<PAGE> 1
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, 2000 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.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0294597
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
333 WEST JULIAN STREET, SAN JOSE, CA 95110-2335
(Address of principal executive offices, including zip code)
(408) 282-3000
(Registrant's telephone number, including area code)
980 UNIVERSITY AVENUE, LOS GATOS, CA 95032-2375
(Former address of principal executive offices, including zip code)
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 July 31, 2000 was
30,716,980.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview 11
Results of Operations 12
Liquidity and Capital Resources 16
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK 18
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURE PAGE 21
EXHIBIT INDEX 22
</TABLE>
2
<PAGE> 3
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, that are based on our current expectations about our
company and our industry. We use words such as "plan," "expect," "intend,"
"believe," "anticipate," "estimate" and other similar expressions to identify
some forward-looking statements, but not all forward-looking statements include
these words. Some of these forward-looking statements relate to the timing of
our planned network deployment, the launch of our high-speed service, our market
opportunities, our strategy, our anticipated revenues from MCI WorldCom, our
competitive position, our management's discussion and analysis of our financial
condition and results of operations and the timing and extent of our funding
needs. All of our forward-looking statements involve risks and uncertainties.
Our actual results may differ significantly from our expectations and from the
results expressed in or implied by these forward-looking statements. Some of the
factors that could cause our results to differ include our limited experience in
marketing our new Ricochet service, the uncertainty of demand for that service,
the short timeframe in which we believe we must deploy our high-speed network to
be competitive, the magnitude of our deployment and launch, our dependence on
third parties to deploy our high-speed network and manufacture modems and other
network equipment on a timely and cost-effective basis, the shortage of supply
of components experienced by our manufacturers, our dependence on channel
partners such as MCI Worldcom and our need to gain acceptance by other channel
partners, and risks related to regulatory approvals. These and other risks that
we currently consider material are described in the section captioned "Risk
Factors" appearing in our 1999 Annual Report on Form 10-K. We urge you to
consider these cautionary statements carefully in evaluating our forward-looking
statements. Except as required by law, we undertake no obligation to publicly
update any forward-looking statements to reflect subsequent events and
circumstances.
3
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METRICOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................................. $ 640,294 $ 354,820
Restricted cash and cash equivalents .................................. 21,858 --
Short-term investments ................................................ 282,212 144,521
Restricted short-term investments ..................................... 38,987 --
Accounts receivable, net .............................................. 1,733 2,387
Inventories, net ...................................................... 3,325 586
Prepaid expenses and other ............................................ 13,408 3,116
----------- ---------
Total current assets .............................................. 1,001,817 505,430
Property and equipment, net ............................................. 26,813 12,233
Network construction in progress ........................................ 282,618 22,034
Other assets ............................................................ 15,705 6,950
Restricted long-term investments ........................................ 35,745 --
----------- ---------
Total assets....................................................... $ 1,362,698 $ 546,647
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable ...................................................... $ 77,266 $ 9,649
Accrued liabilities ................................................... 48,715 12,642
Note payable .......................................................... 908 4,521
----------- ---------
Total current liabilities ......................................... 126,889 26,812
----------- ---------
Long-term debt .......................................................... 242,242 385
----------- ---------
Other liabilities ....................................................... 281 321
----------- ---------
Redeemable convertible preferred stock .................................. 574,653 573,329
----------- ---------
Stockholders' Equity (Deficit)
Common stock .......................................................... 31 25
Warrants to purchase common stock ..................................... 61,869 --
Additional paid-in capital ............................................ 771,653 283,763
Accumulated deficit ................................................... (414,520) (337,988)
Accumulated other comprehensive loss .................................. (400) --
----------- ---------
Total stockholders' equity (deficit) ................................ 418,633 (54,200)
----------- ---------
Total liabilities and stockholders' equity (deficit)............... $ 1,362,698 $ 546,647
=========== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
4
<PAGE> 5
METRICOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ------------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Service revenues .................... $ 2,135 $ 2,195 $ 4,469 $ 4,626
Product revenues .................... 172 2,468 1,061 4,223
-------- -------- -------- --------
Total revenues .................. 2,307 4,663 5,530 8,849
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of service revenues ............ 21,701 4,071 35,519 8,183
Cost of product revenues ............ 1,627 2,011 1,927 3,337
Research and development ............ 9,201 8,559 17,308 16,598
Selling, general and
administrative ................... 12,356 4,099 19,688 7,814
Depreciation and amortization ....... 2,428 1,065 4,532 2,007
-------- -------- -------- --------
Total costs and expenses ............ 47,313 19,805 78,974 37,939
-------- -------- -------- --------
Loss from operations .............. (45,006) (15,142) (73,444) (29,090)
Interest expense ...................... (3,522) (1,601) (10,994) (2,814)
Interest and other income ............. 17,193 186 33,787 329
-------- -------- -------- --------
Net loss .......................... (31,335) (16,557) (50,651) (31,575)
Preferred dividends ................... 12,939 -- 25,881 --
-------- -------- -------- --------
Net loss attributable to
common stockholders ................. $(44,274) $(16,557) $(76,532) $(31,575)
======== ======== ======== ========
Net loss attributable to common
stockholders per share .............. $ (1.44) $ (0.86) $ (2.60) $ (1.65)
======== ======== ======== ========
Weighted average
shares outstanding ................. 30,654 19,296 29,409 19,084
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated statements.
