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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 June 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 August 3, 1999 was
21,039,103.
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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
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Item 7A. Qualitative and Quantitative Disclosures About Market Risk 15
Signature Page 17
</TABLE>
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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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June 30, December 31,
1999 1998
--------- ------------
(Unaudited)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 20,830 $ 19,141
Accounts receivable, net ........................... 2,548 1,450
Inventories, net ................................... 1,484 3,046
Prepaid expenses and other ......................... 3,911 1,522
--------- ---------
Total current assets ........................... 28,773 25,159
PROPERTY AND EQUIPMENT, net .......................... 7,103 5,555
LONG-TERM INVESTMENTS ................................ 58 58
OTHER ASSETS, net .................................... 3,892 3,694
--------- ---------
Total assets ................................... $ 39,826 $ 34,466
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ................................... $ 2,701 $ 5,061
Accrued liabilities ................................ 13,322 10,662
Notes payable ...................................... 10,171 40
--------- ---------
Total current liabilities ...................... 26,194 15,763
--------- ---------
LONG-TERM DEBT ....................................... 75,118 55,098
OTHER LIABILITIES .................................... 348 680
MINORITY INTEREST .................................... 5,184 5,184
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock ....................................... 20 19
Additional paid-in capital ......................... 197,999 191,184
Accumulated deficit ................................ (265,037) (233,462)
--------- ---------
Total stockholders' equity (deficit) ........... (67,018) (42,259)
--------- ---------
Total liabilities and stockholders'
equity (deficit) ............................. $ 39,826 $ 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)
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Three Months Ended Six Months Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
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REVENUES:
Service revenues .................... $ 2,195 $ 2,277 $ 4,626 $ 4,251
Product revenues .................... 2,468 2,084 4,223 3,713
-------- -------- -------- --------
Total revenues .................. 4,663 4,361 8,849 7,964
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of service revenues ............ 4,459 6,419 8,892 12,177
Cost of product revenues ............ 2,011 1,416 3,337 2,791
Research and development ............ 8,806 4,860 17,041 8,318
Selling, general and
administrative ................... 4,529 4,605 8,669 8,866
-------- -------- -------- --------
Total costs and expenses ............ 19,805 17,300 37,939 32,152
-------- -------- -------- --------
Loss from operations .............. (15,142) (12,939) (29,090) (24,188)
INTEREST EXPENSE ...................... (1,601) (953) (2,814) (1,965)
INTEREST INCOME ....................... 186 671 329 1,224
-------- -------- -------- --------
Net loss .......................... $(16,557) $(13,221) $(31,575) $(24,929)
======== ======== ======== ========
BASIC & DILUTED
NET LOSS PER SHARE.................. $ (0.86) $ (0.71) $ (1.65) $ (1.41)
======== ======== ======== ========
WEIGHTED AVERAGE
SHARES OUTSTANDING .................. 19,296 18,512 19,084 17,728
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated tatements.
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METRICOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six Months Ended
-----------------------
June 30, June 30,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................. $(31,575) $(24,929)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization ........................ 2,007 4,622
Increase in accounts receivable,
prepaid expenses and other current assets ......... (3,488) (1,375)
Decrease (increase) in inventories ................... 1,562 (1,826)
Increase (decrease) in accounts payable,
accrued liabilities, and other liabilities ........ (345) 1,889
-------- --------
Net cash used in operating activities ........... (31,839) (21,619)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ...................... (3,159) (1,384)
Other .................................................... -- 156
Proceeds from the sale of investments .................... -- 4,240
-------- --------
Net cash provided by (used in)
investing activities .......................... (3,159) 3,012
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................... 6,816 54,970
Additions to (payments of) notes payable, net ............ 9,871 (5,000)
Additions to long-term debt .............................. 20,000 --
-------- --------
Net cash provided by financing activities .................. 36,687 49,970
-------- --------
NET INCREASE IN CASH AND EQUIVALENTS ....................... 1,689 31,363
CASH AND EQUIVALENTS, BEGINNING OF PERIOD .................. 19,141 9,784
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD ........................ $ 20,830 $ 41,147
======== ========
SUMMARY OF NON-CASH TRANSACTIONS:
Property and equipment acquired under capital lease $ 280 --
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated statements.
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METRICOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note l. 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 include only normal recurring adjustments) which are
necessary for a fair presentation of operations for the three and six month
periods ended June 30, 1999 and June 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 six-month periods ended June 30, 1999 and
June 30, 1998 are not necessarily indicative of the results expected for the
full fiscal year or for any other fiscal period.
