-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Frl8sHeUj7IlVOgYnjEiqpB006CJsgLyysqol3rYtrCvtM9ZZ/8sNo11Hz+G3Fqu dT+4ONCvli+AuCzRcZvXbA== 0000891618-98-001462.txt : 19980401 0000891618-98-001462.hdr.sgml : 19980401 ACCESSION NUMBER: 0000891618-98-001462 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: METRICOM INC / DE CENTRAL INDEX KEY: 0000884318 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 770294597 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19903 FILM NUMBER: 98582369 BUSINESS ADDRESS: STREET 1: 980 UNIVERSITY AVE CITY: LOS GRATOS STATE: CA ZIP: 95030 BUSINESS PHONE: 4083998200 MAIL ADDRESS: STREET 1: 980 UNIVERSITY AVE CITY: LOS GATOS STATE: CA ZIP: 95030 10-K405 1 FORM 10-K405 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended Commission File Number December 31, 1997 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) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001 PAR VALUE PER SHARE 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The approximate aggregate market value of the Common Stock held by non-affiliates of the Registrant, based upon the last sale price of the Common Stock reported on the Nasdaq National Market on March 20, 1998 was $182,763,557. The number of shares of Common Stock outstanding as of March 20, 1998 was 18,507,702. ================================================================================ 2 SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those factors identified below under "Item 1 - Business - Risk Factors." DOCUMENTS INCORPORATED BY REFERENCE Certain parts of the Metricom, Inc. Proxy Statement relating to the annual meeting of stockholders to be held on June 22, 1998 (the "Proxy Statement") are incorporated by reference into Part III of this Annual Report on Form 10-K. PART I ITEM 1 - BUSINESS Metricom, Inc. ("Metricom" or the "Company") was incorporated in California in December 1985 and reincorporated in Delaware in April 1992. Unless the context otherwise requires, references in this Form 10-K to the "Company" refer to Metricom, Inc. and its subsidiaries. The Company's executive offices are located at 980 University Avenue, Los Gatos, California 95032-2375, and its telephone number is (408) 399-8200. Metricom is a leading provider of wide area wireless data communications solutions. The Company designs, develops and markets wireless network products and services that provide low-cost, high performance, easy-to-use data communications that can be used in a broad range of personal computer and industrial applications. The Company's primary service, Ricochet, provides users of portable and desktop computers and hand-held computing devices with fast, reliable, portable, wireless access to the Internet, private intranets, local area networks ("LANs"), e-mail and on-line services for a low, flat monthly subscription fee that permits unlimited usage. OVERVIEW The Company began commercial Ricochet service in September 1995, and Ricochet service is now available in the San Francisco Bay Area, the Seattle and Washington, D.C. metropolitan areas, parts of Los Angeles, and in a number of airports and corporate and university campuses. Ricochet's customers include individuals, corporations, educational institutions and federal, state and local governments. As of February 28, 1998, there were approximately 20,000 Ricochet subscribers, and the Company estimates that its networks covered areas with an aggregate population of approximately 11.4 million people. The Company's current networks use unlicensed spectrum and provide end users with speeds comparable to the most commonly used wired modems and, to the Company's knowledge, faster than other portable wireless wide area data communications networks. The Company plans to upgrade its existing networks and design modems in order to provide end user speeds comparable to today's high-speed ISDN telephone lines. This improvement in speed will be in part the result of the Company's acquisition of licensed spectrum in the 2.3 GHz frequency band in the Wireless Communications Service ("WCS") auction held by the Federal Communications Commission ("FCC"). The Company purchased licenses covering areas with an aggregate population of 127 million people. The licenses consist of two 5 MHz licenses covering the western and central United States, one 5 MHz license covering the northeast United States and 10MHz licenses covering the Seattle, Portland and St Louis metropolitan areas. The Company intends to use this licensed spectrum, together with unlicensed spectrum in the 902 to 928 MHz and 2.4 GHz frequency bands to increase end user speeds to 128 kbps. The Company's existing modems will work with, and enjoy a slight increase in performance as a result of, the upgraded networks. In January 1998, Vulcan Ventures Incorporated (Vulcan), the investment organization of Paul G. Allen, acquired additional Common Stock bringing its ownership to approximately 49.5%. This transaction was approved by the Company's Stockholders. Vulcan had been an investor in Metricom since 1993. The Company is currently working closely with Vulcan Ventures on the strategic plan through which the Company plans to expand and extend its wireless networks after completing the development of the high-speed network. 2 3 THE METRICOM SOLUTION The Company's current subscribers include (i) individual users of portable computers in metropolitan areas, (ii) corporate users of portable computers in metropolitan areas, such as Cisco Systems, Inc. and Microsoft Corporation, (iii) individual and small-office/home-office users of desktop computers in metropolitan areas, (iv) students, faculty and staff using computers at educational institutions and (v) federal, state and local government users of portable computers in metropolitan areas. In addition, the Company (i) through its Industrial Communications Division, provides wireless wide area data communications solutions to utility companies, (ii) in partnership with an affiliate of Visa and SeaFirst Bank, is testing Ricochet for use in credit card point-of-sale verification in the Seattle area, and, (iii) in conjunction with IBM as the system integrator, is deploying its network in parts of Los Angeles for use by the LA Police Department in police vehicles. The Company's Ricochet service provides subscribers with the following combination of benefits: PORTABILITY. Today's computer users demand the ability to use communications-enabled software application programs even when away from their desktop computers. The most significant benefit of Ricochet is that a subscriber within the network coverage area can access the Internet, private intranets, on-line services and e-mail anytime, anywhere, without a telephone connection, giving the subscriber untethered mobility. The Company's surveys show that current subscribers use Ricochet with portable and desktop computers in offices, conference rooms, throughout their homes, airports, libraries and other locations where connecting to a telephone line may be inconvenient or impossible. AFFORDABILITY. The Company offers products and services that it believes are price-competitive with commercial Internet and on-line service providers and other wired data communications services and are significantly less expensive than other wireless data communications services. For a low, flat, monthly subscription fee, subscribers to Ricochet get unlimited, fast, reliable, portable, wireless access to the Internet, private intranets, LANs, e-mail and on-line services. In addition, because Ricochet is wireless, there is no need for a subscriber to incur costs associated with installing and maintaining a separate telephone line for wired data communications. The Company believes it is able to offer an affordable solution because Ricochet employs an efficient, scalable network architecture and license-free spectrum, and will employ inexpensive licensed spectrum, all of which provide significant cost savings to the Company over other wireless data communications technologies. SPEED, SECURITY AND RELIABILITY. Ricochet operates at speeds comparable to the most commonly used wired modems, and the Company believes it operates faster than other commercially available wireless wide area data communications networks. The Company plans to upgrade its existing network platforms and design modems in order to provide end user speeds of approximately 128 kbps, which is comparable to today's high-speed ISDN telephone lines. Ricochet's use of frequency- hopping, spread spectrum technology, combined with optional encryption, makes unauthorized interception of its data packets extremely difficult and provides greater security than is currently available from other wired and wireless data communications services. Furthermore, Ricochet is extremely reliable because Ricochet's network radios have a low failure rate. In addition, if a network radio is busy or not functioning properly, data is routed along a different path to its destination within the networks. ACCESSIBILITY. Because of the Company's unique network design and patented routing technology, Ricochet subscribers have not experienced the well-publicized "busy signals" that have been suffered by users of popular on-line services and wired Internet service providers. In addition, subscribers are able to remain on-line with Ricochet for an unlimited amount of time. These benefits result from the use of packet-switched communications in Ricochet networks as compared to circuit switched technology. In a packet-switched network, capacity is based on the amount of data actually passing through the network at a given time, rather than the number of users on the network. In addition, system congestion can be reduced and network coverage and capacity can be increased quickly and inexpensively by the installation of additional network or wired access point ("WAP") radios in areas of high use. SINGLE-SOURCE SOLUTION; EASE OF INSTALLATION AND USE. Users of other data communications services must usually obtain and integrate a telephone modem, telephone line, Internet service connection and World Wide Web ("Web") browser software, usually from separate parties. By providing the equivalent of all of these in one package, the Company provides "one stop shopping" for Ricochet subscribers. In addition, subscribers can easily install the system using the self-configuring Ricochet installation software. Finally, Ricochet supports operation with standard TCP/IP protocols and the AT command set used by telephone modems, which permits the use of standard third-party applications designed to support communications using dial-up telephone lines. The Company also provides a dial-in service that eliminates the subscribers need for a separate Internet connection while outside the network coverage area. 3 4 SALES, MARKETING AND SUPPORT The Company's sales are handled primarily through a staff of approximately 19 direct sales representatives, approximately 43 retail outlets and a limited number of independent dealers. Direct sales representatives are primarily used to target key corporate accounts, such as Cisco Systems, Inc. and Microsoft Corporation, where users of portable computers are currently using Ricochet to access the Internet, private intranets and LANs. Ricochet is sold to individuals in metropolitan areas and to students, faculty and staff at educational institutions through telephone sales, direct sales representatives and a limited number of independent dealers and retail outlets. Ricochet is sold to Federal government agencies primarily through resellers. The Company structures the compensation arrangements for its direct sales representatives, contract telemarketers, retail outlets and independent dealers so that at least one half of aggregate compensation paid is based on subscribers obtained. Any subscriber obtained must remain a subscriber for at least six months in order for compensation to be paid. The Company expects to increase such sales channels as deployment of Ricochet networks continues. The Company is also building indirect sales channels in order to maximize the commercialization of Ricochet. These include resellers, OEMs and systems integrators, all of whom are compensated on a commission-only basis. The Company expects to enter into more reseller arrangements as deployment of its networks continues. The Company also is pursuing relationships with OEMs and systems integrators in order to address specialized markets such as mobile dispatch and industrial telemetry in each metropolitan area in which Ricochet is deployed. The Company seeks to market Ricochet aggressively by pricing the service attractively as compared to other wired and wireless data communications services. The Company believes that its prices are comparable to commonly used wired data communications services; however, such wired services do not offer the benefit of portability offered by Ricochet. Currently, to access the Ricochet networks and receive unlimited Internet access, subscribers typically pay a $45.00 activation fee and a fixed monthly fee of $29.95 for the basic service package. Additional subscriber charges are incurred for value-added services such as premium e-mail, dial-in service and access to the public switched telephone network. Subscribers are also required to rent or purchase a Ricochet modem from the Company. The Company provides timely, high quality customer service and technical support to meet the needs of its customers. The Company's current customer service and technical support staff consists of 25 full-time employees. The Company offers such services through a toll-free telephone number and Web-based support tools. The Company believes that a high level of customer service and technical support is essential to its business and expects to incur significant expenditures in the future to increase its service and support capabilities as deployment of Ricochet networks grows. THE RICOCHET NETWORK NETWORK CHARACTERISTICS The Company's Ricochet networks use a wireless data communications infrastructure to provide wide area coverage in metropolitan areas. Individual subscribers access the network with wireless portable radio modems that connect to the serial port of a desktop or portable computer or hand-held computing device. Ricochet also supports wireless communications from other devices, such as point-of-sale terminals that can incorporate or connect to a portable radio modem. The Company believes Ricochet provides user data rates that are significantly faster than its wireless competitors and at a rate comparable to that of the most commonly used wired modems. Ricochet provides user data rates of 10 to 30 kbps, depending on factors such as geography and network usage. The Company estimates that the primary competing technologies, ARDIS, RAM and CDPD, provide user data rates of approximately 1 to 4 kbps, 1 to 4 kbps and 5 to 10 kbps, respectively. A variety of high-speed (up to 1 Mbps) fixed-point wireless data technologies are in various stages of development. In addition, it is anticipated that in the future, PCS providers will offer higher speed solutions by combining channels and refining their protocols, but the Company expects that these services will not be price competitive. The most commonly used wired modems operate at 28.8 to 56.6 kbps; however, the Company estimates that the quality of a telephone line may decrease such rate under certain circumstances. ISDN is currently the most frequently used method of accessing high-speed data over telephone lines, but it does not offer portability. The Company plans to upgrade its current network to increase end user speeds up to 128 kbps, which is comparable to an ISDN telephone line. 4 5 The primary elements of a Ricochet network are compact, inexpensive network radios that are deployed on streetlights, utility poles and building roofs in a geographical mesh pattern. The Company's mesh network architecture and patented routing technology moves data packets across the network along any of a number of alternative paths, thus allowing data packets to be routed around busy or non-functioning radios. In addition, system congestion can be reduced and network coverage and capacity increased by the installation of one or more relatively inexpensive network radios or WAP radios where needed. Network radios are quickly and easily installed since no wired communications line is required and power is normally obtained directly from the street light. A WAP provides service to clusters network radios. All of the WAPs in the Ricochet network are interconnected with a high-speed frame relay wired backbone. This wired backbone provides access points to the public switched telephone network, gateways to other networks such as the Internet, private intranets and LANs, which provide e-mail and value-added services. Ricochet networks employ packet-switched technology. The Company believes that data communications networks that utilize packet-switched technology offer a number of inherent advantages over circuit-switched networks such as commonly available wired data communications networks. In a packet-switched network, data is transmitted in discrete units called packets, rather than in a continuous stream as with a telephone modem using a circuit-switched telephone line. The packets travel along any number of alternative paths and are reassembled into the proper order when they arrive at their destination, thus allowing multiple users to efficiently share network capacity. In addition, because a dedicated physical connection is not established between modems at each end of the circuit, network capacity is used only when data packets are actually being transmitted. In a circuit-switched network, a dedicated physical connection is established between modems at each end of the circuit, thus limiting network capacity to the number of circuits available and modems installed. In addition, in a circuit-switched network, once a connection is established, neither modem is available to other users even when data is not being transmitted. Because of these factors, "busy signals" occur in circuit-switched networks when the number of users exceeds the number of physical connections available. A data packet transmitted by a subscriber's Ricochet wireless modem travels through one or more network radios wirelessly to a WAP where it is routed to its destination over the wired backbone. The network is designed so that a data packet typically requires no more than one or two hops through network radios before reaching a WAP. Destinations may include another Ricochet modem anywhere in the Ricochet network, a public packet-switched network like the Internet, a private intranet, a LAN or an on-line service. In addition, Ricochet modems can support communications with one another without accessing network radios, provided that they are close enough to establish a direct radio connection. Network performance is monitored and controlled by the Company's network operations center located in Houston, Texas. As the size of the Ricochet networks grows, certain network management activities that are currently performed centrally will be distributed throughout the network to provide redundancy and limit administrative communications over the network. Ricochet supports operation with standard protocols and interfaces. This permits the use of software applications intended to communicate over dial-up telephone lines for access to the Internet, private intranet, LANs, on-line services and e-mail. NETWORK DEPLOYMENT The Ricochet network deployment process consists of obtaining site agreements, including lease, supply and right-of-way agreements, designing the network configuration, acquiring and installing the network infrastructure and testing the network. Once the necessary site agreements have been obtained, installing the network infrastructure and testing the network can typically be completed in two to three months. The service territory in a metropolitan area will typically be expanded beyond the initial service territory as additional site agreements are obtained and as the market for the Company's service expands. The Company installs most of its Ricochet network radios on streetlights on which it leases space from electric utilities, municipalities or other local government entities. In addition, the Company is often required to enter into agreements with owners of the right-of-way in which streetlights are located and supply agreements with providers of electricity to power the Company's network radios. The Company also leases space on building rooftops for WAP sites. In the event the Company is unable to negotiate site agreements in a timely manner and on commercially reasonable terms or at all, it will seek to obtain sites to deploy network radios on commercial buildings, residential dwellings or similar structures. While deploying a large area in this manner could be significantly more expensive than installing radios on streetlights, it has been used on a limited basis to reduce the delays historically experienced in the deployment process. 5 6 COMPETITION Competition in the market for data communications services is intensifying and a large number of companies in diverse industries are expected to enter the market. There can be no assurance that the Company will be able to compete successfully in this market. A number of privately and publicly held communications companies have developed or are developing new wireless and wired data communications services and products using competing technologies. The competition can be placed into two categories: portable and fixed access. While Ricochet can be used as a fixed-point service, it is positioned primarily as a portable service with its largest competitive advantages being portability and low flat rate pricing. Portable Services. Companies offering portable data communications services include CDPD, cellular analog, PCS, ARDIS, RAM and two-way paging. The primary attributes distinguishing these competitors are speed, price and availability. The Company estimates that user throughput speed for these competitors range from 2 to 10 kbps. Pricing is typically based on per kilobyte or per minute charges, making heavy usage very expensive. CDPD is either installed or being installed in a number of metropolitan areas, but complete coverage and roaming arrangements are not yet in place. Analog and digital cellular networks are widely available throughout the United States and, with the addition of a special modem, can also be used for sending data. ARDIS (owned by American Mobile Satellite) and RAM (owned by BellSouth Corporation), are widely installed and operating across the United States and in some foreign countries. ARDIS, RAM and two-way paging are currently not compatible or fast enough for standard Internet browsers. Fixed-Point Access. A variety of fixed point high-speed (up to 1 Mbps) data technologies for both wired and wireless products are in various stages of development. Fixed-point data services and technologies include XDSL, wireless LANs, cable modems, satellite service, Integrated Services Digital Network ("ISDN") and AT&T's digital wireless service. These services are aimed at providing data connectivity to the home or office at speeds that will support future video & multimedia applications over the Internet, and typically require either high quality phone line connections or special modems and hardware. There can be no assurance that the Company's competitors will not succeed in developing new technologies, products and services that achieve broader market acceptance or that could render Ricochet obsolete or uncompetitive. Internet Access Services. The Company's Internet access services compete with those currently offered by a large number of companies. The Company believes that existing competitors include numerous national and regional independent Internet service providers, established on-line service providers such as American Online ("AOL") and the Microsoft Network, as well as long distance and regional telephone companies. These services are typically offered over the phone network at speeds ranging between 28.8 and 56.6 kbps. Certain competitors could choose to offer Internet or on-line services at a price substantially below that of Ricochet. Such actions would place the Company at a substantial competitive disadvantage. The competitive environment could limit the Company's ability to grow its subscriber base and retain existing subscribers and could result in increased spending on selling, marketing and product development activities. These factors could have a material adverse effect on the Company's financial condition and operating results. The Company's competitors are becoming increasingly aware of the commercial value of technical findings and are becoming more active in seeking patent protection and licensing arrangements for the use of technology that others have developed. The development by others of new products and processes competitive with or superior to those of the Company could render the Company's products obsolete or uncompetitive. The Company's competitive position also depends upon its ability to attract and retain qualified personnel, obtain patents or otherwise develop proprietary products or processes, and secure sufficient capital resources. A broad market for wide area wireless data communications services has not yet developed. In order for the market to develop and for wireless services to compete effectively with widely available wired solutions, the Company believes that wireless data communications services will need to provide data rates and functionality comparable to those of the predominant mode of wired communications at an affordable cost without compromising ease of use. TECHNOLOGY The Company's networks utilize a hardware and software platform based on spread spectrum, digital, packet-switched radio technology. In packet-switched networks such as the Company's and the Internet, data is communicated in discrete units called packets rather than in a continuous stream. Network radios are the primary component of the hardware platform