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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ___________
Commission file number 0-19903
METRICOM, INC.
(A Delaware Corporation)
I.R.S. Employer Identification #77-0294597
980 University Avenue
Los Gatos, CA 95032-2375
(408) 399-8200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of common stock outstanding as of October 29, 1999
was 21,982,627.
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TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview 10
Results of Operations 11
Liquidity and Capital Resources 13
Year 2000 Compliance 14
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK 15
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURE PAGE 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METRICOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(Unaudited)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 21,653 $ 19,141
Accounts receivable, net ............................... 2,570 1,450
Inventories, net ....................................... 1,050 3,046
Prepaid expenses and other ............................. 2,704 1,522
--------- ---------
Total current assets ............................... 27,977 25,159
PROPERTY AND EQUIPMENT, net .............................. 8,861 5,555
LONG-TERM INVESTMENTS .................................... 58 58
OTHER ASSETS, net ........................................ 3,834 3,694
--------- ---------
Total assets ....................................... $ 40,730 $ 34,466
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ....................................... $ 4,006 $ 5,061
Accrued liabilities .................................... 11,324 10,662
Notes payable .......................................... 20,155 40
--------- ---------
Total current liabilities .......................... 35,485 15,763
--------- ---------
LONG-TERM DEBT ........................................... 74,862 55,098
OTHER LIABILITIES ........................................ 327 680
MINORITY INTEREST ........................................ 5,184 5,184
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock ........................................... 21 19
Additional paid-in capital ............................. 206,541 191,184
Accumulated deficit .................................... (281,690) (233,462)
--------- ---------
Total stockholders' equity (deficit) ............... (75,128) (42,259)
--------- ---------
Total liabilities and stockholders' equity (deficit) $ 40,730 $ 34,466
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
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METRICOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
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REVENUES:
Service revenues ............. $ 2,531 $ 2,001 $ 7,158 $ 6,251
Product revenues ............. 2,264 2,194 6,486 5,908
-------- -------- -------- --------
Total revenues ........... 4,795 4,195 13,644 12,159
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of service revenues ..... 4,782 7,684 13,674 19,861
Cost of product revenues ..... 1,403 1,155 4,739 3,946
Research and development ..... 8,559 7,991 25,600 16,309
Selling, general and
administrative ............ 5,212 7,872 13,881 16,738
-------- -------- -------- --------
Total costs and expenses ....... 19,956 24,702 57,894 56,854
-------- -------- -------- --------
Loss from operations ....... (15,161) (20,507) (44,250) (44,695)
INTEREST EXPENSE ............... (1,752) (965) (4,566) (2,930)
INTEREST INCOME ................ 259 466 588 1,690
-------- -------- -------- --------
Net loss ................... $(16,654) $(21,006) $(48,228) $(45,935)
======== ======== ======== ========
BASIC & DILUTED
NET LOSS PER SHARE...........$ (0.80) $ (1.13) $ (2.45) $ (2.55)
======== ======== ======== ========
WEIGHTED AVERAGE
SHARES OUTSTANDING ........... 20,889 18,610 19,694 18,022
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
4
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METRICOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................ $(48,228) $(45,935)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization ............................... 3,120 6,774
Increase in accounts receivable,
prepaid expenses and other current assets ................ (2,302) (1,039)
Decrease (increase) in inventories .......................... 1,996 (2,324)
Increase (decrease) in accounts payable, accrued liabilities,
and other liabilities .................................... (1,061) 4,631
-------- --------
Net cash used in operating activities .................. (46,475) (37,893)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................. (5,802) (2,322)
Other ........................................................... -- 155
Proceeds from the sale of investments ........................... -- 4,389
-------- --------
Net cash provided (used) by investing activities ....... (5,802) 2,222
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock .......................... 14,954 55,878
Additions to (payments of) notes payable, net ................... 19,855 (5,000)
Additions to long-term debt, net ................................ 19,980 --
-------- --------
Net cash provided by financing activities .............. 54,789 50,878
-------- --------
NET INCREASE IN CASH AND EQUIVALENTS .............................. 2,512 15,207
CASH AND EQUIVALENTS, BEGINNING OF PERIOD ......................... 19,141 9,784
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD ............................... $ 21,653 $ 24,991
======== ========
SUMMARY OF NON-CASH TRANSACTIONS:
Property and equipment acquired under capital lease ............... $ 449 $ --
Common stock issued in conversion of long-term debt ............... $ 405 $ --
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
5
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METRICOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Metricom, Inc. (the
"Company") presented in this Form 10-Q are unaudited. In the opinion of
management, the accompanying condensed consolidated financial statements reflect
all adjustments (which consist only of normal recurring adjustments) which are
necessary for a fair presentation of operations for the three and nine month
periods ended September 30, 1999 and September 30, 1998. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K, as amended, for
the year ended December 31, 1998, as filed with the Securities and Exchange
Commission.
