<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 SEPTEMBER 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)
<TABLE>
<S> <C>
DELAWARE 77-0294597
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
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)
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 31, 2000 was
30,777,392
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TABLE OF CONTENTS
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PAGE
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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 18
Outlook 20
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK 20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURE PAGE 21
EXHIBIT INDEX 22
</TABLE>
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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 and related expenditures, the launch of our
high-speed service, our market opportunities, our strategy, our anticipated
revenues from our channel partners, 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,
especially in light of the delays we have experienced to date in some markets,
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
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.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METRICOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(Unaudited)
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ASSETS
Current Assets:
Cash and cash equivalents ...................................... $ 489,397 $ 354,820
Restricted cash and cash equivalents ........................... 22,474 --
Short-term investments ......................................... 224,959 144,521
Restricted short-term investments .............................. 37,492 --
Accounts receivable, net ....................................... 1,847 2,387
Inventories, net ............................................... 21,921 586
Prepaid expenses and other ..................................... 9,890 3,116
----------- -----------
Total current assets ....................................... 807,980 505,430
Property and equipment, net ...................................... 92,193 12,233
Network construction in progress ................................. 384,851 22,034
Other assets ..................................................... 11,404 6,950
Restricted long-term investments ................................. 17,882 --
----------- -----------
Total assets ............................................... $ 1,314,310 $ 546,647
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable ............................................... $ 73,714 $ 9,649
Accrued liabilities ............................................ 52,901 12,642
Note payable ................................................... 898 4,521
----------- -----------
Total current liabilities .................................. 127,513 26,812
----------- -----------
Long-term debt ................................................... 243,452 385
----------- -----------
Other liabilities ................................................ -- 321
----------- -----------
Redeemable convertible preferred stock ........................... 575,314 573,329
----------- -----------
Stockholders' Equity (Deficit)
Common stock ................................................... 31 25
Warrants to purchase common stock .............................. 61,869 --
Additional paid-in capital ..................................... 775,239 283,763
Accumulated deficit ............................................ (468,987) (337,988)
Accumulated other comprehensive loss ........................... (121) --
----------- -----------
Total stockholders' equity (deficit) ......................... 368,031 (54,200)
----------- -----------
Total liabilities and stockholders' equity ................. $ 1,314,310 $ 546,647
=========== ===========
</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 OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
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REVENUES:
Service revenues ....................... $ 2,068 $ 2,531 $ 6,537 $ 7,158
Product revenues ....................... 1,864 2,264 2,925 6,486
--------- --------- --------- ---------
Total revenues ..................... 3,932 4,795 9,462 13,644
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of service revenues ............... 32,919 4,551 68,438 12,734
Cost of product revenues ............... 2,418 1,403 4,345 4,739
Research and development ............... 13,210 8,103 30,518 24,701
Selling, general and administrative .... 10,345 4,785 30,033 12,600
Depreciation and amortization .......... 3,963 1,114 8,495 3,120
--------- --------- --------- ---------
Total costs and expenses ............... 62,855 19,956 141,829 57,894
--------- --------- --------- ---------
Loss from operations ................. (58,923) (15,161) (132,367) (44,250)
Interest expense ......................... (239) (1,752) (11,233) (4,566)
Interest and other income ................ 17,637 259 51,424 588
--------- --------- --------- ---------
Net loss ............................. (41,525) (16,654) (92,176) (48,228)
Preferred dividends ...................... 12,942 -- 38,823 --
--------- --------- --------- ---------
Net loss attributable to common
stockholders ......................... $ (54,467) $ (16,654) $(130,999) $ (48,228)
========= ========= ========= =========
Net loss attributable to common
stockholders per share ................. $ (1.77) $ (0.80) $ (4.39) $ (2.45)
========= ========= ========= =========
Weighted average shares outstanding ...... 30,747 20,889 29,858 19,694
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated statements.