5
<PAGE> 6
METRICOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
2000 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................... $ (50,651) $(31,575)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization ................................ 4,532 2,007
Loss on retirement of fixed assets ........................... 490 --
Accretion of long-term debt .................................. 2,376 --
Non-cash compensation expense ................................ 741 --
Increase in accounts receivable,
prepaid expenses and other current assets .................. (9,638) (3,488)
(Increase) decrease in inventories ........................... (2,739) 1,562
Increase (decrease) in accounts payable, accrued
liabilities and other liabilities .......................... 76,190 (345)
--------- --------
Net cash provided by (used in) operating activities ...... 21,301 (31,839)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .................................. (19,602) (3,159)
Network construction in progress .................................... (248,670) --
Increase in other assets ............................................ (8,755) --
Purchase of short-term investments .................................. (350,036) --
Sale of short-term investments ...................................... 172,958 --
Purchase of long-term investments ................................... (35,745) --
--------- --------
Net cash used in investing activities .................... (489,850) (3,159)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............................ 477,793 6,816
Proceeds from sale of warrants to purchase common stock ........... 61,869 --
Proceeds from the issuance of long-term debt ...................... 236,382 --
(Payments of) additions to notes payable, net ..................... (10) 9,871
(Payments of) additions to long-term debt ......................... (153) 20,000
--------- --------
Net cash provided by financing activities ................. 775,881 36,687
--------- --------
Net increase in cash and cash equivalents ........................... 307,332 1,689
Cash and cash equivalents, beginning of period ...................... 354,820 19,141
--------- --------
Cash and cash equivalents, end of period ............................ $ 662,152 $ 20,830
========= ========
SUMMARY OF NON-CASH TRANSACTIONS:
Property and equipment acquired under capital lease ............... $ -- $ 280
Network construction in progress acquired under capital lease ..... 3,954 --
Interest capitalized on network construction in progress .......... 7,960 --
Common stock issued upon conversion of debt ....................... 4,304 --
Preferred dividends ............................................... 25,881 --
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated statements.
6
<PAGE> 7
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 include only normal recurring adjustments) which are
necessary for a fair presentation of operations for the six- month periods ended
June 30, 2000 and June 30, 1999. 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 for the year ended December 31, 1999, 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
2000 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 six-month periods ended June 30, 2000 and June 30, 1999
are not necessarily indicative of the results expected for the full fiscal year
or for any other fiscal period.
NOTE 2. INVESTMENTS
The Company's investments in securities are considered
available-for-sale and are recorded at their fair values as determined by quoted
market prices with any unrealized holding gains or losses classified as a
separate component of stockholders' equity. Upon sale of the investments, any
previously unrealized gains or losses are recognized in results of operations.
NOTE 3. NETWORK CONSTRUCTION IN PROGRESS
In 1999, the Company began deployment of its high-speed Ricochet
networks in a number of markets in the United States. As of June 30, 2000, the
Company had incurred and capitalized $282.6 million of costs associated with
network deployment. Network deployment costs include labor costs for site
acquisition, radio frequency engineering, zoning and construction management,
material costs for equipment and component inventory, as well as capitalized
interest cost. The Company had capitalized interest cost of $7.96 million for
the six-month period ended June 30, 2000. As commercial service is launched in
each market, the capitalized costs associated with the
7
<PAGE> 8
network equipment assets in each market will be transferred to Property and
Equipment and depreciated over an estimated useful life of four years.
NOTE 4. LONG-TERM DEBT, COMMON STOCK AND PREFERRED STOCK OFFERINGS
In February 2000, the Company, together with its wholly owned finance
subsidiary, Metricom Finance, Inc., as co-issuers and co-obligors, issued $300
million aggregate principal amount of 13% Senior Notes due 2010. Metricom
Finance has no independent assets or operations. The Company has fully and
unconditionally guaranteed the obligations of Metricom Finance, Inc. under the
notes. Interest on the notes will be payable on February 15 and August 15 of
each year, beginning August 15, 2000. The notes will mature on February 15,
2010. The notes were offered together with warrants to purchase 1,425,000 shares
of common stock of the Company at an initial exercise price of $87.00 per share.
