-----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, V8SdKBDnDFB3lX1iAO3YSVeGUVi5eUSrumA3UTb1KM+POFDk0lUuKEGFKGKAjvRb ebpnw8V1gGp9zE9Lf5mWhw== 0000950149-00-000131.txt : 20000207 0000950149-00-000131.hdr.sgml : 20000207 ACCESSION NUMBER: 0000950149-00-000131 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20000204 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: 424B3 SEC ACT: SEC FILE NUMBER: 333-91359 FILM NUMBER: 523404 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 424B3 1 FILED PURSUANT TO RULE 424(B)(3), REG. #333-91359 1 Filed Pursuant to Rule 424(b)(3) Registration Number 333-91359 PROSPECTUS SUPPLEMENT (To Prospectus dated December 30, 1999) 5,000,000 Shares METRICOM, INC. RICOCHET LOGO Common Stock - -------------------------------------------------------------------------------- This prospectus supplement relates to an offering of 5,000,000 shares of our common stock. Our common stock trades on the Nasdaq National Market under the symbol "MCOM." Concurrently with this offering, we are also separately offering $300 million aggregate principal amount of our 13% senior notes due 2010, together with warrants to purchase an aggregate of 1,425,000 shares of our common stock at an initial exercise price of $87.00 per share. The completion of this offering is not contingent upon the completion of the concurrent notes and warrants offering. Investing in the shares involves risks. Risk factors begin on page S-9.
PER SHARE TOTAL --------- ------------ Offering price to public.................................... $87.00 $435,000,000 Underwriting discounts and commissions...................... $ 4.35 $ 21,750,000 Proceeds to Metricom........................................ $82.65 $413,250,000
We have granted the underwriters a 30-day option to purchase up to 750,000 additional shares of common stock on the same terms and conditions set forth above solely to cover over-allotments, if any. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus supplement. Any representation to the contrary is a criminal offense. The underwriters expect to deliver the shares on or about February 7, 2000. - -------------------------------------------------------------------------------- Joint Book-Running Managers LEHMAN BROTHERS SALOMON SMITH BARNEY ------------------------- Co-Managers MERRILL LYNCH & CO. CHASE H&Q J.P. MORGAN & CO. February 1, 2000 2 Inside front cover: [A graphic representation titled "Three-Phase Network Deployment - 100 Million Covered Population Summer 2001" and which depicts the Ricochet logo, a map of the U.S. indicating the 21 metropolitan markets in which we plan to deploy our high-speed network through the second phase of our deployment and the following table:] NETWORK DEPLOYMENT SCHEDULE Number of Cumulative Development Metropolitan Covered Population Expected Phase Markets Upon Completion Launch Date - ----------- ------------ ------------------ ----------- I 12 62 million Summer 2000 II 9 additional 80 million Early 2001 III 15+ additional 100+ million Summer 2001 3 TABLE OF CONTENTS PROSPECTUS SUPPLEMENT
PAGE ---- Summary............................. S-5 Risk Factors........................ S-9 Forward-Looking Statements.......... S-23 Use of Proceeds..................... S-24 Price Range of Common Stock......... S-24 Dividend Policy..................... S-25 Capitalization...................... S-25 Dilution............................ S-27 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... S-28
PAGE ---- Business............................ S-34 Management.......................... S-53 Principal Stockholders.............. S-61 U.S. Federal Income Tax Consequences to Non-U.S. Holders............... S-63 Underwriting........................ S-66 Legal Matters....................... S-69 Experts............................. S-69
PROSPECTUS
PAGE ---- Prospectus Summary.................. 3 Risk Factors........................ 5 Forward-Looking Information......... 5 Deficiency of Earnings to Fixed Charges........................... 5 Use of Proceeds..................... 5 Description of Debt Securities...... 6
PAGE ---- Description of Capital Stock........ 14 Plan of Distribution................ 18 Legal Matters....................... 18 Experts............................. 19 Where You Can Find More Information....................... 19
No dealer, sales person or other person is authorized to give any information or to represent anything not contained in this prospectus supplement. You must not rely on any unauthorized information or representations. This prospectus supplement is an offer to sell only the securities specifically offered by it, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus supplement is current only as of its date. Metricom(R) and Ricochet(R) are our registered trademarks. Trade names and trademarks of other companies appearing in this prospectus supplement are the property of their respective holders. S-1 4 [THIS PAGE INTENTIONALLY LEFT BLANK.] S-2 5 SUMMARY This summary highlights information contained elsewhere in this prospectus supplement. This summary does not contain all of