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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31, 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)
980 UNIVERSITY AVENUE, LOS GATOS, CA 95032-2375
(Address of principal executive offices, including zip
code)
(408) 399-8200
(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 April 30, 2000
was 30,623,868.
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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 11
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 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURE PAGE 20
EXHIBIT INDEX 21
</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, 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.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METRICOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
(Unaudited)
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ASSETS
Current Assets:
Cash and cash equivalents ................................... $ 790,970 $ 354,820
Short-term investments ...................................... 290,050 144,521
Restricted short-term investments ........................... 38,423 --
Accounts receivable, net .................................... 1,523 2,387
Inventories, net ............................................ 981 586
Prepaid expenses and other .................................. 11,354 3,116
----------- -----------
Total current assets .................................... 1,133,301 505,430
Property and equipment, net ................................... 17,653 12,233
Network construction in progress .............................. 138,524 22,034
Other assets .................................................. 15,276 6,950
Restricted long-term investments .............................. 35,183 --
----------- -----------
Total assets ............................................ $ 1,339,937 $ 546,647
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable ............................................ $ 41,241 $ 9,649
Accrued liabilities ......................................... 26,839 12,642
Note payable ................................................ 224 4,521
----------- -----------
Total current liabilities ............................... 68,304 26,812
----------- -----------
Long-term debt ................................................ 237,659 385
----------- -----------
Other liabilities ............................................. 301 321
----------- -----------
Redeemable convertible preferred stock ........................ 573,992 573,329
----------- -----------
Stockholders' Equity (Deficit)
Common stock ................................................ 31 25
Warrants to purchase common stock ........................... 61,869 --
Additional paid-in capital .................................. 768,504 283,763
Accumulated deficit ......................................... (370,247) (337,988)
Accumulated other comprehensive income (loss) ............... (476) --
----------- -----------
Total stockholders' equity (deficit) ...................... 459,681 (54,200)
----------- -----------
Total liabilities and stockholders' equity (deficit) .... $ 1,339,937 $ 546,647
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated statements.
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METRICOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
---------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
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REVENUES:
Service revenues .................... $ 2,334 $ 2,431
Product revenues .................... 889 1,755
-------- --------
Total revenues .................. 3,223 4,186
-------- --------
COSTS AND EXPENSES:
Cost of service revenues ............ 13,750 4,433
Cost of product revenues ............ 300 1,326
Research and development ............ 9,623 8,235
Selling, general and
administrative ................... 7,989 4,140
-------- --------
Total costs and expenses ............ 31,662 18,134
-------- --------
Loss from operations .............. (28,439) (13,948)
Interest expense ...................... (7,471) (1,213)
Interest and other income ............. 16,593 143
-------- --------
Net loss .......................... $(19,317) $(15,018)
Preferred dividends ................... 12,942 --
-------- --------
Net loss attributable to
common stockholders ................. $(32,259) $(15,018)
======== ========
Net loss attributable to
common stockholders per share ....... $ (1.15) $ (0.80)
======== ========
Weighted average
shares outstanding ................. 28,160 18,873
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
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METRICOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
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THREE MONTHS ENDED
-----------------------------
MARCH 31, MARCH 31,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $ (19,316) $ (15,018)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization ............................ 2,057 942
Accretion of long-term debt .............................. 950 --
Non-cash compensation expense ............................ 716 --
Increase in accounts receivable,
prepaid expenses and other current assets .............. (7,374) (689)
(Increase) decrease in inventories ....................... (394) 742
Increase (decrease) in accounts payable, accrued
liabilities and other liabilities ...................... 36,018 (3,464)
--------- ---------
Net cash provided by (used in) operating activities .. 12,657 (17,487)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .............................. (7,527) (1,292)
Network construction in progress ................................ (116,490) --
(Increase) decrease in other assets ............................. (8,326) 343
Purchase of short-term investments .............................. (224,430) --
Sale of short-term investments .................................. 40,000 --
Purchase of long-term investments ............................... (35,183) --
--------- ---------
Net cash used in investing activities ................ (351,956) (949)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ........................ 477,198 1,159
Proceeds from sale of warrants to purchase common stock ....... 61,869 --
Proceeds from the issuance of long-term debt .................. 236,382 19,978
--------- ---------
Net cash provided by financing activities ............. 775,449 21,137
--------- ---------
Net increase in cash and cash equivalents ....................... 436,150 2,701
Cash and cash equivalents, beginning of period .................. 354,820 19,141
--------- ---------
Cash and cash equivalents, end of period ........................ $ 790,970 $ 21,842
========= =========
SUMMARY OF NON-CASH TRANSACTIONS:
Property and equipment acquired under capital lease ........... $ 51 $ 280
Common stock issued upon conversion of debt ................... $ 4,304 --
Preferred dividends ........................................... $ 12,942 --
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
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METRICOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 three-month periods
ended March 31, 2000 and March 31, 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 three-month periods ended March 31, 2000 and March 31,
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 March 31, 2000, the
Company had incurred and capitalized $138.5 million of costs associated with
network deployment. Network deployment costs include labor costs for site
acquisition, radio frequency engineering, zoning and
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construction management, as well as material costs for equipment and component
inventory. As commercial service is launched in each market, the capitalized
costs associated with the 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 ten-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).
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NOTE 5. COMPREHENSIVE INCOME (LOSS)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
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Net loss attributable to common stockholders ................... $(32,259) $(15,018)
Other comprehensive income/(loss):
Unrealized holding loss on available-for-sale securities ....... (476) --
-------- --------
Comprehensive income (loss) .................................... $(32,735) $(15,018)
======== ========
</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 Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information," during the fourth quarter of 1998. SFAS No.
131 established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by chief operating decision makers or decision-making groups in
deciding how to allocate resources and in assessing performance.
The 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
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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 first quarter of 2000 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
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Ricochet Revenue .............. $ 2,707 $ 2,900
Utilinet Revenue .............. 516 1,286
------- -------
Total ..................... $ 3,223 $ 4,186
======= =======
Cost of Service Ricochet ...... $13,750 $ 4,427
Cost of Service Utilinet ...... -- 6
------- -------
Total ..................... $13,750 $ 4,433
======= =======
Cost of Product Ricochet ...... $ 135 $ 786
Cost of Product Utilinet ...... 165 540
------- -------
Total $ 300 $ 1,326
======= =======
</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 second quarter of 2000. The Company does
not believe the adoption of SAB101 will have a material effect on the Company's
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
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. The Company
currently provides Ricochet commercial service in the San Francisco Bay Area,
the Seattle and Washington D.C. metropolitan areas. In 1999, we completed
development of our new high-speed service, which has demonstrated in Company
tests to provide the same service as Ricochet, but at faster downstream speeds
of up to 128 kbps. We are currently in the process of deploying our high-speed
service in various 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, further negotiations for poletop
access rights in three other planned service areas are 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 subscriptions
paid to us by users of our current Ricochet service. After we launch our
high-speed service, planned to occur during the late summer of 2000, 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.
