrum licensed to utilities to provide other
services. The Company plans to use these provisions of the FCC's rules to expand
its network system.
The FCC requires that a minimum configuration of an MAS system be in operation
within eighteen months from the initial date of the grant of the system
authorization or risk forfeiture of the license for the MAS frequencies. The
eighteen-month deadline may be extended upon 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.
40 CELLNET
<PAGE>
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. The FCC is
currently reviewing these rules in response to numerous petitions for
reconsideration and the agency could modify those rules or allow for other uses
of this spectrum that might create interference to the Company's systems, which
could, in either case, have a material adverse impact on the Company's business,
operating results, financial condition and cash flow.
While the Company intends to offer 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 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
41 CELLNET
<PAGE>
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.
The Company is currently 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. However, the FCC has tentatively concluded that the Company's
applications for licenses involve the offering of subscriber-based services, and
have therefore returned any applications newly filed after the initiation of the
processing suspension, precluding the Company from obtaining any new licenses
(other than through the assignment process) while the processing suspension is
in place. The Company has requested reconsideration of this determination since
the currently proposed uses of these licenses constitutes, in the Company's
view, a private, internal use network. If the FCC does not change its tentative
conclusion on this matter, the Company will not be able to file any applications
for new facilities until the suspension is lifted, which is expected to occur
when the proceedings in Docket 97-81 are concluded. This may adversely affect
the Company's ability to service areas where it has not yet acquired adequate
frequencies.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
The Company is pursuing international markets through BCN, its international
joint venture with BEn. The Company has incurred, and anticipates that it will
continue to incur, significant and increasing expenses in connection with
42 CELLNET
<PAGE>
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 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 -- 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 -- 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.
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"
43 CELLNET
<PAGE>
life insurance policy on any of its executives or employees. The Company's
future success also depends on its continuing ability to identify, hire, train
and retain other highly qualified technical and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to attract or retain highly qualified technical and
managerial personnel in the future. An inability to attract and retain the
necessary technical and managerial personnel could have a material adverse
effect on the Company's business, operating results, financial condition and
cash flow.
UNCERTAINTY OF PROTECTION OF COPYRIGHTS, PATENTS AND PROPRIETARY RIGHTS
The Company relies on a combination of trade secret protection, copyright,
patent, trademark and confidentiality agreements and licensing arrangements to
establish and protect its proprietary rights. The Company's success will depend
in part on its ability to maintain copyright and patent protection for its
products, to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties. While the Company has obtained and applied
for patents, and intends to file applications as appropriate for patents
covering its products and processes, there can be no assurance that additional
patents will be issued or, if issued, that the scope of any patent protection
will be significant, or that any patents issued to the Company or licensed by
the Company will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide proprietary protection to the Company.
Since 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 issued in September 1996. Itron
is seeking a judgment for damages, attorneys' fees and injunctive relief. The
Company believes,
44 CELLNET
<PAGE>
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 "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.
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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 and new power
market participants may contain similar provisions. In the event that such a
services contract is terminated, the Company would almost certainly incur
substantial losses. In addition, the Company anticipates that any contracts with
new power market participants will have shorter terms than the Company's
existing utility contracts. 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 effect 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.
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. A second
complaint, also filed in the same Court, of HOWARD FIENMAN AND GERALD SAPSOWITZ
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
46 CELLNET
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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.
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been highly volatile at
relatively low trading volumes since the Company's Initial Public Offering and
has been and is likely to continue to be subject to wide fluctuations in
response to a variety of factors, including quarterly variations in operating
results, the signing of services contracts, new customers, consolidations in the
industry, technological innovations or new products by the Company or its
competitors, developments in patents or other intellectual property rights,
general conditions in the NMR services industry, revised earnings estimates,
comments or recommendations issued by analysts who follow the Company, its
competitors or the NMR services industry and general economic and market
conditions. In addition, it is possible that in some future period the Company's
operating results may be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock could be
materially adversely affected. Additionally, the stock market in general, and
the market for technology stocks in particular, have experienced extreme price
volatility in recent years. Volatility in price and volume has had a substantial
effect on the market prices of many technology companies for reasons unrelated
or disproportionate to the operating performance of such companies. These broad
market fluctuations could have a significant impact on the market price of the
Common Stock.