the information that you should consider before investing in our common stock. We urge you to read carefully the entire prospectus supplement and related prospectus, including the information we incorporate by reference, especially the risks of investing in our common stock discussed under "Risk Factors." Unless otherwise indicated, all information in this prospectus supplement assumes the underwriters will not exercise their option to purchase additional shares in the offering. References in this prospectus supplement to "Metricom," "we," "our," "us" and the "company" refer only to Metricom, Inc. METRICOM, INC. We are a leading provider of mobile wireless data access to corporate networks and the Internet. We have designed our new high-speed service, marketed under the Ricochet(R) brand name, to meet the needs of the growing number of professionals who require full access to their corporate networks and the Internet while away from the office. Our service will provide these mobile professionals with higher speed access to data than any other mobile wireless technology commercially available today. Our service will also appeal to consumers who desire high-speed mobile access to the Internet. Simply by connecting a wireless modem to a laptop computer or other portable electronic device, our users can access their corporate networks and the Internet whenever they want and wherever they are within our service areas, just as they would with a wired modem. Our users pay only a flat fee for our service, unlike many other remote access services. Our technology enables users to replicate wirelessly the look and feel of their desktop computers, providing them with the following features customarily associated with working on a desktop computer at the office: - ALWAYS ON. Our technology allows users to connect to their corporate networks and the Internet without a lengthy dial-up procedure and to remain connected as long as their computers are on. - HIGH-SPEED ACCESS. During the late summer of 2000, we expect to begin offering average downstream data transmission speeds greater than 128 kilobits per second, approximately two to four times faster than most remote wired connections and approximately seven to 14 times faster than most remote mobile wireless connections commercially available today. - SECURE DATA TRANSMISSION. Our frequency-hopping, spread spectrum wireless technology, combined with optional encryption, makes it very difficult for an unauthorized user to intercept data transmitted over our network. - RELIABLE SERVICE. Our packet-switched technology routes data around busy or nonfunctioning network radios, enabling multiple users to share our network capacity and virtually eliminating busy signals or the inability to connect to the network because of capacity constraints. We believe many mobile professionals and consumers will find our high-speed, unlimited network access service to provide a valuable capability, whether used alone or as a complement to the more limited data access services offered by mobile telephone service providers. In November 1999, MCI WorldCom, Inc. and Vulcan Ventures Incorporated, the private investment vehicle of Microsoft Corporation co-founder Paul Allen, each purchased shares of our preferred stock for $300 million in cash, providing us with funds to commence the deployment of our high-speed network. In addition, MCI WorldCom has entered into an agreement with us to sell S-3 6 subscriptions to our service and has agreed to pay us at least $388 million in revenue over the five years following the launch of our service, subject to the timely deployment of our network, our ability to meet agreed performance standards and our ability to attract a significant number of subscribers through other channel partners. This relationship provides us with immediate access to a large and sophisticated sales force that has experience selling products and services to businesses and consumers in our target market. Our high-speed network will consist of: - compact, inexpensive radios, called poletop radios, which communicate with users' wireless modems connected to laptop computers or other portable electronic devices; - wired access points, which carry transmissions between the poletop radios and one of our network interface facilities via high-speed dedicated wired connections; - network interface facilities, which aggregate traffic to and from all wired access points in a metropolitan market and provide connections to the Internet and other networks; and - network operations centers, which provide central management of our entire network. We install our poletop radios on streetlights, utility poles and building rooftops, and we install our wired access points on building rooftops or other locations, many of which also serve as the sites for existing cellular or other wireless base stations. We plan to deploy our high-speed network in three phases and expect that our service areas will cover a cumulative population of at least 100 million by the end of the summer of 2001. - In the first phase, we plan to deploy our network in 12 