and are 6 7 geographically dispersed in a mesh topology. The Company's mesh network architecture and patented routing technology moves data packets across the network along any of a number of alternative paths, thus allowing data packets to be routed around busy or non-functioning radios. If interference is encountered on any given channel, the radio automatically hops to another channel. A high level of security is offered by the frequency-hopping pattern of the Company's spread spectrum technology, which makes interception of data packets by unauthorized users difficult. The Company incorporated optional encryption capability into the Ricochet service in 1996 to provide an additional level of security. The Company believes that the mesh topology used in its network provides certain advantages over the more typical star topology, in which all communications are required to pass through one or more central base stations or hubs. In a star topology system, congestion and impaired signal communications because of weak signal strength must generally be addressed by installation of another hub, typically a costly and time consuming process. With the Company's networks, system congestion can be reduced and network coverage and capacity increased by the installation of one or more relatively inexpensive network or WAP radios where needed. The Company's patented, software-based, radio-to-radio routing method is based on the geographic address of each radio, eliminating the need for static routing tables. Through a built-in protocol, network radios communicate with neighboring network radios to learn their identity, geographic location, how well they can communicate with each other and the frequencies where they can be found at any particular point in time. When this process is complete, a network radio sends data packets by adjusting its transmit frequency to the receive frequency of the intended receiving radio. In the course of network operation, if a network radio is unavailable or out of service, a data packet being transmitted across the network is immediately rerouted along another path by the transmitting radio. The Company's current networks were designed to take advantage of FCC regulations that permit license-free, spread spectrum operation, currently in the 902 to 928 MHz frequency band. The Company recently acquired inexpensive licensed spectrum that it plans to use together with unlicensed spectrum to upgrade its existing network architecture. RESEARCH AND DEVELOPMENT The Company intends to maintain technology leadership by continuing to invest heavily in research and development of its networking products to increase speed and performance. The Company plans to upgrade its existing networks and design modems in order to provide end user speeds comparable to today's high-speed ISDN telephone lines. This improvement in speed will be in part the result of the Company's acquisition of licensed spectrum in the 2.3 GHz frequency band. The Company intends to use this licensed spectrum, together with unlicensed spectrum in the 902 to 928 MHz and 2.4 GHz frequency bands to increase end user speeds to 128 kbps. The Company's existing modems will work with, and enjoy a slight increase in performance as a result of, the upgraded networks. The markets in which the Company participates and intends to participate are characterized by rapid technological change. The Company believes that it will for the foreseeable future be required to make significant investments of resources in research and development in order to continue to enhance its services and products. Research and development expense was $9.1 million, $9.9 million and $10.8 million in 1995, 1996 and 1997, respectively. The Company expects research and development expenses to increase significantly in absolute dollars in future periods. MANUFACTURING The Company's printed circuit boards and other subassemblies are assembled on a contract basis by outside manufacturers. The Company's only manufacturing facilities are for final assembly and testing operations, which are performed internally. The Company believes that it has or can develop adequate capacity to meet forecasted demand for its products and networks for at least the next 12 months. However, if customers begin to place large orders for the Company's products or if the Company decides to accelerate deployment of Ricochet, the Company's present manufacturing capacity may prove inadequate. To be successful, the Company's products and components must be manufactured in commercial quantities at competitive cost and quality. The Company's long-term manufacturing strategy is to supplement its manufacturing capabilities by increasing its outsourcing of product assembly and testing and by licensing other companies to manufacture certain of the Company's products. In the future, the Company will be required to achieve significant product and component cost reductions. 7 8 The Company generally uses standard component parts that are available from multiple sources. However, certain component parts used in the Company's products are available only from sole or limited source vendors. The Company's reliance on these sole or limited source vendors involves certain risks, including the possibility of a shortage of certain key component parts and reduced control over delivery schedules, manufacturing capability, quality and costs. In addition, some key component parts require long delivery times. The Company has in the past experienced delays in its ability to obtain certain key component parts from suppliers. PATENTS, PROPRIETARY RIGHTS AND LICENSES The Company believes that patents and other proprietary rights are important to its business. The Company's policy is to file patent applications to protect its technology, inventions and improvements to its inventions that it considers important to its business. The Company relies on a combination of patent, copyright, trademark and trade secret protection and non-disclosure agreements to establish and protect its proprietary rights. The Company has been issued 25 patents in the United States, which expire on dates between 2006 and 2016. Foreign patents corresponding to one domestic patent have been granted in four foreign countries, foreign patents corresponding to one other U.S. patent have been approved for grant in three foreign countries, and other foreign and domestic patents are pending. The Company also owns over 30 United States trademark registrations and approximately 20 foreign counterparts. The Company is not aware of any infringement of its patents, trademarks or other proprietary rights by others. Although the Company has pursued and intends to continue pursuing patent protection of inventions that it considers important, the Company does not believe that its patent position has as much significance as other competitive factors. However, these patents may not preclude competitors from developing equivalent or superior products and technology to those of the Company. The Company also relies upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. There can be no assurance that others will not independently develop substantially equivalent proprietary information or otherwise gain access to or disclose such information of the Company. It is the Company's policy to require its employees, certain contractors, consultants, directors and parties to collaborative agreements to execute confidentiality agreements upon the commencement of such relationships with the Company. There can be no assurance that these agreements will not be breached, that they will provide meaningful protection of the Company's trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information or that the Company's trade secrets will not otherwise become known or be independently discovered by the Company's competitors. The Company also pays license fees to third parties, such as Counterpoint Systems Foundry, Inc., NetManage, Inc., Netscape Communications Corporation and RSA Data Security Inc., for rights to use or incorporate certain software or technology in its products. Such payments are typically based on products shipped. In addition, the Company pays a royalty to Southern California Edison ("SCE") based on sales and internal use of products incorporating technology developed with funding from SCE pursuant to the Company's development agreement with SCE. The commercial success of the Company will also depend in part on the Company not infringing the proprietary rights of others and not breaching technology licenses that cover technology used in the Company's products. It is uncertain whether any third party patents will require the Company to develop alternative technology or to alter its products or processes, obtain licenses or cease certain activities. If any such licenses are required, there can be no assurance that the Company will be able to obtain such licenses on commercially favorable terms, if at all. Failure by the Company to obtain a license to any technology that it may require to commercialize its products and services could have a material adverse effect on the Company. Litigation, which could result in substantial cost to the Company, may also be necessary to enforce any patents issued or licensed to the Company or to determine the scope and validity of third party proprietary rights. GOVERNMENT REGULATION OF COMMUNICATIONS ACTIVITIES Federal Regulation. The Company is subject to various FCC regulations. The FCC, pursuant to the Communications Act, regulates non-government use of the electromagnetic spectrum in the United States, including the 902 - 928 MHz frequency band (the "900 Band") currently used by the Company's radio products, and the 2400 - 2483.5 MHz band (the "2.4 GHz Band") and 8 9 2305 - 2315, 2350 - 2360, 2315 - 2320 and 2345 - 2350 MHz bands (the "2.3 GHz Band") where the Company is proposing commercial operations in the near future. Part 15 of the FCC's regulations provides that the 900 MHz and 2.4 GHz Bands may be authorized for the operation of certified radio equipment without the requirement for a license. The Company designs its license-free products to conform with, and be certified under, the FCC's Part 15 spread spectrum rules. Operations in the 2.3 GHz Band will be in accordance with FCC regulations for the Wireless Communications Service ("WCS"), a licensed service governed by Part 27 of the FCC's regulations. License-free operation of the Company's products and other Part 15 products in the 900 MHz and 2.4 GHz Bands is subordinate to certain licensed and unlicensed uses of these bands, including industrial, scientific and medical equipment, the United States government, amateur radio services and, in certain instances, location and monitoring systems. The Company's products must not cause harmful interference to any non-Part 15 equipment operating in the band and must accept interference from any of them, as well as from any other Part 15 equipment operating in the band. If the Company were unable to eliminate any such harmful interference caused by its products through technical or other means, or were unwilling to accept interference caused by others to its services, the Company or its customers could be required to cease operations in the band in the locations affected by the harmful interference. Additionally, in the event the license-free 900 MHz or 2.4 GHz Bands become unacceptably crowded, and no additional frequencies are allocated by the FCC, the Company's business, financial condition and results of operations could be materially and adversely affected. Operation in the 2.3 GHz WCS Band is pursuant to licenses that the Company purchased at an FCC spectrum auction. These licenses, issued on July 21,1997, authorize the provision of service only in the Northeastern, Central and Western United States Regional Economic Areas, and in the St. Louis, Missouri, Portland Oregon and Seattle, Washington Major Economic Areas. When the FCC adopted regulations for WCS, it required that WCS licensees provide certain protections for the adjacent channel Wireless Cable and Instructional Television Fixed services for a period of five years. There is currently pending at the FCC a contested Petition For Reconsideration requesting that this protection period be extended to ten years. While the Company believes that it can provide the requisite protection to adjacent channel users, there can be no assurance that such protection can be provided in a technically or economically feasible manner. The WCS operations will require the use of equipment that is type-accepted by the FCC. While the Company believes it can develop type-accepted equipment which performs satisfactorily with its certified equipment operating in the license-free bands, there can be no assurance that such equipment can be developed, or that it can be developed in a timely and economical manner. The licenses for WCS require that "substantial service" be provided to the public in the authorized service areas within ten years of the license grant. In addition, while the WCS licenses expire in ten years, the FCC will grant a "renewal expectancy" to licensees whose operations have been in accordance with the FCC's regulations. Although there can be no assurance of compliance with all of the WCS requirements, the Company believes that it can comply with all of the conditions in an economically efficient manner. Failure to meet any one or all of these conditions could materially and adversely affect the Company's business, financial condition and results of operations. The regulatory environment in which the Company operates is subject to change. Changes in the regulation of the Company's activities by the FCC, as a result of its own regulatory process or as directed by legislation or the courts, including changes in the allocation of available spectrum, could have a material adverse effect on the Company, and the Company might deem it necessary or advisable to move to another of the Part 15 bands or to obtain the right to operate in additional licensed spectrum or other portions of the unlicensed spectrum. Redesigning products to operate in another band could be expensive and time consuming, and there can be no assurance that such redesign would result in commercially viable products. In addition, there can be no assurance that, if needed, the Company could obtain appropriate licensed or unlicensed spectrum on commercially acceptable terms, if at all. On an ongoing basis, the FCC proposes and issues new rules and amendments to existing rules that affect the Company's business. The Company closely monitors the FCC's activities and, when appropriate, actively participates in policy and rulemaking proceedings. The Company is currently monitoring several proceedings at the FCC that could have an impact on the Company. If the FCC adopts rules that directly or indirectly restrict the Company's ability to conduct its business as currently conducted or proposed to be conducted, the Company's business, financial condition or operating results could be materially adversely affected. The FCC has adopted, and affirmed through reconsideration, rules for the Location and Monitoring Service ("LMS"), a licensed service replacing the Automatic Vehicle Monitoring service operating in the 900 MHz Band. There is currently very limited LMS operation; however, sometime toward the end of 1998, the FCC is proposing to auction licenses for this spectrum. In 9 10 adopting the LMS rules, the FCC affirmed the right of Part 15 users such as the Company to operate in this frequency band, provided certain "safe harbors," and authorized operation so long as it does not cause "harmful interference," which was specifically defined by the FCC. In addition, the FCC provided that all LMS licenses would be conditioned upon testing with the Part 15 community to assure that there is no harmful interference to Part 15 operations. While the future LMS auction (and resultant operations) could lead to increased congestion in the 900 MHz Band, the Company believes that there are sufficient means to mitigate harmful interference to Part 15 operations. There can be no assurance, however, that the operation of one or more of the Company's network installations at particular locations would not be adversely affected by existing or proposed LMS operations or that extensive LMS operations would not have a material adverse effect on the Company's business, financial condition or operating results. In a pending Rulemaking, the FCC has solicited comments on a private entity's proposal to authorize non-government, wind profiler radar systems in the 900 MHz Band. While not currently the subject of proposed rules, if the FCC ultimately adopts such rules, there can be no assurance that such regulation would not have a material adverse effect on the Company's business, financial condition or operating results. In March 1997, the FCC initiated a rulemaking proceeding in response to a request filed by the American Radio Relay League, Inc. on behalf of amateur radio operators. The FCC proposed to amend its rules for the Amateur Radio Services to allow amateur stations greater flexibility in the use of high-powered spread spectrum technologies in, among others, the 900 MHz Band. To protect other users, including Part 15 users such as the Company, the FCC proposes to require spread spectrum equipment used by amateur radio licensees to use the minimum power necessary and to incorporate automatic power control circuitry in their equipment to reduce the potential for interference. If the FCC ultimately adopts rules as proposed, amateur spread spectrum operations may interfere with the Company's operations in certain discrete geographic areas. Although the Company believes it would be able to overcome such interference, if any, by installing additional network radios and other measures, there can be no assurance to that effect. The FCC adopted a rule making proceeding and inquiry to determine, among other things, whether to permit local exchange carriers to assess interstate access charges on information service providers like the Company. The FCC has tentatively concluded that access charges should not apply to information service providers and left standing an earlier decision that such charges would not apply to enhanced services, which includes access to the Internet and other interactive computer networks. However, the FCC also sought comment on whether to initiate a separate rulemaking proceeding and inquiry to consider additional rules or actions that may be necessary relating to information services and the Internet. There can be no assurance that the final rules adopted, if any, will reflect the FCC's tentative conclusion with regard to the imposition of access charges or that the outcome of any rulemaking proceeding and inquiry concerning information services and the Internet would not have a material adverse effect on the Company's business, financial condition and results of operations. Wireless networks such as the Company's are subject to certain Federal Aviation Administration and FCC guidelines regarding the location, lighting, construction and modification of structures and antennas used in connection with the radio spectrum. In addition, the FCC has authority to enforce certain provisions of the National Environmental Policy Act as they may apply to the Company's facilities. The FCC recently adopted rules containing guidelines and methods for evaluating the environmental effects of radio frequency emissions from FCC-regulated transmitters. The rules categorically exclude low power, Part 15 devices of the type used by the Company from routine environmental evaluation because they offer little or no potential for exposure in excess of specified health and safety guidelines. The environmental evaluation rules do apply to the 2.3 GHz equipment being developed by the Company for WCS operations. The FCC also incorporated into its rules provisions of the Telecommunications Act of 1996 that preempt state and local governmental regulation over the placement of radio frequency devices based on radio frequency environmental effects. Despite these actions, some public concerns about radio frequency emissions remain. Regulatory action in response to these concerns could have a material adverse effect on the Company's business, financial condition and results of operations. The FCC has issued a Notice of Proposed Rulemaking concerning implementation of the Communications Assistance For Law Enforcement Act ("CALEA"). CALEA requires entities offering certain communications services to provide a means by which law enforcement agencies can conduct electronic surveillance in the face of changing communications technologies. Because of exemptions provided in the act itself, the Company believes that the CALEA provisions are not applicable to its operations. If the FCC or the courts nevertheless require the Company to implement CALEA compliance capability, such action could have a material adverse impact on the Company's business, financial condition and results of operations. 10 11 State and Local Regulation. The Company often requires the siting of its network radios and WAPs on public rights-of-way and other public property. Due to state and local right-of-way, zoning and franchising issues, the Company is not always able to place its radios in the most desirable locations, on an optimal schedule or in the most cost-effective manner. There can be no assurance that state and local processes associated with radio location will not have a material adverse effect on the Company's business, financial condition or operating results. As a result of amendments to the Communications Act of 1934, certain states may attempt to regulate the Company with respect to the terms and conditions of service offerings. While the Company believes that state regulation, if any, will be minimal, there can be no assurance that such regulation will not have a material adverse effect on the Company's business, financial condition or operating results. BACKLOG The Company had backlog of $1.1 million and $600,000 as of December 31, 1996 and 1997, respectively. Backlog as of any particular date is cancelable at any time without penalty and should not be relied on as an indicator of future revenues. EMPLOYEES As of December 31, 1997, the Company employed approximately 217 people, all of whom were based in the United States. Of the total employees, 37 were in manufacturing, 45 were in network operations and deployment, 33 were in research and development, 61 were in sales, marketing and customer support and 41 were in administration. The Company is highly dependent on certain members of its management and engineering staff, the loss of the services of one or more of who might impede the achievement of the Company's development, deployment and commercialization of the Company's products and services. None of these individuals has an employment contract with the Company. None of the Company's employees is represented by a labor union. The Company has not experienced any work stoppage and considers its relations with its employees to be good. RISK FACTORS UNCERTAINTY REGARDING DEPLOYMENT OF RICOCHET AND ACQUISITION OF DEPLOYMENT AGREEMENTS The Company's future success depends on the successful deployment of Ricochet in major metropolitan areas of the United States. Before offering Ricochet service, the Company must complete deployment of the network in a portion of a metropolitan area that is large enough to justify commencement of marketing and sales efforts. The deployment process consists of obtaining site agreements, designing the network configuration, installing the network infrastructure and testing the network. After initial deployment and commencement of service in a portion of a metropolitan area, the Company can extend the geographic coverage of the Ricochet network to include additional portions of the metropolitan area. Any inability or delays in execution in its deployment plan could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has limited prior experience in deploying and operating a wireless data communications service. Accordingly, there can be no assurance as to the timing or extent of the deployment of Ricochet. The construction of the Company's networks will depend to a significant degree on the Company's ability to lease or acquire sites for the location of its network equipment and to maintain agreements for such sites as needed. The Company installs most of its Ricochet network radios on streetlights on which it leases space from electric utilities, municipalities or other local government entities. In addition, the Company is often required to enter into agreements with owners of the right-of-way in which street lights are located and supply agreements with providers of electricity to the street lights to provide power for the Company's network radios. The process of obtaining these agreements is complex and has caused significant delays in deploying Ricochet networks. The Company must deal separately with each city in which it plans to deploy its network. In some instances, cities have never faced requests similar to the Company's, are reluctant to grant such rights or do not have a process in place to do so. The 11 12 Company must then meet with various municipal organizations to discuss issues such as pricing, health and safety concerns, traffic disruption, aesthetics and citizen concerns. In the event the Company is unable to negotiate, renew or extend site agreements in a timely manner and on commercially reasonable terms, or at all, it would need to obtain sites to deploy network radios on commercial buildings, residential dwellings or similar structures. Deploying a large area in this manner could be significantly more expensive than installing network radios on street lights and may be restricted or prohibited by a municipality. The Company also leases space on building rooftops for its WAP sites. In connection with the leasing of WAP sites, the Company faces competition with other providers of wireless communication services. The Company expects that the site acquisition process will