NO DIVIDENDS; DIVIDEND RESTRICTIONS
The Company has not declared or paid any dividends on its capital stock since
its inception. The Company currently anticipates that it will retain all of its
future earnings, if any, for use in the operation and expansion of its business
and does not anticipate paying any cash dividends in the foreseeable future. In
addition, the Company's existing financing arrangements restrict the payment of
any dividends.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
47 CELLNET
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
[LOGO]
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
48 CELLNET
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONSOLIDATED
BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------------------
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.
49 CELLNET
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------
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.
50 CELLNET
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
- -------------------------------------------------------------------------------------------------------------------------
NET
UNREALIZED
CONVERTIBLE NOTES GAIN (LOSS)
PREFERRED STOCK COMMON STOCK RECEIVABLE ON SHORT-
-------------------- ------------------- FROM SALE OF ACCUMULATED TERM
SHARES AMOUNT SHARES AMOUNT COMMON 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 private 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 warrants 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.
51 CELLNET
<PAGE>
CELLNET DATA SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF
CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------
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.
52 CELLNET
<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
53 CELLNET
<PAGE>
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.
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
54 CELLNET
<PAGE>
approximately 50% complete. At December 31, 1997 and 1996, accumulated
depreciation was $6,212,000 and $1,657,000, respectively.
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.
55 CELLNET
<PAGE>
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
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>
- -------------------------------------------------------------------------------------------
Unrealized Unrealized
Amortized Loss on Gain on Market
DECEMBER 31, 1997 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>
- -------------------------------------------------------------------------------------------
Unrealized Unrealized
Amortized Loss on Gain on Market
DECEMBER 31, 1996 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>
56 CELLNET
<PAGE>
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.
57 CELLNET
<PAGE>
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 value of $654,133,000
58 CELLNET
<PAGE>
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.
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.
59 CELLNET
<PAGE>
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 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.
60 CELLNET
<PAGE>
A summary of stock option activity under the Plans on a combined basis is as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Outstanding Options
------------------------
Weighted
Average
Number Exercise
of Shares 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>
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.
61 CELLNET
<PAGE>
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 $14.23 per share, respectively, and
768,028 shares of common stock subject to repurchase were outstanding at
December 31, 1997 but were not included in the computation of diluted EPS as
the Company has a net loss for all periods presented and, therefore, they are
anti-dilutive.
8. INCOME TAXES
No federal income taxes were provided in 1997, 1996 or 1995 due to the
Company's net losses. The provisions for income taxes for these periods
represent various state minimum income and franchise taxes. The provision
62 CELLNET
<PAGE>
for income taxes differs from the amount computed by applying the federal
statutory income tax rate to income before income taxes and extraordinary
item as follows (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Taxes computed at federal statutory rate ($ 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.
63 CELLNET
<PAGE>
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>
- ----------------------------------------------------------------------------------------
Capital Operating
YEARS ENDING DECEMBER 31, 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
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 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.
64 CELLNET
<PAGE>
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.
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
Company considers
65 CELLNET
<PAGE>
necessary for the fair presentation of results of operations for these
interim periods (in thousands, except per share data):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
<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.
* * * * *
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
66 CELLNET
<PAGE>
PART III
Certain information required by Part III is omitted from this Report in that the
registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
registrant's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
registrant's Proxy Statement.
67 CELLNET
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules. The financial statements as set forth
under Item 8 of this report on Form 10-K are included.
Financial Statement Schedules have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the consolidated financial statements or notes thereto.
(b) Reports on Form 8-K. Not applicable.
(c) Exhibits.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
<C> <S>
EXHIBIT DESCRIPTION
- ---------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation filed on February 10,
1998.
3.2 Bylaws as amended February 4, 1998.
4.1(1) Specimen Common Stock Certificate.
4.2(1) Indenture between the Registrant and The Bank of New York dated June 15,
1995, including the form of Senior Discount Note.
