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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-21409
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CELLNET DATA SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C>
DELAWARE 92-2951096
(State or other jurisdiction (I.R.S. Employer
of Identification Number)
incorporation or organization)
</TABLE>
125 SHOREWAY ROAD
SAN CARLOS, CALIFORNIA 94070
(650) 508-6000
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. Yes /X/ No / /
As of November 11, 1999, 43,408,137 shares of the Registrant's Common Stock,
$0.001 par value, were issued and outstanding.
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TABLE OF CONTENTS
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION....................................... 1
Item 1. Consolidated Financial Statements (Unaudited)............... 1
Condensed Consolidated Balance Sheets as of September 30,
1999 and December 31, 1998................................ 1
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998... 2
Condensed Consolidated Statements of Cash Flow for the Three
and Nine Months Ended September 30, 1999 and 1998......... 3
Notes to Condensed Consolidated Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 7
Item 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 33
Item 2. Changes in Securities....................................... 33
Item 3. Defaults upon Senior Securities............................. 33
Item 4. Submission of Matters to a Vote of Security Holders......... 33
Item 5. Other Information........................................... 33
Item 6. Exhibits and Reports on Form 8-K............................ 33
SIGNATURE
EXHIBIT INDEX
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CELLNET DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
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ASSETS
Current assets:
Cash and cash equivalents................................. $ 14,539 $ 35,505
Short-term investments.................................... 3,783 50,728
Accounts receivable--trade................................ 9,517 5,022
Accounts receivable--other................................ 4,130 2,442
Prepaid expenses and other................................ 2,747 1,358
--------- ---------
Total current assets...................................... 34,716 95,055
Networks--net............................................... 232,444 176,090
Network components and inventory............................ 26,093 32,616
Restricted cash............................................. 12,830 17,984
Property--net............................................... 13,079 16,499
Debt issuance costs and other--net.......................... 5,138 5,818
--------- ---------
Total assets.............................................. $ 324,300 $ 344,062
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 19,288 $ 11,703
Accrued compensation and related benefits................. 7,393 4,970
Accrued liabilities....................................... 7,305 4,168
Current portion of capital lease obligations.............. 473 691
--------- ---------
Total current liabilities............................... 34,459 21,532
Senior notes................................................ 358,292 316,709
Revolving credit agreements................................. 82,400 31,350
Deferred revenue............................................ 5,094 5,339
Capital lease obligations................................... 155 437
Commitments and contingencies (Note 4)...................... -- --
Mandatorily redeemable preferred securities of subsidiary
holding solely Company preferred stock.................... 106,438 106,191
Stockholders' deficit:
Preferred stock--$.001 par value; 15,000,000 shares
authorized; no shares outstanding....................... -- --
Common stock--$.001 par value; 300,000,000 shares
authorized; shares outstanding, 1999: 43,172,021; 1998:
42,494,406.............................................. 212,536 211,672
Notes receivable from sale of common stock.................. (528) (640)
Warrants.................................................... 74,545 74,545
Accumulated deficit......................................... (549,091) (423,085)
Net unrealized gain on short-term investments............... 0 12
--------- ---------
Total stockholders' deficit............................... 262,538 (137,496)
--------- ---------
Total liabilities and stockholders' deficit................. $ 324,300 $ 344,062
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CELLNET DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1999 1998 1999 1998
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Revenues:
Network service revenues......................... $ 6,151 $ 2,896 $ 15,747 $ 7,346
Product revenues................................. 229 144 749 552
License fees and other revenues.................. 224 457 830 728
-------- -------- --------- ---------
Total revenues................................. 6,604 3,497 17,326 8,626
-------- -------- --------- ---------
Costs and expenses:
Cost of network operations....................... 11,137 8,729 26,373 20,165
Cost of product and other revenues............... 104 500 792 958
Research and development......................... 6,544 7,115 20,033 22,613
Marketing and sales.............................. 3,314 2,870 9,186 8,768
General and administrative....................... 5,203 3,752 14,681 11,890
Depreciation and amortization.................... 8,057 4,784 21,690 13,431
-------- -------- --------- ---------
Total costs and expenses....................... 34,359 27,750 92,755 77,825
-------- -------- --------- ---------
Loss from operations............................... (27,755) (24,253) (75,429) (69,199)
Equity in net loss of unconsolidated affiliate..... (1,555) (815) (3,689) (1,796)
Other income (expense):
Interest income.................................. 535 2,175 2,359 6,114
Interest expense, net of capitalized interest.... (15,511) (10,897) (43,097) (32,571)
Other--net....................................... (82) 17 (123) (159)
-------- -------- --------- ---------
Total other income (expense), net.............. (15,058) (8,705) (40,861) (26,616)
-------- -------- --------- ---------
Loss before provision for income taxes and
dividends and accretion on preferred
securities....................................... (44,368) (33,773) (119,979) (97,611)
Provision for income taxes......................... -- -- 6 --
-------- -------- --------- ---------
Loss before dividends and accretion on preferred
securities....................................... (44,368) (33,773) (119,985) (97,611)
Dividends and accretion on preferred securities of
subsidiary....................................... (2,007) (2,007) (6,021) (2,945)
-------- -------- --------- ---------
Net loss applicable to common stockholders......... $(46,375) $(35,780) $(126,006) $(100,556)
======== ======== ========= =========
Basic and diluted net loss per share............... $ (1.08) $ (0.86) $ (2.95) $ (2.43)
======== ======== ========= =========
Shares used in computing net loss per share........ 43,037 41,764 42,786 41,460
======== ======== ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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CELLNET DATA SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
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NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss applicable to common stockholders................ $(126,006) $(100,556)
Adjustments to reconcile net loss applicable to common
stockholders to net cash used for operating activities:
Depreciation and amortization........................... 21,690 13,431
Accretion on senior notes, net of capitalized
interest............................................... 39,570 32,190
Accretion on preferred securities....................... 247 122
Amortization of debt issuance costs..................... 491 304
Equity in net loss of unconsolidated affiliate.......... 3,690 1,796
Other................................................... 2,044 (122)
Changes in:
Accounts receivable--trade............................ (4,495) (1,774)
Accounts receivable--other............................ (1,688) 1,855
Prepaid expenses and other............................ (1,389) 373
Accounts payable...................................... 7,585 5,410
Accrued compensation and related benefits............. 2,423 1,802
Accrued liabilities and deferred revenues............. 2,892 2,162
--------- ---------
Net cash used for operating activities.............. (52,946) (43,007)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Networks.................................................. (72,332) (66,714)
Network components and inventory.......................... 6,523 (9,163)
Purchase of property...................................... (2,904) (5,946)
Investment in unconsolidated affiliates................... (3,690) (3,327)
Purchase of short-term investments........................ (15,380) (95,400)
Proceeds from sales and maturities of short-term
investments............................................. 62,313 88,807
Increase in restricted cash............................... -- (21,433)
Proceeds from maturity of restricted cash................. 5,775 2,182
Other assets.............................................. 189 (307)
--------- ---------
Net cash used for investing activities.............. (19,506) (111,301)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit agreements................. 51,050 --
Proceeds from issuance of preferred securities............ -- 105,940
Repayment of capital lease obligations.................... (540) (521)
Proceeds from sale of common stock, net of repurchases.... 864 846
Collection of notes receivable from sale of common
stock................................................... 112 28
--------- ---------
Net cash provided by financing activities........... 51,486 106,293
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (20,966) (48,015)
--------- ---------
CASH AND CASH EQUIVALENTS, Beginning of period.............. 35,505 111,112
--------- ---------
CASH AND CASH EQUIVALENTS, End of period.................... $ 14,539 $ 63,097
========= =========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of property under capital leases.............. $ 40 $ 834
Capitalization of interest into networks.................. $ 2,013 $ 3,086
Change in unrealized gain (loss) on short-term
investments............................................. $ (12) $ 38
Conversion of warrants into common stock.................. $ -- $ 1
Repurchase of unvested common stock and cancellation of
related notes receivable................................ $ -- $ 8
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 2,523 $ 78
Cash paid for income taxes................................ $ 6 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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CELLNET DATA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
In the opinion of management, these unaudited condensed consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments and accruals the Company considers necessary for a fair
presentation of the Company's financial position as of September 30, 1999 and
the results of operations and cash flows for the three and nine months ended
September 30, 1999 and 1998. This unaudited interim information should be read
in conjunction with the audited consolidated financial statements of CellNet
Data Systems, Inc. and the notes thereto for the year ended December 31, 1998.
Operating results for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, during the nine months ended September 30, 1999, the Company used
cash in operating activities of $52,946,000; additionally, the Company used
$72,332,000 of cash for the construction of networks for the nine months ended
September 30, 1999. As of September 30, 1999, the Company had cash, cash
equivalents and short-term investments of $18,322,000 and its accumulated
deficit was $549,091,000. These factors among others may indicate that the
Company will be unable to continue as a going concern for a reasonable period of
time.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis, to comply with the terms and covenants of its
financing agreements, to obtain additional financing or refinancing as may be
required, and ultimately to attain profitability. Management is actively engaged
in several steps designed to enable the Company to meet the capital requirements
of its business, which include: continuing the Company's efforts to obtain
additional short- and long-term financing, such as that described in Note 5 of
the condensed consolidated financial statements, to fund growth and operations;
restructuring of the Company's balance sheet, which may adversely affect the
equity stake of the Company's common shares and the 7% Exchangeable Preferred
Securities of CellNet Funding LLC; streamlining costs by consolidating its
former Commercial Data Services group with other operating units and redeploying
those personnel appropriately; removing certain assets, such as wide area
network components, of its California broad deployment network and redeploying
such assets where they can be better utilized in other current operations; and
implementing efforts to reduce corporate expenditures.
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME, which requires that an
enterprise report, by major components and as a single total, the change in net
assets during the period from nonowner sources. Adoption of SFAS No. 130 did not
impact the Company's consolidated financial position, results of operations or
cash flows. The comprehensive net loss was $46,374,000 and $35,748,000 for the
three months ended September 30, 1999 and 1998, respectively. The comprehensive
net loss was $126,018,000 and $100,518,000 for the nine months ended
September 30, 1999 and 1998, respectively. The comprehensive net loss differs
from the net loss applicable to common stockholders by the net unrealized gain
or loss on short-term investments.
In 1998, the Company adopted SFAS 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.
The Company operates in one reportable segment: the design, development and
operation of its CellNet
4
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CELLNET DATA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION (CONTINUED)
wireless data communication system to provide automated network meter reading
and other services to the utility industry. The Company operates exclusively in
the United States.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which defines
derivatives, requires that all derivatives be carried at fair value, and
provides for hedging accounting when certain conditions are met. SFAS 133 is
effective for quarters of fiscal years beginning after June 15, 2000. The
Company has not fully assessed the implications of this new standard.
2. NET LOSS PER SHARE
Basic EPS for the periods presented is computed by dividing net loss by the
weighted average of common shares outstanding (excluding shares subject to
repurchase). Diluted EPS for all periods presented was computed the same as
basic EPS since all other potential dilutive securities (common stock subject to
repurchase, common stock options and warrants and mandatorily redeemable
preferred securities) are excluded as they are antidilutive.