Certain amounts on the accompanying consolidated financial statements
have been reclassified from the previously reported balances to conform to the
1999 presentation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The results
of operations for the three-month and nine-month periods ended September 30,
1999 and September 30, 1998 are not necessarily indicative of the results
expected for the full fiscal year or for any other fiscal period.
NOTE 2. CAPITAL STOCK
On January 30, 1998, the stockholders of the Company approved the sale
of 4,650,000 shares of Common Stock to Vulcan Ventures Incorporated, a
Washington corporation ("Vulcan") at a per share price of $12.00. At the closing
of the transaction, Vulcan's ownership interest in the Company was increased to
approximately 49.5% of the outstanding shares of Common Stock. The net proceeds
from the transaction were $53.7 million.
On June 20, 1999, the Company entered into a Preferred Stock Purchase
Agreement (the "Stock Purchase Agreement") with MCI WorldCom, Inc., a Georgia
corporation ("MCI WorldCom"), and Vulcan. Pursuant to the terms of the Stock
Purchase Agreement, the Company will issue and sell to MCI WorldCom 30 million
shares of newly-designated Series A1 Preferred Stock at a price of $10 per
share, and the Company will issue and sell to Vulcan 30 million shares of
newly-designated Series A2 Preferred Stock (collectively with the Series
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A1 Preferred Stock, the "Preferred Shares") at a price of $10 per share, for
gross aggregate proceeds to the Company of $600 million (the "Transaction").
Both series of Preferred Shares will bear cumulative dividends at the rate of
6.5% per annum for three years. In addition, each series will have the right to
elect one director to the Company's Board of Directors, although voting rights
otherwise will be generally limited to specified matters. The Preferred Shares
will be subject to mandatory redemption by the Company in 10 years following
initial issuance and to redemption at the option of the holder upon the
occurrence of specified changes in control or major acquisitions. Upon
conversion of the Preferred Shares into shares of Common Stock of the Company,
Vulcan will hold approximately 49% of the Company's outstanding Common Stock and
MCI WorldCom will hold approximately 37%, with the remaining 14% held by other
current public stockholders and optionees (on a pro forma fully-diluted basis,
using the treasury method, based on common stock and options outstanding as of
June 20,1999). As a result, Vulcan's beneficial ownership will continue to be
sufficient to control the vote on most matters submitted to the stockholders of
the Company. The Transaction was approved by stockholders at the Annual Meeting
of Stockholders on October 15, 1999. Pending consummation of the Transaction,
Vulcan has committed to provide the Company with up to $30 million in secured
financing on an interim basis. The Company has received $20 million of this
financing as of September 30, 1999.
NOTE 3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and include purchased parts, labor and manufacturing overhead.
Inventories consisted of the following (in thousands):
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SEPTEMBER 30, DECEMBER 31,
1999 1998
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Raw materials $ 589 $ 680
Work-in-progress 57 3
Finished goods 404 2,363
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Total $1,050 $3,046
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NOTE 4. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the
weighted average number of shares of common stock outstanding. Potential common
equivalent shares from options and warrants to purchase common stock and from
conversion of the convertible subordinated notes have been excluded from the
calculation of diluted net loss per share as their effect would be
anti-dilutive.
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NOTE 5. INVESTMENTS
In February 1996, the Company purchased an option to acquire Overall
Wireless Communications Corporation ("Overall Wireless"), a company that holds a
nationwide, wireless communications license in the 220 to 222 MHz frequency
band. The Company paid $700,000 for the option and agreed to loan Overall
Wireless up to $2.0 million for the construction of a system utilizing the
license, of which approximately $1.8 million had been loaned as of December 31,
1997. In January 1997, the Company paid $500,000 to extend the option from
January 1997 to July 1997. The option was subsequently extended to December 31,
2000 for no additional cash consideration. In June 1997, the Company recorded a
charge of $3.6 million to fully reserve its investment in Overall Wireless due
to uncertainties regarding its realization. In January 1998, Overall Wireless
canceled the option and the Company paid a termination fee of $1.8 million
through cancellation of the indebtedness of Overall Wireless.