Each warrant enables the holder to purchase 4.75 shares of common stock and is
exercisable on or after August 15, 2000. Each warrant was sold for $212.06 per
each associated $1,000 principal amount of notes, and each note was sold for
$787.94. The warrants will expire on February 15, 2010. Net proceeds to the
Company from the notes and warrants offering was approximately $291.8 million,
$73.1 million of which was deposited in a restricted pledge account to secure
the payment of the first four scheduled interest payments on the notes.
In February 2000, the Company issued 5,750,000 shares of common stock at
$87.00 per share in a public offering. Net proceeds to the Company were
approximately $473.2 million, after deducting underwriting discounts,
commissions and estimated offering expenses.
In November 1999, the Company issued and sold to MCI WorldCom, Inc. 30
million shares of newly-designated Series A1 preferred stock at a price of $10
per share, and the Company issued and sold to Vulcan Ventures 30 million shares
of newly-designated Series A2 preferred stock at a price of $10 per share, for
gross aggregate proceeds to the Company of $600 million. Both series of
preferred stock bear cumulative dividends at the rate of 6.5% per annum for
three years, payable in cash or additional shares of preferred stock. In
addition, each series has 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 stock is subject to mandatory redemption by the
Company at the original issuance price 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. Both series of preferred stock will
accrete at approximately $2.7 million per year over the 10-year period from the
beginning aggregate net book value of $573 million up to its redemption value of
$600 million. This accretion will be charged against retained earnings
(accumulated deficit).
8
<PAGE> 9
NOTE 5. COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Net loss attributable to common stockholders .......................... $(76,532) $(31,575)
Other comprehensive income/(loss):
Unrealized holding loss on available-for-sale securities ............. (400) --
-------- --------
Comprehensive income (loss) ........................................... $(76,932) $(31,575)
======== ========
</TABLE>
NOTE 6. 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 preferred stock have been excluded from the
calculation of diluted net loss per share as their effect would be
anti-dilutive.
NOTE 7. SEGMENT REPORTING
The information in the following table is derived directly from the
Company's internal financial reporting used for corporate management purposes.
The Company evaluates its segments' performance based on several factors, of
which the primary financial measures are revenue and gross margin. Corporate
overhead and other costs are not allocated to business segments for management
reporting purposes. The Company does not allocate assets by segment for
management reporting purposes.
All of the Company's operations are located in the United States. 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.
In February 2000, UtiliNet technology was licensed to Schlumberger Resources
Management Services, Inc. The agreement grants Schlumberger the exclusive right
to design, manufacture and sell UtiliNet products in return for license and
royalty fees. A summary of operating results by reportable operating segment in
the second quarter of 2000 is as follows:
9
<PAGE> 10
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
2000 1999
------- ------
<S> <C> <C>
Ricochet Revenue ............. $ 4,962 $5,598
Utilinet Revenue ............. 568 3,251
------- ------
Total .................... $ 5,530 $8,849
======= ======
Cost of Service Ricochet ..... $35,519 $8,158
Cost of Service Utilinet ..... -- 25
------- ------
Total .................... $35,519 $8,183
======= ======
Cost of Product Ricochet ..... $ 1,746 $1,938
Cost of Product Utilinet ..... 181 1,399
------- ------
Total .................... $ 1,927 $3,337
======= ======
</TABLE>
NOTE 8. NEW ACCOUNTING STANDARDS
In June 1998, 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 fiscal years beginning after June
15, 2000. The Company believes the pronouncement will not have a material effect
on its financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
will adopt SAB 101 as required in the fourth quarter of 2000. The Company does
not expect the adoption of SAB 101 to have a material effect on the Company's
consolidated results of operations and financial position.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since inception, we have devoted significant resources to the
development, deployment and commercialization of our wireless network products
and services. Historically, a significant portion of our revenues has 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, we have deployed a commercial wireless data network known as
Ricochet in various metropolitan areas of the United States. For several years
we have provided Ricochet commercial service, which offers mobile wireless
internet and LAN access at average speeds of 28.8 kbps, in the San Francisco Bay
Area, Seattle and Washington D.C. metropolitan areas. In July and August of
2000, we launched our new commercial high-speed Ricochet service, which operates
at average speeds of 128 kbps, in the San Diego and Atlanta metropolitan areas.