continue throughout the construction of the Company's networks. Each stage of the process involves various risks and contingencies, many of which are not within the control of the Company and any of which could adversely affect the construction of the Company's networks should there be delays or other problems. UNCERTAINTY OF MARKET ACCEPTANCE Commercialization of Ricochet is subject to market acceptance risks. A broad market for wide area wireless data communications services has not yet developed. As a result, the extent of the potential demand for Ricochet service cannot be reliably estimated. In addition, the Company has limited experience marketing its Ricochet service. As of February 28, 1998, the Company had approximately 20,000 subscribers. The Company believes that market acceptance depends principally on cost competitiveness, data rate, ease of use, including compatibility with existing applications, cost and size of Ricochet modems, extent of coverage, customer support, marketing, distribution and pricing strategies of the Company and competitors, Company reputation and general economic conditions. Some of the foregoing factors are beyond the control of the Company. If the Company's customer base for Ricochet does not expand as required to support the deployment of additional networks, the Company's business, financial condition and operating results will be materially adversely affected. In addition, the market for wireless communications services is characterized by a high customer turnover rate. There can be no assurance that the Company will be able to retain existing or future customers. CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING The Company intends to continue the development, deployment and commercialization of its Ricochet networks. The timing and amount of capital expenditures may vary significantly depending on numerous factors including market acceptance of Ricochet, availability and financial terms of site agreements for the Company's network infrastructure, technological feasibility, availability of Ricochet radios and modems and availability of sufficient management, technical, marketing and financial resources. The Company will need to raise additional funds through the sale of its equity or debt securities in private or public financings or through strategic partnerships in order to complete the deployment and commercialization of Ricochet. There can be no assurance that such funds will be sufficient to fund such deployment as planned. In addition, no assurance can be given that additional financing will be available or that, if available, such funding can be obtained on terms favorable to the Company. Should the Company be unable to obtain additional financing, it may be required to scale back the planned deployment of its Ricochet networks and reduce capital expenditures, which would have a material adverse effect on the Company's business, financial condition and operating results. EARLY-STAGE TECHNOLOGY; FUTURE OPERATING LOSSES AND NEGATIVE CASH FLOW FROM OPERATIONS The Company's Ricochet technology is at an early stage of development and has been in commercial operation for only a short period of time; consequently, the Company has limited historical financial information upon which a prospective investor could perform an evaluation. The Company will incur significant expenses in advance of generating revenues and is expected to realize significant operating losses in the future as a result of the continuing development, deployment and commercialization of its Ricochet networks. The Company's future operating results are subject to a number of risks, including the Company's ability to implement its strategic plan, to attract and retain qualified individuals and to raise appropriate financing as necessary. As such, no assurance can be given as to the timing and extent of revenue receipts and expense disbursements or the Company's ability to successfully complete all of the tasks associated with developing and maintaining a successful enterprise. In addition, there can be no assurance that the Company will be able to successfully manage operations. Management's failure to guide and control growth effectively (including implementing adequate systems, procedures and controls in a timely manner) could have a material adverse effect on the Company's financial condition and results of operations. 12 13 The Company has incurred cumulative net losses through December 31, 1997 of approximately $149.3 million. These losses resulted primarily from expenditures associated with the development, deployment and commercialization of the Company's wireless network products and services. The Company expects to incur significant operating losses and to generate negative cash flow from operating activities during the next several years while it continues to develop and deploy its Ricochet networks and build its customer base. There can be no assurance that the Company will achieve or sustain profitability or positive cash flow from operating activities in a timely manner. REGULATION OF COMMUNICATIONS ACTIVITIES Federal Regulation. The Company is subject to various FCC regulations. The FCC, pursuant to the Communications Act, regulates non-government use of the electromagnetic spectrum in the United States, including the 902 - 928 MHz frequency band (the "900 Band") currently used by the Company's radio products, and the 2400 - 2483.5 MHz band (the "2.4 GHz Band") and 2305 - 2315, 2350 - 2360, 2315 - 2320 and 2345 - 2350 MHz bands (the "2.3 GHz Band") where the Company is proposing commercial operations in the near future. Part 15 of the FCC's regulations provides that the 900 MHz and 2.4 GHz Bands may be authorized for the operation of certified radio equipment without the requirement for a license. The Company designs its license-free products to conform with, and be certified under, the FCC's Part 15 spread spectrum rules. Operations in the 2.3 GHz Band will be in accordance with FCC regulations for the Wireless Communications Service ("WCS"), a licensed service governed by Part 27 of the FCC's regulations. License-free operation of the Company's products and other Part 15 products in the 900 MHz and 2.4 GHz Bands is subordinate to certain licensed and unlicensed uses of these bands, including industrial, scientific and medical equipment, the United States government, amateur radio services and, in certain instances, location and monitoring systems. The Company's products must not cause harmful interference to any non-Part 15 equipment operating in the band and must accept interference from any of them, as well as from any other Part 15 equipment operating in the band. If the Company were unable to eliminate any such harmful interference caused by its products through technical or other means, or were unwilling to accept interference caused by others to its services, the Company or its customers could be required to cease operations in the band in the locations affected by the harmful interference. Additionally, in the event the license-free 900 MHz or 2.4 GHz Bands become unacceptably crowded, and no additional frequencies are allocated by the FCC, the Company's business, financial condition and results of operations could be materially and adversely affected. Operation in the 2.3 GHz WCS Band is pursuant to licenses that the Company purchased at an FCC spectrum auction. These licenses, issued on July 21,1997, authorize the provision of service only in the Northeastern, Central and Western United States Regional Economic Areas, and in the St. Louis, Missouri, Portland Oregon and Seattle, Washington Major Economic Areas. When the FCC adopted regulations for WCS, it required that WCS licensees provide certain protections for the adjacent channel Wireless Cable and Instructional Television Fixed services for a period of five years. There is currently pending at the FCC a contested Petition For Reconsideration requesting that this protection period be extended to ten years. While the Company believes that it can provide the requisite protection to adjacent channel users, there can be no assurance that such protection can be provided in a technically or economically feasible manner. The WCS operations will require the use of equipment that is type-accepted by the FCC. While the Company believes it can develop type-accepted equipment which performs satisfactorily with its certified equipment operating in the license-free bands, there can be no assurance that such equipment can be developed, or that it can be developed in a timely and economical manner. The licenses for WCS require that "substantial service" be provided to the public in the authorized service areas within ten years of the license grant. In addition, while the WCS licenses expire in ten years, the FCC will grant a "renewal expectancy" to licensees whose operations have been in accordance with the FCC's regulations. Although there can be no assurance of compliance with all of the WCS requirements, the Company believes that it can comply with all of the conditions in an economically efficient manner. Failure to meet any one or all of these conditions could materially and adversely affect the Company's business, financial condition and results of operations. The regulatory environment in which the Company operates is subject to change. Changes in the regulation of the Company's activities by the FCC, as a result of its own regulatory process or as directed by legislation or the courts, including changes in the allocation of available spectrum, could have a material adverse effect on the Company, and the Company might deem it necessary or advisable to move to another of the Part 15 bands or to obtain the right to operate in additional licensed spectrum or other portions of the unlicensed spectrum. Redesigning products to operate in another band could be expensive and 13 14 time consuming, and there can be no assurance that such redesign would result in commercially viable products. In addition, there can be no assurance that, if needed, the Company could obtain appropriate licensed or unlicensed spectrum on commercially acceptable terms, if at all. On an ongoing basis, the FCC proposes and issues new rules and amendments to existing rules that affect the Company's business. The Company closely monitors the FCC's activities and, when appropriate, actively participates in policy and rulemaking proceedings. The Company is currently monitoring several proceedings at the FCC that could have an impact on the Company. If the FCC adopts rules that directly or indirectly restrict the Company's ability to conduct its business as currently conducted or proposed to be conducted, the Company's business, financial condition or operating results could be materially adversely affected. The FCC has adopted, and affirmed through reconsideration, rules for the Location and Monitoring Service ("LMS"), a licensed service replacing the Automatic Vehicle Monitoring service operating in the 900 MHz Band. There is currently very limited LMS operation; however, sometime toward the end of 1998, the FCC is proposing to auction licenses for this spectrum. In adopting the LMS rules, the FCC affirmed the right of Part 15 users such as the Company to operate in this frequency band, provided certain "safe harbors," and authorized operation so long as it does not cause "harmful interference," which was specifically defined by the FCC. In addition, the FCC provided that all LMS licenses would be conditioned upon testing with the Part 15 community to assure that there is no harmful interference to Part 15 operations. While the future LMS auction (and resultant operations) could lead to increased congestion in the 900 MHz Band, the Company believes that there are sufficient means to mitigate harmful interference to Part 15 operations. There can be no assurance, however, that the operation of one or more of the Company's network installations at particular locations would not be adversely affected by existing or proposed LMS operations or that extensive LMS operations would not have a material adverse effect on the Company's business, financial condition or operating results. In a pending Rulemaking, the FCC has solicited comments on a private entity's proposal to authorize non-government, wind profiler radar systems in the 900 MHz Band. While not currently the subject of proposed rules, if the FCC ultimately adopts such rules, there can be no assurance that such regulation would not have a material adverse effect on the Company's business, financial condition or operating results. In March 1997, the FCC initiated a rulemaking proceeding in response to a request filed by the American Radio Relay League, Inc. on behalf of amateur radio operators. The FCC proposed to amend its rules for the Amateur Radio Services to allow amateur stations greater flexibility in the use of high-powered spread spectrum technologies in, among others, the 900 MHz Band. To protect other users, including Part 15 users such as the Company, the FCC proposes to require spread spectrum equipment used by amateur radio licensees to use the minimum power necessary and to incorporate automatic power control circuitry in their equipment to reduce the potential for interference. If the FCC ultimately adopts rules as proposed, amateur spread spectrum operations may interfere with the Company's operations in certain discrete geographic areas. Although the Company believes it would be able to overcome such interference, if any, by installing additional network radios and other measures, there can be no assurance to that effect. The FCC adopted a rule making proceeding and inquiry to determine, among other things, whether to permit local exchange carriers to assess interstate access charges on information service providers like the Company. The FCC has tentatively concluded that access charges should not apply to information service providers and left standing an earlier decision that such charges would not apply to enhanced services, which includes access to the Internet and other interactive computer networks. However, the FCC also sought comment on whether to initiate a separate rulemaking proceeding and inquiry to consider additional rules or actions that may be necessary relating to information services and the Internet. There can be no assurance that the final rules adopted, if any, will reflect the FCC's tentative conclusion with regard to the imposition of access charges or that the outcome of any rulemaking proceeding and inquiry concerning information services and the Internet would not have a material adverse effect on the Company's business, financial condition and results of operations. Wireless networks such as the Company's are subject to certain Federal Aviation Administration and FCC guidelines regarding the location, lighting, construction and modification of structures and antennas used in connection with the radio spectrum. In addition, the FCC has authority to enforce certain provisions of the National Environmental Policy Act as they may apply to the Company's facilities. The FCC recently adopted rules containing guidelines and methods for evaluating the environmental effects of radio frequency emissions from FCC-regulated transmitters. The rules categorically exclude low power, Part 15 devices of the type used by the Company from routine environmental evaluation because they offer little or no potential for exposure in excess of specified health and safety guidelines. The environmental evaluation rules do apply to the 2.3 GHz 14 15 equipment being developed by the Company for WCS operations. The FCC also incorporated into its rules provisions of the Telecommunications Act of 1996 that preempt state and local governmental regulation over the placement of radio frequency devices based on radio frequency environmental effects. Despite these actions, some public concerns about radio frequency emissions remains. Regulatory action in response to these concerns could have a material adverse effect on the Company's business, financial condition and results of operations. The FCC has issued a Notice of Proposed Rulemaking concerning implementation of the Communications Assistance For Law Enforcement Act ("CALEA"). CALEA requires entities offering certain communications services to provide a means by which law enforcement agencies can conduct electronic surveillance in the face of changing communications technologies. Because of exemptions provided in the act itself, the Company believes that the CALEA provisions are not applicable to its operations. If the FCC or the courts nevertheless require the Company to implement CALEA compliance capability, such action could have a material adverse impact on the Company's business, financial condition and results of operations. State and Local Regulation. The Company often requires the siting of its network radios and WAPs on public rights-of-way and other public property. Due to state and local right-of-way, zoning and franchising issues, the Company is not always able to place its radios in the most desirable locations, on an optimal schedule or in the most cost-effective manner. There can be no assurance that state and local processes associated with radio location will not have a material adverse effect on the Company's business, financial condition or operating results. As a result of amendments to the Communications Act of 1934, certain states may attempt to regulate the Company with respect to the terms and conditions of service offerings. While the Company believes that state regulation, if any, will be minimal, there can be no assurance that such regulation will not have a material adverse effect on the Company's business, financial condition or operating results. RISKS OF DEVELOPING TECHNOLOGY The Company's networks have not been in commercial operation for an extended period of time. There can be no assurance that unforeseen problems will not develop with respect to the Company's technology or products or that the Company will be successful in completing the development of its technology and products. Significant risks remain as to the technological performance of the Company's services and products. These include, for example, firmware failures, problems associated with large-scale deployment, inability of networks to meet expected performance in data rate, latency, capacity and range, hardware reliability and performance problems, problems associated with links between Ricochet network radios, WAPs, the wired backbone and other wired networks, excessive interference with or by the Company's networks, failure to receive FCC certification, inability to reduce product size and cost, timing of completion of development and preclusion from commercialization by proprietary rights of third parties. Given the limited deployment of Ricochet to date, there can be no assurance that selected Ricochet network components will be adequate to meet the geographic and radio frequency propagation characteristics of new areas of development. For example, in mid-1995, because of network performance problems discovered during the initial deployment of the Ricochet network in the Silicon Valley, the Company had to redesign certain portions of its Ricochet radios and modems to improve transmission and reception quality and upgrade all of the radios that had been deployed to date. Delays in implementation of the Company's networks as a result of technical difficulties could have a material adverse effect on the Company's business, financial condition and operating results. HIGHLY COMPETITIVE INDUSTRY Competition in the market for data communications services is intensifying and a large number of companies in diverse industries are expected to enter the market. There can be no assurance that the Company will be able to compete successfully in this market. A number of privately and publicly held communications companies have developed or are developing new wireless and wired data communications services and products using competing technologies. The competition can be placed into two categories: portable and fixed access. While Ricochet can be used as a fixed point service, it is positioned primarily as a portable service with its largest competitive advantages being portability and low flat rate pricing. Portable Services. Companies offering portable data communications services include CDPD, cellular analog, PCS, ARDIS, RAM and two-way paging. The primary attributes distinguishing these competitors are speed, price and availability. The Company estimates that user throughput speed for these competitors range from 2 to 10 kbps. Pricing is typically based on per 15 16 kilobyte or per minute charges, making heavy usage very expensive. CDPD is either installed or being installed in a number of metropolitan areas, but complete coverage and roaming arrangements are not yet in place. Analog and digital cellular networks are widely available throughout the United States and, with the addition of a special modem, can also be used for sending data. ARDIS (owned by American Mobile Satellite) and RAM (owned by BellSouth Corporation), are widely installed and operating across the United States and in some foreign countries. ARDIS, RAM and two-way paging are currently not compatible or fast enough for standard Internet browsers. Fixed-Point Access. A variety of fixed point high-speed (up to 1 Mbps) data technologies for both wired and wireless products are in various stages of development. Fixed-point data services and technologies include XDSL, wireless LANs, cable modems, satellite service, Integrated Services Digital Network ("ISDN") and AT&T's digital wireless service. These services are aimed at providing data connectivity to the home or office at speeds that will support future video & multimedia applications over the Internet, and typically require either high quality phone line connections or special modems and hardware. There can be no assurance that the Company's competitors will not succeed in developing new technologies, products and services that achieve broader market acceptance or that could render Ricochet obsolete or uncompetitive. Internet Access Services. The Company's Internet access services compete with those currently offered by a large number of companies. The Company believes that existing competitors include numerous national and regional independent Internet service providers, established on-line service providers such as American Online ("AOL") and the Microsoft Network, as well as long distance and regional telephone companies. These services are typically offered over the phone network at speeds ranging between 28.8 and 56.6 kbps. Certain competitors could choose to offer Internet or on-line services at a price substantially below that of Ricochet. Such actions would place the Company at a substantial competitive disadvantage. The competitive environment could limit the Company's ability to grow its subscriber base and retain existing subscribers and could result in increased spending on selling, marketing and product development activities. These factors could have a material adverse effect on the Company's financial condition and operating results. The Company's competitors are becoming increasingly aware of the commercial value of technical findings and are becoming more active in seeking patent protection and licensing arrangements for the use of technology that others have developed. The development by others of new products and processes competitive with or superior to those of the Company could render the Company's products obsolete or uncompetitive. The Company's competitive position also depends upon its ability to attract and retain qualified personnel, obtain patents or otherwise develop proprietary products or processes, and secure sufficient capital resources. A broad market for wide area wireless data communications services has not yet developed. In order for the market to develop and for wireless services to compete effectively with widely available wired solutions, the Company believes that wireless data communications services will need to provide data rates and functionality comparable to those of the predominant mode of wired communications at an affordable cost without compromising ease of use. TECHNOLOGICAL CHANGE The market for data communications systems is characterized by rapidly changing technology and evolving industry standards in both the wireless and wireline industries. The Company's success will depend to a substantial degree on its ability to develop and introduce in a timely and cost-effective manner enhancements to its existing systems and new products that meet changing customer requirements and evolving industry standards. For example, increased data rates, such as those provided by wired solutions like ISDN, may affect customer perceptions as to the adequacy of the Company's services and may also result in the widespread development and acceptance of applications that require a higher data rate than the Company's Ricochet service currently provides. There can be no assurance that the Company's technology or systems will not become obsolete upon the introduction of alternative technologies. If the Company does not develop and introduce new products and services and achieve market acceptance in a timely manner, its business, financial condition and operating results could be materially and adversely affected. CONTROL OF VOTING STOCK BY VULCAN In January, 1998, Vulcan acquired 4,650,000 shares of the Company's Common Stock bringing Vulcan's beneficial ownership to 49.5% of the Company's outstanding Common Stock. As a result, Vulcan is able to control most matters submitted to a vote of the stockholders, including the election of members of the Board (other than the independent directors) and significant corporate transactions. Accordingly, Vulcan is able to control or significantly influence actions taken by the Board or the Company and to limit the ability of the Company's current stockholders to affect or influence the direction of the Company and the composition of the Board. In addition, conflicts of interest may arise as a consequence of the control relationship between Vulcan and the Company, including (a) conflicts between Vulcan, as a stockholder with effective control of the Company and the other stockholders of the Company, whose interests may differ with respect to, among other things, the strategic direction of the Company or significant corporate transactions, (b) conflicts arising in respect of corporate opportunities that could be pursued by the Company, on the one hand, or by Vulcan and any of its other affiliated entities, on the other hand, or (c) conflicts arising in respect of any new contractual relationships between the Company, on the one hand, and Vulcan and any of its other affiliated entities, on the other hand. In addition, Vulcan's beneficial ownership of 49.5% of the outstanding Common Stock makes it more difficult for a third party to effect a change in management or to acquire control of the Company without the approval of Vulcan and, therefore, may delay, prevent or deter a proxy contest for control of the Company or other changes in management, or discourage bids for a merger, acquisition or tender offer, in which the Company's stockholders could receive a premium for their shares. The Common Stock Purchase Agreement, dated October 10, 1997, between the Company and Vulcan (the "Stock Purchase Agreement"), provides that transactions between Vulcan and the Company outside the ordinary course of business or having a dollar value of $25,000 or more may not be effected without the approval of the Independent Directors (as defined in the Stock Purchase Agreement). To the extent that conflicts arise as a result of Vulcan's control relationship that are not subject to such requirement, it is anticipated that the Board of Directors would be guided by its fiduciary obligations as directors under the Delaware General Corporate Law, included the directors' duty of loyalty. Although the Stock Purchase Agreement contains a number of provisions designed to protect stockholders in the event of, among other things, a proposal by Vulcan to acquire the Company or a proposal to sell the Company to a third party, the Stock Purchase Agreement does not require Vulcan to sell its controlling block of shares, even if an offer is made that might be attractive to the other stockholders. Moreover, there can be no assurance that any of the stockholder protection measures included in the Stock Purchase Agreement will be effective in any particular case. NO FUTURE FUNDING COMMITMENT The Company intends to continue development of its next-generation, high-speed network and modem and deployment and commercialization of Ricochet. In order to do so, the Company will need to raise additional funds through the sale of equity or debt securities in private or public financings or through strategic partnerships. The Stock Purchase Agreement contains no commitment on Vulcan's part to provide additional financing to the Company. Based on the Company's current business plan, the funds provided by Vulcan, together with cash and investments on hand, are adequate to meet the Company's planned needs only through the third quarter of 1998. There can be no assurance that additional financing will be available on terms favorable to the Company, if at all. In addition, it is possible that Vulcan's control position may deter or discourage investors who may otherwise have provided financing to the Company. Should the Company be unable to obtain additional financing, it may be required to scale back its development and commercialization activities, which could have a material adverse effect on the Company's business, financial condition and results of operations. 