major metropolitan markets: Atlanta, Chicago, Dallas/Fort Worth, Houston, Los Angeles, New York City, Philadelphia, Phoenix, San Diego, San Francisco, Seattle and Washington, D.C. We plan to launch our service in these markets during the late summer of 2000. We expect that our initial service areas in these markets will cover a total population of approximately 62 million. - In the second phase, we plan to expand our network and service to an additional nine major metropolitan markets: Baltimore, Boston, Denver, Detroit, Kansas City, Miami, Minneapolis, St. Louis and Salt Lake City. We expect to launch our service in these markets in early 2001. After this expansion, we anticipate that our service areas will cover a cumulative population of approximately 80 million. - In the third phase, we plan to expand our service areas in some of our existing markets and to deploy our network in 15 or more additional markets. We expect to launch our service in these new markets during the summer of 2001. After this expansion, which we plan to complete by the end of the summer of 2001, we anticipate that our service areas will cover a cumulative population of at least 100 million. S-4 7 MARKET OPPORTUNITY We believe the growing demand by organizations and individuals for mobile access to corporate networks and the Internet is driven primarily by the following four trends: - GROWTH IN THE NUMBER OF LAPTOP COMPUTERS AND SMART HANDHELD DEVICES. International Data Corporation, or IDC, a market research firm, has projected that unit shipments of portable computers and smart handheld devices in the U.S. will increase from an estimated 12 million in 1999 to 25 million in 2003, representing a compound annual growth rate of 21%; - GROWTH IN THE NUMBER OF INTERNET USERS. According to IDC, the number of Internet users in the U.S. is projected to increase from 70 million in 1998 to 179 million in 2003, representing a compound annual growth rate of 21%; - INCREASED IMPORTANCE OF NETWORK ACCESS. IDC has projected that, in 1999, 40% of computer users worldwide working for mid-sized and large enterprises would remotely access corporate local area networks; and - GROWTH IN THE NUMBER OF MOBILE WORKERS. IDC has projected that, by 2003, 47 million workers in the U.S. will spend at least 20% of their time away from their offices. OUR STRATEGY Our objective is to be the leading provider of high-speed mobile wireless data access to users of laptop computers and other portable electronic devices. The key elements of our strategy are set forth below: - RAPIDLY DEPLOY A NATIONAL NETWORK. We intend to expand our service areas to cover a cumulative population of at least 100 million in the U.S. by the end of the summer of 2001. - TARGET MOBILE PROFESSIONALS. Our advertising and marketing will focus initially on mobile professionals, particularly those who already use laptop computers or other portable electronic devices, and other people and businesses that are likely to require mobile access to information. - CAPITALIZE ON THE DISTRIBUTION STRENGTH OF A SELECT GROUP OF CHANNEL PARTNERS. We intend to generate demand for, and increase the number of users of, our service through sales efforts by MCI WorldCom and other potential channel partners with significant sales and customer support experience. - BUILD EQUITY IN THE RICOCHET BRAND. We intend to promote the Ricochet brand aggressively, with the objective of gaining widespread business and consumer recognition of our brand. - MAINTAIN NETWORK PERFORMANCE AND COST ADVANTAGES. We intend to outsource substantially all of our manufacturing and network deployment needs to organizations for which these functions are core competencies. Outsourcing these functions will enable us to concentrate on developing positive recognition of the Ricochet brand, recruiting and managing channel partners, managing our network and advancing our core technologies to enhance our network's performance and cost-effectiveness in the future. - PURSUE INTERNATIONAL OPPORTUNITIES. We believe the advantages of our core technologies -- and particularly the relatively low deployment cost of our network -- should enable us to provide service that is attractive to users in other countries that have large populations of knowledge workers. S-5 8 THE OFFERING Common stock offered by us...... 5,000,000 shares Shares of common stock to be outstanding after the offering...................... 