4.3(1) Warrant Agreement between the Registrant and The Bank of New York dated June
15, 1995, including the form of Warrant.
4.4(1) Notes Registration Rights Agreement dated June 15, 1995 by and between the
Registrant and Smith Barney Inc.
4.5(1) Warrants Registration Rights Agreement dated June 15, 1995 by and between
the Registrant and Smith Barney Inc.
4.6(1) First Supplemental Indenture between the Registrant and The Bank of New York
dated November 21, 1995.
4.7(1) First Supplemental Warrant Agreement between the Registrant and The Bank of
New York dated November 21, 1995.
4.8(1) First Supplemental Notes Registration Rights Agreement dated November 21,
1995 by and between the Registrant and Smith Barney Inc.
4.9(1) First Supplemental Warrants Registration Rights Agreement dated November 21,
1995 by and between the Registrant and Smith Barney Inc.
4.10(1) Warrant Agreement between the Registrant and Axonn Corporation dated August
12, 1992.
4.11(1) Form of Warrant Agreement between the Registrant and Diablo Research
Corporation.
4.12(1) Stock Purchase Agreement dated September 6, 1996 between the Registrant and
Northern States Power Company.
4.13(1) Stock Purchase Agreement dated September 4, 1996 between the Registrant and
Union Electric Development Corporation.
4.14(1) Stock Purchase Agreement dated September 16, 1996 between the Registrant and
Bechtel Enterprises, Inc.
4.15(2) Second Supplemental Indenture by and between the Registrant and The Bank of
New York dated as of August 30, 1996.
</TABLE>
68 CELLNET
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
EXHIBIT DESCRIPTION
<C> <S>
- ---------------------------------------------------------------------------------------
4.16(3) Warrant Agreement between the Registrant and The Bank of New York dated as
of September 29, 1997
4.17(3) Registration Rights Agreement among the Registrant and the Placement Agents
dated as of September 24, 1997.
4.18(3) Warrant Registration Rights Agreement among the Registrant and the Placement
Agents dated as of September 24, 1997.
4.19(3) Third Supplemental Indenture by and between the Registrant and The Bank of
New York dated as of August 28, 1997.
4.20(3) Fourth Supplemental Indenture by and between the Registrant and The Bank of
New York dated as of September 29, 1997.
4.21(2) Specimen 13% Senior Discount Note Due 2005, Series B.
4.22(3) Specimen 14% Senior Discount Note Due 2007, Series B
10.1(1) Form of current Indemnification Agreement for directors and officers.
10.2A(1) 1992 Stock Option Plan and forms of agreements thereunder.
10.2B(1) 1994 Stock Plan and forms of agreements thereunder.
10.3(1) 1996 Employee Stock Purchase Plan.
10.4(1) Shareholder's Agreement between the Registrant and certain shareholders
dated August 15, 1994, as amended by Amendment No. 1 on December 22, 1994,
Amendment No. 2 on June 15, 1995 and Amendment No. 3 on November 21, 1995.
10.5(1) Lease between the Registrant and WDT Shoreway dated April 6, 1989 for the
Registrant's San Carlos headquarters.
10.6(1) Restricted Stock Purchase Agreement between the Registrant and John M. Seidl
dated December 27, 1994.
10.7(1) Restricted Stock Purchase Agreement between the Registrant and James J.
Jennings dated August 1, 1995.
10.8(1) Restricted Stock Purchase Agreement between the Registrant and Philip H.
Mallory dated July 21, 1995.
10.9(1) Restricted Stock Purchase Agreement between the Registrant and Larsh M.
Johnson dated August 1, 1995.
10.10+(1) License Agreement between the Registrant and Axonn Corporation dated August
21, 1992, as amended by an Addendum and a Second Addendum, each dated
November 8, 1993.
10.11+(1) License Agreement between the Registrant and Axonn Corporation dated March
25, 1996.
10.12+(1) License Agreement between the Registrant and Life Point Systems Limited
Partnership dated August 12, 1994.
10.13(1) Agreement between the Registrant and James Jennings dated July 11, 1994.