After 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.
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 UtiliNet products and Ricochet
modems and recognize these revenues upon shipment.
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Total revenues decreased to $3.2 million in the first quarter of 2000
from $4.2 million for the same period of 1999, primarily due to a decrease in
product revenues. Product revenues declined to $0.9 million for the first
quarter of 2000 from $1.8 million for the same period of last year as a result
of our licensing of our UtiliNet technology to Schlumberger. Service revenues
decreased to $2.3 million in the first quarter of 2000 from $2.4 million in the
same period of 1999. This decrease was primarily the result of a decrease in
UtiliNet service revenues of approximately $0.3 million, offset by a $0.2
million increase in Ricochet service revenues. Ricochet service revenues
increased as a result of a 10% increase in subscribers as of March 31, 2000
compared with March 31, 1999. Total UtiliNet revenues decreased to $0.5 million
in the first quarter of 2000 from $1.3 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 decline significantly 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 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 two channel partner relationships. In June 1999 and
April 2000, MCI WorldCom and Juno Online Services, Inc., respectively, 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 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:
<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 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
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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,
real estate management costs and depreciation expense 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 in the first quarter of 2000 was $13.8 million
compared with $4.4 million in the same period of 1999. The significant increase
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 increased by over 400% from
March 31, 1999 to March 31, 2000. In the twelve months ending March 31, 2000, we
opened up ten 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 inventory and
manufacturing costs associated with Ricochet modem and UtiliNet product sales.
Cost of product revenues decreased to $0.3 million in the first quarter of 2000
from $1.3 million in the first quarter of 1999. Ricochet cost of product
revenues as a percentage of Ricochet product revenues declined to 37% in the
first quarter of 2000 compared with 106% in the first quarter of 1999 as a
result of increased shipments of refurbished modems for which the majority of
costs have been charged to operations in previous periods. UtiliNet cost of
product revenues as a percentage of UtiliNet product revenues declined to 32% in
the first quarter of 2000 from 53% in the first quarter of 1999 as a result of
higher selling prices and lower allocated costs in 2000. We expect Ricochet cost
of product revenues to increase in 2000 as we sell modem inventory directly to
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MCI WorldCom or other 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 $9.6 million in the first quarter of 2000 from
$8.2 million in the same period of 1999. The increase was primarily due to 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 increased to $4.4 million
in the first quarter of 2000 from $3.1 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 plan 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 $8.0 million for the
first quarter of 2000 from $4.1 million for the first quarter of 1999.
Approximately three-quarters of the increase 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. Approximately
one-quarter of the increase in 2000 was due to increased product marketing,
advertising and public relations expenditures related to commercialization of
the 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.
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<PAGE> 15
Interest and Other Income and Interest Expense
Interest and other income increased to $16.6 million in the first
quarter of 2000 from $0.1 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 over $1
billion 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, in the short-term, we expect to continue to generate a
substantial amount of interest income, although this interest income will
decline rapidly over time as we use this cash.
Interest expense increased to $7.5 million in the first quarter of 2000
from $1.2 million in the same period of 1999 as a result of the increase in our
outstanding debt in 2000. Due to our senior notes and warrants offering in
February 2000, we have approximately $300 million in outstanding debt. The
senior notes require semi-annual cash interest payments commencing August 15,
2000. We have 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
15
<PAGE> 16
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 first 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 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 March 31, 2000, we had incurred $370 million of
cumulative net losses. Our operations have required substantial capital
investments for the purchase of network equipment, modems and computer and
office equipment.
16
<PAGE> 17
Including network construction in progress, capital expenditures were $124.0
million during the first quarter of 2000. Network construction in progress
included approximately $50.3 million in the first quarter of 2000 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 $1.08 billion as
of March 31, 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 March 31, 2000,
we will require additional cash resources of approximately $300 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 in our 1999 Annual Report on Form
10-K, "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."
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 March 31, 2000, we had outstanding commitments to
purchase approximately $325 million of network equipment and related labor from
these suppliers.
17
<PAGE> 18
We expect to incur significant expenditures to procure high-speed modems
in the future. We have agreed to purchase 47,700 modems from our current modem
supplier, Alps Electric (USA), Inc., in 2000, representing a commitment of
approximately $20 million. 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. We anticipate that deliveries
from Alps will begin during the second quarter of 2000 and 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.
In December 1999, we called our $45 million aggregate principal amount
of convertible notes due 2003 for redemption on January 10, 2000. As of December
31, 1999, $40.7 million of the notes had been converted into approximately 2.8
million shares of common stock. In the first quarter of 2000, the remaining $4.3
million of notes outstanding were converted to 0.3 million of shares of our
common stock at a conversion price of $14.55 per share. As a result of the
conversion, we issued an aggregate of 3,064,963 shares of our common stock to
the former convertible note holders.
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 $12 million in the event of a 100-basis
point increase or decrease, respectively, in interest rates.
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<PAGE> 19
PART II. OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
In February 2000, we issued senior notes under an indenture and
supplemental indenture with Bank One Trust Company, N.A., as trustee. We will be
restricted by the terms of the indenture and supplemental indenture from taking
various actions, such as incurring additional indebtedness, paying dividends,
repurchasing junior indebtedness, making investments, entering into transactions
with affiliates, merging or consolidating with other entities and selling all or
substantially all of our assets. These restrictions could also limit our ability
to obtain future financings, make needed capital expenditures, withstand a
future downturn in our business or the economy in general or otherwise conduct
necessary corporate activities.
For information with respect to shares of common stock issued upon
conversion of our convertible notes due 2003, see Part I, Item 2: "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources." These shares were issued pursuant to the
exemption provided by Section 3(a)(9) under the Securities Act of 1933, as
amended, in an exchange with our existing security holders exclusively where no
commission or other remuneration was paid for soliciting the exchange.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
10.1* Agreement and Supplemental Agreement No. 1 for Electronic
Manufacturing Services between the Company and Sanmina
Corporation, dated as of July 2, 1999.
27.1 Financial Data Schedule
b. Reports on Form 8-K:
(i) Report on Form 8-K filed January 28, 2000 regarding a press
release announcing the impact of industry-wide component
shortages.
(ii) Report on Form 8-K filed February 7, 2000 filing forms of
underwriting agreement and supplemental indenture relating to
the senior notes and warrants offering.
(iii) Report on Form 8-K filed February 10, 2000 and amended on
February 16, 2000 reporting the closing of the public offering
of common stock and senior notes with warrants and including
related underwriting and other agreements, certificates and
documents.