29,641,153 shares Use of proceeds................. For the deployment and commercialization of our high-speed network and general corporate purposes, principally working capital, funding our operating losses and capital expenditures. Nasdaq National Market symbol... MCOM We have calculated the number of shares of common stock to be outstanding after the offering based on the number of shares outstanding as of December 31, 1999, together with an additional 296,456 shares of common stock issued in January 2000 upon conversion of $4.3 million aggregate principal amount of our convertible notes remaining outstanding at December 31, 1999. This outstanding share number excludes: - 60,000,000 shares of common stock issuable at an initial conversion price of $10.00 per share upon conversion of shares of our outstanding preferred stock; - 3,999,906 shares of common stock issuable upon exercise of options outstanding at December 31, 1999 at a weighted average exercise price of $7.97 per share; and - Approximately 1,425,000 shares of common stock issuable upon exercise of warrants that we expect to issue together with our 13% senior notes due 2010 in our concurrent notes and warrants offering. CONCURRENT NOTES AND WARRANTS OFFERING Concurrently with this offering, we are separately offering to the public $300 million aggregate principal amount of our 13% senior notes due 2010, together with warrants to purchase an aggregate of 1,425,000 shares of our common stock at an initial exercise price of $87.00 per share. We estimate that the net proceeds from the sale of these notes and warrants, after deducting underwriting discounts and commissions, will be approximately $291.8 million. Upon completion of the notes and warrants offering, we will deposit approximately $73.1 million of the net proceeds in a pledge account to secure the payment of the first four scheduled interest payments on the senior notes. We will use the available net proceeds of the notes and warrants offering, after establishing the required interest reserve on the senior notes, together with cash on hand and the net proceeds of this offering, for the deployment and commercialization of our high-speed network and for the other purposes specified in "Use of Proceeds." The completion of this offering is not contingent upon the completion of the concurrent notes and warrants offering. S-6 9 SUMMARY HISTORICAL CONSOLIDATED AND PRO FORMA FINANCIAL DATA The following table sets forth summary consolidated historical financial data for each of the three years ended December 31, 1996, 1997 and 1998, for the nine-month periods ended September 30, 1998 and 1999 and as of September 30, 1999. The following table also presents certain other data, including EBITDA, which we define as earnings before interest, taxes, depreciation and amortization. EBITDA should not be considered alone or as an alternative to operating loss, cash flows from operating activities or any other measure of operating performance or liquidity, each as calculated in accordance with generally accepted accounting principles. Nevertheless, we believe EBITDA provides meaningful additional information with respect to our operating results and our ability to service our long-term debt and other fixed obligations and to fund our continuing growth. Because all companies do not calculate EBITDA in the same manner, the presentation below may not be comparable to other similarly titled measures of other companies. Our pro forma balance sheet data set forth below give effect to: - our sale in November 1999 of 60,000,000 shares of preferred stock for gross proceeds of $600 million; - our purchase in November 1999 for $5 million of the minority interest in our former joint venture serving Washington, D.C.; - our repayment to Vulcan Ventures in November 1999 of a line of credit and a bridge loan, aggregating $60.5 million, including accrued interest, of which $50 million, plus accrued interest, was outstanding at September 30, 1999; and - the conversion into 3,064,963 shares of our common stock of $44.6 million aggregate principal amount of our remaining convertible notes. In addition to the foregoing adjustments, our pro forma as adjusted balance sheet data set forth below give effect to: - the sale of 5,000,000 shares of common stock in this offering at the public offering price of $87.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses; and - the sale of $300 million aggregate principal amount of our 13% senior notes due 2010, together with warrants to purchase an aggregate of 1,425,000 shares of our common stock at an initial exercise price of $87.00 per share, which we are offering in a separate, concurrent public offering. We estimate that the available net proceeds from the sale of these notes and warrants, after deducting underwriting discounts and commissions and establishing the required interest reserve on the senior notes, will be approximately $218.7 million. The portion of the net proceeds used to fund the required interest reserve will be treated as a restricted investment on our balance sheet. As of September 30, 1999, on an actual and pro forma basis, we had no restricted cash or restricted investments. The completion of this offering is not contingent upon the completion of the concurrent notes and warrants offering, and we cannot assure you that we will be able to complete the notes and warrants offering. S-7 10