10.14(1) Form of Employee Severance Agreement.
10.15(1) Form of Promissory Note between the Registrant and certain officers of the
Registrant in connection with the purchase of restricted stock.
10.16(4) Restricted Stock Purchase Agreement between the Registrant and David L.
Perry dated June 29, 1995.
10.17(4) Restricted Stock Purchase Agreement between the Registrant and David L.
Perry dated June 29, 1995.
</TABLE>
69 CELLNET
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
EXHIBIT DESCRIPTION
<C> <S>
- ---------------------------------------------------------------------------------------
10.18(4) Restricted Stock Purchase Agreement between the Registrant and Paul G. Manca
dated July 31, 1995.
10.19(4) Amendment dated February 5, 1997 to License Agreement between the Registrant
and Axonn Corporation dated August 21, 1992, as amended.
10.20(5) 1997 Bonus Plan
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule.
- ---------------------------------------------------------------------------------------
</TABLE>
+ Confidential Treatment granted.
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (File No. 333-09537) filed on September 24, 1996.
(2) Incorporated by reference to the Registrant's Registration Statement on Form
S-4 (File No. 333-15395) filed on November 1, 1996.
(3) Incorporated by reference to the Registrant's Registration Statement on Form
S-4 (File No. 333-37967) filed on October 15, 1997.
(4) Incorporated by reference to Registrant's Report on Form 10-K filed on March
7, 1997.
(5) Incorporated by reference to Registrant's Report on Form 10-Q filed on
August 13, 1997.
70 CELLNET
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in San Carlos, State of
California, on March 5, 1998.
CELLNET DATA SYSTEMS, INC.
By: /s/ JOHN M. SEIDL
-------------------------------------
John M. Seidl
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John M. Seidl and Paul G. Manca, and each of
them, his attorneys-in-fact, and agents, each with the power of substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Report on Form 10-K, and all 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 perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and conforming all that said
attorneys-in-fact and agents of any of them, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons in the capacities and on the
dates indicated.
- -------------------------------------------------------------------------------
SIGNATURE TITLE DATE
- -------------------------------------------------------------------------------
Chairman of the Board,
/s/ JOHN M. SEIDL President and Chief
- ------------------------------ Executive Officer March 5, 1998
John M. Seidl (Principal Executive
Officer)
Vice President and Chief
/s/ PAUL G. MANCA Financial Officer
- ------------------------------ (Principal Financial and March 5, 1998
Paul G. Manca Accounting Officer)
/s/ PAUL M. COOK
- ------------------------------ Director March 5, 1998
Paul M. Cook
71 CELLNET
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
SIGNATURE TITLE DATE
- -------------------------------------------------------------------------------
<C> <S> <C>
/s/ NEAL M. DOUGLAS
- ------------------------------ Director March 5, 1998
Neal M. Douglas
/s/ E. LINN DRAPER, JR.
- ------------------------------ Director March 5, 1998
E. Linn Draper, Jr.
/s/ WILLIAM C. EDWARDS
- ------------------------------ Director March 5, 1998
William C. Edwards
/s/ WILLIAM HART
- ------------------------------ Director March 5, 1998
William Hart
</TABLE>
72 CELLNET
<PAGE>
CELLNET DATA SYSTEMS, INC.
RESTATED CERTIFICATE OF INCORPORATION
CellNet Data Systems, Inc., a corporation organized and existing under and
by virtue of the Delaware General Corporation Law, hereby certifies as follows:
1. The name of this corporation is CellNet Data Systems, Inc. and the
original Certificate of Incorporation of the corporation was filed with the
Secretary of State of the State of Delaware on December 7, 1993.
2. This Restated Certificate of Incorporation was duly adopted in
accordance with the provisions of Section 245 of the General Corporation Law of
the State of Delaware. Pursuant to Section 245 of the General Corporation Law
of Delaware, this Restated Certificate of Incorporation restates and further
integrates the provisions of this corporation's Certificate of Incorporation.
3. The text of the Restated Certificate of Incorporation is hereby
restated to read in its entirety as set forth in Schedule A attached hereto.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been
signed under the seal of the corporation this 4th day of February, 1998.