- ----------------------
*Certain portions have been deleted pursuant to a confidential treatment
request.
19
<PAGE> 20
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: May 12, 2000 /s/ TIMOTHY A. DREISBACH
---------------------------
Timothy A. Dreisbach
Chief Executive Officer and
Chairman of the Board of Directors
/s/ JAMES E. WALL
---------------------------
James E. Wall
Chief Financial Officer (Principal
Financial and Accounting Officer)
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<S> <C>
10.1* Agreement and Supplemental Agreement No. 1 for Electronic
Manufacturing Services with Sanmina Corporation, dated July 2, 1999.
27.1 Financial Data Schedule
</TABLE>
- ----------------------
*Certain portions have been deleted pursuant to a confidential treatment
request.
21
<PAGE> 1
EXHIBIT 10.1 *TEXT OMITTED AND FILED
SEPARATELY UNDER 17 C.F.R.
SECTIONS 200.80(b)(4) 200.83
AND 240.24b-2
SANMINA CORPORATION
AGREEMENT FOR
ELECTRONIC MANUFACTURING SERVICES
This Agreement between METRICOM, INC., hereinafter referred to as
"Customer," and SANMINA CORPORATION, hereinafter referred to as "Sanmina" is
entered into on July 2nd, 1999. Sanmina shall perform manufacturing services
for the Customer under the terms and conditions set forth herein.
I. TERM. This Agreement shall be in effect for twenty-four (24) months from
the date of this Agreement. Unless the parties agree to extend such
initial term of the Agreement, for any period, prior to the termination
of such initial term, the Agreement shall terminate.
II. SCOPE OF WORK PERFORMED. Customer wishes Sanmina to manufacture a range
of Electronics products or Assemblies on behalf of Customer at the
prices identified in Exhibit A. Sanmina and the Customer shall mutually
agree upon a delivery schedule for the Products.
A. Customer shall be liable for Material that Sanmina procures or
otherwise contracts for in order to manufacture the products per the customer
Bill-of-Materials (BOM) that Customer wishes to buy from Sanmina on a turnkey
basis.
B. This liability shall be determined by defining the process that
incurs this liability and describing the situations or circumstances under which
Customer is liable for Material that Sanmina has procured.
C. Sanmina shall purchase components for the Products in accordance with
a vendor list approved by Sanmina and the Customer ("AVL"). In the event Sanmina
cannot purchase a component from an approved vendor for any reason, including
unavailability or commercial infeasibility of the purchase of such components,
Sanmina may purchase such components from an alternate vendor with the prior
written consent of the Customer.
III. GENERAL PLANNING AND PROCUREMENT PROCESS
A. On the date this Agreement is executed and the first business day of
each calendar month thereafter, the Customer shall provide Sanmina with firm,
monthly, rolling purchase orders covering a minimum period of three (3) months
("Purchase Order").
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<PAGE> 2
B. On the same dates, the Customer shall provide Sanmina with additional
monthly, rolling nine (9) month forecast ("Forecast") covering nine (9) months
immediately following the Purchase Order period. Forecast does not incur any
liability for either Sanmina or Customer except that of any long lead-time parts
for which the forecast would cause procurement activity, and, even in such a
situation such liability for Customer would be limited per section IV and it
sub-sections. Within 30-days of this agreement or at the earliest possible date
thereafter, Sanmina will provide a summary of all components used on the BOM
showing each parts NCNR status, lead-time, standard cost, minimum buy quantity,
ABC code.
C. Sanmina will take the Purchase Orders and Forecast referred to in
III(A) and III(B) above and generate a Master Production Schedule (MPS) for a
twelve-month period using the process described in Section III(D) below.
D. This MPS will define the master plan on which Sanmina will base its
procurement, internal capacity projections and commitments.
1. Sanmina will use the Purchase Orders referred to in A to
generate the first three months of the MPS.
2. Sanmina will use the Forecast referred to in B to generate
the second nine months of the MPS.
3. The MPS created as described above does not incur any
liability for either Sanmina (except to fulfill the binding Purchase Orders) or
Customer except that of any long lead-time parts for which the forecast would
cause procurement activity, and, even in such a situation such liability for
Customer would be limited per section IV and it sub-sections. In the event
Sanmina needs to procure NCNR material, utilizing Customer forecast, beyond the
3 months firm PO, written agreement must be attained from the Customer.
E. Sanmina will process the MPS through industry-standard MRP software
that will convert the MPS reflecting Customer's Purchase Orders and Forecasts
into requirements for components that are required to make these products. In
doing so, Sanmina will off-set the requirements for receipt of components or
materials by allowing for the time required to build the products per the
following times:
1. In-Circuit Test/Functional Test - 5 Working Days
2. Assembly - 7 Working Days
3. Kitting - 2 Working Days
4. Material Handling - 2 Working Days
F. Per this agreement Sanmina will plan and schedule material to be at
Sanmina eleven working days before the products are due to ship to Customer
where no Test is required, and sixteen working days before the products are due
to ship to Customer where Test is required.
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<PAGE> 3
G. Sanmina will also release (launch) orders to suppliers of materials
sometime prior to the anticipated date that the material is needed (per section
III(E) above). When these orders are launched will depend on the Vendor
Lead-Time that Sanmina will determine from time to time and maintain as a
parameter of Sanmina's manufacturing or materials planning systems.
H. Sanmina, through its MRP System will also issue an instruction (MRP
Signal) to its procurement group to buy a part approximately seven days before
the order is due to be placed per section F above.
I. When Sanmina places an order with its suppliers per the sections
above, Sanmina will order parts in various quantities (defined in
periods-worth-of-supply) that are defined by the part's ABC Classification. This
classification as well as the expected distribution or characteristics of
various classes of parts, and, the periods-worth-of-supply (Periods-of-Supply)
that will be bought for each class of part is shown on Table 1.
Table 1. ABC Classifications, Descriptions and Periods-of-Supply
<TABLE>
<CAPTION>
PERIODS WORTH OF
EXPECTED PERCENTAGE SUPPLY TO BE
EXPECTED PERCENTAGE OF TOTAL VALUE (OF BOUGHT WITH EACH
PART CLASS OF TOTAL PARTS GROSS REQUIREMENTS) ORDER
---------- -------------- ------------------- -----
<S> <C> <C> <C>
A 3% 80% 2 Weeks
B 17% 17% 8 Weeks
C 80% 3% 6 Months
</TABLE>
J. In addition to ordering parts for various periods-of-supply, Sanmina
will order parts according to various minimum-buy quantities, tape and reel
quantities, and, multiples of packaging quantities.