Note 2. Changes in Ownership
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
aggregate proceeds to the Company of $600 million (the "Transaction"). Under the
terms of a proposed Restated Certificate of Incorporation, attached as Exhibit A
to the Stock Purchase Agreement (the "Restated Certificate"), 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. The other rights and
preferences of the Preferred Shares will be as set forth in the Restated
Certificate. 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, including
adoption of the Restated Articles, is subject to certain conditions, including
approval by the stockholders of the Company. Vulcan, a 47% stockholder of the
Company, has agreed to vote its shares of the Company in favor of the
Transaction and against any alternative transaction unless the Agreement is
terminated pursuant to its terms. 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 $10 million of this
financing as of June 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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June 30, December 31,
1999 1998
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Raw materials ......... $1,224 $ 680
Work-in-progress ...... 170 3
Finished goods ........ 90 2,363
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Total ............... $1,484 $3,046
====== ======
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Note 4. Comprehensive Income
The Company adopted Statement of Financial Accounting Standard No. 130
"Reporting Comprehensive Income" ("SFAS 130") effective for fiscal years
beginning after December 15, 1997. The adoption of this statement had no effect
on the accompanying statements of operations.
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Note 5. 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.
Note 6. 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 7. 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 and 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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Six Months Ended
June 30,
--------------------
1999 1998
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Ricochet Revenue ............................. $ 5,811 $ 5,320
Utilinet Revenue ............................. 3,038 2,644
------- -------
Total .................................... $ 8,849 $ 7,964
=======
Cost of Service Ricochet ..................... $ 8,866 $12,053
Cost of Service Utilinet ..................... 26 124
------- -------
Total .................................... $ 8,892 $12,177
=======
Cost of Product Ricochet ..................... $ 1,938 $ 1,603
Cost of Product Utilinet ..................... 1,399 1,188
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Total .................................... $ 3,337 $ 2,791
======= =======
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Note 8. 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.
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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, 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 Ricochet2. Ricochet2, an upgrade to Ricochet,
has demonstrated in Company tests to provide the same service as Ricochet, but
at faster downstream speeds of up to 128 Kbps. In conjunction with development
of Ricochet2, the Company has continued to pursue right-of-way and site
agreements to enable Ricochet2 deployment in various metropolitan areas. The
Company plans to complete development of the Ricochet2 system in 1999 and
subsequently deploy it in numerous metropolitan areas in the United States with
commercial operation beginning in 2000.
Except for historical information contained herein, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, the Company's ability to deploy the Ricochet2 system, uncertainty of
market acceptance of the Company's products and services, availability of
sufficient financial, management, technical and marketing resources, 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
and those factors discussed in the section entitled "Risk Factors" and elsewhere
in the Company's Form 10-K, as amended, for the year ended December 31, 1998, as
well as those elsewhere in this Form 10-Q.
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Results of Operations
Revenues
Revenues consist of service and product revenues. Service revenues are
derived from 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 $4.7 million for the second quarter of 1999
from $4.4 million for the comparable period of 1998 and increased to $8.8
million for the first six months of 1999 from $8.0 million for the same period
of 1998. Service revenues remained relatively flat at $2.2 million for the
second quarter of both 1999 and 1998 and increased to $4.6 million for the first
six months of 1999 from $4.3 million for the comparable period of 1998. The
increase in service revenues in the six month period is primarily due to
increased subscriber fees resulting from a larger Ricochet subscriber base.
Ricochet service revenue growth slowed in the second quarter of 1999 compared
with 1998 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 Ricochet2 system.
Product revenues increased to $2.5 million for the second quarter of 1999 from
$2.1 million in the second quarter of 1998 and $4.2 million for the first six
months of 1999 from $3.7 million for the comparable period of 1998. The increase
in product revenues in the second quarter and first six months of 1999 compared
with the respective periods of 1998 was primarily due to increased shipments of
Ricochet modems. For the foreseeable future, the Company plans to continue to
concentrate its marketing efforts on the roll-out of Ricochet2, and as a result,
Ricochet service and product revenues may remain flat or decline over the next
year until the Ricochet2 system is widely deployed and service is commercially
available.