5
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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,
-------------------------
2000 1999
--------- ---------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................. $ (92,176) $ (48,228)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization ....................... 8,495 3,120
Loss on retirement of fixed assets .................. 869 --
Accretion of long-term debt ......................... 3,801 --
Non-cash compensation expense ....................... 741 --
Increase in accounts receivable,
prepaid expenses and other current assets ......... (6,234) (2,302)
(Increase) decrease in inventories .................. (21,335) 1,996
Increase (decrease) in accounts payable, accrued
liabilities and other liabilities ................. 55,477 (1,061)
--------- ---------
Net cash used in operating activities ........... (50,362) (46,475)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ......................... (30,087) (5,802)
Network construction in progress (CIP) ..................... (390,743) --
Increase in other assets ................................... (12,536) --
Purchase of short-term investments ......................... (375,009) --
Sale of short-term investments ............................. 256,958 --
Purchase of long-term investments .......................... (17,882) --
--------- ---------
Net cash used in investing activities ........... (569,299) (5,802)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................... 478,850 14,954
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 ............ (20) 19,855
(Payments of) additions to long-term debt ................ (369) 19,980
--------- ---------
Net cash provided by financing activities ........ 776,712 54,789
--------- ---------
Net increase in cash and cash equivalents .................. 157,051 2,512
Cash and cash equivalents, beginning of period ............. 354,820 19,141
--------- ---------
Cash and cash equivalents, end of period ................... $ 511,871 $ 21,653
========= =========
SUMMARY OF NON-CASH TRANSACTIONS:
Property and equipment acquired under capital lease ...... $ -- $ 449
Network CIP acquired under capital lease ................. 3,954 --
Common stock issued upon conversion of debt .............. 4,304 405
Preferred dividends ...................................... 38,823 --
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated statements.
6
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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 include only normal recurring adjustments) that are
necessary for a fair presentation of operations for the nine-month periods ended
September 30, 2000 and September 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 nine-month periods ended September 30, 2000 and September
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. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market, and primarily represent modem components and finished modems purchased
from suppliers. As part of its marketing strategy, the Company frequently sells
its modems at prices below cost and below market in order to increase
subscribers and service revenues. Losses on sales of modems at prices below cost
are charged to cost of goods sold at time of shipment. Inventories consisted of
the following (in thousands):
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<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
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Raw materials $ 12,358 $ 207
Work-in-progress 28 139
Finished goods 9,535 240
-------- -----
Total $ 21,921 $ 586
======== =====
</TABLE>
NOTE 4. NETWORK CONSTRUCTION IN PROGRESS AND PROPERTY AND EQUIPMENT
In 1999, the Company began deployment of its high-speed Ricochet networks
in a number of markets in the United States. As of September 30, 2000, the
Company had incurred and capitalized $441.9 million of costs associated with
network deployment of the high-speed service. 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. Capitalized interest cost totaled $19.3
million as of the nine-month period ended September 30, 2000. As commercial
high-speed service has been launched in nine markets thus far, $51.2 million of
capital costs incurred and previously recorded as network construction in
progress has been transferred to property and equipment and is being depreciated
over an estimated useful life of four years.
NOTE 5. 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 is payable on February 15 and August 15 of each
year. The first interest payment was made on 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 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
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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 accrete at approximately $2.7 million per year over
the 10-year periods from the beginning aggregate net book value of $573 million
up to the redemption value of $600 million. This accretion is charged against
retained earnings (accumulated deficit).
NOTE 6. COMPREHENSIVE INCOME (LOSS)
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NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
--------- ---------
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Net loss attributable to common stockholders .... $(130,999) $ (48,228)
Other comprehensive income/(loss):
Unrealized holding loss on
available-for-sale securities ............. (121) --
--------- ---------
Comprehensive income (loss) ..................... $(131,120) $ (48,228)
========= =========
</TABLE>
NOTE 7. 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 8. 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
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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 third quarter of 2000 is as follows:
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NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
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Ricochet Revenue ............... $ 7,573 $ 8,689
Utilinet Revenue ............... 1,889 4,955
------- -------
Total ...................... $ 9,462 $13,644
======= =======
Cost of Service Ricochet ....... $68,438 $12,734
Cost of Service Utilinet ....... -- --
------- -------
Total ...................... $68,438 $12,734
======= =======
Cost of Product Ricochet ....... $ 2,838 $ 2,540
Cost of Product Utilinet ....... 1,507 2,199
------- -------
Total ...................... $ 4,345 $ 4,739
======= =======
</TABLE>
NOTE 9. 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 is
currently determining the effect of SAB 101 on its consolidated results of
operations and financial position.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a high-speed wireless data company. Our primary service offering,
Ricochet, is one of the few products available today that offers high-speed
mobile wireless access to the internet and to corporate networks. In the third
quarter of 2000, we launched our new commercial high-speed Ricochet service,
which operates at average speeds of 128 kbps, in nine markets across the United
States. The high-speed service has now been launched in Atlanta, Baltimore,
Dallas, Houston, New York (Manhattan), Phoenix, Philadelphia, San Diego and the
San Francisco metropolitan areas. We continue to provide our 28.8 kbps Ricochet
service in the San Francisco area as well as in Seattle and Washington D.C.