K. The components Sanmina purchases or orders to fulfill the Purchase
Order and the Forecast on behalf of the Customer to manufacture the Products,
and any associated expenses related to purchasing, ordering, manufacturing
(labor and overhead), shipping, storing and eliminating such components and
agreed upon mark-up shall constitute a part of the Customer's Total Liability
("Total Liability").
IV. LIABILITIES FOR MATERIALS
A. Customer's liability for material that Sanmina has procured is
limited to the following:
1. Parts that Sanmina, having ordered per the guidelines above,
cannot cancel prior to their receipt. This includes parts that may not be
cancelable by virtue of having
3
<PAGE> 4
insufficient time between the MRP signal to cancel and the expected or real
receipt date at Sanmina. Sanmina is to advise customer of non-cancelable items
prior to order placement by providing the information referred to in section III
(D.3).
2. Parts that Sanmina, having ordered per the guidelines above,
cannot return to the suppliers that the parts came from, where the value of the
parts exceed $500 in total, and where Sanmina has made reasonable efforts to
return the parts (for no more than four weeks) or use for another requirement
within Sanmina. Sanmina is to advise Customer the list of non-returnable items
prior to order placement. Customer recognizes that some parts may have been
returnable when procured from a supplier by Sanmina, but nevertheless may
subsequently become non-returnable by virtue of some processing that Sanmina may
cause to have done to the parts in preparation for the use of those parts in
manufacturing.
3. Parts that are worth less than $500 in total and where
Sanmina is not required to attempt return.
B. Where Sanmina is able to return parts with a re-stocking or other
fees, those fees shall also become part of Customer's Total Liability.
C. If necessary and with the Customer's written consent, Sanmina shall
purchase any necessary tools to fulfill the Purchase Order and Forecast. Such
tools shall be deemed a part of the Customer's Total Liability. All such tooling
purchased by Sanmina shall remain the Customer's property, shall be subject to a
security interest perfected on behalf of Customer, and Sanmina shall return such
tooling (normal wear and tear excepted) to the Customer upon request, the
completion of the relevant order or the termination of the Agreement.
D. Customer's liability for the material defined in the previous
sections will be at the quoted cost agreed between Sanmina and Customer plus an
agreed margin of 5% (five percent) plus a materials burden of 5%.
V. RESCHEDULES. The Customer may reschedule delivery dates of Products
subject to the following matrix:
<TABLE>
<CAPTION>
NOTICE PRIOR TO PERCENT OF ORIGINAL
ORIGINAL QUANTITY THAT CAN BE
DELIVERY DATE RESCHEDULED
------------- -----------
<S> <C>
0 to 30 days 0%
31 to 60 days 15%
61 to 90 days 30%
Beyond 90 Days 100%
</TABLE>
A. As an example, if the Customer notifies Sanmina in writing between 31
and 60 days prior to the scheduled delivery date of the Products, the Customer
may reschedule a maximum of 15% of the total amount of the Products to be
delivered on such date.
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<PAGE> 5
B. For a decrease in quantity of Products to be delivered on a specific
delivery date, Sanmina and the Customer shall mutually agree upon a date to
deliver the undelivered Products within 45 days from the original delivery date.
C. For an increase in quantity of Products to be delivered on a specific
delivery date, Sanmina, on a best effort basis, will attempt to accommodate such
increase.
D. Any change in the delivery dates of any Product for a period
exceeding 45 days in the aggregate shall be deemed a cancellation by the
Customer with respect to such Products. If the Customer's schedule change
results in additional expenses to Sanmina to store such Products or to acquire
additional components, such additional expenses shall be deemed Part of the
Customer's Total Liability.
VI. REVISIONS. In the event the Customer requests an engineering change to a
product, Sanmina shall notify the Customer in writing of any impact on
the cost and/or scheduled delivery of such Products within five (5)
business days of the receipt of Customer's request. Unless the Customer
consents to the amended notification from Sanmina, the requested
engineering change shall be deemed canceled. Any increases in the cost
of the Products resulting from such Engineering Change Order ("ECO")
shall be deemed a part of the Customer's Total Liability as defined
above. Similarly, any parts made obsolete or excess as a result of such
an ECO shall be deemed part of the Customer's Total Liability. Sanmina
will make reasonable effort to return or use in another application
obsolete ECO related material where each part exceed $500 value in
total. Such efforts are limited to 4 weeks duration.
VII. CANCELLATIONS. The Customer may cancel any order by notifying Sanmina in
writing at least 90 days prior to the delivery date of such order.
Within 30 days of such cancellation, Sanmina shall provide the Customer
with the amount of the Total Liability related to such canceled order.
The Customer shall pay such cancellation amount to Sanmina on a net
30-day basis. After receipt of such cancellation amount, Sanmina shall
deliver to the Customer, at the Customer's expense, any components
purchased but unused as a result of such cancellation or scrap such
components, at the discretion of the Customer.
VIII. PRICING. The prices for the Products are shown in Exhibit A and shall
remain fixed for the term of this Agreement with the following
exceptions:
A. ECO - Engineering Change Order (referred to in section VI)
B. Material variations on the market prices of components. The costed
BOM will be reviewed every quarter with the intent of cost reduction.
IX. COST REDUCTION. Sanmina will make every reasonable effort to improve
component pricing as well as improvements to test and assembly processes
so as to decrease final pricing. Sanmina and CUSTOMER will meet every to
manage a joint and ongoing cost reduction program as outlined in the
Cost Reduction Plan, Exhibit B.
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<PAGE> 6
X. DELIVERY.
A. Delivery of all items under this Agreement shall be in compliance
with a Customer order fulfillment process which will be mutually developed and
agreed to by Sanmina and Customer.
B. Sanmina shall deliver the Products on the agreed upon delivery dates.
Time is of the essence in delivery.
C. Unless otherwise specified by the Customer, Sanmina shall transport
the Products by the method Sanmina deems most advantageous, to the address
specified in writing by CUSTOMER. All reasonable freight, insurance and other
shipping expenses from the delivery point shall be borne Customer.
Specifications for special packaging will be provided by Customer. Expense for
special packaging will be borne by Customer.
XI. TRAINING. Customer will perform initial training of Sanmina personnel.
Upon satisfactory completion, Sanmina will assume responsibility for
ongoing training.
XII. TEST EQUIPMENT.
A. Customer will provide Sanmina with one set of test equipment, which
shall remain the property of Customer. Additional sets of equipment as needed
will be provided by Sanmina. Customer will be responsible for cost of the
additional equipment. Customer must approve additional equipment costs and
purchase of equipment in writing prior to Sanmina supplying this equipment.
B. Sanmina will assume responsibility for calibration and repair of
equipment at the customers expense. Upon completion of 100K radios, calibration
cost will be shared at 50/50 between Sanmina and Customer.