3. CUSTOMER LINE OF CREDIT
In September 1999, one of CellNet's wholly-owned subsidiaries amended its
$40,000,000 term loan agreement (the "Term Loan") with one of its customers, to
provide additional borrowings of up to $31,500,000, bringing the total borrowing
capacity of the Term Loan to $71,500,000. As in the original Term Loan,
borrowings bear interest at 6.5% per annum and are secured by the subsidiary's
assets, contracts and leases. The Term Loan provides for monthly drawdowns.
Interest on the drawdowns is payable quarterly. The drawdowns are payable on
June 30, 2004. At September 30, 1999, the wholly-owned subsidiary had
outstanding drawdowns of $25,800,000 which are included in revolving credit
agreements in the condensed consolidated balance sheet.
4. COMMITMENTS AND CONTINGENCIES
In October 1996, Itron, one of CellNet's competitors, filed a complaint
against CellNet in the Federal District Court in Minnesota, alleging that
CellNet infringed an Itron patent which was issued in September 1996. Itron
sought a judgement for damages, attorneys' fees and injunctive relief. On
January 28, 1999, the Court ruled in favor of CellNet that, as a matter of law,
CellNet's system did not infringe the Itron patent. The Court also ruled in
favor of Itron that the Itron patent was valid against certain prior art. Itron
is appealing the Court's ruling. Consequently, CellNet is cross appealing the
validity issue. CellNet believes that the ultimate outcome of the lawsuit is not
expected to have a material adverse effect on CellNet's operating results,
financial condition and cash flows.
In April 1997, CellNet 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. CellNet sought an injunction, damages and other relief. On
November 2, 1998, the Court ruled that Itron's patent does not infringe upon
CellNet's Patent No. 4,783,623. CellNet filed an appeal of the Court's ruling.
5
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CELLNET DATA SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
5. SUBSEQUENT EVENT
On November 9, 1999 certain holders of the Company's 1997 Notes purchased
$10,000,000 of the Company's 15% Senior Secured Notes due November 30, 1999
("1999 Notes") in order to enable the Company to meet its short-term cash
requirements for the month of November. The 1999 Notes are secured by
substantially all of the assets of the Company, including the stock in
substantially all of its subsidiaries. All of the Company's subsidiaries other
than those holding the Company's interests in the existing projects for
AmerenUE, Kansas City Power & Light, and Puget Sound Energy, Inc. and those
holding the Company's interests in the international joint venture with Bechtel
Enterprises, Inc. have guaranteed the Company's obligations under the 1999
Notes. The purchasers of the 1999 Notes have no obligation to refinance the 1999
Notes when they become due. The purchasers of the 1999 Notes also have no
obligation to purchase additional notes or to otherwise loan or make funds
available to the Company in order to allow the Company to meet its cash
requirements for December 1999 and beyond (including the cash required to repay
principal and interest on the 1999 Notes). The purchasers of the 1999 Notes may
refinance the 1999 Notes, purchase additional notes or otherwise loan or make
available additional funds to the Company subject to mutual agreement between
the parties to do so, but no such agreement has yet been concluded or should be
assumed.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS SECTION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO, INFORMATION ABOUT CELLNET'S
EXPECTED WIRELESS DATA NETWORK DEPLOYMENTS AND OPERATIONS, ITS STRATEGY FOR
MARKETING AND DEPLOYING SUCH NETWORKS AND RELATED FINANCING ACTIVITIES, ITS
EXPECTED REVENUES, EXPENSES AND CAPITAL EXPENDITURES AND ITS ASSESSMENT OF
POTENTIAL YEAR 2000 ISSUES. CELLNET'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THE RESULTS ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS SET FORTH IN "RISK FACTORS" AND ELSEWHERE IN THIS REPORT.
OVERVIEW
CellNet 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 network meter reading services and to use the networks to support a
variety of non-utility applications. CellNet primarily uses a saturation
approach in its deployment of networks to provide network meter reading services
to existing utilities. CellNet, on a limited basis, has also used a broad
deployment approach to provide network meter reading services to other parties
including new power market participants. Under CellNet's saturation approach,
CellNet builds out its wide area network and local area network concurrently in
order to cover virtually 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 CellNet's broad
deployment approach, CellNet first deploys its wide area network 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 CellNet's
services and/or to concentrate their marketing efforts. As contracts for the
provision of network meter reading services are obtained, CellNet would build
out its local area network on an incremental basis as necessary to service those
customers or for advanced coverage of certain areas. Both the local area network
and wide area network 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, CellNet is also able to offer
(i) network meter reading services directly to energy consumers, to the extent
that the information is not being made available to them by their own utility or
energy service provider, (ii) network meter reading services which monitor
sub-meters for industrial and commercial customers which desire to monitor the
energy consumption of particular heating, ventilation and air conditioning
systems, individual manufacturing processes or pieces of equipment and
individual departments, and (iii) a range of non-utility wireless data
communication services for such applications such as monitoring facilities,
office equipment, parking meters and other equipment.
CellNet's business strategy has affected and will continue to affect its
financial condition and results of operations as follows:
COMPOSITION OF REVENUES
CellNet derives substantially all of its revenues from fees earned under
saturation deployment services agreements related to its wireless communications
networks. Under CellNet's existing services agreements with utilities, CellNet
receives monthly network meter reading services fees based on the number of
endpoint devices that are in revenue service during the applicable month.
7
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UNEVEN REVENUE GROWTH
The timing and amount of CellNet'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 CellNet's ability to
deploy and operate successfully its wireless communications networks for utility
and non-utility applications. New services agreements are expected to be
obtained on an irregular basis, and there may be prolonged periods during which
CellNet does not enter into any additional services agreements or other
arrangements. As a result, CellNet expects that its revenues will not grow
smoothly over time, but will increase unevenly as CellNet 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 Operating Performance--We Will
Not Earn Significant Revenues Unless Our Automated Meter Reading System Services
Achieve Broad Acceptance in the Utility Industry;--Since We Derive A Significant
Portion of Our Revenues from a Limited Number of Utilities, We Could Suffer A
Significant Decline In Revenues If We Fail to Continue Earning Revenue from Any
Individual Utility; and--If We Fail To Develop Non-Utility Services That Achieve
Commercial Acceptance, Our Ability to Achieve Future Growth Will Be
Significantly Impaired;--Our Operating Results Are Difficult To Predict Because
They Fluctuate Significantly."
UNCERTAINTY OF MARKET ACCEPTANCE
CellNet'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 network meter reading services to be
provided thereunder. CellNet's existing revenues principally arise from
established utilities. During the first nine months of 1999, approximately 96%
of CellNet's revenues were derived from its contracts with Kansas City Power &
Light, AmerenUE, Northern States Power Company and Puget Sound Energy, Inc.
During 1998, 92% of CellNet's revenues were derived from its contracts with
Kansas City Power & Light, AmerenUE and Northern States Power Company. The
utility industry is historically characterized by long purchasing cycles and
cautious decision making, and purchases of CellNet'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 CellNet'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, CellNet believes that
implementation of utility deregulation will ultimately accelerate the utility
decision-making process. CellNet believes that it will enter into additional
services contracts with other utilities and other parties including new power
market participants, as well as expand its contracts with current network
customers; however, if CellNet'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, CellNet is seeking
opportunities to provide its network meter reading services to other parties
including new power market participants. CellNet believes it is well positioned
to offer competitive advantages to established utilities and other parties
including new power market participants. CellNet has entered into several
contracts with new power market participants and others for the provision of
network meter reading services. However there can be no assurance that CellNet
will be able to enter into contracts covering a sufficient number of meters to
recoup its costs of deployment, on terms favorable to CellNet, or at all.
CellNet 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. For these reasons, CellNet's ability to obtain
financing for the capital expenditures associated with these contracts may be
limited, although CellNet 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 CellNet, reducing CellNet's costs. CellNet 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
8
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costs of network build-out and associated operating costs. There can also be no
assurance that the new power market participants or other parties will be
successful in capturing any significant share of the energy service market.
CellNet's long-term business plan contemplates the generation of future
revenues from non-utility services. CellNet believes its future ability to
service its indebtedness and to achieve profitability will be affected by its
success in generating revenues from such additional services. CellNet currently
has no services contracts which provide for the implementation of such services,
and CellNet has not yet deployed such services on a commercial scale. In
addition, unless CellNet is successful in deploying its wireless networks in
targeted service areas, CellNet 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
CellNet 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 network meter reading data obtained. CellNet 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. Network service revenues are not expected to exceed CellNet's capital
investments and expenses incurred to deploy such network for several years. As
of September 30, 1999, CellNet had approximately 4,881,000 meters under
long-term contracts and 2,800,000 meters under other agreements. 2,599,000
meters were in revenue service as of September 30, 1999. As additional segments
of CellNet's networks are installed and used by its customers for billing
purposes, CellNet expects to realize a corresponding increase in its network
service revenues. However, if CellNet 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
CellNet 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. CellNet has incurred substantial operating losses since its inception
and, as of September 30, 1999, had an accumulated deficit of $549.1 million.
CellNet does not expect significant revenues relative to anticipated operating
costs during 1999 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. CellNet does not expect
positive cash flow after capital expenditures from its network meter reading
services operations for several years. CellNet 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
Operating Performance--We Expect to Continue to Experience Significant Losses
For At Least the Next Several Years Because We Will Incur Network Deployment
Costs In Advance of Receiving Revenues From Services Offered Through the
Network. The Incurrence of Significant Expenses in Advance of Revenues Exposes
Us to a Higher Risk of Failure" and "--Since We Have a Significant Amount of
Debt and Preferred Stock with Substantial Payment Obligations, If We Fail to
Generate Sufficient Cash from Operations or Through Financing Efforts, Our
Business Will Fail."
INTEREST INCOME
CellNet has earned interest income on short-term investments of the proceeds
of its financing activities. CellNet 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.
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RESULTS OF OPERATIONS FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998
REVENUES
Revenues for the three months ended September 30, 1999 and 1998 were
$6.6 million and $3.5 million, respectively. During the three months ended
September 30, 1999, AmerenUE, Kansas City Power & Light, Puget Sound
Energy, Inc. and Northern States Power Company and accounted for approximately
43%, 20%, 17% and 16% of CellNet's revenues, respectively. During the three
months ended September 30, 1998, AmerenUE, Kansas City Power & Light and
Northern States Power Company accounted for approximately 47%, 28% and 15% of
CellNet's revenues, respectively. The increase in revenues from period-to-period
resulted primarily from increases in network service revenues, consistent with
the increase in the number of installed, revenue-generating meters. CellNet's
network service revenues for the three months ended September 30, 1999 and 1998
were $6.2 million and $2.9 million, respectively.
Revenues for the nine months ended September 30, 1999 and 1998 were
$17.3 million and $8.6 million, respectively. During the nine months ended
September 30, 1999, AmerenUE, Kansas City Power & Light, Northern States Power
Company and Puget Sound Energy, Inc. accounted for approximately 42%, 21%, 18%
and 15% of CellNet's revenues, respectively. During the first nine months of
1998, AmerenUE, Kansas City Power & Light and Northern States Power Company
accounted for 50%, 31% and 11% of CellNet's revenues, respectively. The increase
in revenues from period-to-period resulted primarily from increases in network
service revenues, consistent with the increase in number of installed, revenue-
generating meters. CellNet's network service revenues for the nine months ended
September 30, 1999 and 1998 were $15.7 million and $7.3 million, respectively.