We are currently constructing our high-speed service in numerous additional
metropolitan areas in the United States. While we believe we are substantially
on track with the overall national network deployment described in our 1999
Annual Report on Form 10-K, the planned New York service area launch is facing
delays relating to timeframes for zoning approvals as well as utility agreement
negotiations. In addition, progress in three other planned service areas is
proceeding slowly, and we are currently assessing the impact on these market
area launches.
In February 2000, in order to focus our operations on deployment of our
high-speed network, we entered into an agreement to license our UtiliNet
technology to Schlumberger Resources Management Services, Inc. The agreement
grants Schlumberger the exclusive right to design, manufacture and sell UtiliNet
products in return for license and royalty fees. We do not expect UtiliNet to be
a significant source of revenues in the future.
We currently derive substantially all of our revenues from subscription
fees paid to us by users of our current Ricochet service. In the future, we
expect to derive substantially all of our revenues from subscription fees paid
to us by channel partners, which will resell our service directly to their
customers. In connection with the launch of our high-speed service, we expect to
curtail our business operations related to our current Ricochet service. As we
deploy our high-speed network and launch our high-speed service, we expect our
operating expenses to increase significantly from historical levels and to
exceed revenues for the foreseeable future. We expect to generate substantial
net losses to common stockholders for the foreseeable future.
11
<PAGE> 12
RESULTS OF OPERATIONS
Revenues
Currently, we derive revenues from the sale of our services and
products. We derive service revenues from Ricochet subscriber fees and Ricochet
modem rentals, and we recognize these revenues ratably over the service period.
We derive product revenues from the sale of Ricochet modems and recognize these
revenues upon shipment.
Total revenues decreased to $2.3 million in the second quarter of 2000
from $4.7 million for the same period of 1999 and to $5.5 million for the first
six months of 2000 from $8.8 million for the same period of 1999. The decline in
2000 was primarily due to a decrease in product revenues. Product revenues
declined to $0.2 million for the second quarter of 2000 from $2.5 million for
the same period of last year, and to $1.1 million for the first six months of
2000 from $4.2 million for the first six months of 1999. The decline in 2000
resulted primarily from the licensing of our UtiliNet technology to
Schlumberger. It was also partly due to our strategic decision to restrict sales
of our 28.8 kbps modems in order to focus on the launch of our high-speed
service. Service revenues decreased to $2.1 million in the second quarter of
2000 from $2.2 million in the same period of 1999 and to $4.5 million for the
first six months of 2000 from $4.6 million in the same period of 1999. The
slight decrease in the second quarter was primarily the result of a decrease in
UtiliNet service revenues of approximately $0.5 million, offset by a $0.4
million increase in Ricochet service revenues. Ricochet service revenues
increased as a result of a slight increase in the average number of subscribers
during the second quarter of 2000 compared with the second quarter of 1999.
Total UtiliNet revenues decreased to $0.1 million in the second quarter of 2000
from $2.2 million in the same period of 1999 as a result of our licensing of our
UtiliNet technology to Schlumberger. We expect that our UtiliNet revenues will
continue to be insignificant in the future as a result of our focus on the
launch of our high-speed service.
In the future, after we launch our high-speed service, we expect to
curtail our business operations related to our current Ricochet 28.8 kbps
service. We expect to derive substantially all of our future revenues from
subscription fees paid to us by channel partners. We anticipate that our channel
partners will pay us subscription fees based on flat rates for each user they
enroll for our service. We will require each of our channel partners to charge
its subscribers a flat rate for use of our service, although each channel
partner will set the particular rate it charges its customers.
We currently have three channel partner relationships. MCI WorldCom,
Juno Online Services, Inc. and Wireless WebConnect! have all entered into
agreements with us to sell our high-speed service to their customers. In our
agreement with MCI Worldcom, MCI WorldCom has agreed to pay us a per-subscriber
fee, subject to an agreed minimum revenue level of at least $388 million over
the five years following the launch of our high speed service, assuming that our
deployment schedule is not delayed, that we place our network into service on
schedule and that we meet quality-of-service and network performance standards.