NOTE 6. SEGMENT REPORTING
The Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information", during the fourth quarter 1998. SFAS No.
131 established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by chief operating decision makers or decision making groups, in
deciding how to allocate resources and in assessing performance.
The Company's reportable operating segments include Ricochet and
Utilinet. Ricochet designs, manufactures and markets wireless data
communications solutions. Utilinet manufactures and markets customer-owned
networks and related products. The accounting policies of the operating segments
are the same as those described in the summary of significant accounting
policies. A summary of operating results by reportable operating segment is as
follows:
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NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
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Ricochet Revenue .......................................... $ 8,689 $ 8,253
Utilinet Revenue .......................................... 4,955 3,906
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Total ................................................. $13,644 $12,159
======= =======
Cost of Service Ricochet .................................. $13,674 $19,661
Cost of Service Utilinet .................................. -- 200
------- -------
Total ................................................. $13,674 $19,861
======= =======
Cost of Product Ricochet .................................. $ 2,540 $ 2,152
Cost of Product Utilinet .................................. 2,199 1,794
------- -------
Total ................................................. $ 4,739 $ 3,946
======= =======
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NOTE 7. NEW ACCOUNTING STANDARD
In June, 1998, The FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, hedging activities, and exposure
definition. The pronouncement is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company believes the pronouncement will
not have a material effect on its financial statements.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since inception, the Company has devoted significant resources to the
development, deployment and commercialization of its wireless network products
and services. Historically, a significant portion of the Company's revenues have
been derived primarily from the development contracts and sales of
customer-owned networks and related products, known as UtiliNet(R), to utility
companies. In recent years, the Company has deployed a commercial wireless data
network known as Ricochet in various metropolitan areas of the United States.
The Company currently provides Ricochet commercial service, which operates at
speeds comparable to commonly used wired modems, in the San Francisco Bay Area,
the Seattle and Washington D.C. metropolitan areas, parts of Los Angeles and New
York City, and in certain airports and corporate and university campuses.
In 1997, in conjunction with the Company's acquisition of licensed
spectrum in the 2.3 GHz Band in the FCC's WCS auctions, the Company began the
development of a higher speed service known as Ricochet(2). Ricochet(2), an
upgrade to Ricochet, has demonstrated in Company tests to provide the same
service as Ricochet, but at faster average speeds of approximately 128 Kbps. In
conjunction with development of Ricochet(2), the Company has continued to pursue
right-of-way and site agreements to enable Ricochet(2) deployment in various
metropolitan areas. The Company plans to complete development of the Ricochet(2)
system in 1999 and subsequently deploy it in numerous metropolitan areas in the
United States with commercial operation beginning in mid-2000.
In addition to historical information, this report contains
forward-looking statements that involve risks and uncertainties, including
statements about the Company's plans or expectations regarding future network
development and deployment, revenues, expenditures, capital adequacy and
financing. Words such as "plans," "expects," "intends," "believes,"
"anticipates," "estimates" and similar expressions are often used to identify
forward-looking statements, but are not the exclusive means of identifying such
statements. The Company's actual results could differ materially from those
anticipated by the forward-looking statements discussed here. Factors that could
cause or contribute to such differences include, but are not limited to, the
Company's ability to deploy the Ricochet(2) system, the Company's ability to
manufacture and distribute Ricochet(2) modems and other end-user devices,
uncertainty of market acceptance of the Company's products and services, the
availability of sufficient financial, management, technical and marketing
resources, the performance and availability of the Company's Ricochet radios and
modems, the ability of the Company to lease or acquire sites for the location of
its network infrastructure, the ability of the Company to acquire right-of-way
in target markets and those factors discussed in the section entitled "Risk
Factors" and elsewhere in the Company's Annual Report on Form 10-K and elsewhere
in this report.
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RESULTS OF OPERATIONS
Revenues
Revenues consist of service and product revenues. Service revenues are
derived from the subscriber fees and modem rentals for Ricochet and fees for
UtiliNet customer support and are recognized ratably over the service period.