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ ------------------- 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Service revenues...................... $ 2,158 $ 6,642 $ 8,419 $ 6,251 $ 7,158 Product revenues...................... 4,996 6,797 7,440 5,908 6,486 -------- -------- -------- -------- -------- Total revenues................ 7,154 13,439 15,859 12,159 13,644 Total costs and expenses................ 48,506 70,436 97,999 56,854 57,894 Loss from operations.................... (41,352) (56,997) (82,140) (44,695) (44,250) -------- -------- -------- -------- -------- Net loss................................ $(39,345) $(59,328) $(84,164) $(45,935) $(48,228) ======== ======== ======== ======== ======== Net loss per share...................... $ (2.93) $ (4.35) $ (4.63) $ (2.55) $ (2.45) Weighted average shares outstanding..... 13,413 13,641 18,195 18,022 19,694 OTHER DATA: Capital expenditures.................... $ 15,910 $ 10,584 $ 4,994 $ 2,322 $ 6,251 Cash provided (used) by: Operating activities.................. (29,139) (45,739) (51,500) (37,893) (46,475) Investing activities.................. (8,325) 31,158 (830) 2,222 (5,802) Financing activities.................. 47,509 9,119 61,687 50,878 54,789 EBITDA.................................. (37,217) (48,631) (58,543) (37,921) (41,130) Deficiency of earnings to fixed charges............................... (39,345) (59,328) (84,164) (45,935) (48,228)
AS OF SEPTEMBER 30, 1999 ------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED --------- --------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments...... $ 21,653 $539,287 $1,169,215 Restricted investments................................. -- -- 73,077 Working capital (deficit).............................. (7,508) 530,642 1,180,337 Total assets........................................... 40,730 558,364 1,269,619 Long-term debt......................................... 75,189 594 236,976 Redeemable convertible preferred stock................. -- 573,150 573,150 Accumulated deficit.................................... (281,690) (313,396) (313,396) Total stockholders' equity (deficit)................... (75,128) (30,349) 444,524
S-8 11 RISK FACTORS This offering involves a high degree of risk. We urge you to carefully consider the risks described below before deciding to invest in the securities we are offering. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occurs, our business could be harmed substantially. In that case, the trading price of the securities we are offering could decline, and you might lose all or part of your investment. We urge you to refer to the other information included or incorporated by reference in the prospectus to which this prospectus supplement relates, including our financial statements and the related notes. RISKS RELATED TO OUR BUSINESS WE ARE REFOCUSING OUR BUSINESS ON A NEW SERVICE FOR WHICH CONSUMER DEMAND IS UNCERTAIN AND WHICH WE HAVE LIMITED EXPERIENCE OPERATING. We have not yet placed our high-speed mobile wireless data network into commercial operation. We began offering commercial wireless data access services in 1995 with our current Ricochet service. However, we have limited experience marketing our current Ricochet service and have not yet tested our new business strategy, which will utilize channel partners to sell our high-speed service. In addition, the market for mobile wireless data access services is in the early stages of development. Critical issues concerning wireless communications and data access, including security, reliability, cost, regulatory issues, ease of use and quality of service, remain unresolved and are likely to affect the market for our high-speed service. We expect that a substantial marketing effort will be necessary to stimulate initial demand for our high-speed service. We cannot reliably project potential demand for our high-speed service, particularly whether there will be sufficient demand at the volume and prices we need to be profitable. The success of our business ultimately will depend upon the acceptance of our high-speed service by users to whom our channel partners will seek to sell subscriptions to our high-speed service. To date, we have signed only one agreement with a channel partner, MCI WorldCom. Because we are offering a service for which there is only a limited market today, we bear the risk that our channel partners will not generate sufficient revenue for us to recoup the substantial expenditures we will make to deploy and commercially launch our network. Moreover, if the user base for our high-speed service does not expand at the rate required to support the planned deployment of our network, our revenue and business will suffer, and we may be unable to complete our national deployment. In addition, competition to provide wireless data access services of the type we offer could result in a high turnover rate among our users, which could have an adverse effect on our business and results of operations. WE MUST DEPLOY OUR HIGH-SPEED NETWORK IN A LIMITED TIME IN ORDER TO COMPETE EFFECTIVELY. Our business plan contemplates rapid and widespread deployment of our high-speed network in major metropolitan markets throughout the U.S. We believe that the rapid introduction of our service will be crucial to our success in light of competition from other data access providers. However, we do not believe that a nationwide network deployment of the magnitude, and at the rate, contemplated in our deployment schedule has ever been