Subject to these limitations, we currently expect MCI WorldCom to pay us the
following minimum amounts during the first five years after we launch our
service:
12
<PAGE> 13
<TABLE>
<S> <C>
First year........................ $ 5.6 million
Second year....................... 40.6 million
Third year........................ 83.6 million
Fourth year....................... 117.4 million
Fifth year........................ 141.0 million
</TABLE>
Notwithstanding the foregoing, if MCI WorldCom's sales efforts result in fewer
subscribers than MCI WorldCom has agreed contractually to provide, but the
number of subscribers provided by MCI WorldCom and its authorized resellers
nevertheless represent more than a specified percentage of our total users, MCI
WorldCom will pay us only the greater of a per-subscriber rate for each of its
subscribers or the subscription fees we receive from all of our other channel
partners, which could be substantially less than the minimum revenues we
currently expect from MCI WorldCom. Accordingly, our ability to achieve the
minimum revenue levels we expect from our agreement with MCI WorldCom may depend
on our ability to enter into channel agreements with one or more large channel
partners that can successfully sell subscriptions to our service so that
subscribers provided by MCI WorldCom and its resellers represent less than the
threshold percentage of our total users. In addition, if our deployment schedule
is delayed or if we fail to meet deployment schedule deadlines or fail to comply
with quality-of-service standards relating to data transmission performance,
network availability, coverage and latency, ease of use and size of modems, all
as specified in our agreement, MCI WorldCom may delay or reduce its minimum
payments to us or, in the case of a deployment delay in excess of 12 months, may
terminate the contract.
Cost of Revenues
Cost of service revenues consists primarily of network operations costs
and real estate management costs on network equipment. Network operations costs
include the costs associated with the field managers, engineers and technicians
who operate and maintain our high-speed network, as well as the costs associated
with field offices we maintain, including our network operations centers.
Network operations costs also include the telecommunications costs we incur to
transmit data between our wired access points and network interface facilities
and the Internet. Real estate management costs include the costs associated with
the maintenance of lease agreements for our poletop radios, wired access points
and network interface facilities and the ongoing rental payments for these
sites. Real estate management costs also consist of the internal and external
labor costs associated with maintaining right-of-way agreements in the markets
where our network is currently deployed.
Cost of service revenues increased to $21.7 million in the second
quarter of 2000 compared with $4.1 million in the second quarter of 1999, and to
$35.5 million for the first six months of 2000 compared with $8.2 million for
the same period of 1999. The significant increase in 2000 was due to increases
in staffing, property, telecommunications and support costs associated with the
deployment of our new high-speed service in various markets. Staffing of
personnel who manage network deployment and operations increased by over 500%
from June 30, 1999 to June 30, 2000. In the past year, we have entered into over
1,600 site leases for network equipment and opened up over ten new operations
field offices. We expect all
13
<PAGE> 14
components of our cost of service revenues to continue to increase significantly
and rapidly as we expand the scope of our operations through the deployment of
our high-speed network.
Cost of product revenues consists primarily of the inventory and
manufacturing costs associated with Ricochet modem product sales. Cost of
product revenues in the second quarter of 2000 decreased to $1.6 million from
$2.0 million in the second quarter of 1999 and to $1.9 million for the first six
months of 2000 from $3.3 million for the same period of 1999. Ricochet cost of
product revenues as a percentage of Ricochet product revenues increased to over
1100% in the second quarter of 2000 from 125% for the second quarter of last
year and to over 300% for the first six months of 2000 from 98% for the same
period of 1999. The increase was primarily due to a $1.3 million loss provision
established in June 2000 for high-speed modems included in inventory which are
planned for sale at less than cost. This increase is offset in part by a
decrease resulting from shipments of refurbished modems for which the majority
of costs have been charged to operations in previous periods. We expect Ricochet
cost of product revenues to increase in 2000 as we procure and sell modem
inventory directly to channel partners for resale to new subscribers to our
high-speed service. In subsequent years, we anticipate that our channel partners
may begin to purchase modems directly from our licensed third-party
manufacturers.
Research and Development
Research and development costs include the costs incurred to develop our
network technology and subscriber modems, as well as to obtain rights-of-way and
related site agreements in markets where we plan to offer service. Research and
development expenses increased to $9.2 million in the second quarter of 2000
from $8.6 million in the second quarter of 1999 and to $17.3 million for the
first six months of 2000 from $16.6 million for the same period of 1999. The
increase in the second quarter of 2000 compared with 1999 was primarily due to
increases in staffing costs associated with the development of our networking
products and services. The increase in the first six months of 2000 compared
with the same period of 1999 also reflects an increase in costs incurred to
obtain right-of-way and site agreements in metropolitan areas where we currently
plan to offer service. Right-of-way acquisition costs included in research and
development for the first six months of 2000 increased to $6.7 million from $6.5
million in the same period of 1999. We plan to continue to spend a substantial
amount on staffing and support needed to obtain right-of-way agreements in
markets under development. We intend to spend a substantial amount on the
development of our networking products to reduce the cost of our system
components, increase the speed and performance of our services and develop
additional applications for our services. We also plan to continue to improve
and upgrade our network and service to address the emerging demands for mobile
data access. As a result, we expect that research and development costs will
continue to increase significantly in absolute dollars for the foreseeable
future.