Product revenues are derived from the sale of UtiliNet products and Ricochet
modems and are recognized upon shipment.
Total revenues increased to $4.8 million for the third quarter of 1999
from $4.2 million for the comparable period of 1998 and increased to $13.6
million for the first nine months of 1999 from $12.2 million for the same period
of 1998. Service revenues increased to $2.5 million for the third quarter of
1999 over $2.0 million for the same period of 1998, and increased to $7.2
million for the first nine months of 1999 from $6.3 million for the comparable
period of 1998. The increase in service revenues in the third quarter and first
nine months of 1999 over the comparable periods of 1998 is primarily due to
increased subscriber fees resulting from a larger Ricochet subscriber base.
Ricochet service revenue and subscriber growth has slowed in recent quarters in
part due to the Company's reduction in sales and marketing efforts on the
current Ricochet product line. Instead, the Company has concentrated its
marketing efforts on the development and testing of the new Ricochet(2) system.
Product revenues remained relatively flat at $2.3 million for the third quarter
of 1999 compared with $2.2 million for the same period of 1998. Product revenues
increased to $6.5 million for the first nine months of 1999 compared with $5.9
million for the same period of 1998 due primarily to increased shipments of
Utilinet products. For the foreseeable future, the Company plans to continue to
concentrate its marketing efforts on the roll-out of Ricochet(2), and as a
result, Ricochet service and product revenues may remain flat or decline over
the next year until the Ricochet(2) system is widely deployed and service is
commercially available. Utilinet revenues may also remain flat or decline in the
forseeable future as the Company focuses its efforts on the roll-out of
Ricochet(2).
Cost of Revenues
Cost of service revenues is primarily costs incurred to operate Ricochet
networks, the cost of providing customer support, and manufacturing variances
associated with manufacturing the Company's network components. Cost of service
revenues also includes the cost to maintain site agreements for the Company's
infrastructure in the metropolitan areas where commercial service is currently
offered. These costs are expensed as incurred due to the uncertainties regarding
the realizability of these costs.
Cost of service revenues decreased to $4.8 million for the third quarter
of 1999 from $7.7 million in the third quarter of 1998 and to $13.7 million for
the first nine months of 1999 from $19.9 million in the first nine months of
1998. The decreases are primarily due to reduced depreciation expense on network
equipment resulting from the Company's 1998 write-down of Ricochet network
equipment to fair value. In the fourth quarter of 1998, as a result
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of its plans to replace the Company's current Ricochet networks with Ricochet(2)
equipment, the Company recorded a $14.4 million charge to write down the
carrying value of Ricochet network equipment to fair value. Cost of service
revenues is expected to increase significantly as a result of the planned future
deployment of Ricochet(2) networks. Cost of service revenues is expected to be
greater than service revenues for the foreseeable future.
Cost of product revenues increased to $1.4 million in the third quarter
of 1999 from $1.2 million for the third quarter of 1998 and to $4.7 million for
the first nine months of 1999 from $3.9 million for the first nine months of
1998. The increases were primarily due to increased shipments of Utilinet
products. Cost of product revenues as a percentage of product revenues increased
to 62% for the third quarter of 1999 from 53% for the comparable period of 1998,
and to 73% for the first nine months of 1999 from 67% for the same period of
1998. The percentage increases were primarily due to an increase in shipments of
premium Ricochet modems at promotional sales prices in the first nine months of
1999. Cost of product revenues is expected to increase as a percentage of
product revenues over the next year as the Company transitions from the sale of
current Ricochet modems to the production and sale of next generation
Ricochet(2) modems.
Research and Development
Research and development expenses increased to $8.6 million for the
third quarter of 1999 from $8.0 million for the third quarter of 1998 and to
$25.6 million for the first nine months of 1999 from $16.3 million for the first
nine months of 1998. The entire increase in the third quarter of 1999 and
approximately two-thirds of the increase in the first nine months of 1999 is
attributable to costs incurred to obtain right-of-way and site agreements in
metropolitan areas where the Company currently plans to offer service. The
remainder of the increase in the first nine months of 1999 was due to costs
incurred to deploy a beta test network for Ricochet(2). The Company expects
research and development expenses to continue to increase in absolute dollars in
future periods as the Company continues the acquisition of right-of-way and site
agreements as well as the development of next generation modems and subscriber
devices.