CellNet 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
network meter reading services provided. Revenues are expected to increase as
CellNet continues to install its networks, the networks or portions thereof
become operational, and its clients begin billing their own customers or begin
using the network meter reading services provided. The Company expects to have
product sales associated with certain network meter reading deployments. Such
sales could be material to CellNet's revenues, although no assurance can be
given in this regard. 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 nine month ended September 30, 1999 are not
reliable indicators of revenues that might be expected in the future.
COST OF REVENUES
For the three and nine months ended September 30, 1999 and 1998, cost of
revenues primarily consisted of network operations costs. Cost of revenues was
$11.2 million and $9.2 million for the three months ended September 30, 1999 and
1998, respectively. Cost of revenues was $27.2 million and $21.1 million for the
nine months ended September 30, 1999 and 1998, respectively. The increase in
cost of revenues from period-to-period was driven by increasing costs of
providing network services to support the roll-out of new and existing networks.
Cost of network operations consists of labor costs and associated costs
necessary for network monitoring operations, network deployment management and
customer training. Cost of network operations also includes the increased
installation, applications and radio frequency engineering staff to support
anticipated additional utility contracts. Network operations do not currently
generate a profit as CellNet has not yet achieved a scale of services sufficient
to cover network costs. CellNet will incur significant 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.
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OPERATING EXPENSES
Operating expenses, consisting of research and development, marketing and
sales, general and administrative costs and depreciation and amortization
expenses, were $23.1 million and $18.5 million for the three months ended
September 30, 1999 and 1998, respectively. Operating expenses were
$65.6 million and $56.7 million for the nine months ended September 30, 1999 and
1998, respectively. The increase in operating expenses on a period-to-period
basis is attributable to CellNet's rapid growth and to increasing marketing and
sales, general and administrative and depreciation and amortization
expenditures, partially offset by decreased research and development
expenditures. CellNet expects to moderately reduce its spending on research and
development activities during 1999. Marketing and sales costs are expected to
increase over current levels as CellNet continues its efforts to sign new
service agreements. General and administrative costs are expected to increase
over time in line with CellNet's expected growth and are expected to increase
moderately. Depreciation and amortization expense is expected to grow as a
result of increased additions to networks, property and leasehold improvements.
RESEARCH AND DEVELOPMENT
Research and development expenses are attributable largely to continuing
system software, firmware and equipment developments costs, prototype testing,
personnel costs, consulting fees and supplies. Research and development costs
are expensed as incurred. CellNet's networks include certain software
applications which are integral to their operation. The costs to develop such
software have not been capitalized as CellNet believes its software development
is essentially completed when technological feasibility of the software is
established and/or development of the related network hardware is complete.
Research and development expenses were $6.5 million and $7.1 million for the
three months ended September 30, 1999 and 1998, respectively. Research and
development expenses were $20.0 million and $22.6 million for the nine months
ended September 30, 1999 and 1998, respectively. The decrease in research and
development spending in 1999 over 1998 primarily reflects moderate reductions in
CellNet's engineering staff. CellNet expects that research and development
expenses will continue to decrease moderately in the near term.
MARKETING AND SALES
Marketing and sales expenses consist principally of personnel costs,
including commissions paid to sales and marketing personnel, travel,
advertising, trade show and other promotional costs. Marketing and sales
expenses were $3.3 million and $2.9 million for the three months ended
September 30, 1999 and 1998, respectively. These expenses have increased
moderately from period-to-period due to additions in marketing and sales staff
during the period. Marketing and sales expenses were $9.2 million and
$8.8 million for the nine months ended September 30, 1999 and 1998,
respectively. These expenses have increased slightly in 1999 over 1998 due to
additions in marketing and sales staff, partially offset by a reduction in
expenditures for CellNet's advertising programs. CellNet expects marketing and
sales expenses to increase moderately in the remainder of 1999, as CellNet
continues its efforts to sign new service agreements.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include compensation paid to general
management, administrative personnel costs, travel and communications and other
general administrative expenses, including fees for professional services.
General and administrative expenses for the three months ended September 30,
1999 and 1998 were $5.2 million and $3.8 million, respectively. General and
administrative expenses were $14.7 million and $11.9 million for the nine months
ended September 30, 1999 and 1998, respectively. The period-to-period increase
in these expenses in 1999 over 1998 resulted from an increase in expenditures
for certain employee compensation. CellNet expects general and administrative
expenses to increase over time in line with expected growth.
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DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $8.1 million and $4.8 million for
the three months ended September 30, 1999 and 1998, respectively. For the nine
months ended September 30, 1999 and 1998, depreciation and amortization expense
was $21.7 million and $13.4 million, respectively. Depreciation and amortization
expense is attributable to CellNet's networks, including both equipment
manufactured by CellNet 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 and property and leasehold
improvements period-over-period.
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATE
CellNet accounts for its investment in BCN, which began operations in 1997,
using the equity method. In the three months ended September 30, 1999 and 1998,
CellNet recognized $1.6 million and $815,000 as its share of BCN's losses,
respectively. In the nine months ended September 30, 1999 and 1998, CellNet
recognized $3.7 million and $1.8 million as its share of BCN's losses,
respectively. The increase in equity in net loss of unconsolidated affiliate
from period-to-period reflects increases in BCN's expenditures period-to-period.
CellNet expects to recognize increased losses in the future from its share of
BCN's losses. CellNet has no ongoing fixed capital commitment and as such
recognizes losses only to the extent of CellNet's cash contribution and any
committed capital contributions.
INTEREST INCOME AND EXPENSE
Prior to June 1995, CellNet funded its liquidity needs primarily from the
issuance of equity securities. In June and November 1995, CellNet issued and
sold a total of $325.0 million aggregate principal amount at maturity of
CellNet'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, CellNet completed an initial public offering in which it
sold 5,000,000 shares at $20 per common share for aggregate net proceeds of
$92.2 million. In connection with the initial public offering, CellNet also
received $1.2 million in proceeds from the cash exercise of the 1995 warrants
(the "Warrant Exercise") for 495,918 common shares. In addition, on October 2,
1996, CellNet 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, CellNet 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 CellNet's 1995 Notes.
In May 1998, a new subsidiary of CellNet, CellNet Funding, LLC ("Funding")
completed an offering of Exchangeable Preferred Securities Mandatorily
Redeemable 2010 for net proceeds of $106.0 million. The restricted cash at
September 30, 1999 of approximately $12.8 million includes the proceeds of the
offering which are designated for the payment of cash dividends on the Preferred
Securities through June 1, 2001. Funding invested the restricted cash in U.S.
Treasury strips ("Treasury Strips") which was placed in escrow upon the closing
of the offering of Preferred Securities.
In November 1998, two wholly-owned subsidiaries of CellNet each entered into
a revolving line of credit agreement ("the Revolving Credit Agreements") with a
group of banks, which provide for borrowings of $60.0 million and
$15.0 million, respectively, through December 31, 2007, at which time the
Revolving Credit Agreements expire. On September 30, 1999 borrowings of
$44.0 million and $12.6 million were outstanding, respectively, under these
Revolving Credit Agreements. Borrowings are secured by the wholly-owned
subsidiaries' assets, contracts and leases. Borrowings bear interest at the
wholly-owned
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subsidiaries' option at various rates based on the lead bank's prime rate, or
margins above the Federal Funds rate or the London Interbank Offer Rate (LIBOR).
The wholly-owned subsidiaries pay a commitment fee on the unused portion of
their available borrowings under their respective Revolving Credit Agreements.
The Revolving Credit Agreements require the wholly-owned subsidiaries to
enter into Interest Hedge Agreements (as defined) to reduce the impact of
changes in the variable interest rates on borrowings. The Revolving Credit
Agreements require the wholly-owned subsidiaries to hedge not less than 33% of
the outstanding principal amount of their total outstanding borrowings. At
September 30, 1999, the wholly-owned subsidiaries each had an interest rate swap
agreement outstanding with a commercial bank with total notional principal
amounts of $6.0 million and $24.0 million, respectively. The interest rate swap
agreements effectively exchange the wholly-owned subsidiaries' interest rate
exposure on $6.0 million and $24.0 million of outstanding borrowings to fixed
rates of 8.255% and 8.63%, respectively. The interest rate swaps mature on
March 11, 2002. CellNet is exposed to credit loss in the event of nonperformance
by the other party to the interest rate swap agreements. However, CellNet does
not anticipate nonperformance by the counterparty.
One of CellNet's wholly-owned subsidiaries entered into a term loan
agreement (the "Term Loan") with one of its customers, which provides for
borrowings up to $71.5 million. Borrowings bear interest at 6.5% per annum and
are secured by the subsidiary's assets, contracts and leases. The Term Loan
provides for monthly drawdowns. Interest on the drawdowns is payable quarterly.
The drawdowns are payable on June 30, 2004. At September 30, 1999, the
wholly-owned subsidiary had outstanding drawdowns of $25.8 million.
CellNet has earned interest income on the invested proceeds from these
financings. CellNet 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 the increased accretion of a larger original issue discount balance
from the issuance of the 1997 Notes, and from interest and commitment fees
incurred from the Revolving Credit Agreements, Interest Hedge Agreements and the
Term Loan.
Interest income has been and will continue to be received by CellNet from
short-term investment of proceeds from the issuance of equity and debt
securities pending the use of such proceeds by CellNet for capital expenditures
and operating and other expenses. Interest income is expected to be variable
over time as proceeds from the issue and sale of additional equity and debt
securities are received and as funds are used by CellNet in its business.
Interest income was $535,000 and $2.2 million for the three months ended
September 30, 1999 and 1998, respectively. Interest income was $2.4 million and
$6.1 million for the nine months ended September 30, 1999 and 1998,
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 CellNet's interest expense includes such
accretion. Interest expense on the Revolving Credit Agreements is generally
payable quarterly or upon the maturity date of the advance if less than
90 days. Commitment fees on the unused portion of the Revolving Credit
Agreements are paid quarterly. Interest under the Interest Hedge Agreements is
received and paid quarterly. Interest expense on the Term Loan is generally
payable quarterly.
Interest expense, net of capitalized interest, increased to $15.5 million
from $10.9 million for the three months ended September 30, 1999 over the 1998
period. Interest expense, net of capitalized interest, increased to
$43.1 million from $32.6 million for the nine months ended September 30, 1999
and 1998, respectively. The period-to-period increase in interest expense
primarily resulted from increases in the accretion on the 1997 Notes and
interest incurred on the Revolving Credit Agreements, Interest Hedge Agreements
and the Term Loan.
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PROVISION FOR INCOME TAXES
CellNet has not provided for or paid federal income taxes due to CellNet's
net losses. A nominal provision has been recorded for various state minimum
income and franchise taxes.
At December 31, 1998, CellNet had net operating loss carryforwards of
approximately $289.0 million and $149.0 million available to offset future
federal and state taxable income, respectively. Such federal carryforwards
expire in 2001 through 2013. Such state carryforwards expire in 1999 through
2013. 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. Based upon CellNet's history of operating
losses and the expiration dates of the loss carryforwards, CellNet has recorded
a valuation allowance to the full extent of its net deferred tax assets.