XIII. PAYMENT AND INVOICING.
A. Payment terms will be net 30 days from invoice date. Sanmina will
provide the Customer with a credit limit set at (to be determined). In the event
that the Customer exceeds this credit limit or has outstanding invoices for more
than 60 days, Sanmina may stop shipments of Products to Customer until the
Customer makes sufficient payment to bring its account consistent with terms
outlined above. Sanmina may reduce the credit limit with written notice to the
Customer.
XIV. WARRANTY.
A. Sanmina warrants that the Products shall be free from any defects in
materials and workmanship for a period of one year from the date of delivery.
Warranty on third-party components is limited to the warranty provided by the
component manufacturer. Sanmina shall pass on any unexpired warranty for such
Vendor Components provided by third-party vendors or passed on by such
third-party vendors from the original manufacturers until the expiration of such
warranties or up to a maximum of one (1) year from date of manufacture of the
Product by
6
<PAGE> 7
Sanmina, whichever is shorter. As the Customer's sole remedy under the warranty,
Sanmina will, at no charge, rework, repair and retest or replace any such
Products returned to Sanmina and found to contain defects. Warranty coverage
does not include failures due to the Customer design errors, the supply or
selection of improper or defective parts or materials used by the Customer,
damages caused by the Customer's misuse, unauthorized repair or negligence.
Sanmina does not assume any liability for expendable items such as lamps and
fuses. Sanmina reserves the right to inspect the Products and verify that they
are defective or non-conforming. Sanmina's total liability shall be limited to
the value of the Product supplied under this Agreement.
B. The performance of any repair or replacement by Sanmina does not
extend the warranty period for any Products beyond the period applicable to the
Products originally delivered.
C. EXCEPT FOR THE ABOVE EXPRESS WARRANTIES, SANMINA MAKES AND THE
CUSTOMER RECEIVES NO WARRANTIES OR CONDITIONS ON THE PRODUCTS, EXPRESS, IMPLIED,
STATUTORY, OR OTHERWISE, AND SANMINA SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
XV. GENERAL INDEMNITY.
A. The Customer shall indemnify Sanmina against, and hold it harmless
from any loss, cost, liability or expense (including court costs and the
reasonable fees of attorneys and other professionals) to the extent that such
loss, cost, liability or expense arises out of, or in connection with, in whole
or in part, (A) infringements of any patent, trademark, copyright or other
intellectual property of the Customer or (B) any negligence or willful
misconduct by the Customer, its employees or agents and subcontractors,
including but not limited to any such act or omission that contributes to: (i)
any bodily injury, sickness, disease, or death; (ii) any injury or destruction
to tangible or intangible property of the injured party or any loss of use
resulting therefrom; or (iii) any violation of any statute, ordinance or
regulation; provided that Sanmina shall give Customer prompt written notice of
such claim, sole control over the defense or settlement of such claim, and
reasonable assistance in such defense or settlement at Customer's request and
expense.
B. Sanmina shall indemnify Customer against, and hold it harmless from
any loss, cost, liability or expense (including without limitation court costs
and the reasonable fees of attorneys and other professionals) to the extent that
such loss, cost, liability or expense arises out of, or in connection with, in
whole or in part, any negligence or willful misconduct by Sanmina, its employees
or agents and subcontractors, including but not limited to any such act or
omission that contributes to: (i) any bodily injury, sickness, disease, or
death; (ii) any injury or destruction to tangible or intangible property of the
injured party or any loss of use resulting therefrom; or (iii) any violation of
any statute, ordinance or regulation; provided that Customer shall give Sanmina
prompt written notice of such claim, sole control over the defense or settlement
of such claim, and reasonable assistance in such defense or settlement at
Sanmina's request and expense.
7
<PAGE> 8
XVI. QUALITY, INSPECTION AND REPORTING.
A. The Customer will have the right at all reasonable times, to visit
Sanmina's plant to inspect the work performed on the Products. Inspection of the
work shall not relieve Sanmina of any of its obligations under the Agreement or
purchase orders. Sanmina shall provide Customer with all mutually agreed upon
quality reports at agreed upon intervals. Sanmina reserves the right to restrict
the Customer's access to the plant or any area within it as necessary to protect
confidential information of Sanmina or its other customers.
B. Customer and Sanmina will implement a joint quality improvement
program that will develop and implement a continuous quality improvement.
XVII. CONFIDENTIALITY.
A. All Confidential Information shall be treated as confidential and not
disclosed or transferred by the recipient to third parties, other than the
recipient's agents and employees who need to know such information to serve the
recipient and who are obligated to treat such information as confidential. All
Confidential Information shall remain the sole property of the disclosing party,
and the receiving party shall have no interest in or rights with respect thereto
except as expressly set forth in this Agreement. Each party agrees to maintain
all such Confidential Information in confidence to the same extent that it
protects its own similar Confidential Information, which in no event will be
less than reasonable care. "Confidential Information" is defined as information
in written, graphic, or electronic form identified by a party as its
confidential or proprietary information, or if initially disclosed in any other
form, identified at the time of disclosure as confidential or proprietary and
subsequently reduced to writing within thirty (30) days. Without limiting the
foregoing, the terms and conditions of this Agreement are the Confidential
Information of both parties.
B. EXCEPTIONS. The foregoing restriction on disclosure shall not apply
with respect to any information which (a) becomes generally known or publicly
available through no act or failure to act on the part of the receiving party;
(b) is furnished to others by the disclosing party without restriction on
disclosure; (c) is known by the receiving party at the time of receiving such
information as evidenced by its records; (d) is hereafter furnished to the
receiving party by a third party, as a matter of right and without restriction
on disclosure; or (e) was developed independently of this Agreement without
obligation of confidentiality.
XVIII. LICENSE GRANT; OWNERSHIP
A. LICENSE GRANT.
1. TECHNOLOGY LICENSE. Subject to the terms and conditions of
this Agreement, Customer hereby grants to Sanmina during the term of this
Agreement a nonexclusive, non-transferable, worldwide, royalty-free license,
without right to sublicense, to make the Products in accordance with the
specifications and to sell such Products to Customer.
8
<PAGE> 9
2. SOFTWARE LICENSE. Subject to the terms and conditions of this
Agreement, Customer grants to Sanmina during the term of this Agreement a
nonexclusive, non-transferable, worldwide, royalty-free license, without right
to sublicense, to reproduce and use any software that Customer provides Sanmina
for incorporation in the Products (the "Software") in object code form only.
Sanmina shall not reverse compile, reverse engineer or otherwise disassemble the
Software. No rights to prepare derivative works or to display the Software are
granted hereunder.
3. SOURCE CODE. Subject to the terms and conditions of this
Agreement, Customer may disclose to Sanmina the source code for the Software for
purposes of enabling Sanmina to port the Software as set forth in Exhibit A.