Selling, General and Administrative
Selling, general and administrative expenses decreased to $5.2 million
for the third quarter of 1999 from $7.9 million for the third quarter of 1998
and to $13.9 million for the first nine months of 1999 from $16.7 million in the
first nine months of 1998. The decreases in 1999 for both periods are primarily
attributable to a one-time charge of approximately $2.6 million for severance
costs incurred by the Company in the third quarter of 1998. Selling, general and
administrative expenses are expected to increase for the foreseeable future as
the Company's headcount grows to support the deployment and commercialization of
Ricochet(2).
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Interest Income and Expense
Interest expense increased to $1.8 million in the third quarter of 1999
from $1.0 million in the third quarter of 1998 and to $4.6 million for the first
nine months of 1999 from $2.9 million in the first nine months of 1998. The
increases in 1999 are due to increases in outstanding debt under both the line
of credit and bridge loan from Vulcan. Interest income decreased to $259,000 for
the third quarter of 1999 from $466,000 for the comparable period of 1998 and to
$588,000 for the first nine months of 1999 from $1.7 million in the first nine
months of 1998 primarily due to a lower average balance of cash, cash
equivalents and short-term investments in the first nine months of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital expenditures
primarily through the public and private sale of equity and convertible debt
securities. Since inception, the Company has completed (i) private placements of
preferred stock with net proceeds to the Company of approximately $18.9 million,
of which $3.0 million was repurchased and the balance converted to Common Stock
at the time of the Company's initial public offering in 1992, (ii) an initial
public offering of Common Stock with net proceeds to the Company of
approximately $8.8 million in 1992, (iii) private placements of Common Stock
with net proceeds to the Company of approximately $18.6 million in 1993, (iv)
public and private placements of Common Stock with net proceeds to the Company
of approximately $75.2 million in 1994, (v) a private placement of 8%
Convertible Subordinated Notes due 2003 with net proceeds to the Company of
approximately $43.4 million in 1996 and (vi) a private placement of Common Stock
with Vulcan Ventures Incorporated ("Vulcan") with net proceeds to the Company of
approximately $53.7 million in 1998. In October 1998, the Company secured a line
of credit for $30 million from Vulcan. As of September 30, 1999, the Company had
drawn down $30 million against this line of credit. On June 20, 1999, the
Company entered into a Stock Purchase Agreement described in Note 2 of the Notes
to Condensed Consolidated Financial Statements. Pending consummation of the
Transaction, the Company will receive up to $30 million in secured financing on
an interim basis. The Company has received $20 million of this financing as of
September 30, 1999.
The Company plans to use the net proceeds from the Stock Purchase
Agreement to complete its first phase of widespread deployment and
commercialization of its Ricochet(2) networks in various metropolitan areas in
the United States. The Company believes that the Company's existing cash and
investments, interest income from investments and contributions to be received
from the Stock Purchase Agreement will be adequate to satisfy its capital
expenditure, operating loss and working capital requirements through mid-2000.
The Company is currently considering various proposals for future financing of
operations.
In June 1995, Metricom Investments, Inc. ("Metricom Investments"), a
subsidiary of the Company, and PepData, Inc. ("PepData"), a subsidiary of
Potomac Electric Power Company, formed Metricom DC, L.L.C. ("Metricom DC") to
own and operate a Ricochet
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network in the Washington D.C. metropolitan area. Metricom Investments
contributed $1,000 and rights to use proprietary technology employed by the
Company's Ricochet networks in exchange for an 80% interest in Metricom DC.
PepData committed to contributing up to $7.0 million in exchange for a 20%
interest in Metricom DC and certain preferential rights to available cash
distributions. As of September 30, 1999, PepData had contributed approximately
$6.0 million to the joint venture, $5.2 million of which is reflected as a
minority interest in the accompanying condensed consolidated financial
statements. In November 1999, the Company paid $5.0 million to PepData to
acquire the minority interest of Metricom DC from PepData.