CELLNET DATA SYSTEMS, INC.
By: /s/ JOHN M. SEIDL
--------------------------------
John M. Seidl, President and
Chief Executive Officer
ATTEST:
/s/ DAVID L. PERRY
- -------------------------
David L. Perry, Secretary
<PAGE>
SCHEDULE A
RESTATED CERTIFICATE OF INCORPORATION
OF
CELLNET DATA SYSTEMS, INC.
FIRST. The name of the corporation is CellNet Data Systems, Inc. (the
"Corporation").
SECOND. The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, County of New Castle, Delaware
19801. The name of its registered agent at such address is The Corporation
Trust Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH. This Corporation is authorized to issue two classes of shares,
designated "Common Stock," $0.001 par value and "Preferred Stock," $0.001 par
value, respectively. The number of shares of Common Stock authorized to be
issued is one hundred million (100,000,000) and the number of shares of
Preferred Stock authorized to be issued is fifteen million (15,000,000). The
Board of Directors shall have the authority to issue the authorized but
undesignated Preferred Stock from time to time in one or more series and to fix
the number of shares of such series and to determine the designation of any such
series and to determine or alter the powers, preferences, rights,
qualifications, limitations or restrictions granted to or imposed upon any
wholly unissued series. The Board of Directors, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, may increase or
decrease (but not below the number of shares in any such series then
outstanding) the number of shares of any series subsequent to the issue of
shares of that series.
FIFTH. The Board of Directors of the Corporation is expressly authorized
to make, alter or repeal the Bylaws of the Corporation.
SIXTH. Elections of directors need not be by written ballot except and to
the extent provided in the Bylaws of the Corporation.
SEVENTH. (a) To the fullest extent permitted by the Delaware General
Corporation Law as the same exists or as may hereafter be amended, a director of
the Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
(b) The Corporation shall indemnify to the fullest extent
permitted by law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil,
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<PAGE>
administrative or investigative, by reason of the fact that he, his testator
or intestate is or was a director or executive officer of the Corporation or
any predecessor of the Corporation or serves or served any other enterprise
as a director or executive officer at the request of the Corporation or any
predecessor to the Corporation. The Corporation shall have the authority
upon approval of the Board of Directors to indemnify any other officer and
employee of the Corporation.
(c) Neither any amendment nor repeal of this Article SEVENTH,
nor the adoption of any provision of the Corporation's Certificate of
Incorporation inconsistent with this Article SEVENTH, shall eliminate or reduce
the effect of this Article SEVENTH in respect of any matter occurring, or any
action or proceeding accruing or arising or that, but for this Article SEVENTH,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
EIGHTH. No action shall be taken by the stockholders of the Corporation
except at an annual or special meeting of the stockholders called in accordance
with the Bylaws and no action shall be taken by the stockholders by written
consent. The affirmative vote of sixty-six and two thirds percent (66 2/3%) of
the then outstanding voting securities of the Corporation, voting together as a
single class, shall be required for the amendment, repeal or modification of the
provisions of this Article EIGHTH of this Amended and Restated Certificate of
Incorporation or Sections 2.3 and 2.5 of the Corporation's Bylaws.
-3-
<PAGE>
BYLAWS
OF
CELLNET DATA SYSTEMS, INC.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is Corporation Trust Center.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the Second
Tuesday of December in each year at 10:00 a.m. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on the
next succeeding full business day. At the meeting, directors shall be elected
and any other proper business may be transacted.
-1-
<PAGE>
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
(i) board of directors, (ii) chairman of the board, or (iii) president. No
other person or persons are permitted to call a special meeting.