16 17 UNCERTAINTY OF PROPRIETARY RIGHTS The Company believes that patents and other proprietary rights are important to its business. The Company's policy is to file patent applications to protect its technology, inventions and improvements to its inventions that it considers important to its business. The Company relies on a combination of patent, copyright, trademark and trade secret protection and non-disclosure agreements to establish and protect its proprietary rights. The Company has been issued 25 patents in the United States, which expire on dates between 2006 and 2016. Foreign patents corresponding to one domestic patent have been granted in four foreign countries, foreign patents corresponding to one other U.S. patent have been approved for grant in three foreign countries, and other foreign and domestic patents are pending. There can be no assurance that patents will issue from any pending applications or, if patents do issue, that claims allowed will be sufficiently broad to protect the Company's technology. The Company also owns over 30 United States trademark registrations and approximately 20 foreign counterparts. There can be no assurance that any of the Company's current or future patents or trademarks will not be challenged, invalidated, circumvented or rendered unenforceable, or that the rights granted thereunder will provide significant proprietary protection or commercial advantage to the Company. The Company is not aware of any infringement of its patents, trademarks or other proprietary rights by others. Although the Company has pursued and intends to continue pursuing patent protection of inventions that it considers important, the Company does not believe that its patent position has as much significance as other competitive factors. However, these patents may not preclude competitors from developing equivalent or superior products and technology to those of the Company. There can be no assurance that the measures adopted by the Company for the protection of its intellectual property will be adequate to protect its interests The Company also relies upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain its competitive position. There can be no assurance that others will not independently develop substantially equivalent proprietary information or otherwise gain access to or disclose such information of the Company. It is the Company's policy to require its employees, certain contractors, consultants, directors and parties to collaborative agreements to execute confidentiality agreements upon the commencement of such relationships with the Company. There can be no assurance that these agreements will not be breached, that they will provide meaningful protection of the Company's trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information or that the Company's trade secrets will not otherwise become known or be independently discovered by the Company's competitors. The commercial success of the Company will also depend in part on the Company not infringing the proprietary rights of others and not breaching technology licenses that cover technology used in the Company's products. It is uncertain whether any third party patents will require the Company to develop alternative technology or to alter its products or processes, obtain licenses or cease certain activities. If any such licenses are required, there can be no assurance that the Company will be able to obtain such licenses on commercially favorable terms, if at all. Failure by the Company to obtain a license to any technology that it may require to commercialize its products and services could have a material adverse effect on the Company. Litigation, which could result in substantial cost to the Company, may also be necessary to enforce any patents issued or licensed to the Company or to determine the scope and validity of third party proprietary rights. MANAGEMENT OF GROWTH Management of growth is especially challenging for a company with a short operating history and the failure to effectively manage growth could have a material adverse effect on the Company's business, financial condition and operating results. Development, deployment and commercialization of Ricochet has required and will continue to require management of a number of operational activities in which the Company has little or no prior experience, including the administration of its subscriber base, maintenance and support of Ricochet hardware and software and management of Company activities and properties in dispersed locations. There can be no assurance that the Company will be able to manage the growth of its business successfully. SOLE SOURCES OF SUPPLY The Company generally uses standard component parts that are available from multiple sources. However, certain component parts used in the Company's products are available only from sole or limited source vendors. The Company's reliance on these sole or limited source vendors involves certain risks, including the possibility of a shortage of certain key component parts and reduced control over delivery schedules, manufacturing capability, quality and costs. In addition, some key component parts require long delivery times. The Company has in the past experienced delays in its ability to obtain certain key component parts from suppliers. In the event of future supply problems from the Company's sole or limited source vendors, the inability of the Company to develop alternative sources of supply quickly and on a cost-effective basis could materially impair the Company's ability to manufacture and deliver its products and to implement its services. 17 18 DEPENDENCE ON KEY PERSONNEL The Company is highly dependent on certain members of its management and engineering staff, the loss of the services of one or more of who might impede the achievement of the Company's business objectives. None of these individuals has an employment contract with the Company. Furthermore, recruiting and retaining qualified technical personnel to perform research, development and technical support work is critical to the Company's success. If the Company's Ricochet business grows, the Company will also need to recruit a significant number of management, technical and other personnel for such business. Competition for employees in the Company's industry is intense. Although the Company believes that it will be successful in attracting and retaining skilled and experienced personnel, there can be no assurance that the Company will be able to continue to attract and retain such personnel on acceptable terms. Vulcan has previously indicated in filings with the Commission its interest in enhancing the Company's management team. The Company is dependent to a large extent on the services of its management personnel and any inability on the part of the Company to attract and retain new, highly qualified persons to fill key management positions could have a material adverse effect on the Company. It is possible that, due to the Acquisition, certain key technical, management and other personnel may elect to leave the employ of the Company, which could have a material adverse effect on the Company's business. In addition, if the Company is to realize the anticipated benefits of the Acquisition, any new personnel must be integrated into the Company efficiently. The integration of new personnel will result in some disruption to the Company's ongoing operations and any failure to complete such integration in an efficient manner could have a material adverse effect on the Company's business, financial condition and results of operations. LIMITED MANUFACTURING EXPERIENCE AND CAPABILITY; INVENTORY MANAGEMENT The Company has limited experience in large-scale manufacturing. The Company's printed circuit boards and other subassemblies are assembled on a contract basis by local manufacturers. Final assembly and testing operations are performed internally. The Company believes that it has or can secure adequate capacity to meet forecasted demand for its products and networks for at least the next 12 months. However, if customers begin to place large orders for the Company's products or if the Company decides to accelerate deployment of Ricochet, the Company's present manufacturing capacity may prove inadequate. To be successful, the Company's products and components must be manufactured in commercial quantities at competitive cost and quality. The Company's long-term manufacturing strategy is to supplement its manufacturing capabilities by increasing outsourcing of product assembly and testing and by licensing other companies to manufacture certain of the Company's products. In the future, the Company will be required to achieve significant product and component cost reductions. If the Company is unable to develop or contract for manufacturing capabilities on acceptable terms and if product and component cost reductions are not achieved, the Company's competitive position, and the ability of the Company to achieve profitability, would be materially impaired. Effective inventory management requires the Company to accurately forecast demand for its services and products and to adequately take into account the introduction of new or replacement products. Failure to manage this process effectively could result in insufficient inventory to meet demand, thereby limiting revenues and deployment of Ricochet networks, or could result in excess inventory that may become obsolete before it is sold, either of which could have a material adverse effect on the Company's business, financial condition or operating results. QUARTERLY FLUCTUATIONS The Company believes that its future operating results over both the short and long term will be subject to annual and quarterly fluctuations due to several factors, some of which are outside the control of the Company. These factors include the significant cost of building its Ricochet networks (including any unanticipated costs associated therewith), fluctuating market demand for the Company's services, establishment of a market for the Ricochet service, pricing strategies for competitive services, delays in the introduction of the Company's services, new offerings of competitive services, changes in the regulatory environment, the cost and availability of Ricochet infrastructure and subscriber equipment and general economic conditions. VOLATILITY OF STOCK PRICE The market price of the Company's Common Stock has been volatile and may be volatile in the future. Future announcements concerning the Company or its competitors, including technological innovations, new commercial products, status of network implementation, government regulations, proprietary rights or product or patent litigation, operating results and general market and economic conditions may have a significant impact on the market price of the Company's Common Stock. In addition, any delays or difficulties in establishing Ricochet or attracting Ricochet subscribers are likely to result in pronounced fluctuations in the market price of the Company's Common Stock. 18 19 DEPENDENCE ON SOUTHERN CALIFORNIA EDISON The Company has relied to date primarily on Southern California Edison ("SCE") as the principal source of its revenues. Revenues from SCE accounted for 79%, 84%, 72%, 51% and 12% of the Company's total revenues in 1993, 1994, 1995, 1996 and 1997, respectively. As of December 31, 1997, SCE was the only company to have made a commitment to purchase a large volume of the Company's products. The Company expects only a small amount of revenues from SCE in 1998 and thereafter. ANTITAKEOVER PROVISIONS; POSSIBLE FUTURE ISSUANCES OF PREFERRED STOCK The Company's Certificate of Incorporation, as amended (the "Amended Certificate"), Bylaws and the provisions of the Delaware General Corporation Law (the "Delaware GCL") contain certain provisions that may have the effect of discouraging, delaying or making more difficult a change in control of the Company or preventing the removal of incumbent directors. The existence of these provisions may have a negative impact on the price of the Common Stock and may discourage third party bidders from making a bid for the Company or may reduce any premiums paid to security holders for their Common Stock. Furthermore, the Company is subject to Section 203 of the Delaware GCL, which could have the effect of delaying or preventing a change in control of the Company. The Amended Certificate also allows the Board of Directors to issue up to 2,000,000 shares of Preferred Stock and to fix the rights, preferences and privileges of such shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. While the Company has no present intention to issue shares of Preferred Stock, any such issuance could be used to discourage, delay or make more difficult a change in control of the Company. ITEM 2 - PROPERTIES. The largest part of the Company's operations and its headquarters are located in approximately 78,500 square feet of leased office, manufacturing and warehouse space located in Los Gatos, California. The leases on this space expire on various dates from January 2004 to January 2007. The Company believes that it will be required to obtain additional office and manufacturing space in order to meet anticipated increases in the Company's business activity over the next year. The Company also leases approximately 10,000 square feet for its network operations facility in Houston, Texas under a lease that expires in the year 2000. The Company maintains small offices in Washington and Virginia. ITEM 3 - LEGAL PROCEEDINGS The Company is not a party to any material litigation. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the Company's security holders during the fourth quarter of 1997. 19 20 PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the Nasdaq National Market under the symbol "MCOM." The table below sets forth the high and low sales prices for the Company's Common Stock (as reported on the Nasdaq National Market) during the periods indicated. The reported last sale price of the Common Stock on the Nasdaq National Market on March 20, 1998 was $9.87.
PRICE RANGE OF COMMON STOCK ----------------------------- HIGH LOW ---------- ---------- Year Ending December 31, 1996: 1st Quarter ....................................... $ 14.375 $ 9.25 2nd Quarter ....................................... 19.75 10.75 3rd Quarter ....................................... 18.625 11.375 4th Quarter ....................................... 18.625 11.25 Year Ending December 31, 1997: 1st Quarter ....................................... $ 16.50 $ 9.50 2nd Quarter ....................................... 10.75 4.875 3rd Quarter ....................................... 11.50 4.375 4th Quarter ....................................... 18.375 9.87
As of March 20, 1998, there were approximately 443 holders of record of the Company's Stock. Since inception, the Company has not declared or paid any cash dividends on its capital stock. The Company currently intends to retain future earnings, if any, to finance the growth and development of its business and, therefore does not anticipate paying any cash dividends in the foreseeable future. 20 21 ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Revenues: Service revenues ........... $ -- $ 27 $ 789 $ 2,158 $ 6,642 Product revenues ........... 8,173 19,580 4,995 4,996 6,797 Development contract revenues ................. 1,884 1,957 -- -- -- -------- -------- -------- -------- -------- Total revenues ........... 10,057 21,564 5,784 7,154 13,439 -------- -------- -------- -------- -------- Costs and expenses: Cost of service revenues . -- 1,244 9,674 18,358 30,275 Cost of product revenues .. 6,401 15,116 3,134 2,528 4,558 Cost of development contract revenues ....... 1,932 1,890 -- -- -- Research and development .. 3,256 8,668 9,145 9,896 10,803 Selling, general and administrative .......... 5,027 9,695 11,715 17,724 21,189 Provision for Overall Wireless................. -- -- -- -- 3,611 -------- -------- -------- -------- -------- Total costs and expenses . 16,616 36,613 33,668 48,506 70,436 -------- -------- -------- -------- -------- Loss from operations ..... (6,559) (15,049) (27,884) (41,352) (56,997) Interest expense ............ -- -- -- (1,310) (4,151) Interest income ............. 410 3,300 4,363 3,317 1,820 -------- -------- -------- -------- -------- Net loss ................ $ (6,149) $(11,749) $(23,521) $(39,345) $(59,328) ======== ======== ======== ======== ======== Basic and diluted net loss per share ........ $ (0.74) $ (0.96) $ (1.79) $ (2.93) $ (4.35) ======== ======== ======== ======== ======== Weighted average shares outstanding ................. 8,353 12,202 13,140 13,413 13,641 ======== ======== ======== ======== ========
AS OF DECEMBER 31, -------------------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- BALANCE SHEET DATA: Cash and investments ......... $ 25,020 $ 89,588 $ 64,415 $ 65,221 $ 14,474 Working capital .............. 28,545 73,012 46,771 57,738 6,980 Property and equipment ....... 1,990 10,170 17,717 33,606 40,301 Total assets ................. 32,483 105,534 86,076 101,799 51,103 Long-term debt ............... -- -- -- 45,000 45,000 Stockholders' equity (deficit) 29,171 101,516 80,374 43,306 (13,817)
21 22 ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since inception, the Company has devoted significant resources to the development, deployment and commercialization of its wireless network products and services. Prior to 1997, a significant portion of the Company's revenues had been derived primarily from sales of customer-owned networks and related products, known as UtiliNet, to Southern California Edison ("SCE") and other utility companies. The Company began commercial Ricochet service in September 1995, and Ricochet service is now available in the San Francisco Bay Area, in the Seattle and Washington, D.C. metropolitan areas; parts of Los Angeles; and in a number of airports and corporate and university campuses. Ricochet's customers include individuals, corporations, educational institutions and federal, state and local governments. As of February 28, 1998, there were approximately 20,000 Ricochet Network subscribers, and the Company estimates that its networks covered areas with an aggregate population of approximately 11.4 million people. The Company has incurred cumulative net losses through December 31, 1997 of approximately $149.3 million. These losses resulted primarily from expenditures associated with the development, deployment and commercialization of the Company's wireless network products and services. The Company expects to incur significant operating losses and to generate negative cash flow from operating activities during the next several years while it continues to develop and deploy its Ricochet networks and build its customer base. There can be no assurance that the Company will achieve or sustain profitability or positive cash flow from operating activities in a timely manner or at all. The Company's future success depends on the successful deployment of Ricochet in major metropolitan areas of the United States. Deployment in each metropolitan area will require significant expenditures, a substantial portion of which is incurred before the realization of revenues from such area. Any inability to execute, or delays in execution of, such deployment plan could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance as to the timing or extent of the deployment of Ricochet. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section above entitled "Risk Factors." RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain operational data as a percentage of total revenues:
YEAR ENDED DECEMBER 31, ---------------------------- 1995 1996 1997 ---- ---- ---- REVENUES: Service revenues .................. 14% 30% 49% Product revenues .................. 86 70 51 --- --- --- Total revenues ................ 100% 100% 100% COSTS AND EXPENSES: Cost of service revenues .......... 167 257 225 Cost of product revenues .......... 54 35 34 Research and development .......... 158 138 80 Selling, general and administrative 203 248 158 Provision for Overall Wireless .... -- -- 27 --- --- --- Total costs and expenses .............. 582 678 524 --- --- --- Loss from operations .................. (482) (578) (424) Interest expense ...................... -- (18) (31) Interest income........................ 75 46 14 ---- ---- ---- Net loss .............................. (407)% (550)% (441)% ==== ==== ====