Since inception, the Company has devoted significant resources to the
development, deployment and commercialization of wireless network products and
services. As a result, as of September 30, 1999, the Company had incurred $282
million of cumulative net losses. The Company's operations have required
substantial capital investments for the purchase of Ricochet network equipment,
Ricochet modems and computer and office equipment. Capital expenditures were
approximately $6.3 million and $2.3 million in the first nine months of 1999 and
1998, respectively. The Company expects to increase significantly and rapidly
the amount of capital expenditures in connection with the development,
deployment and marketing of its Ricochet(2) system. In October 1999, the Company
entered into operating contracts with three vendors who will support the
physical deployment of Ricochet(2) infrastructure in multiple markets through
2000. The Company also expects to incur significant expenditures to procure
Ricochet(2) modems. The amount and timing of expenditures, however, may vary
significantly depending on numerous factors including market acceptance;
availability of radios and modems; availability of sufficient financial,
management, marketing and technical resources, and technological feasibility.
As of September 30, 1999, the Company had cash and cash equivalents of
$21.6 million and a working capital deficit of $7.5 million. The Company's
accounts receivable increased to $2.6 million as of September 30, 1999 from $1.5
million at December 31, 1998 due primarily to an increase in Utilinet shipments
in the third quarter of 1999 versus the fourth quarter of 1998. Inventories
decreased to $1.1 million at September 30, 1999 from $3.0 million at December
31, 1998 due primarily to increased sales of Utilinet and Ricochet products
combined with a reduction in the procurement of Ricochet modems. The Company
believes that both accounts receivable and inventories will increase in the
future in order to support the planned deployment and commercialization of
Ricochet(2).
YEAR 2000 COMPLIANCE
Many installed computer systems and software products are coded to
accept only two digit entries in the date code field. As the year 2000
approaches, these code fields will need to accept four digit entries to
distinguish years beginning with "19" from those beginning with "20" dates. As a
result, in the next year, computer systems and/or software products used by many
companies may need to be upgraded to comply with such year 2000 ("Y2K")
requirements.
14
<PAGE> 15
In the third quarter of 1998, the Company began a plan to remedy the
potential Y2K problems. The Company is currently in various stages of
assessment, testing and remediation of Y2K compliance, depending on the
particular computer systems or software involved. The Company's business and
financial systems have recently been upgraded to Oracle 10.7, a current revision
which has been certified by the vendor to be Y2K compliant. The Company has
completed the testing and evaluation of its Utilinet products and believes them
to be Y2K compliant. The Company has completed its assessment of its Ricochet
microcellular commercial data networks, and is in the process of upgrading
vendor supplied network components that are not Y2K compliant. These upgrades
are expected to be completed in November 1999. Ricochet networks are dependent
upon third parties for telecommunications services and power. If the Company's
providers of these services are not Y2K compliant, the usability of the
Company's microcellular commercial networks could be impaired, which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company intends to have its Y2K assessment, testing, remediation
efforts and development of necessary contingency plans complete by the year
2000. To date, costs incurred to address Y2K compliance issues have not been
material. The Company estimates that total costs to address Y2K compliance
issues will be approximately $250,000. The total cost estimate is subject to
change as the Company continues to progress in the execution of its Y2K plan.
Costs related to Y2K issues continue to be funded through operating cash flows.
There can be no assurance that the Company will be able to complete its Y2K
assessment, testing, remediation efforts and development of necessary
contingency plans by the year 2000. Any failure to complete the Y2K assessment,
testing, remediation efforts and development of necessary contingency plans
prior to the year 2000 could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is currently communicating with its key suppliers to assess
Y2K compliance. There can be no assurance that the Company's key suppliers have
or will have information technology systems, non-information technology systems
and products that are Y2K compliant. Similarly, there can be no assurance that
the Company's customers have, or will have information technology systems,
non-information technology systems and products that are Y2K compliant. Any Y2K
problem facing the Company, its customers or suppliers could have a material
adverse effect on the Company's business, financial condition and results of
operations. In the event that the Company's planned actions do not resolve the
Y2K issues, the Company is prepared to use backup systems, where possible, that
do not rely on computers. For other critical functions where computer systems
are essential, the Company is in the process of developing an alternative
contingency plan.
ITEM 3: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's interest income and expense is sensitive to market
fluctuations in the general level of U.S. interest rates. In this regard,
changes in U.S. interest rates affect the interest earned on the Company's cash
and cash equivalents, as well as the interest paid on long-term debt
obligations. The Company's cash and cash equivalents subject to interest rate
risk are primarily highly liquid corporate debt securities from high credit
quality issuers. At September 30, 1999, the
15
<PAGE> 16
Company's investments in debt securities had maturities of three months or less.