Such disclosure shall take place only at Customer's facilities. The source code
shall be retained at Customer's facilities and shall not be removed therefrom by
Sanmina, and any disclosure of source code, and all notes made by Sanmina
pertaining thereto shall be treated as Customer's Confidential Information
pursuant to the terms of this Agreement. Customer shall provide Sanmina with
access to materials and equipment located at Customer's facilities and the
support reasonably needed in connection with the porting effort. Except as
needed to port the Customer Software as set forth in Exhibit A, no copyright
rights to reproduce, prepare derivative works, perform, display or distribute
the Software in source code format are granted to Sanmina hereunder.
B. OWNERSHIP. Sanmina acknowledges and agrees that Customer is and shall
remain the sole owner of any materials, tooling, designs, schematics, Software,
specifications or other information (including without limitation Confidential
Information) that Customer provides Sanmina pursuant to this Agreement
(collectively, the "Customer Technology"). Any improvements to the Technology
(the "Improvements") created during this Agreement by either party shall be
owned by Customer. Sanmina acknowledges and agrees that it has no rights in or
to the Technology, and any Improvements other than the license rights
specifically granted herein.
XIX. TERMINATION.
A. Either party may, without penalty, terminate this Agreement upon 180
days written notice to the other party in either one of the following events:
The other party materially breaches this Agreement and such
breach remains uncured for thirty (30) days following written
notice of breach the non breaching party;
The other party becomes involved in any voluntary or involuntary
bankruptcy or other insolvency petition or proceeding for the
benefit of its creditors, and such petition, assignment or
proceeding is not dismissed within sixty (60) days after it was
filed.
B. Upon termination, Sanmina shall provide the Customer with an invoice
of the Customer's Total Liabilities. In addition, if the Customer is the
breaching party, the Customer shall be liable for all work-in-progress and any
outstanding charges. Upon termination,
9
<PAGE> 10
Customer shall pay all invoiced charges in net thirty (30) days. In addition,
Sections XIV, XV, XVII, XVIII.B, XIX.B, XX and XXI shall survive any termination
or expiration of this Agreement.
XX. LIMITATION OF LIABILITY. IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY
SPECIAL, INDIRECT, CONSEQUENTIAL, OR INCIDENTAL DAMAGES, HOWEVER CAUSED
AND ON ANY THEORY OF LIABILITY, ARISING IN ANY WAY OUT OF THIS
AGREEMENT. THIS LIMITATION WILL APPLY EVEN IF SUCH PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING ANY
FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY PROVIDED HEREIN.
XXI. MISCELLANEOUS
A. GOVERNING LAW. This Agreement will be governed by and interpreted
under the laws of the State of California, without reference to conflict of laws
principles.
B. JURISDICTION. For any dispute arising out of this Agreement, the
parties consent to personal and exclusive jurisdiction of and venue in the state
and federal courts within Santa Clara County, California.
C. ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement sets forth
the entire agreement and understanding of the parties relating to the subject
matter herein and therein and merge all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, will be effective unless in writing signed by the party to
be charged. The failure by either party to enforce any rights thereunder will
not be construed as a waiver of any rights of such party.
D. ASSIGNMENT. Sanmina shall not assign this Agreement nor any of its
rights or obligations hereunder without the prior written consent of Customer.
The rights and liabilities of the parties hereto will bind and incur to the
benefit of their successors, executors or administrators.
E. NOTICES. Any required notices thereunder will be given in writing at
the address of each party set forth above, or to such other address as either
party may substitute by written notice to the other in the manner contemplated
herein, and will be deemed served when delivered by facsimile or mail or when
tendered in person.
F. FORCE MAJEURE. Neither party will be liable to the other for any
default thereunder if such default is caused by an event beyond such party's
control, including without limitation acts or failures to act of the other
party, component shortages, unavailability of transportation, floods, fires,
governmental requirements and acts of God (a "Force Majeure Event"). In the
event of threatened or actual non-performance as a result of any of the above
causes, the non-performing party will exercise commercially reasonable efforts
to avoid and cure such non-performance. Should a Force Majeure Event prevent a
party's performance thereunder
10
<PAGE> 11
for a period in excess of ninety (90) days, then the other party may elect to
terminate this Agreement by written notice thereof.
G. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original and all of which together
will constitute one instrument.
SANMINA CORPORATION METRICOM, INC.
Signed: /s/ Rick LaPonzina Signed: /s/ Robert Mott
------------------------------- -----------------------------
Name: Rick LaPonzina Name: Robert Mott
------------------------------- -----------------------------
Title: VP of Sales and Administration Title: Senior VP of Eng. And Mfg.
------------------------------- -----------------------------
11
<PAGE> 12
EXHIBIT A
PRICE LIST
Poletop [***]
Eradio [***]
WCS [***]
Installation Kit [***]
Note: Price is subject to change due to material and process.
- ----------
* CONFIDENTIAL TREATMENT REQUESTED
12
<PAGE> 13
EXHIBIT B
COST REDUCTION PLAN
DEDICATED COST REDUCTION TEAM
Sanmina will organize a team whose focus will be to reduce cost. This team will
consist of Front-End Engineers, Purchasing Agents, Manufacturing Engineers and
RF Engineers. We will work aggressively with Metricom to reduce cost yet
maintain quality, delivery and flexibility.
DESIGN FOR MANUFACTURABILITY (FRONT-END COST SAVINGS)
For future reference, DFM is a large part of Sanmina's Value Added Services.
Sanmina's PWB NPI Group can provide Metricom feedback on stack-up material
selection, DFM parameters and enhancements, electrical performance simulation,
panelizations and cost-abatement recommendations.
The resources offered can also provide Metricom Design Engineers the front-end
suggestions for testability, manufacturability and componentary. This exercise
will allow a smooth new product introduction, prototype and into production.
MATERIAL COST SAVINGS
Sanmina Purchasing Department will work with suppliers to negotiate aggressive
contracts, which will allow on going material cost reductions. Such contracts
will include shorter leadtimes, which will in turn allow much more flexibility
to Metricom yet at reduced cost. Sanmina's goal is to reduce material cost by
10-13% annually. Sanmina and Metricom will review material cost on a quarterly
basis at which time new cost will be implemented.
FURTHER MATERIAL COST SAVINGS
Sanmina will review material mark up as soon as Metricom meets or exceeds 15k/M
rate at which time new pricing will be implemented.
PROCESS IMPROVEMENTS (LABOR COST SAVINGS)
Sanmina Engineers will work with Metricom to expedite the "learning curve".
Furthermore, Sanmina Engineers will work towards developing a manufacturing
process flow, which will improve cost effectivity. Upon completion of the first
22k pieces, Sanmina Engineers will provide feedback on manufacturing process
improvements. Both Metricom and Sanmina will review the process flow on a
quarterly basis thereafter, at which time new cost will be implemented.