22 23 YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Revenues. Revenues consist of service and product revenues. Service revenues are derived from subscriber fees and modem rentals for Ricochet and fees for UtiliNet customer support and are recognized ratably over the service period. Product revenues are derived from the sale of UtiliNet products and Ricochet modems and are recognized upon shipment. Total revenues increased to $13.4 million in 1997 from $7.2 million in 1996 primarily due to increased Ricochet service revenues, which increased to $6.6 million in 1997 from $2.2 million in 1996. This increase was due to increases in Ricochet subscriber fees and modem rentals resulting from a larger subscriber base. Product revenues increased to $6.8 million in 1997 from $5.0 million in 1996. A significant portion of such revenue was derived from SCE, the Company's principal customer. Product revenues from SCE accounted for 17% and 51% of total product revenues in 1997 and 1996, respectively. Total revenues are expected to continue to increase as a result of increases in the subscriber base. Cost of Revenues. Cost of service revenues is primarily costs incurred to operate Ricochet networks, the cost of providing customer support, certain excess capacity costs and manufacturing variances associated with manufacturing the Company's network components and depreciation of modems rented to Ricochet subscribers. Cost of service revenues also includes the cost to design the Ricochet networks and obtain site agreements for the Company's network infrastructure. These costs are expended as incurred due to the uncertainties regarding the realizability of these costs. Cost of service revenues increased to $30.3 million in 1997 from $18.4 million in 1996. The increase is due to a higher Ricochet network operating expenses resulting from increases in the Ricochet service territory during 1997. Customer service expenses increased $1.1 million in 1997 from $1.8 million in 1996. Cost of modems rented to Ricochet subscribers increased $4.8 million in 1997 from $496,000 in 1996, as a result of the increase in the Ricochet subscriber base in 1997. These increases were partially offset by a reduced level of activity to obtain site agreements in 1997 as compared to 1996. Cost of service revenues are expected to increase significantly as a result of the continued deployment of Ricochet networks and are expected to be greater than Ricochet service revenues for the foreseeable future. Cost of product revenues increased to $4.6 million in 1997 from $2.5 million in 1996. The cost of product revenues as a percentage of product revenues increased to 67% in 1997 from 51% in 1996. The increase was primarily due to a higher percentage of product revenues in 1997 that were derived from the sale of Ricochet modems that were sold for less than the cost to manufacture them. Research and Development. Research and development expenses increased to $10.8 million in 1997 from $9.9 million in 1996. The increase was due to development of an ISDN speed network and subscriber device and enhancements to the technology employed by the Company's Ricochet networks. The Company expects research and development expenses to increase significantly in absolute dollars in future periods. Selling, General and Administrative. Selling, general and administrative expenses increased to $21.2 million in 1997 from $17.7 million in 1996 primarily due to increased selling expense as a result of personnel increases and additional efforts to increase the number of Ricochet subscribers. General and administrative expenses also increased primarily as a result of personnel increases and professional fees associated with addressing regulatory matters, developing strategic relationships and pursuing financing arrangements. These costs are expected to continue to increase as a result of efforts to obtain Ricochet subscribers. Provision for Overall Wireless. In February 1996, the Company purchased an option to acquire Overall Wireless Communications Corporation ("Overall Wireless"), a company that holds a nationwide, wireless communications license in the 220 to 222 MHz frequency band. The Company paid $700,000 for the option and agreed to loan Overall Wireless up to $2.0 million for the construction of a system utilizing the license, of which approximately $1.8 million had been loaned as of December 31, 1997. In January 1997, the Company paid $500,000 to extend the option from January 1997 to July 1997. The option was subsequently extended to December 31, 2000 for no additional cash consideration. In June 1997, the Company recorded a charge of $3.6 million to fully reserve its investment in Overall Wireless due to uncertainties regarding its realization. The $3.6 million charge included $616,000 of warrants (valued at fair market value) to purchase common stock that had been granted to a financial advisor for investment banking services in connection with the acquisition of the option to acquire Overall Wireless. In January 1998, Overall Wireless terminated the option and the Company paid a termination fee of $1.8 million through cancellation of the indebtedness of Overall Wireless. 23 24 Interest Income and Expense. Interest expense increased to $4.2 million in 1997 from $1.3 million in 1996 as a result of a full year of interest expense in 1997 from the issuance of $45 million in principal amount of 8% Convertible Subordinated Notes due 2003 in August 1996. Interest income decreased to $1.8 million in 1997 from $3.3 million in 1996 primarily due to a lower level of cash, cash equivalents and investments in 1997 as compared to 1996. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenues. Total revenues increased to $7.2 million in 1996 from $5.8 million in 1995 primarily due to increased service revenues, which increased to $2.2 million in 1996 from $789,000 in 1995. This increase was due to increases in Ricochet subscriber fees and modem rentals. Product revenues, derived primarily from the sale of Utilinet products, were $5.0 million in 1996 and 1995. A significant portion of such revenue, 51% and 72% of total product revenues in 1996 and 1995, respectively, was derived from SCE, the Company's principal customer. Cost of Revenues. Cost of service revenues increased to $18.4 million in 1996 from $9.7 in 1995. The increase is due to a higher level of Ricochet network deployment in the San Francisco Bay Area and the Seattle and Washington, D.C. metropolitan areas and activities to obtain necessary site agreements in 1996 as compared to 1995. Cost of product revenues decreased to $2.5 million in 1996 from $3.1 million in 1995. The cost of product revenues as a percent of product revenues decreased to 51% in 1996 from 63% in 1995. This decrease was primarily due to a more favorable product mix of the Company's Utilinet products in 1996 and provisions for the write-down of inventory related to certain Ricochet products in the first quarter of 1995. Research and Development. Research and development expenses increased to $9.9 million in 1996 from $9.1 million in 1995. The increase was due to development activities related to enhancements to the technology employed by the Company's Ricochet networks and development of Ricochet modems. Selling, General and Administrative. Selling, general and administrative expenses increased to $17.7 million in 1996 from $11.7 million in 1995 primarily due to increased selling expense as a result of personnel increases and additional efforts to increase the number of Ricochet subscribers. General and administrative expenses also increased primarily as a result of personnel increases. Interest Income and Expense. Interest expense increased to $1.3 million in 1996 as a result of the issuance of $45 million in principal amount 8% Convertible Subordinated Notes due 2003 in August 1996. Interest income decreased to $3.3 million in 1996 from $4.4 million in 1995 primarily due to a lower level of cash and cash equivalents in 1996 as compared to 1995. LIQUIDITY AND CAPITAL RESOURCES The Company has financed operations primarily through the public and private sale of equity and convertible debt securities. Since inception, the Company has completed (i) private placements of preferred stock with net proceeds to the Company of approximately $18.9 million, of which $3.0 million was repurchased and the balance converted to Common Stock at the time of the Company's initial public offering in 1992, (ii) an initial public offering of Common Stock with net proceeds to the Company of approximately $8.8 million in 1992, (iii) private placements of Common Stock with net proceeds to the Company of approximately $18.6 million in 1993, (iv) public and private placements of Common Stock with net proceeds to the Company of approximately $75.2 million in 1994, (v) a private placement of 8% Convertible Subordinated Notes due 2003 with net proceeds to the Company of approximately $43.4 million in 1996 and (vi) private placement of Common Stock with net proceeds to the company of $53.7 million in 1998. 24 25 Since the inception, the Company has devoted significant resources to the development, deployment and commercialization of wireless network products and services. The Company's operations have required substantial capital investments for the purchase of Ricochet Network equipment, Ricochet modems and computer and office equipment. Capital expenditures were $8.4 million, $15.9 and $10.6 million in 1995, 1996 and 1997, respectively. The Company expects to make significant capital expenditures in connection with the development, deployment, upgrade and commercializaton of its Ricochet networks. The Company also expects that to the extent the Ricochet subscriber base grows, significant capital expenditures will be required to procure Ricochet modems. The amount and timing of expenditures, however, may very significantly depending on numerous factors including market acceptance; availability and financial terms of site agreements for the Company's network infrastructure; technological feasibility; availability of Ricochet radios and modems; and availability of sufficient financial, management, marketing and technical resources. The Company anticipates that its existing cash and investments, interest income from investments, investments from Vulcan Ventures and contributions received from its existing joint venture partner will be adequate to satisfy its capital expenditure, operating loss and working capital requirements at least through 1997. The Company believes that additional capital will be required in the future to fund further deployment and operating activities of Ricochet. There can be no assurance that such funds would be available on commercially reasonable terms or at all. As of December 31, 1997, the Company had cash and cash equivalents and short and long term investments of $14.5 million and working capital of $7.0 million. The Company's accounts receivable increased to $2.3 million as of December 31, 1997 from $1.1 million as of December 31, 1996 due to increased revenues in the fourth quarter of 1997 as compared to the fourth quarter of 1996. Inventories remained constant for December 31, 1997 as compared to December 31, 1996. The Company believes that both accounts receivable and inventories will increase in the future in order to support the deployment and commercialization of Ricochet. In 1995, Metricom Investments DC, Inc. ("Metricom Investments"), a subsidiary of the Company, and PepData, Inc. ("PepData"), a subsidiary of Potomac Electronic Power Company, formed Metricom DC, L.L.C ("Metricom DC") to own and operate a wireless data communications network in the metropolitan Washington D.C. area. Metricom Investments contributed $1,000 and rights to use proprietary technology employed by the Company's Ricochet networks in exchange for an 80% ownership interest in Metricom DC. PepData will contribute up to $7.0 million in exchange for a 20% ownership interest in Metricom DC. Metricom DC will distribute available cash first to PepData, until PepData has received cumulative distributions equal to its capital contributions, and second to PepData and Metricom Investments in proportion to their respective ownership interests. As of December 31, 1997, PepData had contributed $5.2 million to the joint venture. The Company is in the process of identifying anticipated costs, problems and uncertainties associated with making the Company's internal-use software applications Year 2000 compliant. In general, the Company expects to resolve the Year 2000 issues through planned replacement or upgrades of its third party software applications including updating its financial management system to Oracle 10.7. Although management does not expect Year 2000 issues to have a material impact on its business or future results of operations, there can be no assurance that there will not be interruptions of operations or other limitations of system functionality or that the Company will not incur significant costs to avoid such interruptions or limitations. NEW ACCOUNTING STANDARDS. In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which established standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in non-condensed general-purpose financial statements. SFAS No. 130 requires classification of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company believes the pronouncement will not have a material effect on its financial statements. In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"), which established standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports to shareholders. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997, although earlier application is encouraged. The Company believes the pronouncement will not have a material effect on its financial statements. 25 26 METRICOM, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, ------------------------- 1996 1997 --------- --------- ASSETS Current assets: Cash and cash equivalents .......................... $ 15,246 $ 9,784 Short-term investments ............................. 46,825 4,390 Accounts receivable, net ........................... 1,126 2,278 Inventories ........................................ 3,115 3,011 Prepaid expenses and other ......................... 1,744 1,124 --------- --------- Total current assets ........................... 68,056 20,587 Property and equipment, net ............................ 26,776 25,875 Long-term investments .................................. 3,150 300 Other assets, net ...................................... 3,817 4,341 --------- --------- Total assets ................................... $ 101,799 $ 51,103 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................... $ 5,517 $ 3,143 Accrued liabilities ................................ 4,801 5,464 Notes payable ...................................... --- 5,000 --------- --------- Total current liabilities .............................. 10,318 13,607 --------- --------- Long-term debt ......................................... 45,000 45,000 --------- --------- Other liabilities ...................................... 768 1,129 --------- --------- Minority interest ...................................... 2,407 5,184 --------- --------- Commitments (Note 5) Stockholders' equity (deficit): Preferred Stock, $.001 par value per share: authorized - 2,000,000 shares; issued and outstanding - none --- --- Common Stock, $.001 par value per share: authorized - 50,000,000 shares; issued and outstanding - 13,555,445 shares in 1996 and 13,819,276 shares in 1997 ................................. 14 14 Additional paid-in capital ............................. 133,298 135,466 Unrealized holding gain (loss) on investments .......... (36) 1 Accumulated deficit .................................... (89,970) (149,298) --------- --------- Total stockholders' equity (deficit) ........... 43,306 (13,817) --------- --------- Total liabilities and stockholders' equity (deficit) .................................... $ 101,799 $ 51,103 ========= =========
The accompanying notes are an integral part of these consolidated statements. 26 27 METRICOM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, -------------------------------------- 1995 1996 1997 -------- -------- -------- REVENUES: Service revenues ................... $ 789 $ 2,158 $ 6,642 Product revenues ................... 4,995 4,996 6,797 -------- -------- -------- Total revenues .................. 5,784 7,154 13,439 -------- -------- -------- COSTS AND EXPENSES: Cost of service revenues ........... 9,674 18,358 30,275 Cost of product revenues ........... 3,134 2,528 4,558 Research and development ........... 9,145 9,896 10,803 Selling, general and administrative 11,715 17,724 21,189 Provision for Overall Wireless ..... -- -- 3,611 -------- -------- -------- Total costs and expenses ........ 33,668 48,506 70,436 -------- -------- -------- Loss from operations ............... (27,884) (41,352) (56,997) Interest expense ................... -- (1,310) (4,151) Interest income .................... 4,363 3,317 1,820 -------- -------- -------- Net loss ........................... $(23,521) $(39,345) $(59,328) ======== ======== ======== Basic and diluted net loss per share $ (1.79) $ (2.93) $ (4.35) ======== ======== ======== Weighted average shares outstanding 13,140 13,413 13,641 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 27 28 METRICOM, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS)
UNREALIZED HOLDING COMMON STOCK ADDITIONAL GAIN/(LOSS) -------------------------- PAID-IN ON ACCUMULATED SHARES AMOUNT CAPITAL INVESTMENTS DEFICIT TOTAL ---------- ---------- ---------- ----------- ----------- ---------- BALANCE, DECEMBER 31, 1994 ......... 12,978,677 $ 13 $ 129,280 $ (673) $ (27,104) $ 101,516 Exercise of common stock warrants... 72,896 -- 64 -- -- 64 Exercise of common stock options ... 198,566 -- 894 -- -- 894 Common stock issued to employees ... 40,886 -- 593 -- -- 593 Unrealized holding gain on investments ....................... -- -- -- 828 -- 828 Net loss ........................... -- -- -- -- (23,521) (23,521) ---------- ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 1995 ......... 13,291,025 13 130,831 155 (50,625) 80,374 Exercise of common stock options ... 81,573 -- 497 -- -- 497 Common stock issued to employees ... 110,465 1 1,354 -- -- 1,355 Exercise of common stock warrants .. 72,382 -- -- -- -- -- Warrant issued in exchange for services rendered ................. -- -- 616 -- -- 616 Unrealized holding loss on investments .................... -- -- -- (191) -- (191) Net loss ........................... -- -- -- -- (39,345) (39,345) ---------- ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 1996 ......... 13,555,445 14 133,298 (36) (89,970) 43,306 Exercise of common stock options ... 98,386 -- 674 -- -- 674 Common stock issued to employees ... 165,445 -- 1,494 -- -- 1,494 Unrealized holding gain on investments ....................... -- -- -- 37 -- 37 Net loss ........................... -- -- -- -- (59,328) (59,328) ---------- ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 1997 ......... 13,819,276 $ 14 $ 135,466 $ 1 $ (149,298) $ (13,817) ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements. 28 29 METRICOM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------------- 1995 1996 1997 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ........................................... $(23,521) $(39,345) $(59,328) Adjustments to reconcile net loss to net cash used in operating activities - Depreciation and amortization ...................... 1,902 4,135 8,366 Provision for Overall Wireless ..................... -- -- 3,611 Provision for obsolete inventory ................... 523 -- 3,622 (Increase) decrease in accounts receivable, prepaid expenses and other current assets ...... 1,333 (765) (93) (Increase) decrease in inventories ................. (1,121) 1,352 (567) Increase (decrease) in accounts payable, accrued liabilities and other liabilities ........ 1,584 5,484 (1,350) -------- -------- -------- Net cash used in operating activities ............. (19,300) (29,139) (45,739) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ................. (8,421) (15,910) (10,584) Other .............................................. 69 (1,463) (3,580) Purchase of investments ............................ (59,976) (58,675) (18,941) Proceeds from the sale of investments .............. 55,718 67,723 64,263 -------- -------- -------- Net cash provided by (used in) investing activities (12,610) (8,325) 31,158 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock ............. 1,551 1,852 2,168 Proceeds from issuance of debt ..................... -- 45,000 5,000 Financing costs .................................... -- (1,650) (826) Contribution from minority interest ................ 100 2,307 2,777 -------- -------- -------- Net cash provided by financing activities ......... 1,651 47,509 9,119 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (30,259) 10,045 (5,462) Cash and cash equivalents, beginning of year ....... 35,460 5,201 15,246 -------- -------- -------- Cash and cash equivalents, end of year ............. $ 5,201 $ 15,246 $ 9,784 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 29 30 METRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES. ORGANIZATION AND BASIS OF PRESENTATION. Metricom, Inc. (the "Company") designs, develops and markets wireless network products and services that provide low cost, high performance, easy to use, data communications that can be used in a broad range of personal computer and industrial applications. The Company's primary service, Ricochet, provides subscriber-based, wireless data communications for users of portable and desktop computers and hand-held computing devices. Ricochet is currently available in the San Francisco Bay Area, in the Seattle and Washington, D.C. metropolitan areas and in a number of airports and college and university campuses across the United States. In the future, the Company plans to deploy Ricochet in major metropolitan areas throughout the United States. The Company's UtiliNet products provide customer-owned wireless data communications for industrial control and monitoring primarily in the electric utility, waste water and natural gas industries. The Company's UtiliNet products are sold throughout the United States. Since its inception, the Company has incurred significant operating losses. These losses resulted primarily from expenditures associated with the development, deployment and commercialization of the Company's wireless network products and services. The Company expects to incur significant operating losses and to generate negative cash flows from operating activities during the next several years while it continues to develop and deploy Ricochet networks and build its customer base. The ability of the Company to achieve profitability will depend in part upon the successful and timely deployment of Ricochet in major metropolitan areas of the United States and its successful marketing, as to which there can be no assurance. A broad market for wide area wireless data communications has not yet developed. As a result, the extent of the potential demand for Ricochet cannot be reliably estimated. In addition, the Company is subject to additional risks, including the risks of developing technology, competition from companies with substantially greater financial, technical, marketing and management resources than the Company and potential changes in the regulatory environment. The accompanying consolidated financial statements include the accounts of the Company and all subsidiaries after elimination of significant intercompany accounts and transactions. Certain amounts have been restated from the previously reported balance to conform to the 1997 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. CASH AND CASH EQUIVALENTS. All highly liquid monetary instruments with an original maturity of 90 days or less from the date of purchase are considered to be cash equivalents. Cash paid during fiscal 1995 and 1996 for interest and income taxes was not significant. In fiscal 1997, the Company paid $3.6 million for interest. Cash paid for income taxes was not significant. NON CASH TRANSACTIONS. In July 1997, the Company transferred certain property and equipment to a third party in exchange for research and development services. The assets and the services were valued at $439,000, which was the net book value of the assets as of the date of the transaction. 30 31 INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out) or market and include purchased parts, labor and manufacturing overhead. Inventories consisted of the following (in thousands):
DECEMBER 31, ------------------ 1996 1997 ------ ------ Raw materials and component parts ........ $ 656 $1,660 Work-in-process .......................... 1,606 28 Finished goods and consigned inventory ... 853 1,323 ----- ----- TOTAL $3,115 $3,011 ===== =====
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost and are depreciated using the straight-line method over the shorter of their estimated useful lives of three to five years or the lease term. As of December 31, 1996 and 1997, network equipment included approximately $3.8 million and $3.6 million, respectively, of raw materials, work-in-process and finished goods related to network equipment that is manufactured by the Company for its Ricochet networks. Depreciation of this equipment will commence when it is placed in service. Property and equipment consisted of the following (in thousands):
DECEMBER 31, ----------------------- 1996 1997 -------- -------- Machinery and equipment .......................... $ 7,958 $ 9,150 Network equipment ................................ 19,118 24,603 Ricochet modems .................................. 4,158 3,317 Furniture and fixtures ........................... 1,290 2,071 Leasehold improvements ........................... 1,082 1,160 -------- -------- 33,606 40,301 Less--Accumulated depreciation and amortization .. (6,830) (14,426) -------- -------- TOTAL $ 26,776 $ 25,875 ======== ========
ACCRUED LIABILITIES. Accrued liabilities consisted of the following (in thousands):
DECEMBER 31, ------------------ 1996 1997 ------ ------ Interest ....................... $1,220 $1,050 Employee stock purchase plan ... 299 282 Deferred Revenue ............... 1,021 1,843 Payroll and related ............ 1,148 981 Royalties ...................... 244 332 State and local taxes .......... 338 453 Warranty ....................... 256 256 Other .......................... 275 267 ------ ------ TOTAL $4,801 $5,464 ====== ======
DEBT ISSUANCE COSTS. Debt issuance costs of $1.6 million and $1.3 million at December 31, 1996 and 1997, respectively are included in other assets in the accompanying consolidated balance sheet. Debt issuance costs are amortized over the life of the respective debt instrument, and amortization expense is reflected as a component of interest expense, as an adjustment to the yield on the respective debt instruments. LICENSED SPECTRUM. In fiscal 1997, the Company paid $1.45 million for licensed spectrum in the Wireless Communication Services auction. This spectrum will be used to increase network capacity and speed. This amount is included in other assets in the accompanying consolidated balance sheet and will be amortized over its life commencing with commercial use. 31 32 REVENUE RECOGNITION. Product revenues are recognized upon shipment. Service revenues consist of subscriber fees and equipment rentals from Ricochet and fees for UtiliNet customer support and are recognized ratably over the service period. Cash received from customers in advance of providing services is deferred and is included in accrued liabilities in the accompanying consolidated balance sheets. RESEARCH AND DEVELOPMENT EXPENDITURES. Research and development expenditures are charged to operations as incurred. NET LOSS PER SHARE. In 1997, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per Share." Basic and diluted net loss per share data has been computed using the weighted average number of shares of common stock outstanding. Potential common shares from options and warrants to purchase common stock and from conversion of the Convertible Subordinated Notes have been excluded from the calculation as their effect would be anti-dilutive. NEW ACCOUNTING STANDARDS. In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130 "Reporting Comprehensive Income" ("SFAS No. 130"), which established standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in non-condensed general-purpose financial statements. SFAS No. 130 requires classification of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company believes the pronouncement will not have a material effect on its financial statements. In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"), which established standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports to shareholders. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997, although earlier application is encouraged. The Company believes the pronouncement will not have a material effect on its financial statements. 2. SHORT-TERM AND LONG-TERM INVESTMENTS. The Company's investments in debt and equity securities are considered available-for-sale and are recorded at their fair value 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. As of December 31, 1996 and 1997, the difference between aggregate fair value and cost basis was an unrealized holding loss of $36 and a holding gain of $1, respectively. The value of the Company's investments by major security type is as follows (in thousands):