Selling, General and Administrative
Selling, general and administrative expenses include our corporate
overhead and the costs associated with our efforts to obtain and support our
channel partners, promote the Ricochet brand and our high-speed service, and
develop and implement our marketing strategy for our service and modems.
Selling, general and administrative expenses increased to $12.4 million for the
second quarter of 2000 from $4.1 million for the second quarter of 1999 and to
$19.7 million
14
<PAGE> 15
for the first six months of 2000 from $7.8 million for the same period of 1999.
Nearly all of the increase in the second quarter of 2000 was due to increased
product marketing, advertising and public relations expenditures related to
commercialization and launch of our high-speed service. Approximately one-third
of the increase in the first six months was due to increases in administrative
staff and the labor, travel and support costs associated with supporting the
widespread deployment of our high-speed service. We expect selling, general and
administrative costs to increase significantly from historical levels as we
implement our planned advertising campaign related to the launch of the various
phases of our high-speed service. We expect to spend more than $50 million on
sales and marketing efforts in 2000 and substantially more in 2001. We also
expect to continue to expand our corporate and administrative infrastructure to
support our planned growth.
Depreciation and Amortization
Depreciation and amortization expenses increased to $2.4 million for the
second quarter of 2000 from $1.1 million for the second quarter of 1999 and to
$4.5 million for the first six months of 2000 from $2.0 million for the same
period of 1999. The increases resulted principally from the purchase and lease
of over $25 million of property, plant and equipment, primarily computer
equipment and software, since June 30, 1999. We expect depreciation and
amortization to increase substantially in the second half of 2000 and in future
years as we launch our commercial high-speed Ricochet service in each
metropolitan area. As we launch our service in each market, capitalized costs
associated with the network equipment assets in the market will be transferred
to Property and Equipment and depreciated over an estimated useful life of four
years.
Interest and Other Income and Interest Expense
Interest and other income increased to $17.2 million in the second
quarter of 2000 from $0.2 million in the second quarter of 1999 and to $33.8
million for the first six months of 2000 from $0.3 million in the same period of
1999 due primarily to a significantly higher average balance of cash, cash
equivalents and investments on hand in 2000. As a result of the November 1999
sale of our preferred stock for net proceeds of $573.2 million and the February
2000 sale of common stock, 13% senior notes due 2010 and warrants to purchase
common stock, we have approximately $1 billion in cash and investments on hand.
We are using these cash resources to fund the deployment of our network, to fund
operating losses and working capital requirements through the first two phases
of our network deployment, and to fund interest on long-term debt and dividends
on our preferred stock outstanding. Pending these uses, we have invested this
cash in high-quality, short-term, interest-bearing securities. Accordingly,
although in the short-term we expect to continue to generate a substantial
amount of interest income, this interest income will decline rapidly over time
as we use this cash.
Interest expense increased to $3.5 million in the second quarter of 2000
from $1.6 million in the second quarter of 1999 and to $11.0 million for the
first six months of 2000 from $2.8 million for the same period of 1999 as a
result of the increase in our outstanding debt in 2000. In the second quarter of
2000, interest expense was reduced by approximately $8.0 million as a result of
capitalization of interest into network construction in progress. Due to our
senior notes and warrants offering in February 2000, we have approximately $300
million in outstanding debt.
15
<PAGE> 16
The senior notes require semi-annual cash interest payments commencing August
15, 2000. We deposited approximately $73.1 million of the net proceeds from the
sale of the senior notes in a pledge account to secure the first four interest
payments on these securities. We therefore will continue to incur a substantial
expense, a portion of which will be non-cash, for interest on these obligations.
If we incur additional debt in the future to fund our expansion plans, our
interest costs will increase.
Preferred Dividends
In November 1999, we issued 60,000,000 shares of preferred stock to
Vulcan Ventures Incorporated and MCI WorldCom, Inc. for gross proceeds of $600
million. Each share of preferred stock bears a cumulative dividend at the rate
of $.65 per year for the first three years after issuance, which we may pay in
cash or in additional shares of preferred stock. We have historically paid and
currently expect to continue to pay future dividends on the preferred stock in
cash. Because the preferred stock sold to Vulcan Ventures is immediately
convertible into common stock at the holder's option at a conversion price of
$10.00 per share, which was below $11.06, the per share closing price of our
common stock on the date immediately prior to our execution of the preferred
stock purchase agreement, we recorded an additional dividend of $31.8 million in
the fourth quarter of 1999 to reflect the beneficial conversion privilege
associated with this series of preferred stock. The preferred stock issued to
MCI WorldCom is also deemed to have been issued with a beneficial conversion
privilege. However, that series of preferred stock does not begin to become
convertible into common stock at the holder's option until May 2002. As a
result, this discount will be amortized over the 48-month period, which began in
November 1999, during which this series of preferred stock becomes convertible
into common stock at the holder's option. Accordingly, for both series of
preferred stock in the aggregate, we will record preferred stock dividends in
addition to our cash dividend on the preferred stock as follows:
<TABLE>
<S> <C>
2000.................. $10.1 million
2001.................. $10.1 million
2002.................. $7.8 million
2003.................. $2.6 million
</TABLE>
Both series of preferred stock will accrete at approximately $2.7
million per year in total over the ten-year period from the beginning aggregate
net book value of $573 million up to its aggregate face value of $600 million.