If a special meeting is called by any person or persons other than the
board of directors, then the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be transacted,
and shall be delivered personally or sent by registered mail or by telegraphic
or other facsimile transmission to the chairman of the board, the president, any
vice president or the secretary of the corporation. The officer receiving the
request shall cause notice to be promptly given to the stockholders entitled to
vote, in accordance with the provisions of Sections 2.4 and 2.6 of these bylaws,
that a meeting will be held at the time requested by the person or persons
calling the meeting so long as that time is not less than thirty-five (35) nor
more than sixty (60) days after the receipt of the request. If the notice is
not given within twenty (20) days after receipt of the request, then the person
or persons requesting the meeting may give the notice. Nothing contained in
this paragraph of Section 2.3 shall be construed as limiting, fixing or
affecting the time when a meeting of stockholders called by action of the board
of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings of stockholders shall be sent or otherwise given in
accordance with Section 2.6 of these bylaws not less than ten (10) nor more than
sixty (60) days before the date of the meeting. The notice shall specify the
place, date, and hour of the meeting, and, (i) in the case of a special meeting,
the purpose of purposes for which the meeting is called (no business other than
that specified in the notice may be transacted) or (ii) in the case of the
annual meeting, those matters which the board of directors, at the time of
giving the notice, intends to present for action by the stockholders (but any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation,
(i) nominations for the election of directors, and
(ii) business proposed to be brought before any stockholder meeting
may be made by the board of directors or proxy committee appointed by the board
of directors or by any stockholder entitled to vote in the election of directors
generally if such nomination or business
-2-
<PAGE>
proposed is otherwise proper business before such meeting. However, any such
stockholder may nominate one or more persons for election as directors at a
meeting or propose business to be brought before a meeting, or both, only if
such stockholder has given timely notice in proper written form of their
intent to make such nomination or nominations or to propose such business.
To be timely, such stockholder's notice must be delivered to or mailed and
received at the principal executive offices of the corporation not less than
one hundred twenty (120) calendar days in advance of the date specified in
the corporation's proxy statement released to stockholders in connection with
the previous year's annual meeting of stockholders; provided, however, that
in the event that no annual meeting was held in the previous year or the date
of the annual meeting has been changed by more than thirty (30) days from the
date contemplated at the time of the previous year's proxy statement, notice
by the stockholder to be timely must be so received a reasonable time before
the solicitation is made. To be in proper form, a stockholder's notice to
the secretary shall set forth:
(a) the name and address of the stockholder who intends to make the
nominations or propose the business and, as the case may be, of the
person or persons to be nominated or of the business to be proposed;
(b) a representation that the stockholder is a holder of record of
stock of the corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice;
(c) if applicable, a description of all arrangements or
understandings between the stockholder and each nominee and any other
person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by the stockholder;
(d) such other information regarding each nominee or each matter of
business to be proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or intended to
be proposed by the board of directors; and
(e) if applicable, the consent of each nominee to serve as director
of the corporation if so elected.
The chairman of the meeting shall refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the
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<PAGE>
corporation. An affidavit of the secretary or an assistant secretary or of
the transfer agent of the corporation that the notice has been given shall,
in the absence of fraud, be prima facie evidence of the facts stated therein.
2.7 QUORUM
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present or represented. At such adjourned meeting at which a quorum is present
or represented, any business may be transacted that might have been transacted
at the meeting as originally noticed.
2.8 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than forty-five (45) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.12 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as may be provided in the certificate of incorporation, each
stockholder shall be entitled to one vote for each share of capital stock held
by such stockholder.
2.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except
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<PAGE>
when the person attends a meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the certificate of incorporation, any action
required or permitted to be taken at any annual or special meeting of
stockholders, may be taken without a meeting, without prior notice, and without
a vote if a consent or consents in writing, setting forth the action so taken,
is signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Such consents shall be delivered to the corporation by delivery to its
registered office in the state of Delaware, its principal place of business, or
an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to the
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.