Interest rate risk on cash and cash equivalents is considered to be
insignificant.
The Company's exposure to interest rate risk on outstanding debt relates
primarily to an unsecured line of credit agreement and a secured loan agreement,
both entered into with Vulcan Ventures Incorporated, a significant shareholder
of the Company. As of September 30, 1999, there was $30 million outstanding on
the line of credit, which is due on October 29, 2000. As of September 30, 1999,
there was $20 million outstanding on the secured loan, which is due on November
20, 1999. Interest on both the line of credit and secured loan is due quarterly
at the prime interest rate on the outstanding balance. Any future increase in
interest rates could result in increased interest expense on the outstanding
balances and a negative impact on the Company's financial statements.
PART II. OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of Stockholders of Metricom, Inc. was held on
October 15, 1999.
b) The matters voted upon at the meeting and the voting of
stockholders with respect thereto are as follows:
1) Elect the following persons as Directors to hold office until the
respective Annual Meeting of Stockholders in the year the term
expires and until their successors are elected:
<TABLE>
<CAPTION>
For Withheld Term Expires
--- -------- ------------
<S> <C> <C> <C>
Robert S. Cline 19,394,709 386,219 2002
Justin L. Jaschke 19,397,463 383,465 2002
Robert P. Dilworth 19,257,670 523,258 2001
Ralph Derrickson 19,404,690 376,238 2001
Timothy A. Dreisbach 19,358,218 422,710 2001
William D. Savoy 19,406,710 374,218 2000
David M. Moore 19,406,062 374,866 2000
</TABLE>
2) Approve the Preferred Stock Purchase Agreement, dated as of June
20, 1999 among MCI Worldcom, Inc., Vulcan Ventures Incorporated
and the Company and the issuance of Preferred Stock and other
transactions contemplated thereby.
For: 12,503,061 Against: 354,974 Abstain: 26,523
16
<PAGE> 17
3) Approve the restatement of the Company's Certificate of
Incorporation.
For: 12,326,331 Against: 525,862 Abstain: 32,365
4) Approve the Company's 1997 Equity Incentive Plan, as amended.
For: 12,050,332 Against: 795,325 Abstain: 38,901
5) Approve the Company's 1991 Employee Stock Purchase Plan, as
amended.
For: 12,579,721 Against: 261,005 Abstain: 43,832
6) Approve the Company's 1993 Non-Employee Directors' Stock Option
Plan, as amended.
For: 12,193,814 Against: 638,314 Abstain: 52,430
7) Ratify the selection of Arthur Andersen LLP as independent
auditors of the Company for its fiscal year ending December 31,
1999
For: 19,705,326 Against: 35,753 Abstain: 39,939
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
Exhibit 27.1 - Financial Data Schedule
B. Reports on Form 8-K:
The Company filed a Form 8-K on July 9, 1999 pertaining to the
Preferred Stock Purchase Agreement between the Company, MCI
Worldcom Inc., and Vulcan Ventures Incorporated.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METRICOM, INC.
(Registrant)
Date: November 10, 1999 /s/ TIMOTHY A. DREISBACH
-------------------------------
Timothy A. Dreisbach
President and Chief Executive
Officer
/s/ JAMES E. WALL
-------------------------------
James E. Wall
Chief Financial Officer
18
<TABLE> <S> <C>
<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> 21,653
<SECURITIES> 0
<RECEIVABLES> 4,470
<ALLOWANCES> 1,900
<INVENTORY> 1,050
<CURRENT-ASSETS> 27,977
<PP&E> 48,897
<DEPRECIATION> 40,036
<TOTAL-ASSETS> 40,730
<CURRENT-LIABILITIES> 35,485
<BONDS> 44,595
0
0
<COMMON> 21
<OTHER-SE> (75,149)
<TOTAL-LIABILITY-AND-EQUITY> (75,128)
<SALES> 6,486
<TOTAL-REVENUES> 13,644
<CGS> 4,739
<TOTAL-COSTS> 18,413
<OTHER-EXPENSES> 39,481
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,566
<INCOME-PRETAX> (48,228)
<INCOME-TAX> 0
<INCOME-CONTINUING> (48,228)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,228)
<EPS-BASIC> (2.45)
<EPS-DILUTED> (2.45)
</TABLE>