13
<PAGE> 14
FURTHER LABOR COST SAVINGS
Sanmina will review labor rate once Metricom meets or exceeds 8k/M rate,
equivalent to 96k/Y, at which time reduced rate will be implemented.
ICT IMPLEMENTATION (TEST COST SAVINGS)
Sanmina will dedicate a team of Test Engineers to develop ICT Programs and
Fixtures. Complex products such as Metricom's, benefit from ICT as it will
improve functional test yield.
RF TEST YIELD IMPROVEMENTS AND TIME REDUCTION (TEST COST SAVINGS)
Sanmina RF Engineers will work closely with Metricom Engineers to improve yields
and reduce test time. Sanmina will organize a RF team of Engineers who will
focus on improvements in both board level test yields and time, system level
test yields and time. The improvement in yields and reduction in test time will
allow this program to run more cost effectively. During the quarterly cost
review such cost savings will be realized and implemented.
FURTHER TEST COST SAVINGS
During the initial production of the program Sanmina will dedicate RF Engineers
to work with Metricom. Such RF Engineers have the expertise and experience to
reach the goals set by Metricom Test Engineers. During this process, Sanmina
Test Technicians will be trained to perform test and debug. Once Sanmina has
reached a satisfactory yield, Test Technicians will perform test on a full time
basis. At this time, Sanmina will review the test rate and reduced rate will be
implemented.
LONGTERM COST SAVINGS
Sanmina offers low cost manufacturing alternatives where mature products can be
transferred. This transfer will be completely invisible to Metricom. Sanmina
will ramp up at the low cost facility and phase out at the current facility.
14
<PAGE> 15
SUPPLEMENTAL AGREEMENT NO. 1
OF THE
AGREEMENT FOR ELECTRONIC MANUFACTURING SERVICES
BETWEEN
SANMINA CORPORATION
AND
METRICOM DC, L.L.C
THIS SUPPLEMENTAL AGREEMENT for the purchase and consignment of Radio
Kits, effective on the date last signed by both parties is between METRICOM DC,
L.L.C., (hereinafter referred to as "Customer"), METRICOM, INC. (HEREINAFTER
REFERRED TO AS "METRICOM, INC."), and SANMINA CORPORATION, (hereinafter referred
to as "Sanmina"). There is currently in full force and effect between Metricom,
Inc. and Sanmina an Agreement for Electronic Manufacturing Services, dated July
2, 1999 (hereinafter referred to as the "Agreement"). Customer, hereby, agrees
to the terms and conditions of the Agreement, and the parties to the Agreement,
intending to be legally bound, mutually agree that it is hereby supplemented as
follows:
I. PREAMBLE
WHEREAS, Customer will purchase [***] Radio Kits, as defined herein, from
Sanmina for [***]
WHEREAS, Customer will consign the Radio Kits purchased to Sanmina for use in
the manufacture of Customer's Radios.
WHEREAS, Sanmina will invoice Customer for the finished Radios upon delivery,
and Customer will pay Sanmina the invoiced amount for delivered Radios minus
Customer's credit of [***]/Radio Kit for Consigned Goods.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, and intending to be legally bound, the parties
agree as follows (and as hereinabove set forth):
- ----------
* CONFIDENTIAL TREATMENT REQUESTED
1
<PAGE> 16
II. DEFINITIONS
A. Approved Components: electronic components listed in the Bill of
Materials for Customer's Radios, current as of the date of this
Supplemental Agreement, No. 1.
B. Radio Kit: One "Complete Radio Kit" is comprised of all the
Approved Components necessary to manufacture one Customer Radio.
A "Partial" Radio Kit is one that is missing some amount of
necessary Approved Components to make it a Complete Radio Kit.
C. Radio: electronic devices manufactured by Sanmina to Customer's
specifications.
D. Consigned Goods: Complete and Partial Radio Kits owned by
Customer, located at Sanmina, and used exclusively for the
manufacture of Customer's Radios.
III. TERM OF SUPPLEMENTAL AGREEMENT NO. 1
This Supplemental Agreement No. 1 will be in effect until one of the
following occurs: (1) Sanmina completely exhausts the supply of Consigned Goods
by delivering an equal amount of finished Radios to Customer, under the terms
and conditions of the Agreement and this Supplemental Agreement No. 1; or (2)
either party terminates the Agreement or this Supplemental Agreement No. 1.
IV. TERMINATION OF MODIFICATION
A. This Supplemental Agreement No. 1 may be terminated: i) by any party under
the provisions set forth in Section XIX "Termination" of the Agreement, or ii)
by Customer if Sanmina fails to deliver [***] finished radios to Customer, based
on current design, within six (6) months from the execution of this Supplemental
Agreement No. 1. Delivery based on material availability of supply chain
specified by Customer
B. In the event of termination of this Supplemental Agreement No. 1 and/or the
Agreement for any reason, Sanmina will surrender to Customer all Radio Kits
purchased by Customer and consigned to Sanmina, less the amount of Consigned
Goods already manufactured into finished Radios and delivered and accepted by
Customer. Should there be a shortage of components and Sanmina can only return
"Partial" Radio Kits, the parties will mutually agree on how Customer will be
compensated for the shortfall in components. If the parties are unable to
mutually agree upon how Customer is to be compensated for the shortfall in
components, Customer may accept some combination of Approved Components equal in
value to the shortfall, or pursue any other remedies it has under the law.
- ----------
* CONFIDENTIAL TREATMENT REQUESTED
2
<PAGE> 17
C. In the event of termination as provided in Section IV. B., Sanmina, at
Customer's option, will return all Consigned Goods by: (1) making them available
for pick-up by Customer; or (2) at Sanmina's expense, package and transport the
remaining Consigned Goods by common carrier to location(s) designated by
Customer within the continental United States. Consigned Goods that are to be
transported will be packaged and labeled in accordance with Customer's specific
shipping instructions.
V. PURCHASE TERMS AND OBLIGATIONS
On a date to be agreed upon by the parties, but no later than
March 27, 2000, the parties will do the following:
(1) Sanmina will prepare a report for Customer estimating the number of Radio
Kits in its inventory and their respective percentage of completion. The cost of
the Radio Kits to Customer will be [***].
(2) Sanmina will provide documentation which evidences its good title to the
Radio Kits and/or the components comprising the Radio Kits;
(3) Following receipt of the information set forth in section (1) and (2),
Customer will make payment to Sanmina in the amount of [***], and take title to
[***] of Radio Kits;
(4) Once title to the Radio Kits has passed to Customer, Customer will consign
the Radio Kits ("Consigned Good") to Sanmina for use in the manufacture of
Customer's Radios;
(5) Customer will be invoiced for the finished Radios upon delivery at the
selling price for the Radios set forth in APPLICABLE ORDER(s) TO THE AGREEMENT.