DIVIDENDS AND ACCRETION ON PREFERRED SECURITIES OF SUBSIDIARY
The net proceeds from the placement of the Preferred Securities in
May 1998, after offering costs, was $106.0 million and will fully accrete to the
face value of $110.0 million on June 1, 2010. The dividend is paid quarterly in
arrears each March 1, June 1, September 1 and December 1, and commenced
September 1, 1998. Dividend expense was $1.9 million in both the three months
ended September 30, 1999 and 1998, respectively. Accretion of the Preferred
Securities was $82,000 in both the three months ended September 30, 1999 and
1998, respectively. Dividend expense for the nine months ended September 30,
1999 and 1998 was $5.8 million and $2.8 million, respectively. Accretion on the
Preferred Securities for the nine months ended September 30, 1999 and 1998 was
$246,000 and $121,000, respectively.
IMPACT OF THE YEAR 2000
Many currently installed computer systems, software products and electronic
products are coded to accept only two-digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, during 1999 CellNet,
its suppliers and customers and its potential suppliers and customers, may need
to upgrade, repair or replace certain equipment, computer systems or software to
ensure that its operations will not be adversely impacted by system failures
related to "Year 2000" noncompliance.
CellNet is in the process of conducting an internal and external review of
all of its systems and contacting all material software and other suppliers to
determine any major areas of exposure of its systems to Year 2000 issues. As a
result of the internal review to date, CellNet believes that its wireless data
networks, through which it provides network meter reading and other services to
its customers, are or will be Year 2000 compliant by January 1, 2000. As a
result of the external review to date, CellNet believes that its material
suppliers will be Year 2000 compliant by the year 2000.
To date, CellNet has spent an immaterial amount and does not expect to spend
a material amount to review and remedy Year 2000 compliance problems. Although
CellNet believes that its wireless data networks, through which it provides
network meter reading and other services to its customers, are or will be Year
2000 compliant, failure to provide Year 2000 compliant business solutions to its
customers or to receive such business solutions from its suppliers could result
in liability to CellNet or otherwise have a material adverse effect on CellNet's
business, operating results, financial condition, cash flows and its ability to
service its indebtedness. Furthermore, CellNet believes that the purchasing
patterns of its customers and potential customers may be affected by Year 2000
issues as companies expend significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase products and services such as those
offered by CellNet, which could result in a material adverse effect on CellNet's
business, operating results, financial condition, cash flows and its ability to
service indebtedness. See "Risk Factors That May Affect Future Operating
Performance-Our Business Could by Affected by Year 2000 Issues."
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LIQUIDITY AND CAPITAL RESOURCES
CellNet 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 the related sales and marketing and general
and administrative expenses. Historically, CellNet has satisfied its liquidity
requirements primarily through external financings, including private placements
of equity and debt securities and interest income derived from the investment of
the proceeds of its financing activities.
In the nine months ended September 30, 1999 and 1998, net cash used for
CellNet's operating activities totaled $52.9 million and $43.0 million,
respectively. Net cash used for operating activities resulted primarily from
cash used to fund net operating losses.
In the nine months ended September 30, 1999 and 1998, net cash used for
CellNet's investing activities totaled $19.5 million and $111.3 million,
respectively. CellNet's investing activities consisted primarily of purchases of
network components and inventory, the construction and installation of networks,
purchases of property, plant and equipment and purchases, sales and maturities
of short-term investments. In the nine months ended September 30, 1999, net
proceeds from the sales and maturities of short-term investments were $46.9 and
were used to fund operating activities. For the nine months ended September 30,
1998, purchases of short-term investments exceeded proceeds from the sale and
maturities of short-term investments by $6.6 million.
In the nine months ended September 30, 1999 and 1998, net cash provided by
CellNet's financing activities totaled $51.5 million and $106.3 million,
respectively. Cash provided in 1999 resulted primarily from additional
borrowings of $51.1 million from the Revolving Credit Agreements and the Term
Loan.
As of September 30, 1999, CellNet had cash, cash equivalents and short-term
investments of $18.3 million. As of December 31, 1998, CellNet had cash, cash
equivalents and short-term investments totaling $86.2 million. The decrease of
$67.9 million during the first nine months of 1999 resulted from operating costs
and the development and construction of CellNet's wireless communications
networks, offset by proceeds from the Revolving Credit Agreements and Term Loan
of $51.1 million.
Deployments of CellNet's wireless communications networks will require
substantial additional capital. CellNet has made $72.3 million in capital
expenditures in the first nine months of 1999 for saturation and broad
deployment network installations, and anticipates making an additional
$30.8 million in such capital expenditures during the remaining three months of
1999. The exact amount of such expenditure will depend, in part, upon the amount
of network meter reading and other services contracted for. CellNet may make
additional capital expenditures in connection with the installation of new
networks, expansion of existing networks and /or an acceleration in anticipated
network installation schedules if we are able to raise additional capital to
fund the deployment of our network. 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. CellNet 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 CellNet obtains new
services agreements or enters into other arrangements for the installation of
networks, and that CellNet will require significant amounts of additional
capital from external sources. Sources of additional capital for CellNet and its
subsidiaries, if available to us, may include project or conventional bank
financing, including financing provided by utilities to finance the construction
of networks being built out primarily for them, public and private offerings of
debt and equity securities and cash generated from operating activities. We have
been unsuccessful in securing additional capital necessary to fund the continued
operation and growth of our business. See "Risk Factors that May Affect Future
Operating Results--We Currently Require a Substantial Amount of Additional
Capital to
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Finance Our Networks and Our Operations and a Failure to Raise Sufficient
Capital will Cause our Business to Suffer and Fail."
CellNet expects that a substantial portion of the financing of its
individual network deployments will be at the subsidiary level on a project
basis. CellNet 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. CellNet believes 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. CellNet expects that operating activities will
require the consumption of a substantial amount of cash resources for the next
several years, which may not be available to us on satisfactory terms or at all.
See "Risk Factors that May Affect Future Operating Results--We Currently Require
a Substantial Amount of Additional Capital to Finance Our Networks and Our
Operations and a Failure to Raise Sufficient Capital will Cause our Business to
Suffer and Fail."
As of November 12, 1999, CellNet had cash, cash equivalents and short-term
investments of $6.3 million. CellNet believes that existing cash, cash
equivalents, short-term investments, anticipated interest income, and other
revenues will be sufficient to meet its cash requirements to fund operations
through the end of November 1999. We have been unable to raise anticipated
project financing and equity capital which would have enabled us to meet our
projected cash requirements through June 2000. Our financial advisors have
advised us that potential investors are reluctant to invest in CellNet given the
amount of debt and 7% Exchangeable Preferred Securities on our balance sheet and
the restrictive terms of those instruments.
On November 9, 1999 certain holders of CellNet's 1997 Notes purchased
$10,000,000 of the Company's 15% Senior Secured Notes due November 30, 1999
("1999 Notes") in order to enable CellNet to meet its short-term cash
requirements for the month of November. The 1999 Notes are secured by
substantially all of the assets of CellNet, including the stock in substantially
all of its subsidiaries. All of CellNet's subsidiaries other than those holding
CellNet's interests in the existing projects for AmerenUE, Kansas City Power &
Light, and Puget Sound Energy, Inc. and those holding CellNet's interests in the
international joint venture with Bechtel Enterprises, Inc. have guaranteed
CellNet's obligations under the 1999 Notes. The purchasers of the 1999 Notes
have no obligation to refinance the 1999 Notes when they become due. The
purchasers of the 1999 Notes also have no obligation to purchase additional
notes or to otherwise loan or make funds available to CellNet in order to allow
CellNet to meet its cash requirements for December 1999 and beyond (including
the cash required to repay principal and interest on the 1999 Notes). The
purchasers of the 1999 Notes may refinance the 1999 Notes, purchase additional
Notes, or otherwise loan or make available additional funds to CellNet, subject
to mutual agreement between the parties to do so, but no such agreement has yet
been concluded or should be assumed.
CellNet is actively engaged in several steps designed to enable us to meet
the capital requirements of our business, which include:
- Continuing our efforts to obtain additional short- and long-term
financing, such as that described in the preceding paragraph, to fund
growth and operations.
- A restructuring of our balance sheet (which may adversely affect the
equity stake of our common shares and the 7% Exchangeable Preferred
Securities of CellNet Funding LLC ("CellNet Funding")).
- Streamlining costs by consolidating our former Commercial Data Services
group with our other operating units and redeploying those personnel
appropriately.
- Removing certain assets, such as wide area network components, of our
California broad deployment network and redeploying such assets where they
can be better utilized in other current operations.
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- Implementing efforts to reduce corporate expenditures.
There can be no assurance that we will be successful in our efforts to
obtain the financing necessary to fund our growth and operations or in our
efforts to streamline costs and reduce corporate expenditures. If we fail in our
efforts to reduce our capital requirements and to raise sufficient financing,
our business and operations will suffer and fail.
CellNet 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 CellNet or, if
available, that it can be obtained on terms acceptable to CellNet and within the
limitations contained in the Indenture or that may be contained in any
additional financing arrangements. The Indenture governing the 1997 Notes
contained certain covenants to incur additional indebtedness. Future financings
may be dilutive to existing stockholders. Failure to obtain such financing could
result in a delay or abandonment of some or all of CellNet's development and
expansion plans and expenditures, which could have a material adverse effect on
its business and the value of its Common Stock and the Preferred Securities of
CellNet Funding.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
WE CURRENTLY REQUIRE A SUBSTANTIAL AMOUNT OF ADDITIONAL CAPITAL TO FINANCE OUR
NETWORKS AND OUR OPERATIONS AND A FAILURE TO RAISE SUFFICIENT CAPITAL IN THE
NEAR FUTURE WILL CAUSE OUR BUSINESS TO SUFFER AND FAIL.
We currently require substantial additional funds to maintain current
operations, to develop, commercially deploy and expand our networks, and to fund
operating losses. If we are not able to raise sufficient funds, our business
will suffer and could fail. As of November 12, 1999, we had $6.3 million in
cash, cash equivalents and short-term investments. Although we obtained
$10 million from the sale of the 1999 Notes on November 9, 1999, this amount
will only cover our immediate short-term capital needs through the end of
November 1999. We will need to raise a substantial amount of additional capital
to fund operations for the remainder of 1999 and expect to continue to require
substantial amounts of additional capital in the future. We currently require
additional equity or debt financing to fund our working capital and other
requirements. Our financial advisors have advised us that potential investors
are reluctant to invest in CellNet given the amount of debt and 7% Exchangeable
Preferred Securities on our balance sheet and the restrictive terms of those
instruments. If we are able to issue equity securities, the ownership percentage
of our stockholders would be reduced, and the new equity securities may have
rights, preferences or privileges senior to those of existing holders of our
common stock.
In addition, if we are unable to obtain funds necessary to meet required
payments on our indebtedness, we could be in default under the terms of the
agreements governing our indebtedness. If this happens, the holders of such
indebtedness would have certain enforcement rights, including the right to
accelerate such debt, the right to foreclose on assets securing such debt and
the right to commence an involuntary bankruptcy proceeding against us.
BECAUSE WE HAVE A SIGNIFICANT AMOUNT OF DEBT AND PREFERRED STOCK WITH
SUBSTANTIAL PAYMENT OBLIGATIONS, IF WE FAIL TO GENERATE SUFFICIENT CASH FROM
OPERATIONS OR THROUGH FINANCING EFFORTS, OUR BUSINESS WILL FAIL.