If the board of directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
2.13 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
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<PAGE>
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of
Section 212(c) of the General Corporation Law of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The number of directors of the corporation shall be not less than six (6)
nor more than eleven (11). The exact number of directors shall be ten (10)
until changed, within the limits specified above, by a bylaw amending this
Section 3.2, duly adopted by the board of directors or by the stockholders. The
indefinite number of directors may be changed, or a definite number may be fixed
without provision for an indefinite number, by a duly adopted amendment to the
certificate of incorporation or by an amendment to this bylaw duly adopted by
the vote or written consent of the holders of the majority of the stock issued
and outstanding and entitled to vote or by resolution of the majority of the
board of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
-6-
<PAGE>
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his successor is elected and qualified
or until his earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the
corporation. When one or more directors so resigns and the resignation is
effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have power to fill such vacancy
or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each director so chosen shall hold
office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from
any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by
a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions
of the certificate of incorporation, vacancies and newly created
directorships of such class or classes or series may be filled by a majority
of the directors elected by such class or classes or series thereof then in
office, or by a sole remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a
stockholder, or other fiduciary entrusted with like responsibility for the
person or estate of a stockholder, may call a special meeting of stockholders
in accordance with the provisions of the certificate of incorporation or
these bylaws, or may apply to the Court of Chancery for a decree summarily
ordering an election as provided in Section 211 of the General Corporation
Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten (10) percent of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors
then in office as aforesaid, which
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<PAGE>
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.7 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telecopy or telegram, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least
four (4) days before the time of the holding of the meeting. If the notice
is delivered personally or by telephone, telecopy or by telegram, it shall be
delivered personally or by telephone or to the telegraph company at least
forty-eight (48) hours before the time of the holding of the meeting. Any
oral notice given personally or by telephone may be communicated either to
the director or to a person at the office of the director who the person
giving the
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<PAGE>
notice has reason to believe will promptly communicate it to the director.
The notice need not specify the purpose or the place of the meeting, if the
meeting is to be held at the principal executive office of the corporation.
3.9 QUORUM
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.11 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
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Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.15 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of incorporation
or by these bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock
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adopted by the board of directors as provided in Section 151(a) of the
General Corporation Law of Delaware, fix any of the preferences or rights of
such shares relating to dividends, redemption, dissolution, any distribution
of assets of the corporation or the conversion into, or the exchange of such
shares for, shares of any other class or classes or any other series of the
same or any other class or classes of stock of the corporation), (ii) adopt
an agreement of merger or consolidation under Sections 251 or 252 of the
General Corporation Law of Delaware, (iii) recommend to the stockholders the
sale, lease or exchange of all or substantially all of the corporation's
property and assets, (iv) recommend to the stockholders a dissolution of the
corporation or a revocation of a dissolution, or (v) amend the bylaws of the
corporation; and, unless the board resolution establishing the committee, the
bylaws or the certificate of incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger pursuant to Section 253 of the General Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment), and
Section 3.12 (action without a meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members; provided, however, that the time of
regular meetings of committees may also be called by resolution of the board of
directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a president, one or more vice
presidents, a secretary, and a chief financial officer. The corporation may
also have, at the discretion of the board of directors, a chairman of the board,
one or more assistant vice presidents, assistant secretaries, treasurer,
assistant treasurers, and such other officers as may be appointed in accordance
with the provisions of Section 5.3 of these bylaws. Any number of offices may
be held by the same person.
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5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be chosen by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the
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corporation and shall, subject to the control of the board of directors, have
general supervision, direction, and control of the business and the officers
of the corporation. He shall preside at all meetings of the shareholders
and, in the absence or nonexistence of a chairman of the board, at all
meetings of the board of directors. He shall have the general powers and
duties of management usually vested in the office of president of a
corporation and shall have such other powers and duties as may be prescribed
by the board of directors or these bylaws.
5.8 VICE PRESIDENT
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and shareholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at shareholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained
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earnings, and shares. The books of account shall at all reasonable times be
open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as treasurer and of the financial condition of the corporation, and
shall have such other powers and perform such other duties as may be prescribed
by the board of directors or these bylaws.
5.11 ASSISTANT SECRETARY
The assistant secretary, if any, or, if there is more than one, the
assistant secretaries in the order determined by the stockholders or board of
directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the secretary or in the event of his or her
inability or refusal to act, perform the duties and exercise the powers of the
secretary and shall perform such other duties and have such other powers as the
board of directors or the stockholders may from time to time prescribe.