attempted. If we are unable to deploy our high-speed network in accordance with our aggressive deployment schedule, we could be forced to incur substantial unanticipated costs or to revise our business plan. S-9 12 In order to complete our network, commence our sales and marketing efforts and offer our service to users in our targeted metropolitan markets, we must successfully: - obtain agreements from local municipalities and other third parties to deploy our network; - design the network configuration; and - acquire, install and test the network equipment. These events may not occur on a timely basis or at the cost that we have assumed, or at all. Deployment of the network involves various risks and contingencies, many of which are not within our control, including: - delays or refusals by local governments or other third parties to enter into the agreements we need to deploy our network; - inability of third parties on whom we depend to meet delivery schedules; - failure of our network to perform as expected; - hardware reliability and performance problems; - failure to receive Federal Communications Commission certification; and - changes in existing laws and regulations. We currently plan to launch our high-speed service in 12 markets during the late summer of 2000. Following our initial deployment, we will continue to need to deploy network radios and wired access points to maintain performance levels. If we cannot deploy our network on a timely basis and are forced to delay our commercial launch or to reduce the number of markets in which we initially launch operations or, if after we have launched our service, we are unable to meet continuing deployment needs, our business would suffer and the trading prices for our securities could decline, perhaps substantially. WE DEPEND SUBSTANTIALLY ON THIRD PARTIES TO DEPLOY OUR HIGH-SPEED NETWORK ON A TIMELY AND COST-EFFECTIVE BASIS. We depend heavily on third parties to meet our deployment schedule. If any of these third parties has difficulty performing, or is unable to perform, its obligations in accordance with our schedule and projected costs, the deployment of our high-speed network could be delayed, and we could be forced to incur substantial unanticipated costs. RIGHTS-OF-WAY. The development, expansion and operation of our network depend to a significant degree on our ability to obtain and maintain rights-of-way for the location of our poletop radios from local municipalities, public utilities or other local government entities. We have faced delays and may face future delays or rejections in attempting to obtain the approvals and agreements necessary to deploy our network and commercially launch our service. For example, variations in local regulations, including zoning and franchise fee regulations, could delay us in obtaining agreements we need in order to begin installing our poletop radios in areas where we propose to offer our service. If we are unable to negotiate, renew or extend site agreements in a timely manner and on commercially reasonable terms, or at all, we would be required to seek alternative sites, such as commercial buildings, residential dwellings or similar structures, from which to deploy network radios. Deploying a large area in this manner could be time-consuming and significantly more expensive than installing poletop radios on street lights and may be restricted or prohibited by one or more municipalities. S-10 13 WIRED ACCESS POINT LEASES. The deployment of our service also depends on our ability to lease space for our wired access points on building rooftops or on transmission towers owned by third parties. There is substantial competition from a variety of communications companies for these sites. We employ third parties to locate appropriate sites and negotiate leases on our behalf. If these third parties were unable to identify and negotiate these leases on terms favorable or acceptable to us, the deployment of our network would be impaired. The rate at which we are acquiring these leases has been slower and the cost has been higher than we anticipated. Consequently, we must commit more time, effort and capital resources to acquiring these leases in order to meet our deployment plans. NETWORK EQUIPMENT. We depend on sole or limited source suppliers for many of the principal components of our network, including our network radios and wired access points. Some of our suppliers have experienced shipment delays, either as a result of capacity limitations at their production facilities or because they were unable to obtain raw materials or parts necessary for the network components they manufacture. Some of these supply shortages are ongoing. If we continue to experience these or future supply problems and are unable to develop alternative sources of supply quickly and on a cost-effective basis, our ability to obtain and install the equipment we need to implement our service will be impaired. This would cause delays in our network deployment. NETWORK CONSTRUCTION. We have outsourced the physical construction of our high-speed network to a small number of contractors. We