metropolitan areas while these markets are under construction for the high-speed
service. We continue to construct our high-speed networks in a total of 46
metropolitan areas in the U.S., including expansion of coverage in the markets
that have already been launched. While we believe we are substantially on track
with the overall national network deployment described in our 1999 Annual Report
on Form 10-K, we have encountered delays in various markets relating to
timeframes for zoning approvals, as well as utility agreement negotiations. In
the fourth quarter, we expect to launch the high-speed service in one, possibly
four, additional markets. Most, if not all, of the first twenty-one markets are
expected to be launched by March 31, 2001.
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 28.8 kbps Ricochet service. In the near future,
we expect to derive substantially all of our revenues from subscription fees
paid to us by channel partners, which resell our high-speed service directly to
their customers. In connection with the launch of our high-speed service, we
have entered into an agreement with one of our channel partners, Wireless
WebConnect!, to assume responsibilities for internet service, billing and
customer support operations relating to our 28.8 kbps Ricochet service. As we
deploy our high-speed network and launch our high-speed service, we expect our
operating expenses to continue to increase significantly and to exceed revenues
for the foreseeable future. We expect to generate substantial net losses to
common stockholders for the foreseeable future.
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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 $3.9 million in the third quarter of 2000 from
$4.8 million for the same period of 1999 and to $9.5 million for the first nine
months of 2000 from $13.6 million for the same period of 1999. The decline in
2000 was partly due to a decrease in product revenues. Product revenues declined
to $1.9 million for the third quarter of 2000 from $2.3 million for the same
period of last year, and to $2.9 million for the first nine months of 2000 from
$6.5 million for the first nine months of 1999. The decline in 2000 resulted
primarily from the licensing of our UtiliNet technology to Schlumberger.
Included in product revenues in the third quarter of 2000 was approximately $1.3
million related to a one-time sale of Utilinet inventory to Schlumberger. The
decline in product revenues in 2000 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 third quarter of 2000 from $2.5 million in the same period of 1999 and to
$6.5 million for the first nine months of 2000 from $7.2 million in the same
period of 1999. The decrease in the third quarter and first nine months was
primarily the result of a decrease in UtiliNet service revenues. Ricochet
service revenues in the third quarter of 2000 remained relatively flat compared
with the third quarter of 1999, as a result of an increase in subscribers of the
new high-speed service offset by a decrease in subscribers of the 28.8 kbps
service. Total UtiliNet revenues decreased to $1.3 million in the third quarter
of 2000 from $1.9 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 be insignificant in the future as a result of our focus
on the launch of our high-speed service.
We expect to derive substantially all of our future revenues from
subscription fees paid to us by channel partners that resell the high-speed
service. We 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 five channel partner
relationships. WorldCom, Juno Online Services, Wireless WebConnect!, GoAmerica
and Aether Systems have all entered into agreements with us to sell our
high-speed service to their customers. In our agreement with Worldcom, 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, and potentially subject to pro-rata adjustment in the fifth year as
a result of deployment delays experienced in certain markets thus far, the
agreement specifies that WorldCom pay us the following minimum amounts during
the first five years after we launch our service:
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<TABLE>
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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 WorldCom's sales efforts result in fewer
subscribers than WorldCom has agreed contractually to provide, but the number of
subscribers provided by WorldCom and its authorized resellers nevertheless
represent more than a specified percentage of our total users, 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
WorldCom. Accordingly, our ability to achieve the minimum revenue levels we
expect from our agreement with 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 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, 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.
We are currently assessing the impact that certain deployment delays we have
experienced thus far may have on the minimum revenue commitment from Worldcom.
Because the Worldcom revenue amounts specified above represent minimum
commitments, the ultimate impact, if any, of deployment delays on total revenues
from Worldcom cannot be predicted.
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. In the third quarter of 2000, cost of
service revenues included approximately $22.9 million of network operations
costs and approximately $10 million of real estate management costs.