Cost of Revenues
Cost of service revenues is primarily costs incurred to operate Ricochet
networks, the cost of providing customer support, and certain excess capacity
costs 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 $4.5 million for the second quarter
of 1999 from $6.4 million in the second quarter of 1998 and $8.9 million for the
first six months of 1999 from $12.2 million in the first six months of 1998. The
decrease is 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 of its
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plans to replace the Company's current Ricochet networks with Ricochet2
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 Ricochet2 networks. Cost of service revenues is expected to be
greater than service revenues for the foreseeable future.
Cost of product revenues increased to $2.0 million in the second quarter of
1999 from $1.4 million for the second quarter of 1998 and $3.3 million for the
first six months of 1999 from $2.8 million for the first six months of 1998. The
increases were primarily due to increased shipments of Ricochet modems. Cost of
product revenues as a percentage of product revenues increased to 81% for the
second quarter of 1999 from 68% for the comparable period of 1998, and 79% for
the first six months of 1999 over 75% for the respective period of 1998. The
percentage increases were primarily due to an increase in shipments of premium
Ricochet modems at promotional sales prices in the second quarter 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 Ricochet2 modems.
Research and Development
Research and development expenses increased to $8.8 million for the second
quarter of 1999 from $4.9 million for the second quarter of 1998 and $17.0
million for the first six months of 1999 from $8.3 million for the first six
months of 1998. Approximately two-thirds of the increase in the second quarter
of 1999 and the first six months of 1999 was due to costs incurred to deploy a
beta test network for Ricochet2. The remainder of the increase in the first six
months of 1999 is primarily attributable to costs incurred to obtain
right-of-way and site agreements in metropolitan areas where the Company
currently plans to offer service. 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 slightly to $4.5
million for the second quarter of 1999 from $4.6 million for the second quarter
of 1998 and $8.7 million for the first six months of 1999 from $8.9 million in
the first six months of 1998. Selling, general and administrative expenses are
expected to increase for the foreseeable future as the Company grows to support
the deployment and commercialization of Ricochet2.
Interest Income and Expense
Interest expense increased to $1.6 million in the second quarter of 1999
from $1.0 million in the second quarter of 1998 and $2.8 million for the first
six months of 1999 from $2.0 million in the first six months of 1998. The
increases in 1999 are due to the increase in
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outstanding debt under the line of credit with Vulcan. Interest income decreased
to $186,000 for the second quarter of 1999 from $671,000 for the comparable
period of 1998 and $329,000 for the first six months of 1999 from $1.2 million
in the first six months of 1998 primarily due to a lower average balance of
cash, cash equivalents and short-term investments in the first six 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 June 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.
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
Ricochet2 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 2000.
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 June 30, 1999, the Company had incurred $265
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 $3.4 million and $1.4 million in the first six months of 1999 and
1998, respectively. The Company expects to increase significantly the amount of
capital expenditures in connection with the development, deployment and
marketing of its Ricochet2 system. The Company also expects to incur significant
expenditures to procure Ricochet2 modems. The amount and timing of expenditures,
however, may vary significantly depending on numerous factors including market
acceptance; availability of radios and modems;
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availability of sufficient financial, management, marketing and technical
resources, and technological feasibility.
As of June 30, 1999, the Company had cash and cash equivalents of $20.8
million and working capital of $2.6 million. The Company's accounts receivable
increased to $2.5 million as of June 30, 1999 from $1.5 million at December 31,
1998 due primarily to a high proportion of shipments made at the end of the
second quarter of 1999 versus the fourth quarter of 1998. Inventories decreased
to $1.5 million at June 30, 1999 from $3.0 million at December 31, 1998 due
primarily to increased sales of Utilinet and Ricochet products. The Company
believes that both accounts receivable and inventories will increase in the
future in order to support the planned deployment and commercialization of
Ricochet2.
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.
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
certain elements that have date fields. These upgrades are expected to be
completed in October 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
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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.
Part II. Other Information
Item 6: Exhibits and Reports on Form 8-K
A. Exhibits:
Exhibit 27.1 - Financial Data Schedule
B. Form 8-K:
i) 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
Item 7A: 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 June 30, 1999, the 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.
15
<PAGE> 16
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 June 30, 1999, there was $30 million outstanding on the
line of credit, which is due on October 29, 2000. As of June 30, 1999, there was
$10 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.
16
<PAGE> 17
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: August 13, 1999 /s/ TIMOTHY A. DREISBACH
-------------------------------------
Timothy A. Dreisbach
President and Chief Executive Officer
/s/ JAMES E. WALL
-------------------------------------
James E. Wall
Chief Financial Officer
17
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