DECEMBER 31, -------------------- 1996 1997 ------- ------- SECURITY TYPE United States Treasury and Agencies .. $23,309 $ 717 Corporate debt securities ............ 36,629 3,922 Certificates of Deposit ............. -- 1,300 ------- ------- TOTAL ................................ $59,938 $ 5,939 ======= =======
As of December 31, 1997, investments in obligations of the United States Treasury and Agencies and corporate debt securities had remaining contractual maturities of 6-12 months. Approximately $10 million and $1.3 million of the total investments as of December 31, 1996 and 1997, respectively, are included in cash and cash equivalents. 3. INVESTMENT IN METRICOM DC, L.L.C. On June 8, 1995, Metricom Investments DC, Inc. ("Metricom Investments"), a subsidiary of the Company, and PepData, Inc. ("PepData"), a subsidiary of Potomac Electric Power Company, formed Metricom DC, L.L.C. ("Metricom DC") to own and operate a Ricochet network in the Washington, D.C. metropolitan area. Metricom Investments contributed $1,000 and rights to use proprietary technology employed by the Company's Ricochet networks in exchange for an 80% ownership interest in Metricom DC. PepData will contribute up to $7.0 million in exchange for a 20% ownership interest in Metricom DC. Metricom DC will distribute available cash 32 33 first to PepData, until PepData has received cumulative distributions equal to its capital contributions, and second to PepData and Metricom Investments in proportion to their respective ownership interests. As of December 31, 1997, PepData had contributed $5.2 million to the joint venture, which is reflected as a minority interest in the accompanying consolidated financial statements. 4. SIGNIFICANT CUSTOMER. In October 1992, the Company entered into a development and supply agreement with Southern California Edison ("SCE") that superseded a prior agreement in force since 1986. Under the terms of the new agreement, which expired in December 1994, SCE provided the Company with funding for certain development activities. Although SCE will be entitled to utilize the technology for its own internal purposes, the Company retains title to the technology. For the years ended December 31, 1995, 1996 and 1997, combined product and service revenues from SCE accounted for 72%, 51% and 12%, respectively, of total revenues. No other customers accounted for more than 10% of revenues. 5. COMMITMENTS. The Company leases various facilities and equipment under operating lease agreements. Rent expense under these agreements for the years ended December 31, 1995, 1996 and 1997, was approximately $1.1 million, $1.4 million and $1.8 million, respectively. The lease agreement for the Company's primary facility provides for escalating rent payments over a 12-year term ending February 2004, however rent expense is recognized ratably over the lease term. As of December 31, 1996 and 1997, the Company had accrued approximately $469,000 and $428,000, respectively, of deferred rental payments under this agreement, which are included in other liabilities in the accompanying consolidated balance sheets. Approximate future minimum rental payments under operating lease agreements are as follows (in thousands): YEARS ENDING DECEMBER 31, 1998 .................. $1,388 1999 .................. 1,215 2000 .................. 1,106 2001 .................. 909 2002 .................. 1,016 Thereafter ............ 1,131 ------ TOTAL ................. $6,765 ======
The Company has also entered into various agreements with electric utilities, municipalities and building owners for the use of utility poles and building rooftops on which network equipment is installed. Payment under these agreements is generally contingent upon the number of network radios installed during the year. Rent expense under these agreements for the year ended December 31, 1996 and 1997, was approximately $430,000 and $1.1 million, respectively. On December 30, 1997 the Company, drew $5 million on a $10 million credit facility provided by Vulcan Ventures, a current shareholder of the Company. The $5 million was repaid on January 30, 1998 from the net proceeds of the sale of Common Stock to Vulcan Ventures (see Note 11). 6. LONG-TERM DEBT. On August 28, 1996, the Company issued $45 million principal amount of unsecured, 8% Convertible Subordinated Notes (the "Notes") due September 15, 2003. Interest is payable semi-annually on March 15 and September 15, commencing March 15, 1997. The Notes are convertible into shares of the Company's common stock at a conversion price of $14.55 per share, subject to adjustment in certain events. The Notes are redeemable, in whole or in part, at the option of the Company at any time on or after September 15, 1999, at the following redemption prices if redeemed during the 12- month period commencing September 15 of the years indicated below: YEAR PERCENTAGE ---- ---------- 1999 104.0 2000 102.7 2001 101.3 2002 100.0 33 34 In the event of a change of control, as defined in the indenture, each holder of the Notes will have the right to require the Company to purchase all or any part of such holder's Notes at 101% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any. 7. COMMON STOCK. COMMON STOCK WARRANTS. In September 1994, the Company issued warrants to purchase 200,000 shares of common stock at $13.75 per share in exchange for certain investment banking services. These warrants are exercisable in cash or via a net exercise, expire five years from the date of issuance and provide for certain registration rights. Upon closing of the Company's initial public offering in May 1992, warrants to purchase 368,000 shares of Series C preferred stock at $7.81 per share were converted to warrants to purchase 395,541 shares of common stock at $7.27 per share. During 1996, 72,382 shares were issued upon a net exercise of 168,451 of these warrants. STOCK OPTIONS. In March 1988, the Company adopted the 1988 Stock Option Plan. Under the plan, as amended, the Company is authorized to grant up to 4,119,500 incentive or non-qualified stock options to purchase shares of common stock. Incentive stock options may be granted to employees at prices not lower than the market value of the stock at the date of grant. Non-qualified stock options may be granted to employees, officers, directors and consultants at prices not lower than 85% of the market value of the stock at the date of the grant. Options granted under the plan are exercisable at any time, as determined by the Board of Directors, and will expire no later than ten years from the date of grant. Options generally vest 25% after the first year and ratably over the following three years. In January 1996, the Board of Directors approved the replacement of each outstanding option with a per share exercise price of $14.00 or greater, upon the request of the optionee, with a stock option having an exercise price of $13.125 per share and certain extended vesting terms. A total of 982,263 options with exercise prices ranging from $15.00-$28.75 per share were replaced. In August 1997, the Board of Directors approved the replacement of each outstanding option held by non-officer employees with a per share exercise price of $7.00 or greater, upon the request of the optionee, with a stock option having an exercise price of $4.53 per share and certain delayed exercise provisions. A total of 1,423,650 options with exercise prices ranging from $7.81-$19.63 per share were replaced. In September 1997, the Board of Directors approved the replacement of each outstanding option held by executive officers with a per share exercise price of $11.00 or greater, upon the request of the optionee, with a stock option having an exercise price of $6.75 per share and certain delayed exercise provisions. A total of 568,000 options with exercise prices ranging from $11.88-$13.50 per share were replaced. In February 1993, the Company adopted the 1993 Non-Employee Directors' Stock Option Plan. Under the plan, as amended, the Company is authorized to grant up to 300,000 non-qualified stock options to purchase shares of common stock at the market value at the date of grant. Options granted under the plan are exercisable in three equal annual installments commencing one year from the date of grant and will expire no later than 10 years from the date of grant. In May 1997, the Company adopted the 1997 Equity Incentive Plan. Under the plan, the Company is authorized to grant up to 675,000 incentive stock options, non-qualified stock options, restricted stock purchase awards, and stock bonuses (collectively "Stock Awards") to employees, directors and consultants. Incentive stock options may be granted to employees at prices not lower than the market value of the stock at the date of grant. Non-qualified stock options and other Stock Awards may be granted to employees, officers, directors and consultants at prices not lower than 85% of the market value of the stock at the date of the grant. Options granted under the plan are exercisable at any time, as determined by the Board of Directors, and will expire no later than ten years from the date of grant. In May 1997, the Company adopted the 1997 Non-Officers Equity Incentive Plan. Under the plan, the Company is authorized to grant up to 675,000 incentive stock options, non-qualified stock options, restricted stock purchase awards, and stock bonuses (collectively "Stock Awards") to employees and consultants. Incentive stock options may be granted to employees at prices not lower than the market value of the stock at the date of grant. Non-qualified stock options and other Stock Awards may be granted to 34 35 employees and consultants at prices not lower than 85% of the market value of the stock at the date of the grant. Options granted under the plan are exercisable at any time, as determined by the Board of Directors, and will expire no later than ten years from the date of grant. During 1995, 1996 and 1997, the Company issued members of the Board of Directors and Advisory Board options to purchase 50,000, 53,000 and 42,000 shares, respectively, of common stock at fair market value of the stock at the date of grant. These options vest 25% after the first year and ratably over the following three years and will expire no later than ten years from the date of grant. Stock option activity under the 1988 Stock Option Plan, the 1993 Non-Employee Directors' Stock Option Plan, the 1997 Equity Incentive Plan, the 1997 Non-Officers Equity Incentive Plan and options issued to members of the Board of Directors and Advisory Board for the fiscal years ended December 31, 1995, 1996 and 1997 was as follows:
SHARES WEIGHTED AVAILABLE AVERAGE FOR FUTURE OPTIONS EXERCISE GRANT OUTSTANDING PRICE ---------- ---------- ---------- Balance, December 31, 1994 ..... 176,265 2,394,652 $ 13.33 Authorized ............. 950,000 -- -- Grants ................. (705,250) 705,250 $ 16.48 Exercises .............. -- (198,566) $ 4.53 Cancellations .......... 253,517 (253,517) $ 18.12 ---------- ---------- ---------- Balance, December 31, 1995 ..... 674,532 2,647,819 $ 14.36 Authorized ............. 475,000 -- -- Grants ................. (1,050,500) 1,050,500 $ 13.87 Exercises .............. -- (85,092) $ 6.08 Cancellations .......... 245,358 (245,358) $ 18.01 ---------- ---------- ---------- Balance, December 31, 1996 ..... 344,390 3,367,869 $ 12.45 Authorized ............. 1,350,000 -- -- Grants ................. (3,213,650) 3,213,650 $ 6.01 Exercises .............. -- (98,386) $ 6.85 Cancellations .......... 2,509,455 (2,509,455) $ 13.11 ---------- ---------- ---------- Balance, December 31, 1997 ..... 990,195 3,973,678 $ 6.99 ========== ========== ==========
35 36 The following table summarizes information concerning stock options outstanding and exercisable as of December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------- ----------------------- RANGE OF SHARES WEIGHTED WEIGHTED SHARES WEIGHTED EXERCISE OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE PRICES REMAINING EXERCISE EXERCISE LIFE PRICE PRICE $ 1.00 - $ 4.00 188,584 3.23 $ 3.12 188,584 $ 3.12 $ 4.01 - $ 4.70 1,363,439 7.52 $ 4.53 684,630 $ 4.53 $ 4.71 - $ 6.19 389,500 4.83 $ 5.71 375,000 $5.73 $ 6.20 - $ 6.36 846,250 9.33 $ 6.31 0 $0 $ 6.37 - $23.37 1,185,905 7.59 $11.33 693,176 $11.90 --------- ---- ------ --------- ------ 3,973,678 7.46 $ 6.99 1,941,390 $ 7.26 ========= ==== ====== ========= ======
STOCK PURCHASE PLAN. In 1991, the Board of Directors adopted the 1991 Employee Stock Purchase Plan (the "Purchase Plan"). An aggregate of 350,000 shares of common stock has been reserved for issuance under the Purchase Plan. Employees may designate up to 15% of their earnings, as defined, to purchase shares at 85% of the lesser of the fair market value of the common stock at the beginning of the offering period or on any purchase date during the offering period, as defined. In 1995, 1996 and 1997, the Company issued 35,886, 49,994 and 103,056 shares, respectively, under this plan. In January, 1998 the Company issued 37,177 shares under this plan, at a weighted fair value of $8.91 per share. STOCK-BASED COMPENSATION. In January 1996, the Company adopted FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 defines a fair value method of accounting for stock-based compensation plans. Under the fair value method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. As permitted under SFAS 123, the Company continues to apply the provisions of Accounting Principals Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans and, accordingly, does not recognize compensation cost. If the Company had elected to recognize compensation cost based on the fair value of the stock options and employee purchase rights under the Purchase Plan at the grant date as prescribed by SFAS 123, net income and earnings per share would have been as follows (in thousands, except per share amounts):
1995 1996 1997 ---------- ---------- ---------- Net loss - As reported $ 23,521 $ 39,345 $ 59,328 Net loss - Pro forma $ 24,822 $ 44,178 $ 65,436 Basic and diluted net loss per share - As reported $ 1.79 $ 2.93 $ 4.35 Basic and diluted net loss per share - Pro forma $ 1.89 $ 3.29 $ 4.80
The weighted average fair value of stock options granted during 1995, 1996 and 1997 was $6.34, $4.51 and $2.02 per share, respectively. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model using the following assumptions:
1995 1996 1997 ---- ---- ---- Risk free interest rate 6.0% 6.0% 5.5% Dividend yield 0.0% 0.0% 0.0% Volatility factor of expected market price of the Company's stock 0.48 0.48 0.50 Weighted average expected option life from vest date (in years) 0.68 0.68 1.11
36 37 The weighted average fair value of employee stock purchase rights granted during 1995, 1996 and 1997 was $1.69, $1.44 and $1.04 per share, respectively. The fair value for these purchase rights was estimated at the date of grant using a Black-Scholes option pricing model using the following assumptions:
1995 1996 1997 ------- ------- ------- Risk free interest rate 5.0% 5.0% 5.2% Dividend yield 0.0% 0.0% 0.0% Volatility factor of expected market price of the Company's stock 0.48 0.48 0.50 Weighted average expected life 0.50 0.50 0.50
COMMON STOCK RESERVED FOR FUTURE ISSUANCE. As of December 31, 1997 the Company had reserved the following shares of common stock for future issuance: Exercise of stock options .................................. 4,963,873 Conversion of 8% Convertible Subordinated Notes due 2003 ... 3,092,783 Exercise of common stock warrants .......................... 200,000 Employee stock purchase plan ............................... 89,989 --------- TOTAL ................................................... 8,346,645 =========
8. 401(k) PLAN. In November 1987, the Company adopted a tax-qualified savings and retirement plan (the "401(k) Plan"). Pursuant to the terms of the 401(k) Plan, employees may elect to contribute up to 15% of their gross compensation. The Company matches employee contributions at the rate of 50% for the first $2,000 contributed. Contributions by the Company to date have not been material. 9. INCOME TAXES. Deferred taxes are provided to reflect the net tax effects of temporary differences between the financial reporting and income tax bases of assets and liabilities using the currently enacted tax rate. The tax effect of temporary differences and carryforwards, which give rise to a significant portion of deferred tax assets, consisted of the following (in thousands):
DECEMBER 31, ------------------------- 1996 1997 -------- -------- Reserves and other $ 2,902 $ 5,485 Capitalized research and development 1,495 1,821 -------- -------- TOTAL 4,397 7,306 NOL and other credit carryforwards 31,993 51,916 Valuation allowance (36,390) (59,222) -------- -------- TOTAL $ -- $ -- ======== ========
As of December 31, 1996 and 1997, a valuation allowance was provided for the net deferred tax assets as a result of uncertainties regarding their realization. During 1997, the valuation allowance increased by approximately $22.8 million due to increases in temporary differences and additional losses incurred during the year. Approximately $2.6 million of the valuation allowance will be credited directly to stockholders' equity and will not be available to reduce the provision for income taxes in future years. As of December 31, 1997, the Company had net operating loss carryforwards for Federal and California income tax purposes of approximately $136.0 million and $55.9 million, respectively, and research and development tax credit carryforwards of approximately $2.3 million. To the extent not used, these carryforwards expire at various times through 2012. The Company's ability to utilize the net operating loss carryforwards in any given year may be limited upon the occurrence of certain events, including significant changes in ownership interests. 10. EARNINGS PER SHARE. The Company adopted SFAS No. 128 as of December 31, 1997. The reconciliation of the numerators and denominators of the basic and diluted earnings per share computation are as follows: 37 38
PER SHARE INCOME SHARES AMOUNT ------ ------ --------- FOR THE YEAR 1995 BASIC LOSS PER SHARE Income available to common stockholders $(23,521) 13,140 $(1.79) DILUTED LOSS PER SHARE Income available to common stockholders $(23,521) 13,140 $(1.79) FOR THE YEAR 1996 BASIC LOSS PER SHARE Income available to common stockholders $(39,345) 13,413 $(2.93) DILUTED LOSS PER SHARE Income available to common stockholders $(39,345) 13,413 $(2.93) FOR THE YEAR 1997 BASIC LOSS PER SHARE Income available to common stockholders $(59,328) 13,641 $(4.35) DILUTED LOSS PER SHARE Income available to common stockholders $(59,328) 13,641 $(4.35)
Basic and diluted earnings per share for the years ended December 31, 1997, 1996 and 1995 were computed using the weighted average number of common shares outstanding. Potential common shares from outstanding options and warrants to purchase common stock and from conversion of the Convertible Subordinated Notes were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive. As discussed in Note 10, in January 1998, the Company issued an additional 4,650,000 shares of Common Stock to Vulcan Ventures, Inc. 11. SUBSEQUENT EVENTS On January 30, 1998, the shareholders of the Company approved the sale of 4,650,000 shares of Common Stock to Vulcan Ventures Incorporated ("Vulcan") at a per share price of $12.00. Upon closing of the transaction, Vulcan's ownership interest in the Company was increased to 49.5% of the outstanding shares of Common Stock. The net proceeds from the transaction were $53.7 million. In February 1996, the Company purchased an option to acquire Overall Wireless Communications Corporation ("Overall Wireless"), a company that holds a nationwide, wireless communications license in the 220 to 222 MHz frequency band. The Company paid $700,000 for the option and agreed to loan Overall Wireless up to $2.0 million for the construction of a system utilizing the license, of which approximately $1.8 million had been loaned as of December 31, 1997. In January 1997, the Company paid $500,000 to extend the option from January 1997 to July 1997. The option was subsequently extended to December 31, 2000 for no additional cash consideration. In June 1997, the Company recorded a charge of $3.6 million to fully reserve its investment in Overall Wireless due to uncertainties regarding its realization. The $3.6 million charge included $616,000 of warrants (valued at fair market value) to purchase stock that had been granted to a financial advisor for investment banking services in connection with the acquisition of the option to acquire Overall Wireless. In January 1998, Overall Wireless canceled the option and the Company paid a termination fee of $1.8 million through cancellation of the indebtedness of Overall Wireless. 38 39 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF METRICOM, INC.: We have audited the accompanying consolidated balance sheets of Metricom, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Metricom, Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Jose, California February 9, 1998 39 40 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL REPORTING DISCLOSURE None PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS The names, ages and positions held by the executive officers of the Company are as follows:
NAME AGE POSITION Robert P. Dilworth ............................. 56 President, Chief Executive Officer, Chairman of the Board William D. Swain ............................... 57 Vice President of Administration and Secretary Gary M. Green .................................. 57 Executive Vice President and Chief Operating Officer Vanessa A. Wittman ............................. 30 Vice President of Finance