Cost of service revenues increased to $32.9 million in the third quarter of
2000 compared with $4.6 million in the third quarter of 1999, and to $68.4
million for the first nine months of 2000 compared with $12.7 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
13
<PAGE> 14
the deployment of our new high-speed service in various markets. Staffing of
personnel who manage network deployment and operations increased by over 400%
from approximately 100 at September 30, 1999 to over 400 at September 30, 2000.
In the past year, we have entered into approximately 1,900 site leases for
network equipment and opened up over twenty-five new operations field offices.
We expect all 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 product costs associated
with Ricochet modem product sales. Cost of product revenues in the third quarter
of 2000 increased to $2.4 million from $1.4 million in the third quarter of 1999
and decreased to $4.3 million for the first nine months of 2000 from $4.7
million for the same period of 1999. Ricochet cost of product revenues as a
percentage of Ricochet product revenues increased to 212% for the third quarter
of 2000 from 91% for the third quarter of last year and to 281% for the first
nine months of 2000 from 106% for the same period of 1999. These increases were
due to the commencement of volume shipments of high-speed Ricochet modems to our
channel partners in the third quarter of 2000. As part of our marketing
strategy, we frequently sell modems at prices below cost and below market in
order to increase subscribers and service revenues. The average loss incurred on
the current generation high-speed modems exceeds the loss on the 28.8 kbps
modems that were sold in 1999. Consistent with the wireless services industry,
we charge these losses to cost of goods sold at the time of shipment to our
customers. If we valued the Ricochet GS modem inventory on hand at September 30,
2000 at its current selling price, cost of product revenues for the third
quarter of 2000 would be increased by approximately $8.4 million. In the third
quarter of 2000, net inventories increased by $18.6 million due to increased
receipts of high-speed modems. We expect to sell these and additional modems to
be received at prices below our cost. We therefore expect to continue to incur
significant losses on modems in the future. 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 $13.2 million in the third quarter of 2000
from $8.1 million in the third quarter of 1999 and to $30.5 million for the
first nine months of 2000 from $24.7 million for the same period of 1999. The
increases in 2000 compared with 1999 were primarily due to increases in
engineering activities associated with the development of our next generation of
networking products and services. The increases also reflect 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 nine months of 2000 increased
to $10.5 million from $8.4 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.
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<PAGE> 15
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 $10.3 million for the third quarter of
2000 from $4.8 million for the third quarter of 1999 and to $30.0 million for
the first nine months of 2000 from $12.6 million for the same period of 1999. In
the third quarter of 2000, selling, general and administrative expenses included
approximately $6.5 million of sales and marketing expenditures. Approximately
$4.2 million of the increase in selling, general and administrative expenses in
the third 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 $5.7 million of the increase in the first nine
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
continue to increase significantly from historical levels as we continue our
planned advertising campaign related to the launch of new markets of our
high-speed service. We expect to spend about $15 million on advertising in the
fourth quarter of 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 $3.9 million for the
third quarter of 2000 from $1.1 million for the third quarter of 1999 and to
$8.5 million for the first nine months of 2000 from $3.1 million for the same
period of 1999. The increases resulted principally from the purchase and lease
of over $35 million of property, plant and equipment, primarily computer
equipment and software, since September 30, 1999. The increase in the third
quarter also resulted from the start of depreciation on $51.2 million of network
construction in progress that was transferred to property and equipment in the
third quarter of 2000 as a result of the launching of high-speed service in nine
new markets. We expect depreciation and amortization to increase substantially
in the fourth quarter of 2000 and in future years as we continue to launch our
commercial high-speed Ricochet service in new markets and expand our coverage in
existing markets.
Interest and Other Income and Interest Expense
Interest and other income increased to $17.6 million in the third quarter
of 2000 from $0.3 million in the third quarter of 1999 and to $51.4 million for
the first nine months of 2000 from $0.6 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 $800 million 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
15
<PAGE> 16
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 decreased to $0.2 million in the third quarter of 2000
from $1.8 million in the third quarter of 1999 and increased to $11.2 million
for the first nine months of 2000 from $4.6 million for the same period of 1999.