This accretion will be charged against retained earnings (accumulated deficit).
In the second quarter of 2000, preferred dividends included $9.7 million of
accrued dividends payable, $2.5 million of beneficial conversion privilege and
$0.7 million of accretion related to the preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations and capital expenditures primarily
through the public and private sale of equity and debt securities. In 1996, we
completed a private placement of 8% Convertible Subordinated Notes due 2003 with
net proceeds of approximately $43.4 million. In January 1998, we completed a
private placement of common stock with Vulcan Ventures with
16
<PAGE> 17
net proceeds of approximately $53.7 million. In November 1999, we completed a
private placement of redeemable convertible preferred stock with Vulcan Ventures
and MCI WorldCom with net proceeds of approximately $573 million. In February
2000, we completed a public offering of common stock with net proceeds of
approximately $473 million and a public offering of 13% senior notes due 2010
and warrants to purchase common stock with available net proceeds of
approximately $219 million, after establishing the required reserve to secure
the first four interest payments on the notes. This large amount of indebtedness
could adversely affect our business, for example, by requiring us to dedicate a
substantial portion of our cash flow from operations to required payments on
indebtedness or limiting our ability to acquire additional financing in the
future. See "Risk Factors - We have a substantial amount of debt, which could
adversely affect our business, financial condition and results of operations" in
our 1999 Annual Report on Form 10-K.
Since inception, we have devoted significant resources to the
development, deployment and commercialization of wireless network products and
services. As a result, as of June 30, 2000, we had incurred $415 million of
cumulative net losses. Our operations have required substantial capital
investments for the purchase of network equipment, modems and computer and
office equipment. Including network construction in progress, capital
expenditures were $156.2 million during the second quarter of 2000. Network
construction in progress at June 30, 2000 included approximately $73 million
related to the purchase of component inventory located at our vendors. We expect
that our vendors holding this inventory will use these components in the
manufacture and assembly of network equipment for us in 2000. We expect that
capital expenditures will significantly increase in the future as a result of
our ongoing deployment and commercialization of the high-speed network.
Our principal uses of cash for the foreseeable future will be to fund
the deployment of our high-speed network, to fund operating losses and to pay
interest on our debt securities issued in February 2000, as well as dividends on
our preferred stock. Based on our current projections, we believe that our cash,
cash equivalents and unrestricted investments of approximately $922 million as
of June 30, 2000 will be sufficient to fund the first two phases of our network
deployment. We believe that, in addition to the funds on hand at June 30, 2000,
we will require additional cash resources of approximately $300 to $500 million
to enable us to complete the three-phase deployment of our network, as well as
for the other purposes described above. However, the funds we may actually
require to complete any phase of the deployment may vary materially from our
estimates. In addition, we could incur unanticipated costs or be required to
alter our plans in order to respond to changes in competitive or other market
conditions, which could require us to raise additional capital sooner than we
expect. Further, although it is not our current intention to do so, we may
decide to use a portion of our cash resources to acquire licensed spectrum or to
license, acquire or invest in new products, technologies or businesses that we
consider complementary to our business. We cannot assure you that the additional
capital we will require to complete the third phase of our network deployment or
for these other purposes will be available on commercially reasonable terms or
at all. If we are unable to secure additional financing as necessary, we may
need to delay or curtail our expansion plans. See "Risk Factors -- We will
require significant additional capital in the future to fund our continuing
development, deployment and marketing of our high-speed network and service" in
our 1999 Annual Report on Form 10-K.
17
<PAGE> 18
Our current and future operations will require substantial capital
investments for the purchase of our network equipment, which consists primarily
of network radios, wired access points and network interface facilities.
Significant labor costs associated with deploying our network equipment include
design of the network, site acquisition, zoning, construction and installation
of equipment. In July 1999, we entered into an agreement with Sanmina
Corporation to manufacture our poletop radios and network radios installed at
wired access points. In October 1999, we entered into agreements with Wireless
Facilities, Inc., General Dynamics Worldwide Telecommunications Systems and
Whalen & Company to provide us with expertise and personnel to assist with the
deployment of our network. At June 30, 2000, we had outstanding commitments to
purchase approximately $368 million of network equipment and related labor from
these suppliers.