ROBERT P. DILWORTH has served as the Company's President and Chief Executive Officer since September 1987, as a director since August 1987 and as Chairman of the Board since February 1997. Prior to joining the Company, he served as President of Zenith Data Systems Corp., a microcomputer manufacturer and a wholly-owned subsidiary of Zenith Electronics Corp., from May 1985 to November 1987. Mr. Dilworth is also a director of VLSI Technology, Inc. and Data Technology Corporation. WILLIAM D. SWAIN has served as the Company's Vice President of Administration since May 1997, and its Secretary since April, 1992. Mr. Swain served as the Company's Chief Financial Officer from February 1988 to May, 1997. Mr. Swain joined the Company as Director of Finance in January 1988. Prior to joining the Company, Mr. Swain was Chief Financial Officer of Morrow Designs, Incorporated, a computer manufacturer; Controller of the mini-computer division of Unisys Corporation; and Controller of Varian Data Machines, the computer division of Varian Associates, Inc. GARY M. GREEN has served as the Company's Executive Vice President and Chief Operating Officer since October 1991. Mr. Green joined the Company in January 1991 as Vice President, New Products Division. Prior to joining the Company, Mr. Green served as Senior Vice President and General Manager of Energy Sciences Inc., a manufacturer of electron-beam processing systems, from April 1987 to January 1991. From 1984 to April 1987, Mr. Green served as General Manager, Vacuum Products Division, of Varian Associates, Inc. VANESSA A. WITTMAN has served as the Company's Vice President of Finance since May, 1997. Prior to joining the Company, she was a Principal at Sterling Payot Company, a strategic advisory company from April 1996 to May 1997. Prior to joining Sterling Payot, she was an associate in the Media Corporate Finance and Mergers and Acquisitions Groups of Morgan Stanley & Co., Inc. from June 1993 to April 1996. Additional information regarding directors and executive officers will be filed with the Company's Proxy Statement relating to the annual meeting of stockholders to be held on June 22, 1998. ITEM 11 - EXECUTIVE COMPENSATION. Information regarding Executive Compensation is incorporated by reference from the Proxy Statement relating to the annual meeting of stockholders to be held on June 22, 1998. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information regarding Security Ownership of Certain Beneficial Owners and Management is incorporated by reference from the Proxy Statement relating to the annual meeting of stockholders to be held on June 22, 1998. 40 41 ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information regarding Certain Relationships and Related Transactions is incorporated by reference from the Proxy Statement relating to the annual meeting of stockholders to be held on June 22, 1998. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K. (a) FINANCIAL STATEMENTS. The consolidated financial statements and related notes, together with the report thereon of Arthur Andersen LLP, independent public accountants. (b) REPORTS ON FORM 8-K. A report on Form 8-K was filed during the last quarter of the fiscal year ended December 31, 1997. (c) EXHIBITS. EXHIBIT NUMBER EXHIBIT - ------- ------- 3.1 Restated Certificate of Incorporation of the Company. 3.2 Bylaws of the Company, as amended. 4.1 Reference is made to Exhibits 3.1 and 3.2. 4.2(1) Registration Rights Agreement between the Company and the other parties named therein, dated as of June 23, 1986, as amended. 4.3(1) Specimen stock certificate. 4.4(5) Fifth Amendment to Registration Rights Agreement. 4.5(5) Sixth Amendment to Registration Rights Agreement. 4.6(10) Form of 8% Convertible Subordinated Note due 2003. 4.7(10) Indenture, dated as of August 15, 1996, between the Company and U.S. Trust Company of California, N.A. 10.1(1) Form of Indemnity Agreement entered into between the Company and its directors and officers, with related schedule. 10.2(2)(5) 1988 Stock Option Plan (the "Option Plan"), as amended November 1, 1993. 10.3(1)(2) Form of Incentive Stock Option Agreement under the Option Plan. 10.4(1)(2) Form of Supplemental Stock Option Agreement under the Option Plan. 10.5(1)(2) Form of Notice of Exercise under the Option Plan, as amended. 10.6(1) Form of Restricted Stock Purchase Agreement and promissory note under the Option Plan. 41 42 EXHIBIT NUMBER EXHIBIT - ------- ------- 10.7(1) Form of Market Stand-Off Agreement between the Company and various holders of Common Stock. 10.8(1)(2) 1991 Employee Stock Purchase Plan. 10.9(1) Form of Co-Sale Agreement between the Company and various holders of Common Stock, with related schedule. 10.10(1) Form of Stock Repurchase Agreement between the Company and various holders of Common Stock, with related schedule. 10.11(1) Form of Series C Preferred Stock Purchase Warrant between the Company and various investors, with related schedule. 10.12(1) Manufacturing, Supply and Marketing Agreement between the Company, Mitsui & Co., Ltd., Mitsui Comtek Corp. and Oi Electric Co., Ltd. dated as of March 12, 1991. 10.13(1) Standard Industrial Lease between the Company and Pen Nom I Corporation dated as of October 17, 1991. 10.14(3) Agreement between the Company and Southern California Edison dated October 1, 1992. 10.15(2)(5) 1993 Non-Employee Directors' Stock Option Plan, as amended November 1, 1993 (the "Directors' Plan"). 10.16(2)(3) Form of Supplemental Stock Option under the Directors' Plan. 10.17(4) Purchase Agreement, dated October 3, 1993, between the Company and Vulcan Ventures Incorporated. 10.18(4) Warrant to Purchase 408,333 shares of Common Stock, dated October 28, 1993. 10.19(4) Purchase Agreement, dated October 8, 1993, between the Company and Donald H. Rumsfeld. 10.20(5) Common Stock Purchase Warrant for 350,000 shares dated March 25, 1993 granted to Sterling Payot Company. 10.21(5) Common Stock Purchase Warrant for 100,000 shares dated February 19, 1993 granted to Sterling Payot Company. 10.22(5) Letter Agreements between the Company and Sterling Payot Company dated February 19, 1993 and September 15, 1993. 10.23(6) Purchase Agreement, dated February 18, 1994, between the Company and Microsoft Corporation. 10.24(8) Common Stock Purchase Agreement for 200,000 shares dated September 27, 1994 granted to Sterling Payot Company. 10.25(8) Letter Agreement between the Company and Sterling Payot Company dated October 31, 1994. 10.26(7) Management Agreement of Metricom DC, L.L.C. 42 43 EXHIBIT NUMBER EXHIBIT - ------- ------- 10.27(8) Option Agreement and Agreement and Plan of Reorganization, dated as of February 7, 1996, among the Company, Overall Wireless and the sole stockholder of Overall Wireless. 10.28(8) Loan and Security Agreement, dated as of February 7, 1996, among the Company, Overall Wireless and the sole stockholder of Overall Wireless. 10.29(10) Registration Rights Agreement, dated as of August 28, 1996, among the Company, Furman Selz LLC and Feshbach Brothers Investor Services, Inc. 10.30(10) Placement Agreement, dated as of August 20, 1996, among the Company, Furman Selz LLC and Feshbach Brothers Investor Services, Inc. 10.31(11) Letter Agreement, dated as of January 23, 1997, between the Company and Sterling Payot Company 10.32(12) Stock Purchase Agreement, dated as of October 10, 1997, between Metricom, Inc., a Delaware corporation and Vulcan Ventures Incorporated, a Washington corporation. 23.1 Consent of Independent Public Accountants. 24.1(5) Power of Attorney. 27.1 Financial Data Schedule. - ---------- (1) Incorporated by reference from the indicated exhibit in the Company's Registration Statement on Form S-1 (File No. 33-46050), as amended. (2) Management contract or compensatory plan or arrangement. (3) Incorporated by reference from the Company's Form 10-K for the year ended December 31, 1992. (4) Incorporated by reference from the Company's Form 10-Q for the quarter ended October 31, 1993. (5) Incorporated by reference from the Company's Form 10-K for the year ended December 31, 1993. (6) Incorporated by reference from the Company's Form 10-K/A Amendment No. 1 to the Company's Form 10-K for the year ended December 31, 1993. (7) Incorporated by reference from the Company's Form 10-Q for the quarter ended June 30, 1995. (8) Incorporated by reference from the Company's Form 10-Q for the quarter ended June 28, 1996. (9) Incorporated by reference from the Company's Form 10-Q for the quarter ended September 27, 1996. (10) Incorporated by reference from the Company's Form 8-K filed September 11, 1996. (11) Incorporated by reference from the Company's Form 10-K for the year ended December 31, 1996. (12) Incorporated by reference from the Company's Form 8-K dated as of October 13, 1997. 43 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of March 1998. METRICOM, INC. By: _____________________________________ Vanessa Wittman Vice President Finance (duly authorized representative) 44 45 INDEX TO EXHIBITS EXHIBIT NUMBER EXHIBIT - ------- ------- 3.1 Restated Certificate of Incorporation of the Company. 3.2 Bylaws of the Company, as amended. 4.1 Reference is made to Exhibits 3.1 and 3.2. 4.2(1) Registration Rights Agreement between the Company and the other parties named therein, dated as of June 23, 1986, as amended. 4.3(1) Specimen stock certificate. 4.4(5) Fifth Amendment to Registration Rights Agreement. 4.5(5) Sixth Amendment to Registration Rights Agreement. 4.6(10) Form of 8% Convertible Subordinate Note due 2003. 4.7(10) Indenture, dated as of August 15, 1996, between the Company and U.S. Trust Company of California, N.A. 10.1(1) Form of Indemnity Agreement entered into between the Company and its directors and officers, with related schedule. 10.2(2)(5) 1988 Stock Option Plan (the "Option Plan"), as amended November 1, 1993. 10.3(1)(2) Form of Incentive Stock Option Agreement under the Option Plan. 10.4(1)(2) Form of Supplemental Stock Option Agreement under the Option Plan. 10.5(1)(2) Form of Notice of Exercise under the Option Plan, as amended. 10.6(1) Form of Restricted Stock Purchase Agreement and promissory note under the Option Plan. 10.7(1) Form of Market Stand-Off Agreement between the Company and various holders of Common Stock. 10.8(1)(2) 1991 Employee Stock Purchase Plan. 10.9(1) Form of Co-Sale Agreement between the Company and various holders of Common Stock, with related schedule. 10.10(1) Form of Stock Repurchase Agreement between the Company and various holders of Common Stock, with related schedule. 10.11(1) Form of Series C Preferred Stock Purchase Warrant between the Company and various investors, with related schedule. 10.12(1) Manufacturing, Supply and Marketing Agreement between the Company, Mitsui & Co., Ltd., Mitsui Comtek Corp. and Oi Electric Co., Ltd. dated as of March 12, 1991. 10.13(1) Standard Industrial Lease between the Company and Pen Nom I Corporation dated as of October 17, 1991. 10.14(3) Agreement between the Company and Southern California Edison dated October 1, 1992. 10.15(2)(5) 1993 Non-Employee Directors' Stock Option Plan, as amended 46 EXHIBIT NUMBER EXHIBIT ------- ------- November 1, 1993 (the "Directors' Plan"). 10.16(2)(3) Form of Supplemental Stock Option under the Directors' Plan. 10.17(4) Purchase Agreement, dated October 3, 1993, between the Company and Vulcan Ventures Incorporated. 10.18(4) Warrant to Purchase 408,333 shares of Common Stock, dated October 28, 1993. 10.19(4) Purchase Agreement, dated October 8, 1993, between the Company and Donald H. Rumsfeld. 10.20(5) Common Stock Purchase Warrant for 350,000 shares dated March 25, 1993 granted to Sterling Payot Company. 10.21(5) Common Stock Purchase Warrant for 100,000 shares dated February 19, 1993 granted to Sterling Payot Company. 10.22(5) Letter Agreements between the Company and Sterling Payot Company dated February 19, 1993 and September 15, 1993. 10.23(6) Purchase Agreement, dated February 18, 1994, between the Company and Microsoft Corporation. 10.24(8) Common Stock Purchase Agreement for 200,000 shares dated September 27, 1994 granted to Sterling Payot Company. 10.25(8) Letter Agreement between the Company and Sterling Payot Company dated October 31, 1994. 10.26(7) Management Agreement of Metricom DC, L.L.C. 10.27(8) Option Agreement and Agreement and Plan of Reorganization, dated as of February 7, 1996, among the Company, Overall Wireless and the sole stockholder of Overall Wireless. 10.28(8) Loan and Security Agreement, dated as of February 7, 1996, among the Company, Overall Wireless and the sole stockholder of Overall Wireless. 10.29(10) Registration Rights Agreement, dated as of August 28, 1996, among the Company, Furman Selz LLC and Feshbach Brothers Investor Services, Inc. 10.30(10) Placement Agreement, dated as of August 20, 1996, among the Company, Furman Selz LLC and Feshbach Brothers Investor Services, Inc. 10.31(11) Letter Agreement, dated as of January 23, 1997, between the Company and Sterling Payot Company 23.1 Consent of Independent Public Accountants 24.1(5) Power of Attorney. 27.1 Financial Data Schedule. 47 - ---------- (1) Incorporated by reference from the indicated exhibit in the Company's Registration Statement on Form S-1 (File No. 33-46050), as amended. (2) Management contract or compensatory plan or arrangement. (3) Incorporated by reference from the Company's Form 10-K for the year ended December 31, 1992. (4) Incorporated by reference from the Company's Form 10-Q for the quarter ended October 31, 1993. (5) Incorporated by reference from the Company's Form 10-K for the year ended December 31, 1993. (6) Incorporated by reference from the Company's Form 10-K/A Amendment No. 1 to the Company's Form 10-K for the year ended December 31, 1993. (7) Incorporated by reference from the Company's Form 10-Q for the quarter ended June 30, 1995. (8) Incorporated by reference from the Company's Form 10-Q for the quarter ended June 28, 1996. (9) Incorporated by reference from the Company's Form 10-Q for the quarter ended September 27, 1996. (10) Incorporated by reference from the Company's Form 8-K filed September 11, 1996. (11) Incorporated by reference from the Company's Form 10-K for the year ended December 31, 1996. EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION 1 Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION OF METRICOM, INC. 1. The Corporation's original Certificate of Incorporation was filed on October 24, 1991, under the name of Metricom (Delaware), Inc. 2. The Restated Certificate of Incorporation of said corporation as provided in Exhibit A hereto was duly adopted in accordance with the provisions of Section 242 and Section 245 of the General Corporation Law of the State of Delaware by the Board of Directors of the corporation. IN WITNESS WHEREOF, the undersigned has signed this certificate this 30th day of January 1998 and hereby affirms and acknowledges under penalty of perjury that the filing of this Restated Certificate of Incorporation is the act and deed of Metricom, Inc. METRICOM, INC. By: /s/ Robert P. Dilworth ----------------------------------- Robert P. Dilworth Chief Executive Officer STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 02/02/1998 981041347 -- 2276962 1. 2 RESTATED CERTIFICATE OF INCORPORATION OF METRICOM, INC. 1. The name of this corporation is Metricom, Inc. 2. The address of the registered office of the corporation in the State of Delaware is 32 Loockerman Square, Suite L-100, City of Dover, County of Kent, and the name of the registered agent of the corporation in the State of Delaware at such address is The Prentice-Hall Corporation System, Inc. 3. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. A. The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under Delaware law. B. The Corporation is authorized to provide indemnification of agents (as defined in Section 145 of the Delaware General Corporation Law) for breach of duty to the Corporation and its stockholders through bylaw provisions, through agreements with the agents, and/or through stockholder resolutions, or otherwise, in excess of the indemnification otherwise permitted by Section 145 of the Delaware General Corporation Law. C. Any repeal or modification of this Article III shall be prospective and shall not affect the rights under this Article III in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. IV. A. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is fifty-two million (52,000,000) shares. Fifty million (50,000,000) shares shall be Common Stock, each having a par value of one tenth of one cent ($0.001). Two million (2,000,000) shares shall be Preferred Stock, each having a par value of one tenth of one cent ($0.001). 1. 3 B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate pursuant to the Delaware General Corporation Law, to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof, including without limitation the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and the liquidation preferences of any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series and the designation thereof, or any of them (a "Preferred Stock Designation"); and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. C. No share or shares of any series of Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued as part of such series, and the Board of Directors is authorized, pursuant to Section 243 of the Delaware General Corporation Law, to retire any such share or shares. The retirement of any such share or shares shall not reduce the total authorized number of shares of Preferred Stock. V. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted from time to time by the Board of Directors. The directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the corporation's initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of the Common Stock of the corporation (the "Initial Public Offering"), the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. 2. 4 Notwithstanding the foregoing provisions of this Article, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes shall be filled by either (i) the affirmative vote of the holders of a majority of the voting power of the then-outstanding shares of voting stock of the corporation entitled to vote generally in the election of directors (the "Voting Stock") voting together as a single class; or (ii) by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such newly created directorship shall be filled by the stockholders, be filled only by the affirmative vote of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. Notwithstanding the foregoing, in the event of any vacancy on the Board of Directors resulting from the resignation, death, disability, removal or disqualification of any director serving on the Board of Directors both prior to and immediately after the closing of the transactions contemplated by the Common Stock Purchase Agreement, dated October 10, 1997, between the Company and the purchaser named therein, or any successor thereto, or successor of such successor (an "Independent Director"), a committee of the Board of Directors consisting of the remaining Independent Directors shall, pursuant to Section 141(a) of the Delaware General Corporation Law, fill such vacancy by a majority vote of such directors. Any director so elected by such committee shall be an "Independent Director" for purposes of this paragraph. B. The Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. In furtherance and not in limitation of the power conferred by statute, the Board of Directors is expressly authorized to adopt, amend, supplement or repeal the Bylaws. C. The directors of the corporation need not be elected by written ballot unless the Bylaws so provide. D. No action shall be taken by the stockholders of the corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws and no action shall be taken by the stockholders by written consent; provided, however, that notwithstanding anything to the contrary contained herein, the stockholders may act by without a meeting, without prior notice and without a vote solely in the election of directors to fill vacancies on the Board of Directors (other than a vacancy resulting from the resignation, death, disability, removal or disqualification of any Independent Director). 3. 5 E. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. F. Any director, or the entire Board of Directors, may be removed from office at any time (i) with cause by the affirmative vote of the holders of at least a majority of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class; or (ii) without cause by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. VI. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal Article V, Article VI or Article VIII. VII. The corporation is to have perpetual existence. VIII. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in Article VI of this Certificate, and all rights conferred upon the stockholders herein are granted subject to this right. 4. EX-3.2 3 BYLAWS OF THE COMPANY 1 EXHIBIT 3.2 BYLAWS OF METRICOM, INC. (a Delaware corporation) (as amended through January 29, 1998) 2 TABLE OF CONTENTS
Page ---- ARTICLE I Offices Section 1. Registered Office............................................... 1 Section 2. Other Offices................................................... 1 ARTICLE II Corporate Seal Section 3. Corporate Seal.................................................. 1 ARTICLE III Stockholders' Meetings Section 4. Place of Meetings............................................... 1 Section 5. Annual Meeting.................................................. 1 Section 6. Special Meetings................................................ 3 Section 7. Notice of Meetings.............................................. 4 Section 8. Quorum.......................................................... 4 Section 9. Adjournment and Notice of Adjourned Meetings.................... 4 Section 10. Voting Rights.................................................. 5 Section 11. Joint Owners of Stock.......................................... 5 Section 12. List of Stockholders........................................... 5 Section 13. Action Without Meeting......................................... 5 Section 14. Organization................................................... 6 ARTICLE IV Directors Section 15. Number and Term of Office...................................... 7 Section 16. Powers......................................................... 7 Section 17. Classes of Directors........................................... 7 Section 18. Vacancies...................................................... 7 Section 19. Resignation.................................................... 8 Section 20. Removal........................................................ 8 Section 21. Meetings....................................................... 8 Section 22. Quorum and Voting.............................................. 9 Section 23. Action Without Meeting......................................... 9 Section 24. Fees and Compensation.......................................... 10 Section 25. Committees..................................................... 10
i. 3 Section 26. Organization................................................... 11 ARTICLE V Officers Section 27. Officers Designated............................................ 11 Section 28. Tenure and Duties of Officers.................................. 12 Section 29. Delegation of Authority........................................ 13 Section 30. Resignations................................................... 13 Section 31. Removal........................................................ 13 ARTICLE VI Execution of Corporate Instruments and Voting of Securities Owned by the Corporation Section 32. Execution of Corporate Instruments............................. 13 Section 33. Voting of Securities Owned by the Corporation.................. 14 ARTICLE VII Shares of Stock Section 34. Form and Execution of Certificates............................. 14 Section 35. Lost Certificates.............................................. 15 Section 36. Transfers...................................................... 15 Section 37. Fixing Record Dates............................................ 15 Section 38. Registered Stockholders........................................ 16 ARTICLE VIII Other Securities of the Corporation Section 39. Execution of Other Securities.................................. 16 ARTICLE IX Dividends Section 40. Declaration of Dividends....................................... 17 Section 41. Dividend Reserve............................................... 17 ARTICLE X Fiscal Year Section 42. Fiscal Year.................................................... 17
ii. 4 ARTICLE XI Indemnification Section 43. Indemnification of Directors, Officers, Employees and Other Agents......................................................... 18 ARTICLE XII Notices Section 44. Notices........................................................ 21 ARTICLE XIII Amendments Section 45. Amendments..................................................... 23 ARTICLE XIV Loans to Officers Section 46. Loans to Officers.............................................. 23 ARTICLE XV Miscellaneous Section 47. Annual Report.................................................. 24