The increase in interest expense in the first nine months of 2000 compared with
the same period of 1999 was the result of our increase in outstanding debt,
offset by a reduction of approximately $19.3 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 face value of outstanding debt. The senior notes require semi-annual
cash interest payments, the first of which was paid August 15, 2000. 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. Future
interest and related charges on the 13% senior notes due 2010 are comprised of
the following, in millions:
<TABLE>
<CAPTION>
Warrant
Accretion Total
Cash and Fee Interest
Year Interest Amortization Charges
---- -------- ------------ --------
<S> <C> <C> <C>
2000 .......... $ 34.1 $ 5.6 $ 39.7
2001 .......... 39.0 6.5 45.5
2002 .......... 39.0 6.7 45.7
2003 .......... 39.0 6.8 48.8
2004 .......... 39.0 7.0 46.0
2005 .......... 39.0 7.1 46.1
2006 .......... 39.0 7.2 46.2
2007 .......... 39.0 7.4 46.4
2008 .......... 39.0 7.5 46.5
2009 .......... 39.0 7.7 46.7
2010 .......... 4.9 1.0 5.9
------ ----- ------
Total $390.0 $70.6 $463.6
====== ===== ======
</TABLE>
Preferred Dividends
In November 1999, we issued 60,000,000 shares of preferred stock to Vulcan
Ventures Incorporated and 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
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<PAGE> 17
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 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, in millions:
<TABLE>
<CAPTION>
Beneficial
Conversion
Cash and Fee Total
Year Dividend Accretion Dividends
------- -------- ---------- ---------
<S> <C> <C> <C>
1999 ............. $ 3.3 $ 33.5 $ 36.8
2000 ............. 39.0 12.8 51.8
2001 ............. 39.0 12.8 51.8
2002 ............. 35.7 10.5 46.2
2003 ............. -- 5.3 5.3
2004 ............. -- 2.7 2.7
2005 ............. -- 2.7 2.7
2006 ............. -- 2.7 2.7
2007 ............. -- 2.7 2.7
2008 ............. -- 2.7 2.7
2009 ............. -- 2.4 2.4
-------- ------- --------
Total ...... $ 117.0 $ 90.8 $ 207.8
======== ======= ========
</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 third 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.
17
<PAGE> 18
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 net proceeds of
approximately $53.7 million. In November 1999, we completed a private placement
of redeemable convertible preferred stock with Vulcan Ventures and 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 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 September 30, 2000, we had incurred $469 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 $163.9
million during the third quarter of 2000. Network construction in progress at
September 30, 2000 included approximately $19 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 the next two quarters. 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 $714 million as
of September 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
September 30, 2000, we will require additional cash resources of approximately
$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
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<PAGE> 19
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.
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 in the first 21 markets. At September 30, 2000, we had
outstanding commitments to purchase approximately $289 million of network
equipment and related labor from these suppliers. In October 2000, we entered
into agreements with American Tower, Delta Groups Engineering, Divine Tower
International, and Whalen & Company to assist us with network deployment in 25
additional markets.
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 September 30, 2000, we had received
approximately 31,700 modems from Alps. In January 2000, we entered into a
two-year agreement with NatSteel Electronics, Ltd. for the purchase of
additional modems, under which we currently have outstanding commitments to
purchase 150,000 at a cost of approximately $34 million. 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. 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.
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<PAGE> 20
OUTLOOK
In addition to certain forward-looking statements, which involve risks and
uncertainties, made in various other parts of this document, we make the
following forward looking statements. For more information, see the "Special
Note on Forward-Looking Statements" on Page 3 of this document.
We expect to have 30,000 to 45,000 Ricochet subscribers by December 31,
2000. We expect average revenue per user (ARPU) to be in the range of $25 to $35
per month through December 31, 2001.
We expect earnings before interest, taxes, depreciation and amortization to
be a loss in the range of $75 to $100 million for the fourth quarter of 2000.
We expect capital expenditures for the 46 market build-out to be in the
range of $1.0 billion to $1.2 billion by the end of 2001, at which time nearly
all, if not all, construction on these markets for initial coverage is expected
to be complete.
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 floating 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
relatively short-term nature of its 6.5% dividend obligation. We estimate that
the fair value of our long-term debt would decrease or increase by approximately
$8 million in the event of a 100-basis point increase or decrease, respectively,
in interest rates.
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27.1 Financial Data Schedule
b. Reports on Form 8-K: None
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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 13, 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
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
22