We have substantial outstanding indebtedness and preferred stock which have
substantial cash interest and dividend requirements. We intend to incur
substantial additional indebtedness to finance operations and to install
networks. As a result, we will have a significant debt and preferred stock
balance and substantial related payment obligations which will require
significant payments of cash. If we are unable to
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generate significant cash from operations or from debt or equity offerings, we
will not be able to satisfy these obligations. Our debt balance and related debt
service includes the following:
- We have $654.1 million in aggregate principal amount due at maturity of
14% Senior Discount Notes due 2007 which we issued in 1997. We will be
required to pay cash interest on the 1997 Notes commencing April 1, 2003
and repay the 1997 notes on October 1, 2007.
- In May 1998, CellNet Funding LLC, our wholly-owned finance subsidiary,
completed its offering of preferred securities, which will fully accrete
to a face value of $110.0 million on June 1, 2010. The preferred
securities bear a cumulative dividend at the rate of 7% per annum. Funding
is required to pay quarterly dividends in cash on the preferred securities
through June 1, 2001, and thereafter, in cash or shares of our common
stock, at the option of Funding. The preferred securities are subject to
mandatory redemption on June 1, 2010 at a redemption price of 100% of the
liquidation preference of the Preferred Securities, plus accrued and
unpaid dividends, if any. We have provided the holders of the preferred
securities certain guarantees of payment of dividends, distributions, and
redemptions.
- In November 1998, two of our wholly-owned subsidiaries each entered into
the revolving credit agreements with a group of banks, which provide for
borrowings of $60.0 million and $15.0 million, respectively, through
December 31, 2007, at which time the revolving credit agreements expire.
Borrowings are secured by the wholly-owned subsidiaries' assets, contracts
and leases. Borrowings bear interest at the wholly-owned subsidiaries'
option at various rates based on the lead bank's prime rate, or margins
above the federal funds rate or LIBOR. At September 30, 1999, the wholly-
owned subsidiaries had outstanding advances totaling $56.6 million.
- One of our wholly-owned subsidiaries entered into a term loan agreement
with one of its customers, which provides for borrowings of up to
$71.5 million. Borrowings bear interest at 6.5% per annum and are secured
by the subsidiary's assets, contracts and leases. The Term Loan provides
for monthly drawdowns. Interest on the drawdowns is payable quarterly. The
drawdowns are payable on June 30, 2004. At September 30, 1999, the
wholly-owned subsidiary had outstanding drawdowns of $25.8 million.
On November 9, 1999 certain holders of CellNet's 1997 Notes purchased
$10,000,000 of the Company's 15% Senior Secured Notes due November 30, 1999
("1999 Notes") in order to enable CellNet to meet its short-term cash
requirements for the month of November. The 1999 Notes are secured by
substantially all of the assets of CellNet, including the stock in substantially
all of its subsidiaries. All of CellNet's subsidiaries other than those holding
CellNet's interests in the existing projects for AmerenUE, Kansas City Power &
Light, and Puget Sound Energy, Inc. and those holding CellNet's interests in the
international joint venture with Bechtel Enterprises, Inc. have guaranteed
CellNet's obligations under the 1999 Notes. The purchasers of the 1999 Notes
have no obligation to refinance the 1999 Notes when they become due. The
purchasers of the 1999 Notes also have no obligation to purchase additional
notes or to otherwise loan or make funds available to CellNet in order to allow
CellNet to meet its cash requirements for December 1999 and beyond (including
the cash required to repay principal and interest on the 1999 Notes). The
purchasers of the 1999 Notes may refinance the 1999 Notes, purchase additional
notes, or otherwise loan or make available additional funds to CellNet subject
to mutual agreement between the parties to do so, but no such agreement has yet
been concluded or should be assumed.
Our ability to meet our debt and preferred stock payment obligations will
depend upon achieving significant and sustained growth in our cash flow. Our
ability to generate such cash flow is subject to a number of risks and
contingencies, including:
- we may not obtain a sufficient number of new services contracts on terms
favorable to us;
- network installations may not be completed on a timely basis;
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- revenues may not be generated quickly enough to meet our operating costs
and debt service obligations;
- the operating and/or capital costs associated with the installation and
maintenance of our networks could be higher than projected;
- our wireless systems could experience performance problems;
- the adoption of our services could be less widespread than anticipated.
As a result, our operations may not generate cash flow sufficient to meet
these obligations. If that happens, we will have to take actions which could
adversely affect our business, such as to reduce or delay planned capital
expenditures, sell assets, restructure or refinance our indebtedness or seek
additional equity capital, which we may be unable to do. In particular, there is
a risk that we would be unable, if needed, to refinance our senior discount
notes prior to the date cash interest payments become due and payable or at
their maturity date. Such inability to refinance the senior discount notes could
result in cross-defaults under other indebtedness, our preferred stock and the
preferred securities of our subsidiary. If this happens, 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 us.
In addition, our financial advisors have advised us that potential investors
are reluctant to invest in CellNet given the amount of debt and 7% Exchangeable
Preferred Securities on our balance sheet and the restrictive terms of those
instruments.
A RESTRUCTURING OF OUR BALANCE SHEET IS LIKELY TO BE NECESSARY TO ATTRACT THE
CAPITAL WE NEED; SUCH A RESTRUCTURING MAY ADVERSELY AFFECT THE EQUITY STAKE OF
OUR COMMON SHARES AND THE 7% EXCHANGEABLE PREFERRED SECURITIES OF CELLNET
FUNDING.
A restructuring of our balance sheet is likely to be necessary to attract
the capital we need; such a restructuring may adversely affect the equity stake
of our common shares and the 7% Exchangeable Preferred Securities of CellNet
Funding. A restructuring could result in the issuance of debt or equity with
rights senior to the Common Stock in the event of liquidation. In addition, a
restructuring could substantially reduce the current stockholders' ownership in
CellNet.
WE WILL NOT EARN SIGNIFICANT REVENUES AND THUS OUR BUSINESS COULD FAIL UNLESS
OUR AUTOMATED METER READING SYSTEM SERVICES ACHIEVE BROAD ACCEPTANCE IN THE
UTILITY INDUSTRY.
We will not earn significant revenues and thus our business could fail
unless a significant number of utilities, new power market participants and
their customers decide to adopt and use our network meter reading and other
services. We are exposed to the risk of a slow rate of adoption of our service
by customers due to the historic nature of the utility industry. The utility
industry historically has been slow and deliberate in making decisions to adopt
new technology such as our services. Utilities can take up to several years to
complete a major decision to adopt new technology because the decision-making
process involves multiple stages. As a result of this lengthy decision-making
process, only a limited number of utilities have purchased our services to date,
and the utility industry may be slow to adopt our services, if such adoption
occurs at all. In the event we do not achieve sufficient financing, utilities
may be more reluctant to purchase our services.
SINCE WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES FROM A LIMITED NUMBER OF
UTILITIES, WE COULD SUFFER A SIGNIFICANT DECLINE IN REVENUES IF WE FAIL TO
CONTINUE EARNING REVENUE FROM ANY INDIVIDUAL UTILITY.
We currently derive almost all of our revenues from long-term services
contracts with a limited number of established utilities. Accordingly, if any of
these or other utilities that account for a significant portion of our revenues
decides to significantly reduce the level of our services, our revenue levels
and our business would suffer. During the nine months ended September 30, 1999,
96% of our revenues were derived from our contracts with Kansas City Power &
Light, AmerenUE, Northern States Power Company and Puget Sound Energy, Inc.
During 1998, 92% of our revenues were derived from our contracts with Kansas
City Power & Light, AmerenUE and Northern States Power Company.
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IF WE FAIL TO DEVELOP NON-UTILITY SERVICES THAT ACHIEVE COMMERCIAL ACCEPTANCE,
OUR ABILITY TO ACHIEVE FUTURE GROWTH WILL BE SIGNIFICANTLY IMPAIRED.
We plan to generate revenues in the future from non-utility services as part
of our long-term business plan. If we fail to develop these services or if these
services fail to achieve commercial acceptance, our prospects for future growth
will be significantly impaired. These potential non-utility services may include
remote status monitoring of facilities, office equipment, parking meters and
other equipment. We currently have no contracts to deploy these non-utility
services on a commercial scale. If we are not able to widely deploy our
networks, we will not be able to develop these services. In addition, if
developed, these services may not achieve market acceptance.
SINCE WE DEPEND ON THIRD PARTIES TO PENETRATE NEW MARKETS, WE WILL NOT ACHIEVE
SIGNIFICANT GROWTH IF WE FAIL TO DEVELOP RELATIONSHIPS WITH THESE THIRD
PARTIES.
We believe that our success in penetrating markets for utility and
non-utility applications of our network will depend in large part on our ability
to develop and maintain relationships with leading companies. Our ability to
penetrate new markets and gain access to new customers would be impaired without
forming relationships with such leading companies. These relationships will
enable us to expand existing markets, enter new markets and access certain
customers that we cannot otherwise reach economically by ourselves. We are
currently investing, and plan to continue to invest, significant resources to
develop these relationships.
WE EXPECT TO CONTINUE TO EXPERIENCE SIGNIFICANT LOSSES FOR AT LEAST THE NEXT
SEVERAL YEARS BECAUSE WE WILL INCUR NETWORK DEPLOYMENT COSTS IN ADVANCE OF
RECEIVING REVENUES FROM SERVICES OFFERED THROUGH THE NETWORK. THE INCURRENCE
OF SIGNIFICANT EXPENSES IN ADVANCE OF REVENUES EXPOSES US TO A HIGHER RISK OF
FAILURE.
We expect to continue to incur significant operating losses for at least the
next several years because we will incur significant network deployment costs
before we receive revenues from the services we offer using the network. We are
exposed to a greater risk of failure because of the incurrence of significant
expense in advance of revenues if we are not able to make up this shortfall. We
expect that our networks will be installed before fixed endpoints are in revenue
service and are generating revenues adequate enough to cover the costs of
network construction and associated operating costs. The installation of each
network covering an entire service area generally will require two to four years
after a services contract has been signed. Service revenues from our networks
are not expected to exceed our capital investments and expenses incurred to
deploy and operate such networks for several years.
DELAYS IN, AND INCREASED COSTS ASSOCIATED WITH, THE CONSTRUCTION OF OUR NETWORKS
MAY ADVERSELY AFFECT OUR ABILITY TO ACHIEVE PROFITABILITY OR POSITIVE CASH
FLOW.
We do not begin to receive initial recurring revenues under a services
contract until portions of the network become operational. As each portion of
the network becomes operational, we will receive revenues associated with only
the operational portion of the network. Accordingly, delays or difficulties in
the network installation process and in making a network operational will delay
our ability to earn revenue and increase deployment costs.
In addition, we have in the past and may in the future incur costs in the
construction of our networks that exceeds our budgets. The cost of network
deployments varies based upon a wide variety of factors, including:
- radio frequency characteristics,
- the size of a service territory and density of the fixed endpoints within
such territory,
- cost of site leases,
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- the nature and sophistication of services being provided,
- the costs of acquiring radio frequencies,
- governmental approvals costs and fees, and
- local labor rates and other economic factors.
If one or more of these network construction costs exceed our budget, our
ability to achieve profitability or positive cash flow would be impaired.
OUR OPERATING RESULTS ARE DIFFICULT TO PREDICT BECAUSE THEY WILL FLUCTUATE
SIGNIFICANTLY.