rely on these third parties, among other things, to install our poletop radios and wired access points, deliver and install circuits at our wired access points and network interface facilities, establish and maintain our connection to corporate networks and the Internet and provide radio frequency engineering. Our reliance on these contractors will reduce our control over deployment schedules, quality assurance and costs. The successful and timely deployment of our network by these parties will be subject to numerous factors, including the supply of labor, materials and equipment, as well as prevailing weather conditions. The failure of these contractors to complete the installation of our network on a timely, cost-effective basis could delay the deployment of our network, which would damage our business and prospects. WE DEPEND ON THIRD PARTIES TO DEVELOP, ASSEMBLE AND MANUFACTURE THE MODEMS THROUGH WHICH OUR USERS ACCESS OUR SERVICE. We depend on a limited number of third-party manufacturers to assemble our modems. We currently obtain the majority of our modems from a single manufacturer. If this manufacturer were unable to keep pace with production schedules, our operations would be disrupted. Additionally, under agreements with our existing modem supplier and four new modem suppliers, we have committed to purchase a minimum number of units in the first year of deliveries and to reimburse these suppliers for a portion of their development costs. Consequently, if consumer demand for our service is less than we anticipate, we could owe a substantial amount, up to approximately $90 million in the aggregate, to these modem suppliers. Our agreement with one of these modem manufacturers provides for the manufacture of the quantity of modems we have forecast that we will require through approximately the first three months following commercial launch of our high-speed service. We will need to arrange for an additional supply of modems to meet forecast demand for subsequent periods. If we cannot secure arrangements for the manufacture of additional modems beyond the initial period, our channel partners may be unable to secure new subscribers to our service, which would harm our business. If any of our modem suppliers were to experience financial, operational, production or quality assurance difficulties, allocate resources to others in lieu of us or experience a catastrophic event that results in a reduction or interruption in supply of modems, our business would be impaired. In addition, if our channel partners sell more subscriptions than we anticipate or if we decide to accelerate deployment S-11 14 of our high-speed network, our presently anticipated supplies may prove inadequate. We cannot assure you that, if any of these events occurs, modems from alternate suppliers will be available at favorable prices, if at all. ONE OF OUR MANUFACTURERS IS EXPERIENCING SHORTAGES OF SUPPLY OF COMPONENTS FOR OUR POLETOP AND NETWORK RADIOS AND OUR OTHER MANUFACTURERS MAY EXPERIENCE SHORTAGES OF SUPPLY OF COMPONENTS FOR OUR MODEMS OR OTHER PRODUCTS, WHICH COULD INVOLVE SUBSTANTIAL COST AND DELAY AND REDUCE AVAILABILITY OF OUR SERVICE. Some of the component parts that our manufacturers use in our products, including our modems and network radios, are available only from sole or limited source vendors. Our manufacturers' reliance on these sole or limited source vendors involves risks, including the possibility of a shortage of key component parts and reduced control over delivery schedules, manufacturing capability, quality and costs. In addition, some key component parts require long delivery times. We have in the past experienced delays because key component parts have been unavailable to our manufacturers. In January 2000, we reported that we have been affected by industry-wide component shortages, causing delays to production of our poletop and network radios assembled under contract by Sanmina Corporation. While we may experience some delays in deployment of our high-speed network, based on currently projected component delivery dates, we expect to launch the first phase of our high-speed service during the late summer of 2000. However, if the global supply shortage continues longer than expected, we may experience further delays, which could have an adverse effect on our business and results of operations. In addition, if our manufacturers are unable to obtain components, we may need to reconfigure our modems or radios, which could involve substantial cost and delay and limit availability of our modems or radios necessary for the deployment of our network. This could delay our deployment, which would reduce the availability of our service to users and harm our business. WE MAY DEPEND ON MCI WORLDCOM TO PROVIDE SUBSCRIPTION SALES AND CUSTOMER SUPPORT CRITICAL TO OUR SUCCESS. Currently, we have only one agreement with a channel partner, MCI WorldCom. When we launch our high-speed network, we may depend entirely on MCI WorldCom to sell subscriptions to our service. Our agreement with MCI WorldCom is non-exclusive, allowing it to market and sell the services