iii. 5 BYLAWS OF METRICOM, INC. (a Delaware corporation) ARTICLE I Offices Section 1. Registered Office. The registered office of the corporation in the State of Delaware shall be in the City of Dover, County of Kent. Section 2. Other Offices. The corporation shall also have and maintain an office or principal place of business in Campbell, California, at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II Corporate Seal Section 3. Corporate Seal. The corporate seal shall consist of a die bearing the name of the corporation and the inscription, "Corporate Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE III Stockholders' Meetings Section 4. Place of Meetings. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the corporation required to be maintained pursuant to Section 2 hereof. Section 5. Annual Meeting. (a) The annual meeting of the stockholders of the corporation, for the purpose of election of Directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. 1. 6 (b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (B) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (C) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than one hundred twenty (120) calendar days in advance of the date specified in the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b). The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. (c) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of Directors at the meeting who complies with the notice procedures set forth in this paragraph (c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation in accordance with the provisions of paragraph (b) of this Section 5. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a Director: (A) the name, age, 2. 7 business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation which are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the 1934 Act (including without limitation such person's written consent to being named in the proxy statement, if any, as a nominee and to serving as a Director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to paragraph (b) of this Section 5. At the request of the Board of Directors, any person nominated by a stockholder for election as a Director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. Section 6. Special Meetings. (a) Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the President, (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized Directors (whether or not there exist any vacancies in previously authorized Directorships at the time any such resolution is presented to the Board of Directors for adoption) or (iv) by the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting, and shall be held at such place, on such date, and at such time as the President or the Board of Directors, as the case may be, shall fix. (b) If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board of Directors, the President, or the Secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The Board of Directors shall determine the time and place of such special meeting, which shall be held not less than thirty-five (35) nor more than one hundred twenty (120) days after the date of the receipt of the request. Upon determination of the time and place of the meeting, the officer receiving the request shall cause notice to be given to the stockholders entitled to vote, in accordance with the provisions of Section 7 of these Bylaws. If the notice is not given within sixty (60) days after the receipt of the request, the person or persons requesting the meeting may set the time and place of the meeting and give the notice. Nothing contained in this paragraph (b) shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held. 3. 8 Section 7. Notice of Meetings. Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, date and hour and purpose or purposes of the meeting. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. Section 8. Quorum. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all action taken by the holders of a majority of the vote cast, excluding abstentions, at any meeting at which a quorum is present shall be valid and binding upon the corporation; provided, however, that Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of Directors. Where a separate vote by a class or classes is required, a majority of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and the affirmative vote of the majority (plurality, in the case of the election of Directors) of shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class. Section 9. Adjournment and Notice of Adjourned Meetings. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares casting votes, excluding abstentions. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 4. 9 Section 10. Voting Rights. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote or execute consents shall have the right to do so either in person or by an agent or agents authorized by a written proxy executed by such person or his duly authorized agent, which proxy shall be filed with the Secretary at or before the meeting at which it is to be used. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period. All elections of Directors shall be by written ballot, unless otherwise provided in the Certificate of Incorporation. Section 11. Joint Owners of Stock. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the General Corporation Law of Delaware, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even-split in interest. Section 12. List of Stockholders. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof and may be inspected by any stockholder who is present. Section 13. Action Without Meeting. (a) Unless otherwise provided in the Certificate of Incorporation, any action required by statute to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize 5. 10 or take such action at a meeting at which all shares entitled to vote thereon were present and voted. (b) Every written consent shall bear the date of signature of each stockholder who signs the consent, and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered to the corporation in the manner herein required, written consents signed by a sufficient number of stockholders to take action are delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. (c) Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of the State of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. Section 14. Organization. (a) At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or, if the President is absent, the most senior Vice President present, or in the absence of any such officer, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. (b) The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. 6. 11 ARTICLE IV Directors Section 15. Number and Term of Office. The authorized number of Directors of the corporation shall be fixed in accordance with the Certificate of Incorporation. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the Directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. Section 16. Powers. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation. Section 17. Classes of Directors. Following the closing of the Initial Public Offering, the Directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I Directors shall expire and Class I Directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class II Directors shall expire and Class II Directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class III Directors shall expire and Class III Directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, Directors shall be elected for a full term of three years to succeed the Directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Article, each Director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. Section 18. Vacancies. Unless otherwise provided in the Certificate of Incorporation, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes shall be filled by either (i) the affirmative vote of the holders of a majority of the voting power of the then-outstanding shares of voting stock of the corporation entitled to vote generally in the election of Directors (the "Voting Stock") voting together as a single class; or (ii) by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board of Directors. Newly created directorships resulting from any increase in the number of Directors shall, unless the Board of Directors determines by resolution that any such newly created directorship shall be filled by the stockholders, be filled only by the affirmative vote of the Directors then in office, even though 7. 12 less than a quorum of the Board of Directors. Any Director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of Directors in which the new directorship was created or the vacancy occurred and until such Director's successor shall have been elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Bylaw in the case of the death, removal or resignation of any Director, or if the stockholders fail at any meeting of stockholders at which Directors are to be elected (including any meeting referred to in Section 21 below) to elect the number of Directors then constituting the whole Board of Directors. Section 19. Resignation. Any Director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more Directors shall resign from the Board of Directors, effective at a future date, a majority of the Directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. Section 20. Removal. Subject to any limitations imposed by law or the Certificate of Incorporation, the Board of Directors, or any individual Director, may be removed from office at any time (a) with cause by the affirmative vote of the holders of at least a majority of the then outstanding shares of the capital stock of the corporation entitled to vote at an election of or (b) without cause by an affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of such outstanding shares. Section 21. Meetings. (a) Annual Meetings. The annual meeting of the Board of Directors shall be held immediately before or after the annual meeting of stockholders and at the place where such meeting is held. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (b) Regular Meetings. Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held in the office of the corporation required to be maintained pursuant to Section 2 hereof. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may also be held at any place within or without the State of Delaware which has been designated by resolution of the Board of Directors or the written consent of all Directors. (c) Special Meetings. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place 8. 13 within or without the State of Delaware whenever called by the Chairman of the Board, the President or any two of the Directors. (d) Telephone Meetings. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (e) Notice of Meetings. Notice of the time and place of all regular and special meetings of the Board of Directors shall be orally or in writing, by telephone, facsimile, telegraph or telex, at least twenty-four (24) hours before the meeting, or sent in writing to each Director by first class mail, charges prepaid, at least three (3) days before the date of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any Director by attendance thereat, except when the Director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (f) Waiver of Notice. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the Directors not present shall sign a written waiver of notice, or a consent to holding such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 22. Quorum and Voting. (a) Unless the Certificate of Incorporation requires a greater number and except with respect to indemnification questions arising under Section 43 hereof, for which a quorum shall be one-third of the exact number of Directors fixed from time to time in accordance with the Certificate of Incorporation, but not less than one (1), a quorum of the Board of Directors shall consist of a majority of the exact number of Directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation, but not less than one (1); provided, however, at any meeting whether a quorum be present or otherwise, a majority of the Directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (b) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by a vote of a majority of the Directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws. Section 23. Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all 9. 14 members of the Board of Directors or committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 24. Fees and Compensation. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any Director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor. Section 25. Committees. (a) Executive Committee. The Board of Directors may by resolution passed by a majority of the whole Board of Directors appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and specifically granted by the Board of Directors, shall have and may exercise when the Board of Directors is not in session all powers of the Board of Directors in the management of the business and affairs of the corporation, including, without limitation, the power and authority to declare a dividend or to authorize the issuance of stock, except such committee shall not have the power or authority to amend the Certificate of Incorporation, to adopt an agreement of merger or consolidation, to recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, to recommend to the stockholders of the corporation a dissolution of the corporation or a revocation of a dissolution or to amend these Bylaws. (b) Other Committees. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall such committee have the powers denied to the Executive Committee in these Bylaws. (c) Term. Each member of a committee of the Board of Directors shall serve a term on the committee coexistent with such member's term on the Board of Directors. The Board of Directors, subject to the provisions of subsections (a) or (b) of this Bylaw may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate 10. 15 one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (d) Meetings. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 24 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any Director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any Director by attendance thereat, except when the Director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. Section 26. Organization. At every meeting of the Directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or if the President is absent, the most senior Vice President, or, in the absence of any such officer, a chairman of the meeting chosen by a majority of the Directors present, shall preside over the meeting. The Secretary, or in his absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting. ARTICLE V Officers Section 27. Officers Designated. The officers of the corporation shall include, if and when designated by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President, one or more Vice Presidents, the Secretary, the Chief Financial Officer, the Treasurer, the Controller, all of whom shall be elected at the annual organizational meeting of the Board of Directors. The order of the seniority of the Vice Presidents shall be in the order of their nomination, unless otherwise determined by the Board of Directors. The Board of Directors may also appoint one or more Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such other officers and agents with such powers and duties as it shall 11. 16 deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. Section 28. Tenure and Duties of Officers. (a) General. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. (b) Duties of Chairman of the Board of Directors. The Chairman of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. If there is no President, then the Chairman of the Board of Directors shall also serve as the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in paragraph (c) of this Section 27. (c) Duties of President. The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. The President shall be the Chief Executive Officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (d) Duties of Vice Presidents. The Vice Presidents, in the order of their seniority, may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. The Vice Presidents shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (e) Duties of Secretary. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties given him in these Bylaws and other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the 12. 17 Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (f) Duties of Chief Financial Officer. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct the Treasurer or any Assistant Treasurer, or the Controller or any Assistant Controller to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and each Controller and Assistant Controller shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. Section 29. Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof. Section 30. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer. Section 31. Removal. Any officer may be removed from office at any time, either with or without cause, by the vote or written consent of a majority of the Directors in office at the time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors. ARTICLE VI Execution of Corporate Instruments and Voting of Securities Owned by the Corporation Section 32. Execution of Corporate Instruments. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or 13. 18 to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation. Unless otherwise specifically determined by the Board of Directors or otherwise required by law, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board of Directors, or the President or any Vice President, and by the Secretary or Chief Financial Officer or Treasurer or any Assistant Secretary or Assistant Treasurer. All other instruments and documents requiring the corporate signature, but not requiring the corporate seal, may be executed as aforesaid or in such other manner as may be directed by the Board of Directors. All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. Section 33. Voting of Securities Owned by the Corporation. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the President, or any Vice President. ARTICLE VII Shares of Stock Section 34. Form and Execution of Certificates. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Where such certificate is countersigned by a transfer agent other than the corporation or its employee, or by a registrar other than the corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect 14. 19 as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the designations, preferences, limitations, restrictions on transfer and relative rights of the shares authorized to be issued. Section 35. Lost Certificates. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed. Section 36. Transfers. (a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. (b) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. Section 37. Fixing Record Dates. (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board 15. 20 of Directors to fix a record date. The Board of Directors shall promptly, but in all events within 10 days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within 10 days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 38. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VIII Other Securities of the Corporation Section 39. Execution of Other Securities. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 34), may be signed by the Chairman of the Board of Directors, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature of a trustee under an indenture pursuant to which such 16. 21 bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. ARTICLE IX Dividends Section 40. Declaration of Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Section 41. Dividend Reserve. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X Fiscal Year Section 42. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. 17. 22 ARTICLE XI Indemnification Section 43. Indemnification of Directors, Officers, Employees and Other Agents. (a) Directors and Executive Officers. The corporation shall indemnify its Directors and executive officers to the fullest extent not prohibited by the Delaware General Corporation Law; provided, however, that the corporation may limit the extent of such indemnification by individual contracts with its Directors and executive officers; and, provided, further, that the corporation shall not be required to indemnify any Director or executive officer in connection with any proceeding (or part thereof) initiated by such person or any proceeding by such person against the corporation or its Directors, officers, employees or other agents unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation or (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the Delaware General Corporation Law. (b) Other Officers, Employees and Other Agents. The corporation shall have power to indemnify its other officers, employees and other agents as set forth in the Delaware General Corporation Law. (c) Good Faith. (i) For purposes of any determination under this Bylaw, a Director or executive officer shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, to have had no reasonable cause to believe that his conduct was unlawful, if his action is based on information, opinions, reports and statements, including financial statements and other financial data, in each case prepared or presented by: (A) one or more officers or employees of the corporation whom the Director or executive officer believed to be reliable and competent in the matters presented; (B) counsel, independent accountants or other persons as to matters which the Director or executive officer believed to be within such person's professional competence; and (C) with respect to a Director, a committee of the Board upon which such Director does not serve, as to matters within such Committee's designated authority, which committee the Director believes to merit confidence; so long as, in each 18. 23 case, the Director or executive officer acts without knowledge that would cause such reliance to be unwarranted. (ii) The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal proceeding, that he had reasonable cause to believe that his conduct was unlawful. (iii) The provisions of this paragraph (c) shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth by the Delaware General Corporation Law. (d) Expenses. The corporation shall advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by any Director or executive officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Bylaw or otherwise. Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (e) of this Bylaw, no advance shall be made by the corporation if a determination is reasonably and promptly made (i) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to the proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested Directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation. (e) Enforcement. Without the necessity of entering into an express contract, all rights to indemnification and advances to Directors and executive officers under this Bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the Director or executive officer. Any right to indemnification or advances granted by this Bylaw to a Director or executive officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. The corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed. Neither the failure of the corporation (including its Board of Directors, 19. 24 independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. (f) Non-Exclusivity of Rights. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its Directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the Delaware General Corporation Law. (g) Survival of Rights. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a Director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (h) Insurance. To the fullest extent permitted by the Delaware General Corporation Law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Bylaw. (i) Amendments. Any repeal or modification of this Bylaw shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. (j) Saving Clause. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each Director and executive officer to the full extent not prohibited by any applicable portion of this Bylaw that shall not have been invalidated, or by any other applicable law. (k) Certain Definitions. For the purposes of this Bylaw, the following definitions shall apply: (i) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. 20. 25 (ii) The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding. (iii) The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its Directors, officers, and employees or agents, so that any person who is or was a Director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Bylaw with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (iv) References to a "Director," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as a Director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. (v) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a Director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such Director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Bylaw. ARTICLE XII Notices Section 44. Notices. (a) Notice to Stockholders. Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent. 21. 26 (b) Notice to Directors. Any notice required to be given to any Director may be given by the method stated in subsection (a), or by facsimile, telex or telegram, except that such notice other than one which is delivered personally shall be sent to such address as such Director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such Director. (c) Address Unknown. If no address of a stockholder or Director be known, notice may be sent to the office of the corporation required to be maintained pursuant to Section 2 hereof. (d) Affidavit of Mailing. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or Director or Directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall be conclusive evidence of the statements therein contained. (e) Time Notices Deemed Given. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing, and all notices given by facsimile, telex or telegram shall be deemed to have been given as of the sending time recorded at time of transmission. (f) Methods of Notice. It shall not be necessary that the same method of giving notice be employed in respect of all Directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. (g) Failure to Receive Notice. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any Director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such stockholder or such Director to receive such notice. (h) Notice to Person with Whom Communication Is Unlawful. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate 22. 27 shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. (i) Notice to Person with Undeliverable Address. Whenever notice is required to be given, under any provision of law or the Certificate of Incorporation or Bylaws of the corporation, to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a twelve-month period, have been mailed addressed to such person at his address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth his then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this paragraph. ARTICLE XIII Amendments Section 45. Amendments. Except as otherwise set forth in paragraph (i) of Section 43 of these Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock. The Board of Directors shall also have the power, if such power is conferred upon the Board of Directors by the Certificate of Incorporation, to adopt, amend or repeal Bylaws. ARTICLE XIV Loans to Officers Section 46. Loans to Officers. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this Bylaw shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 23. 28 ARTICLE XV Miscellaneous Section 47. Annual Report. (a) Subject to the provisions of paragraph (b) of this Bylaw, the Board of Directors shall cause an annual report to be sent to each stockholder of the corporation not later than one hundred twenty (120) days after the close of the corporation's fiscal year. Such report shall include a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accounts or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. When there are more than 100 stockholders of record of the corporation's shares, as determined by Section 605 of the California Corporations Code, additional information as required by Section 1501(b) of the California Corporations Code shall also be contained in such report, provided that if the corporation has a class of securities registered under Section 12 of the 1934 Act, that Act shall take precedence. Such report shall be sent to stockholders at least fifteen (15) days prior to the next annual meeting of stockholders after the end of the fiscal year to which it relates. (b) If and so long as there are fewer than 100 holders of record of the corporation's shares, the requirement of sending of an annual report to the stockholders of the corporation is hereby expressly waived. 24. EX-23.1 4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23.1 METRICOM, INC. CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8, File Nos. 33-47688, 33-63076, 33-63088, 33-91746, 33-95070, 333-09001, 333-09005 and 333-18319, and on Form S-3, File Nos. 33-78286 and 333-15169. ARTHUR ANDERSEN LLP San Jose, California March 23, 1998 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE COMPANY'S ANNUAL REPORT ON FORM 10-K 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 9,784 4,390 2,278 0 3,011 20,587 40,301 14,426 51,103 13,607 45,000 0 0 14 0 51,103 6,797 13,439 4,558 34,833 35,603 0 4,151 (59,328) 0 (59,328) 0 0 0 (59,328) (4.35) (4.35)
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