Our operating results will be difficult to predict because of significant
fluctuations which could cause our stock price to decline. Factors that will
cause variations in our operating results include:
- the rate at which established utilities, other utility industry
participants and utility customers enter into new services contracts;
- capital expenditures and other costs relating to the expansion of
operations;
- the introduction of new services by us or our competitors and the mix of
services sold;
- pricing changes and new service introductions by us and our competitors
and prices charged by suppliers;
- the effects of governmental regulations and regulatory changes;
- industry-specific conditions in the utility industry;
- the effect of certain pricing, service or marketing decisions; and
- the outcome of strategic relationships.
Any of these factors could have a substantial negative impact on our
operating results in any given quarter and accordingly, our stock price could
decline.
WE EXPECT THAT SUBSTANTIAL AND INCREASING COMPETITION WILL MAKE IT MORE
DIFFICULT FOR US TO SIGN NETWORK SERVICES CONTRACTS FOR UTILITY AND
NON-UTILITY APPLICATIONS.
Electronics, communications and utility product companies are beginning to
develop various wireless network meter reading systems as a result of the
deregulation of the electric utility industry and the potential market for other
applications once a common infrastructure is in place. A number of these systems
currently compete, and others may in the future compete, with our system. If we
do not successfully distinguish our services as superior to our competitors, we
will fail to achieve growth and earn sufficient revenue. Deregulation will
likely cause competition to increase. We believe that at this time our most
significant direct competitor in the marketplace is Itron, an established
manufacturer and seller of hand-held and drive-by automated meter reading
equipment for utilities. Itron is currently providing to customers its
Genesis-TM- system, a wireless radio network marketed as similar to ours for
meter reading purposes.
There are other potential alternative solutions to our network meter reading
services including traditional wireline and wireless solutions. For example:
- Mtel has announced that it intends to adapt its technology to carry data
from local area networks operated by third parties who would offer
residential services similar to network meter reading some time in 1999,
with the development of endpoint radios and network management
capabilities being left to other independent companies.
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- Whisper Communications has been offering its True 2 Way?-TM- fixed-based
radio frequency architecture communications technology for automated meter
reading and other services and has several trials and one deployment
underway.
- Metricom, a provider primarily of subscriber-based, wireless data
communications for users of portable and desktop computers, has been
involved in the automated meter reading market through trials with Whisper
Communications.
- Schlumberger is working with a number of companies including us, to
conduct pilot trials of utility network automation systems.
- Other wireless communications providers who have entered the market for
utility and commercial data services include cellular control channel
companies such as Cellemetry and Aeris Communications. These companies
offer low bandwidth services that compete with some of our metering
applications.
- Several companies are offering telephone-based network automated meter
reading services or equipment. Among these are Teldata, Inc. and American
Innovations. Bell South Wireless (formerly, Ram Mobile Data) offers data
services that may compete with a variety of our data services. 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 us although
they have not yet done so. Communications or technology companies may also
seek to adapt new or existing technology to serve this market.
Many of our present and potential future competitors have substantially
greater financial, marketing, technical and manufacturing resources, name
recognition and experience than us. As a result, our 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 us. 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 our prospective customers. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. We may be unable to compete
successfully against current and future competitors, and any failure to do so
would harm our business.
NEW TECHNOLOGIES MAY RENDER OUR SERVICES OBSOLETE IF WE FAIL TO CONTINUE TO
ENHANCE OUR TECHNOLOGIES.
Market acceptance of our services will depend, in part, on our ability to
develop new technology and enhance our existing hardware, software and wireless
communications technology. If we do not develop competitive technology on a
timely basis, our current and potential customers will not purchase our
services. Significant technological advances occur rapidly in our industry and
frequently in the telecommunications industry. For example, the advent of
computer-linked electronic networks, fiber optic transmission, advanced data
digitization technology, cellular and satellite communications capabilities,
specialized mobile radio services and personal communication services and other
commercial mobile radio services have radically expanded communications
capabilities and market opportunities. Future advances may render our technology
obsolete or less cost effective than competitive systems or erode our market
position. If this happens, our ability to gain new customers and achieve revenue
growth would be adversely affected.
THE DELIVERY OF OUR SERVICES DEPENDS ON OUR ACCESS TO RADIO FREQUENCY, WHICH IS
COSTLY AND SUBJECT TO REGULATION BY THE FCC. IF WE FAIL TO OBTAIN SUCH ACCESS,
OUR BUSINESS WILL SUFFER.
Our network equipment uses radio spectrum subject to regulation by the FCC
for the wireless transmission of data. If we fail to obtain access to radio
frequency, we will not be able to grow and our
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business will suffer. We hold licenses to utilize the 928/952 MHz frequencies,
which allow us exclusive use of particular channels within a particular
geographic area. We have not acquired such frequencies in all markets and such
frequencies may not be available in every area in which we have existing or
prospective customers. We also use 902-928 MHz frequencies for part of our
network. We are not licensed for these channels but rather they are available on
a shared basis among many unlicensed users. These channels are also available
for licensed use in the Location and Monitoring Radio Service. However, our
unlicensed operations are protected from interference from this licensed
service, provided that we continue to operate our equipment within certain
technical parameters. The FCC, however, may in the future authorize additional
multiple address system licenses which could interfere with our equipment and
adversely impact our operations in any given location.
In addition, on July 1, 1999, the FCC imposed an indefinite freeze on the
licensing of any new multiple address systems frequencies, which, until lifted
or waived, prevents us from acquiring any new frequencies at this time. This
freeze could impact our ability to expand existing systems or to implement
systems for prospective customers. While we are seeking relief from this freeze
as appropriate to avoid these consequences, we cannot be sure that such relief
will be granted. Furthermore, the FCC is currently considering in several
different proceedings changes to its rules that could alter the procedures for
obtaining new licenses for frequencies in the 928/952 MHz band, and there is a
possibility that we may no longer be eligible for all of the channels available
in this band or that we may only be able to acquire such licenses through FCC
implemented auctions. We may also be required to incur substantial expense
either to obtain licenses in the frequencies we currently use or to develop
technologies capable of operating in alternative frequencies.
CHANGES IN FCC REGULATION COULD LIMIT THE FUTURE AVAILABILITY OF PARTICULAR
RADIO FREQUENCIES AND REQUIRE US TO OBTAIN LICENSES IN AUCTIONS, WHICH COULD
BE COSTLY FOR US TO COMPLY WITH OR COULD CAUSE RADIO FREQUENCY TO BE MORE
COSTLY TO ACQUIRE IN THE FUTURE.
Recent proposed changes in regulation could limit our ability to gain access
to radio frequency which could harm our business. In March 1999, the FCC
published for public comment a NOTICE OF PROPOSED RULE MAKING in WT Docket
No. 99-87, proposing revised for the licensing of private services generally, as
a result of the changed auction authority. In July 1999, the FCC also published
for public comment a FURTHER NOTICE OF PROPOSED RULE MAKING in WT Docket
No. 97-81 regarding the future licensing of radio frequencies. This FURTHER
NOTICE follows an earlier NOTICE OF PROPOSED RULE MAKING, released in
February 1997. Both of these proceedings were initiated in response to recent
Congressional changes expanding the Commission's authority to issue licenses by
auction. We have addressed the issues raised in each of these proceedings that
would limit or increase substantially the cost of acquiring the spectrum we
require in our networks. The outcome of either proceeding could impair the
future availability or cost of licenses we need. Given this uncertainty, our use
of radio frequency channels could be restricted, thereby requiring us to obtain
any future channels in the 928/952 MHz band or in any other band only through
auction. Although we believe that additional frequencies will be generally
available to us as required, the cost associated with acquiring such frequency
rights as well as our operating costs could increase, perhaps substantially.
Further, we could experience substantial delays in adapting our networks if new
rules were adopted.
WE ARE DEVELOPING BUSINESS OUTSIDE OF THE UNITED STATES WHICH WILL BE EXPENSIVE,
AND IF WE FAIL TO GENERATE SUFFICIENT INTERNATIONAL REVENUES, OUR BUSINESS
WILL SUFFER.
We offer our network meter reading services in international markets through
BCN, our international joint venture with Bechtel Enterprises, Inc. We have
incurred, and will likely continue to incur, significant and increasing expenses
in establishing international operations. We do not expect to generate material
revenues from BCN's operations during 1999 or 2000. If revenues generated by
international activities or
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proceeds from financings are not adequate to offset the expense of establishing
and maintaining these international activities, we will experience greater
losses than budgeted and our business will suffer.
Our success internationally will depend on demand for CellNet's or BCN's
services and systems. Such demand may not materialize, and where present, is
likely to vary by country, based on many factors including:
- the degree of regulation of our services by a given country;
- labor costs in each country;
- fluctuations in currency exchange rates;
- potentially adverse tax consequences; and
- the availability of radio spectrum and the costs of acquisition of
licensed frequencies.
In addition, differing standards among utilities on a country-by-country
basis, among other factors, may hinder our ability to develop and implement
localized versions of our network meter reading system without significant
effort and cost. We have extremely limited experience in developing a localized
version of a wireless data communications system for foreign markets to date.
BECAUSE WE NEED PARTNERS TO SUCCEED INTERNATIONALLY, WE MAY LOSE CONTROL OF
INTERNATIONAL OPERATIONS AND SUCH OPERATIONS COULD CREATE LOSSES FOR US.
We will need additional partners in particular countries to continue our
strategy of pursuing international markets through BCN. If we fail to develop
relationships with such partners, we may not be able to succeed internationally.
The development of such relationships, however, could expose us to the loss of
control of international operations and significant losses. BCN anticipates
having a majority interest and control over the Board of Directors of entities
through which business is carried out in foreign countries. In the event that
this does not occur, BCN may not have control over the operations and assets of
such entities. If the other venture partner has economic, business or legal
interests or goals that are inconsistent with those of CellNet or BCN and
accordingly takes actions inconsistent with our interests, the joint venture
could suffer high losses. It is also possible that a partner will not impose the
same or similar accounting and financial controls as CellNet or BCN. In
addition, an international partner may be unable to meet its economic or other
obligations and CellNet or BCN may be required to fulfill those obligations.
Furthermore, the entity's structure or the laws of a foreign country may limit
or substantially tax the amount of funds that can be transferred to CellNet or
BCN.
THE RAPID EXPANSION OF OUR BUSINESS HAS PLACED A STRAIN ON OUR MANAGEMENT,
PERSONNEL AND OTHER RESOURCES WHICH WILL MAKE IT DIFFICULT TO SUCCESSFULLY
EXPAND.
We cannot successfully implement our business model if we fail to manage our
growth. We have rapidly and significantly expanded our operations domestically
and internationally and expect further expansion to take advantage of market
opportunities. Our recent growth has placed, and is expected to continue to
place, a significant strain on our managerial, operational and financial
resources. We must implement and improve our operational and financial systems
and expand or manage our employee base to manage growth effectively. In
addition, our systems, procedures or controls may be inadequate to support our
operations, in which case management may be unable to exploit opportunities for
our services.
WE DEPEND ON KEY PERSONNEL WHO MAY LEAVE US AT ANY TIME.
Our success substantially depends on the continued employment of our
executive officers and key employees. The loss of the services of any of our
executive officers or key employees could disrupt our day-to-day operations,
result in delays in network construction, or losses of customers, and otherwise
harm
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our business. Substantially all of our employees and officers are employed on an
at-will basis. Presently, we do not maintain a key man life insurance policy on
any of our executives or employees.
OUR FAILURE TO ATTRACT, TRAIN OR RETAIN HIGHLY QUALIFIED PERSONNEL COULD HARM
OUR BUSINESS.