We expect to incur significant expenditures to procure high-speed modems
in the future. We have agreed to purchase 57,700 modems from our current modem
supplier, Alps Electric (USA), Inc., in 2000, representing a commitment of
approximately $24 million. As of June 30, 2000, we had received approximately
8,800 modems from Alps. In January 2000, we entered into a two-year agreement
with NatSteel Electronics, Ltd. for the purchase of additional modems. In
November 1999 and October 1999, we entered into agreements with Sierra Wireless
and Novatel, respectively to develop and manufacture custom personal computer
card modems. We have agreed with both Sierra Wireless and Novatel to purchase a
minimum of 150,000 units in the first year of deliveries from each, representing
a total commitment of approximately $68 million. Deliveries from Alps began in
the second quarter of 2000 and we anticipate that deliveries from Sierra
Wireless and Novatel will begin in early 2001. In April 2000, we entered into an
agreement with National Semiconductor Corporation to integrate the Ricochet
modem technology onto a microchip set.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to financial market risk, including changes in interest
rates and marketable securities prices, relates primarily to our investment
portfolio, long-term debt and redeemable convertible preferred stock
outstanding. Our cash equivalents and short-term investments subject to interest
rate risk are primarily highly liquid corporate debt securities from high credit
quality issuers. We do not have any significant investments in foreign
currencies and we do not have any foreign exchange contracts or derivative
instruments. We performed a sensitivity analysis to assess the impact of a
change in interest rates. In the analysis, the fair value of our investment
portfolio would not be significantly impacted by a 100-basis point change in
interest rates, due primarily to the fixed rate, short-term nature of our
portfolio. The fair value of our redeemable convertible preferred stock would
not change materially in the event of a 100-basis point change in interest
rates, due primarily to the fixed and relatively short-term nature of its 6.5%
coupon rate. We estimate that the fair value of our long-term debt would
decrease or increase by approximately $9 million in the event of a 100-basis
point increase or decrease, respectively, in interest rates.
18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
In June 2000, the stockholders approved an amendment to the Company's
Restated Certificate of Incorporation to increase the authorized number of
shares of capital stock from 230,000,000 to 580,000,000 shares and to increase
the Company's authorized number of shares of Common Stock from 150,000,000 to
500,000,000. The additional common stock to be authorized will have rights
identical to the currently outstanding Common Stock of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of Stockholders of Metricom, Inc. was held on June
26, 2000.
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 Against Term Expires
---------- --------- ------------
<S> <C> <C> <C>
William D. Savoy 27,831,925 1,270,077 2003
David M. Moore 27,835,840 1,266,162 2003
</TABLE>
2) Approve the 1997 Equity Incentive Plan, as amended.
For: 13,235,902 Against: 6,037,228 Abstain: 62,789
3) Approve the Company's 1991 Employee Stock Purchase Plan, as amended.
For: 18,907,006 Against: 360,035 Abstain: 68,878
4) Approve an amendment to the Restated Certificate of Incorporation.
For: 86,917,234 Against: 2,128,058 Abstain: 56,710
5) Ratify the selection of Arthur Andersen LLP as independent auditors
of the Company for its fiscal year ending December 31, 2000
For: 28,993,854 Against: 76,437 Abstain: 31,711
19
<PAGE> 20
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
3.1(a) Restated Certificate of Incorporation
3.1(b) Certificate of Amendment of Amended and Restated
Certificate of Incorporation dated August 2, 2000.
10.8 1991 Employee Stock Purchase Plan, as amended
10.17 1997 Equity Incentive Plan, as amended
10.18 2000 Equity Incentive Plan
27.1 Financial Data Schedule
b. Reports on Form 8-K: None
20
<PAGE> 21
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 14, 2000 /s/ TIMOTHY A. DREISBACH
------------------------------------
Timothy A. Dreisbach
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
/s/ JAMES E. WALL
------------------------------------
James E. Wall
Chief Financial Officer (Principal
Financial and Accounting Officer)
21
<PAGE> 22
EXHIBIT INDEX
3.1(a) Restated Certificate of Incorporation
3.1(b) Certificate of Amendment of Amended and Restated
Certificate of Incorporation dated August 2, 2000.
10.8 1991 Employee Stock Purchase Plan, as amended
10.17 1997 Equity Incentive Plan, as amended
10.18 2000 Equity Incentive Plan
27.1 Financial Data Schedule
22