(6) Customer will pay Sanmina the invoiced amount for delivered Radios minus
Customer's credit of [***]/Radio Kit for Consigned Goods, subject to the
standard payment provisions set forth in THE AGREEMENT.
VI. TITLE OF GOODS AND CONSIGNMENT
Title to the Radio Kits will pass from Sanmina to Customer, upon receipt
of payment by Sanmina from Customer. Upon passage of title, Customer will
consign the Radio Kits to Sanmina ("Consigned Goods").
- ----------
* CONFIDENTIAL TREATMENT REQUESTED
3
<PAGE> 18
VII. WARRANTY OF TITLE
Sanmina warrants that it holds title to the Approved Components
comprising the Radio Kits free and clear of any encumbrances, attachments,
and/or liens. Prior to Customer's purchase of the Radio Kits, Sanmina will
provide Customer documentation evidencing its clear title to the Radio Kits.
Sanmina shall indemnify and hold harmless Customer and its affiliates,
and the directors, shareholders, agents and employees of each of them
("Indemnitees"), from and against any fine, penalty, loss, cost, damage, injury,
claim, expense or liability (individually and collectively "Liabilities") as a
result of encumbrances, attachments, and/or liens against the Inventory
purchased by Customer, whether known or unknown.
Upon request of Customer, Sanmina shall, at no cost or expense to any
Indemnitee, defend and/or settle any claim, proceeding, appellate proceeding, or
suit against Indemnitees for Liabilities, whether or not litigation is actually
commenced, or the allegations are groundless or contain language that creates
the potential for Liabilities, and pay any costs, attorney fees, and any
judgment and/or settlement that may be incurred by any Indemnitee, under this
section or the enforcement of its rights under this section.
VII. RISK OF LOSS
Sanmina shall bear the risk of loss and indemnify Customer for any loss
or damage to, and/or destruction of any Consigned Goods held by SANMINA UNTIL
THOSE GOODS HAVE BEEN DELIVERED TO AND ACCEPTED BY CUSTOMER.
Sanmina shall notify Customer promptly of any loss or damage to, and/or
destruction of Consigned goods held by Sanmina, and shall make every reasonable
effort to repair Consigned Goods that are damaged, and/or replace Consigned
Goods that have been destroyed to avoid delay in the manufacture of Customer's
Radios.
Sanmina shall make reasonable efforts to safeguard the Consigned Goods
from loss, damage, and destruction while in Sanmina's control, custody, or
possession. The Consigned Goods shall remain segregated from other inventory
held by Sanmina.
IX. INSURANCE
Without limiting in any way Sanmina's indemnification obligations
hereunder, Sanmina shall maintain at its expense commercial general liability
(CGL) insurance with coverage limits of not less than [***] combined single
limit per occurrence. Such insurance shall provide protection against any claims
and/or liabilities including, but not limited to, claims for property
- ----------
* CONFIDENTIAL TREATMENT REQUESTED
4
<PAGE> 19
damage, which may arise or result from this Supplemental Agreement No. 1. Such
insurance shall include contractual liability coverage as well as Product and
Completed Operations Liability Insurance for all obligations assumed hereunder.
Sanmina agrees the insurance shall be issued by companies who hold a current
rating of not less then "A" according to Best's Key Rating Guide, shall name
Customer as additional an insured in matters covered by this Supplemental
Agreement No. 1, shall provide that said insurance is primary coverage with
respect to this insured. Sanmina agrees to maintain any additional insurance
requirements specified hereunder and to notify Customer thirty (30) days in
advance of any change or lapse in any of the coverages specified herein or
therein.
X. WARRANTY
Nothing in this Supplemental Agreement No. 1 will modify the rights and
obligations of the parties as provided in Section XIV "Warranty" of the
Agreement.
XI. INVENTORY COSTS
Sanmina is solely responsible for any and all costs incurred in
connection with the storage, warehousing, and inventory of the Consigned Goods.
XII. ENTIRE AGREEMENT
THIS SUPPLEMENTAL AGREEMENT NO. 1, INCLUDING ALL SUBORDINATE DOCUMENTS
ATTACHED TO OR REFERENCED IN THIS SUPPLEMENTAL AGREEMENT ARE MADE A PART HEREOF
BY REFERENCE AND SHALL CONSTITUTE THE ENTIRE AGREEMENT BETWEEN THE PARTIES WITH
RESPECT TO THE SUBJECT MATTER. THIS AGREEMENT SUPERSEDES ALL PRIOR ORAL AND
WRITTEN COMMUNICATIONS, AGREEMENTS AND UNDERSTANDINGS OF THE PARTIES WITH
RESPECT TO THE SUBJECT OF THIS AGREEMENT.
XIII. AMENDMENTS, MODIFICATIONS AND WAIVERS
NO PROVISIONS OF THIS SUPPLEMENTAL AGREEMENT, NO. 1 SHALL BE DEEMED
WAIVED, AMENDED OR MODIFIED BY ANY PARTY HERETO, UNLESS SUCH WAIVER, AMENDMENT
OR MODIFICATION IS IN WRITING AND SIGNED BY A DULY AUTHORIZED REPRESENTATIVE OF
EACH OF THE PARTIES HERETO.
XIV. EXCEPT AS MODIFIED BY THIS SUPPLEMENTAL AGREEMENT ALL OF THE TERMS AND
CONDITIONS OF THE AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT AND ARE
INCORPORATED BY REFERENCE HEREIN, AND SHALL HAVE THE FULL FORCE AND EFFECT AS IF
THEY WERE PROVIDED HEREIN.
(Signature Page Follows)
5
<PAGE> 20
IN WITNESS THEREOF, the parties have caused this Supplemental Agreement No. 1 to
be executed by their duly authorized representatives.
6
<PAGE> 21
METRICOM, INC.
By: /s/ Timothy A. Dreisbach
---------------------------------
Timothy A. Dreisbach
---------------------------------
(Print Name)
Title: Chairman and CEO
---------------------------------
Date Signed: March 24, 2000
-------------------------
METRICOM DC, L.L.C.
By: /s/ Timothy A. Dreisbach
---------------------------------
Timothy A. Dreisbach
---------------------------------
(Print Name)
Title: Chairman and CEO
---------------------------------
Date Signed: March 24, 2000
-------------------------
7
<PAGE> 22
SANMINA CORPORATION
By: /s/ Steven J. Deblock
---------------------------------
Steven J. Deblock
---------------------------------
(Print Name)
Title: VP Operations
---------------------------------
Date Signed: 3/22/00
-------------------------
8
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