Our future success also depends on our continuing ability to identify, hire,
train and retain other highly qualified technical and managerial personnel, the
failure of which could harm our business. If we are unable to attract and retain
the necessary technical and managerial personnel, our business will suffer.
Competition for such personnel is intense, particularly in high-technology
centers such as northern California. In making employment decisions,
particularly in high-technology industries, existing employees and job
candidates often consider the value of stock options they may receive in
connection with their employment. As a result of recent volatility in our stock
price, we may be disadvantaged in competing with companies that have not
experienced similar volatility or that have yet to sell their stock publicly.
DESPITE OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY, THIRD PARTIES MAY GAIN
ACCESS TO OUR PROPRIETARY TECHNOLOGY OR DEVELOP SUPERIOR TECHNOLOGY AND USE IT
TO COMPETE EFFECTIVELY AGAINST US.
Our inability to protect our proprietary rights, and the costs of doing so,
could harm our business. We rely on a combination of trade secret protection,
copyright, patent, trademark and confidentiality agreements and licensing
arrangements to establish and protect our proprietary rights. While we have
obtained and applied for patents, and intend to file other applications for
patents covering our products and processes, additional patents may not be
issued or, if issued, may not provide adequate protection of our proprietary
rights. Our success will depend in part on our ability to maintain copyright and
patent protection for our products, to preserve our trade secrets and to operate
without infringing the proprietary rights of third parties. In addition, any
patents issued to us or licensed by us may be challenged, invalidated or
circumvented, and the patent rights may not adequately protect our intellectual
property rights.
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, we
cannot be certain that we were the first creator of inventions covered by our
issued patents or pending patent applications. We also cannot be certain that we
were the first to file these patent applications or that no patent conflict will
exist with other products or processes which could compete with our products or
approach. Despite our efforts, we may not be able to safeguard and maintain
these proprietary rights. Our competitors may independently develop and patent
technologies that are substantially equivalent or superior to ours. Participants
in the wireless industry, including our competitors, 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. The issuance of third-party patents could
require us to alter our products or processes, obtain licenses or cease certain
activities. An adverse outcome with regard to a third-party patent infringement
claim could subject us to significant liabilities, require disputed rights to be
licensed or restrict our ability to use such technology. We also rely to a
substantial degree upon unpatented trade secrets. Our competitors may
independently develop or otherwise acquire substantially equivalent trade
secrets.
THIRD-PARTY CLAIMS REGARDING OUR INTELLECTUAL PROPERTY COULD LIMIT OUR ABILITY
TO PROVIDE NETWORK SERVICES OR REQUIRE US TO OBTAIN LICENSES WHICH COULD BE
COSTLY.
Whether or not we obtain additional patents, others may receive patents that
contain claims applicable to products or processes developed by us. If any such
claims were to be upheld, we would require licenses. These licenses may not be
available on commercially acceptable terms, if at all. In addition, we could
incur substantial costs in defending against suits brought against us by others
for infringement of intellectual property rights or in prosecuting suits that we
might bring against other parties to protect our intellectual property rights.
From time to time we receive inquiries with respect to the coverage of our
intellectual property rights, and inquiries could develop into litigation.
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In October 1996, Itron, one of our competitors, filed a complaint against us
in the Federal District Court in Minnesota, alleging that we infringed an Itron
patent which was issued in September 1996. Itron sought a judgment for damages,
attorneys' fees and injunctive relief. On January 28, 1999, the Court ruled in
favor of us that, as a matter of law, our system did not infringe the Itron
patent. The Court also ruled in favor of Itron that the Itron patent was valid
against certain prior art. Itron is appealing the Court's ruling. Consequently,
CellNet filed a cross-appeal on the validity issue. We believe that the ultimate
outcome of the lawsuit is not expected to materially harm our business.
In April 1997, we 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 our U.S. Patent No. 4,783,623. We
sought an injunction, damages and other relief. On November 2, 1998, the Court
ruled that Itron's patent does not infringe upon CellNet's Patent
No. 4,783,623. We have appealed the Court's ruling.
WE ARE DEPENDENT ON A SOLE VENDOR FOR A SUBSTANTIAL PORTION OF OUR NETWORK
EQUIPMENT WHO MAY BE UNABLE TO MEET OUR NEEDS ON A TIMELY OR A COST-EFFECTIVE
BASIS.
We rely and will continue to rely on outside parties to manufacture most of
our network equipment such as radio devices and printed circuit boards, who may
not be able to meet our manufacturing needs in a satisfactory and timely manner.
Currently we are relying on the manufacturing services of a sole vendor, Jabil
Circuits, Inc., for a substantial portion of our network equipment. As we sign
additional services contracts, this manufacturer must significantly ramp-up the
amount of manufacturing to be undertaken for us in order to enable us to meet
our contractual commitments. In addition, we may be unable to obtain additional
manufacturers when and if needed. If we are unable to develop alternative
suppliers quickly or cost-effectively, our ability to manufacture and install
systems could be impaired, which would harm our business.
Our 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 quality,
amount and timing of resources to be devoted to these activities are not within
our control, and manufacturing problems may 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 harm our business.
WE ARE EXPOSED TO THE RISK OF USING THIRD-PARTY COMPONENTS AND PRODUCTS THAT MAY
HINDER OUR ABILITY TO MEET CUSTOMER DEMAND.
We purchase certain subassemblies, components and network equipment from
single sources or from a limited number of sources. We 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. Our 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. Some components
relied upon may have an excessive failure rate or inferior capabilities. A
significant price increase or interruption in supply from one or more of such
suppliers could harm our business. Although we believe alternative suppliers of
subassemblies, components and network equipment are available, our inability to
develop alternative sources quickly or cost-effectively could materially impair
our ability to manufacture, install and maintain systems. Lead times can be as
long as a year for certain components, which may require us to use working
capital to purchase inventory significantly in advance of receiving any
revenues.
26
<PAGE>
WE CANNOT BE CERTAIN THAT WE CAN OBTAIN AN ADEQUATE SUPPLY OF METERS FROM METER
MANUFACTURERS.
We also need a significant number of new electric meter products to initiate
meter retrofit and replacement in connection with each network deployment and to
replace existing meters in the field that 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 other utility industry
participants. 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,
resulting in delayed or postponed revenues from such deployments. Similar
situations could also arise in connection with network deployments for gas and
water meters.
SYSTEM FAILURES, DELAYS AND INADEQUACIES COULD SIGNIFICANTLY HARM OUR BUSINESS.
The performance, reliability and availability of our wireless data networks
are critical to our reputation and ability to attract and retain customers and
earn revenues from network meter reading services as well as non-utility
applications. Since our networks are distributed over wide geographic areas and
part of each network is physically exposed, these wireless data networks are
vulnerable to damage or interruption from fire, flood, earthquakes, storms and
other similar events. Any system failure that causes interruption in the
availability of network services, whether caused by an act of God or not, could
result in a loss of revenue and, if sustained or repeated, could reduce the
attractiveness of our services for future utilities or other customers. The
occurrence of any of the foregoing could harm our business.
WE COULD LOSE A SUBSTANTIAL PORTION OF OUR FUTURE REVENUES BECAUSE OUR SERVICES
CONTRACTS CAN BE TERMINATED.
We expect that a substantial portion of our future revenues will come from
services contracts of various kinds. These contracts can generally be cancelled
or terminated in certain circumstances or in the event we materially fail to
meet the agreed network meter reading and other performance standards on a
consistent basis. While the terms of our utility services are of a long-term
nature, each of our existing utility services contracts can be terminated by the
respective utility without cause prior to the expiration of the contract term.
In many instances, these contracts also provide that we will be required to
compensate the utilities for the use of its system for non-utility applications.
Future services contracts with utilities may contain similar provisions.
Contracts with new power market participants generally can be terminated without
cause on thirty days' prior written notice except to the extent they have
already ordered services under the contract. In the event that a services
contract is terminated, we may incur substantial losses. In addition, our
contracts with other utility market participants will generally have shorter
terms than our existing utility contracts.
Our current contracts with new power market participants generally have
terms of one to five years, compared to terms of ten to twenty years generally
with utilities. Since a network's service revenues are not expected to exceed
our capital investments to deploy such network for several years, the
termination or cancellation of one or more significant services contracts would
harm our business.
OUR BUSINESS COULD BE AFFECTED BY YEAR 2000 ISSUES.
Many currently installed computer systems, software products and electronic
products are coded to accept only two-digit entries in the date code field.
These date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, CellNet, our suppliers
and customers and our potential suppliers and customers, may need to upgrade,
repair or replace certain equipment computer systems or software to ensure that
our operations will not be adversely impacted by system failures related to Year
2000 noncompliance. If CellNet is required to take action to remedy any Year
2000 problems, the costs could be significant.
27
<PAGE>
We expect to spend approximately $4.0 million relating to the replacement of
our internal legacy corporate information systems through year-end 1999. Failure
to provide Year 2000 compliant business solutions to our customers or to receive
such business solutions from our suppliers could result in liability to us or
otherwise harm our business. Furthermore, we believe that the purchasing
patterns of customers and potential customers may be affected by Year 2000
issues as companies expend significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase products and services such as those
offered by us, which could harm our business.
We believe that our worst-case Year 2000 scenarios would most likely relate
to problems with the systems of third parties rather than with our internal
systems, products or services. Because we have limited ability to assess,
control or remediate the Year 2000 problems of third parties, we believe the
risks are greatest with infrastructure, such as electricity supply and water and
sewer service, telecommunications, transportation supply channels and critical
suppliers or materials and services over which we exercise little or no control.
We manufacture some of our network equipment, but rely mainly on outside
manufacturers. Each manufacturing site, whether it is ours or that of a third
party relies on local private and governmental suppliers for electricity, water,
sewer and other needed supplies. Failure of any of these supplies may represent
a worst-case scenario in that it might result in the shut down of critical
manufacturing plants, a loss of communications with customers and suppliers, and
transportation system failures. Backup sources of supply may be inadequate.
We do not maintain the capability to replace most third-party suppliers with
internal production or alternate suppliers. Where efforts to work with critical
suppliers to avoid or limit the adverse effects of Year 2000 non-compliance
problems turn out to be unsuccessful then a worst-case scenario may occur
although we anticipate that its duration would not be long. We are not in a
position to identify or to avoid all possible adverse Year 2000 scenarios;
however, we are currently assessing these scenarios and taking steps to mitigate
the impacts of such scenarios if they were to occur.
WE ARE BOUND BY OUR SHAREHOLDERS' AGREEMENT WHICH PROVIDES CERTAIN STOCKHOLDERS
GREATER INFLUENCE OVER MANAGEMENT.
Under the terms of a shareholders' agreement among us and certain
stockholders, so long as certain parties to the agreement continue to hold at
least 700,000 shares of common stock, as adjusted for stock splits,
consolidations or other similar events, we are obligated to nominate for
election representatives of certain stockholders as directors any time a vote
for directors is taken. The shareholders' agreement gives certain stockholders
greater influence over our management and to provide certain stockholders with,
among other things, certain registration, first refusal, co-sale and other
rights. Other investors in us do not have these rights and would therefore be
disadvantaged as a result of this agreement.
WE COULD BE SUBJECT TO SECURITIES ACTIONS AND OTHER LITIGATION, WHICH IF IT
OCCURS, WILL DISTRACT MANAGEMENT, RESULT IN SUBSTANTIAL COSTS AND HARM OUR
BUSINESS.