5.12 ASSISTANT TREASURER
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the treasurer or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the treasurer
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.13 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
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ARTICLE VI
INDEMNITY
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
executive officers against expenses (including attorneys' fees), judgments,
fines, settlements, and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.1, a
"director" or "executive officer" of the corporation includes any person (i) who
is or was a director or executive officer of the corporation, (ii) who is or was
serving at the request of the corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, or (iii) who
was a director or executive officer of a corporation which was a predecessor
corporation of the corporation or a director or officer of another enterprise at
the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
officers, employees and agents (other than directors and executive officers)
against expenses (including attorneys' fees), judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with any
proceeding, arising by reason of the fact that such person is or was an agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or executive officer) includes any person
(i) who is or was an employee or agent of the corporation, (ii) who is or was
serving at the request of the corporation as an employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or (iii) who
was an employee or agent of a corporation which was a predecessor corporation of
the corporation or of another enterprise at the request of such predecessor
corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of Delaware.
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ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each shareholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting a full and
clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of
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this corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of this corporation. The
authority granted herein may be exercised either by such person directly or
by any other person authorized to do so by proxy or power of attorney duly
executed by such person having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
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The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 DIVIDENDS
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The directors of the corporation, subject to any restrictions contained in
the certificate of incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not
be limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.10 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any agreement
with any number of shareholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.11 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
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ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote or by the board of directors of
the corporation. The fact that such power has been so conferred upon the
directors shall not divest the stockholders of the power, nor limit their power
to adopt, amend or repeal bylaws.
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with
Section 103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall
have attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
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ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification
of their successors; or
(ii) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for
action by the board of directors cannot be obtained and the stockholders are
unable to terminate this division; or
(iii) the corporation has abandoned its business and has failed
within a reasonable time to take steps to dissolve, liquidate or distribute
its assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
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CERTIFICATE OF SECRETARY
The undersigned, Secretary of CELLNET DATA SYSTEMS, INC., a Delaware
corporation, hereby certifies that the foregoing is a full, true and correct
copy of the Bylaws of said Corporation, with all amendments to date.
The undersigned hereby certifies that such Bylaws were adopted as the
Bylaws of the Corporation effective February 4, 1998 by the Board of
Directors of the Corporation.
WITNESS the signature of the undersigned and the seal of the Corporation
this 4th day of February, 1998.
/s/ David L. Perry
----------------------------------
David L. Perry, Secretary
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EXHIBIT 21.1 (1)
The following is a complete list of the Company's Domestic and Foreign
Subsidiaries:
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------
DOMESTIC SUBSIDIARIES PLACE OF INCORPORATION
- ---------------------------------------------------------------------------------------
BCN Data Systems, L.L.C. (Delaware)
CellNet Data Services, Inc. (Delaware)
CellNet Data Services (CA), Inc. (Delaware)
CellNet Data Services (IS), Inc. (Delaware)
CellNet Data Services (KC), Inc. (Delaware)
CellNet Data Services (MSP), Inc. (Delaware)
CellNet Data Services (SE), Inc. (Delaware)
CellNet Data Services (SF), Inc. (Delaware)
CellNet Data Services (SL), Inc. (Delaware)
CN Frequency (IS), Inc. (Delaware)
CN Frequency (KC), Inc. (Delaware)
CN Frequency (MSP), Inc. (Delaware)
CN Frequency (SE), Inc. (Delaware)
CN Frequency (SF), Inc. (Delaware)
CN Frequency (SL), Inc. (Delaware)
CN Holdings, Inc. (Delaware)
CN WAN Corp. (Delaware)
- ---------------------------------------------------------------------------------------
FOREIGN SUBSIDIARIES
- ---------------------------------------------------------------------------------------
BCN Data Systems Limited (England/Wales)
- ---------------------------------------------------------------------------------------
</TABLE>
73 CELLNET
<PAGE>
EXHIBIT 23.1
[LOGO]
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-16399 of CellNet Data Systems, Inc. on Form S-8 of our report dated February
2, 1998, appearing in this Annual Report on Form 10-K of CellNet Data Systems,
Inc. for the year ended December 31, 1997.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
March 5, 1998
74 CELLNET
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