In the past, securities class action litigation has often been filed against
companies for various reasons, including after periods of volatility in the
market price of their securities. We have been and may still become the target
of similar litigation in the future. Securities litigation could result in
substantial costs and divert management's attention and resources, which could
cause serious harm to our business.
28
<PAGE>
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE WHICH COULD RESULT IN
SUBSTANTIAL LOSSES FOR INDIVIDUAL INVESTORS.
The trading price of our common stock has been highly volatile since our
initial public offering and an active market for our stock may not be sustained.
Since we are an early-stage company, our stock price is likely to continue to be
subject to wide fluctuations in response to a variety of factors, including:
- quarterly variations in operating results;
- the number of new service contracts we enter into with customers;
- consolidations in the industry or other conditions in the network meter
reading industry and other industries;
- technological innovations or the introduction of new products by us or our
competitors;
- developments in patents or other intellectual property rights;
- comments or recommendations issued by analysts who follow us and our
competitors; and
- ability to obtain additional financing to fund our projects or operations.
In addition, in some future period our operating results could be below the
expectations of public market analysts and investors. In such event, the price
of our common stock could fall substantially. Additionally, the stock market in
general, and the market for technology stocks in particular, have recently
experienced extreme price and volume fluctuations that are not related to the
operating performance of particular companies. These broad market fluctuations
could have a significant impact on the market price of our securities.
FUTURE SALES OF OUR STOCK MAY DEPRESS OUR STOCK PRICE.
A substantial portion of our 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. If our
stockholders sell substantial amounts of our common stock in the public market,
the market price of our common stock could substantially decline. Given the
volatility of our stock price, we may be exposed to a higher risk of stockholder
sales which would magnify our stock volatility. 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.
WE HAVE GUARANTEED PAYMENT ON THE PREFERRED SECURITIES OF OUR SUBSIDIARY TO THE
EXTENT THAT OUR SUBSIDIARY HAS FUNDS LEGALLY AVAILABLE TO MAKE SUCH PAYMENTS.
In May 1998 our wholly-owned subsidiary, CellNet Funding LLC completed an
offering of preferred securities which will fully accrete to a face value of
$110.0 million on June 1, 2010. We have guaranteed CellNet Funding's payment
obligations on those preferred securities including dividends, distributions and
redemption, but only to the extent that CellNet Funding has funds sufficient and
legally available to make such payment obligations.
The preferred securities are subject to mandatory redemption on June 1, 2010
at a redemption price of 100% of the liquidation preference of the preferred
securities, plus accrued and unpaid dividends, if any.
OUR ANTI-TAKEOVER DEFENSES COULD DISCOURAGE AN ACQUISITION THAT A STOCKHOLDER
MAY CONSIDER FAVORABLE.
We have adopted certain anti-takeover measures that may discourage, delay or
prevent a merger or acquisition that a stockholder may consider favorable.
29
<PAGE>
On November 24, 1998, our board of directors adopted a stockholder rights
plan and declared a dividend of one preferred share purchase right for each
outstanding share of common stock. The rights plan was adopted to protect our
stockholders in the event of an unsolicited attempt to acquire us on terms that
the board deems are not in the stockholders' best interests. The rights plan
does not prevent an acquisition, impact our ability to negotiate a transaction
on mutually agreeable terms, or limit our flexibility in responding to offers.
Nevertheless, the rights plan could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change of control even if the
change of control were at a premium price or favored by a majority of the
stockholders.
We are also authorized to issue additional shares of undesignated preferred
stock. The board of directors has the authority, without further action by the
stockholders, to issue such stock in one or more series, to fix the rights,
preferences, privileges and restrictions thereof. The issuance of such stock may
also have the effect of delaying, deferring or preventing a change in control of
us, may discourage bids for our common stock at a premium over its market price
and may harm the market price of and the voting and other rights of the holders
of common stock.
In addition, we are, and will continue to be, subject to the anti-takeover
provisions of the Delaware General Corporation Law, which could have the effect
of delaying or preventing a change of control of us. Furthermore, upon a change
of control, the holders of our outstanding senior discount notes due 2007 are
entitled, at their option, to be repaid in cash. These provisions may delay or
prevent changes in control or management of us. All of these factors could harm
the price of our common stock and Funding's preferred securities.
WE HAVE MADE FORWARD-LOOKING STATEMENTS THAT ARE ESTIMATES OR PREDICTIONS THAT
CANNOT BE RELIED UPON.
This document contains forward-looking statements that are based on current
expectations that cannot be relied upon and are subject to substantial risks and
uncertainties. You can identify these forward-looking statements by words such
as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates" and similar words. Examples of such forward-looking statements
include:
- the rate at which participants in the utility industry adopt our services;
- our plan to generate revenues from non-utility services;
- our plan to invest resources to develop third party relationships to
penetrate new markets;
- predictions as to our network deployments and strategies;
- our ability to generate sufficient cash flow to meet our debt service
obligations; and
- our ability to obtain debt or equity financing as needed.
- our ability to streamline costs or reduce corporate expenditures.
Our actual results could differ significantly from those anticipated in the
forward-looking statements as a result of a number of factors, including those
that are outside of our control. The risk factors listed in this section provide
examples of risks, and specific uncertainties and events that may cause our
actual results to differ materially from the forward looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SHORT-TERM INVESTMENTS AND RESTRICTED CASH
CellNet maintains a short-term investment portfolio primarily consisting of
corporate debt securities with maturities less than one year and auction rate
preferred stock with maturities greater than ten years.
30
<PAGE>
These available-for-sale securities are subject to interest rate risk and will
rise and fall in value if the market interest rate changes.
CellNet's restricted cash balances are invested in fixed income Treasury
Securities having staggered maturities matching dividend payment dates of the
Preferred Securities. Accordingly, changes in market interest rates have no
effect on CellNet's operating results, financial condition and cash flows.
As of September 30, 1999, the following table provides information about
CellNet's investment portfolio and restricted cash, and presents principal cash
flows and related weighted average interest rates by expected maturity dates (in
thousands).
<TABLE>
<CAPTION>
YEAR OF MATURITY TOTAL DUE
---------------------------------------------------- AT
1999 2000 2001 2002 2003 THEREAFTER MATURITY FAIR VALUE
-------- -------- -------- -------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and Cash
Equivalents.............. $14,539 -- -- -- -- -- $14,539 $14,539
Average Interest Rate...... 3.9% -- -- -- -- --
Corporate Debt
Securities............... -- $2,983 -- -- -- -- $ 2,983 $ 2,983
Average Interest Rate...... -- 5.8% -- -- -- --
Auction-rate Preferred
Stock.................... -- -- -- -- -- $800 $ 800 $ 800
Average Interest Rate...... -- -- -- -- -- 4.9%
Restricted Cash--Fixed
Rate..................... $ 1,937 $7,700 $3,850 -- -- -- $13,487 $12,866
Interest Rate.............. 5.6% 5.6% 5.6% -- -- --
</TABLE>
SENIOR NOTES, REVOLVING CREDIT AGREEMENTS AND MANDATORILY REDEEMABLE PREFERRED
SECURITIES
CellNet uses senior notes, revolving credit agreements and mandatorily
redeemable preferred securities to finance its operations. These financial
instruments, to the extent they provide for variable rates of interest expose
CellNet to interest rate risk with the primary interest rate risk exposure
resulting from changes in LIBOR or the prime rate which are used to determine
the interest rates that are applicable to borrowings under revolving credit
agreements with two wholly-owned subsidiaries of CellNet. The revolving credit
agreements require the subsidiaries to partially hedge the interest rate
exposure using off-balance sheet derivative financial instruments. CellNet uses
off-balance sheet derivative financial instruments, including interest rate
swaps, to partially hedge interest rate exposure associated with on-balance
sheet financial instruments. All of CellNet's derivative financial instrument
transactions are entered into for non-trading purposes. The terms and
characteristics of the derivative financial instruments are matched with the
existing on-balance sheet instruments and do not constitute speculative or
leveraged positions independent of these exposures.
The information below summarizes CellNet's financial instruments exposed to
market risks associated with fluctuations in interest rates as of September 30,
1999. To the extent CellNet's financial instruments expose CellNet to interest
rate risk, they are presented within each market risk category in the table
below. The table presents principal cash flows and related interest rates by
year of maturity for CellNet's senior notes, revolving credit agreements,
mandatorily redeemable preferred securities and interest rate swaps in
31
<PAGE>
effect at September 30, 1999 and, in the case of the senior notes and
mandatorily redeemable preferred securities, exclude the potential exercise of
the relevant redemption features (in thousands).
<TABLE>
<CAPTION>
YEAR OF MATURITY TOTAL DUE
---------------------------------------------------- AT
1999 2000 2001 2002 2003 THEREAFTER MATURITY FAIR VALUE
-------- -------- -------- -------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Senior Notes--Fixed Rate.... -- -- -- -- -- $654,133 $654,133 $235,488
Interest Rate............... -- -- -- -- -- 14.0%
Mandatorily Redeemable
Preferred
Securities--Fixed Rate.... -- -- -- -- -- $110,000 $110,000 $ 42,350
Interest Rate............... -- -- -- -- -- 7.0%
Revolving Credit
Agreements--Variable
Rate...................... -- -- -- -- $1,163 $ 81,237 $ 82,400 $ 82,400
Average Interest Rate....... -- -- -- -- 7.8% 7.7%
Interest Rate
Swaps--Variable to Fixed
Rate...................... -- -- -- $30,000 -- -- $ 30,000 $ 345
Average Pay Rate............ -- -- -- 5.6% -- --
Average Receive Rate........ -- -- -- 5.1% -- --
</TABLE>
32
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See above, "Management's Discussion and Analysis--Risk Factors that May
Affect Future Operating Results--We Could Be Subject to Securities Actions and
Other Litigation, Which If It Occurs, Will Distract Management, Result in
Substantial Costs and Harm Our Business."
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
Exhibit 27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
REPORT DATE EVENT REPORTED
- ----------- --------------
<S> <C>
10/27/99 CellNet Data Systems Reports on Efforts to Raise Additional
Capital
</TABLE>
33
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
CELLNET DATA SYSTEMS, INC.
Date: November 15, 1999 /S/ DAVID L. PERRY
------------------------------------------------
David L. Perry
VICE PRESIDENT AND CHIEF ADMINISTRATIVE OFFICER
AND ACTING CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
</TABLE>
34
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT TITLE
- ----------- -------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 14,539
<SECURITIES> 3,783
<RECEIVABLES> 9,517
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 34,716
<PP&E> 309,655
<DEPRECIATION> (64,132)
<TOTAL-ASSETS> 324,300
<CURRENT-LIABILITIES> (34,459)
<BONDS> (358,292)
(106,438)
0
<COMMON> (212,536)
<OTHER-SE> (74,017)
<TOTAL-LIABILITY-AND-EQUITY> (324,300)
<SALES> 830
<TOTAL-REVENUES> 17,326
<CGS> (792)
<TOTAL-COSTS> (27,165)
<OTHER-EXPENSES> (65,590)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (43,097)
<INCOME-PRETAX> (119,979)
<INCOME-TAX> (6)
<INCOME-CONTINUING> (119,985)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (126,006)
<EPS-BASIC> (2.95)
<EPS-DILUTED> (2.95)
</TABLE>