of our competitors, and MCI WorldCom may terminate the agreement without penalty if we breach our material obligations under the agreement. We believe that the extent to which MCI WorldCom devotes resources to marketing our service will substantially affect the development of our user base. We cannot predict whether MCI WorldCom will decide to support future competing technologies in preference to ours. MCI WorldCom's termination of its agreement with us, now or in the future, would disrupt our operations and harm our business. We are seeking to enter into non-exclusive agreements with other channel partners. However, our agreement with MCI WorldCom contains a "most favored nation" clause, which assures MCI WorldCom no less favorable terms than we grant any other channel partner. The agreement also restricts us and other channel partners, if any, from marketing our service to three specified entities to which MCI WorldCom may seek to resell our service. These provisions could deter other potential channel partners from entering into agreements with us or limit the number of potential users to which our service is marketed. In addition, our standard agreement with channel partners will require them to offer our service at a flat rate that each channel partner will determine. This provision could allow a single channel partner to undercut our other channel partners, which could deter potential channel partners from entering into agreements with us. If we are unable to establish additional agreements with appropriate channel partners at the rate needed to keep pace with the growth of our network, or at all, the growth of our customer base and revenues would be reduced. S-12 15 We cannot be certain that either we or the users of our service will be satisfied with the performance of any channel partner with which we enter into an agreement. When we launch our high-speed network, we will rely on our channel partners to provide the initial level of customer support, which we will supplement with higher level technical support. If we or our channel partners are unable to provide adequate customer service, our business and results of operations could be adversely affected. MCI WORLDCOM MAY REDUCE OR CANCEL ITS OBLIGATIONS TO US IF WE FAIL TO MEET CERTAIN PERFORMANCE THRESHOLDS. Although MCI WorldCom has agreed to pay us at least $388 million in revenue over the five years following the launch of our service, if our deployment schedule is delayed or if we fail to meet deployment schedule deadlines or fail to comply with quality-of-service standards relating to data transmission performance, network availability, coverage and latency, ease of use and size of modems, all as specified in our agreement with MCI WorldCom, MCI WorldCom may delay or reduce its minimum payments to us or, in the case of a deployment delay in excess of 12 months, may terminate the contract. In addition, in the event that, in any agreement year, subscribers provided by MCI WorldCom represent more than a specified percentage of our total subscribers, then MCI WorldCom's guaranteed revenue commitment for that agreement year could be reduced. If we fail to correct any deficiency for sustained periods of time, MCI WorldCom may suspend its obligations to us or terminate the agreement. Any reduction in or termination of these fees or any suspension or termination of any sales and marketing services we receive under our agreement with MCI WorldCom will impair the growth of our user base and adversely affect our business and results of operations. WE WILL REQUIRE SIGNIFICANT ADDITIONAL CAPITAL IN THE FUTURE TO FUND OUR CONTINUING DEVELOPMENT, DEPLOYMENT AND MARKETING OF OUR HIGH-SPEED NETWORK AND SERVICE. We intend to use the net proceeds of this offering, together with cash on hand and the available proceeds of our concurrent notes and warrants offering, primarily to continue the deployment of our high-speed network and service. Based on our current projections, we believe that, in addition to the funds currently on hand, we will require additional cash resources of approximately $1 billion to enable us to complete the three-phase deployment of our network to cover a cumulative population of 100 million. We believe that our cash on hand as of December 31, 1999, together with the net proceeds of this offering and, if completed, the anticipated available net proceeds of the notes and warrants offering, will be sufficient to fund the deployment of our network through its second phase. However, the completion of this offering is not contingent upon the completion of the concurrent notes and warrants offering. Moreover, we will need additional funds to complete the third phase of our network deployment, and the funds we may actually require to complete any phase of the deployment may vary materially from our estimates. For example, we could incur unanticipated costs or be required to alter our plans to respond to changes in competition or other market conditions, which could require us to raise additional capital sooner than we expect. We could also require additional funds if we decide to depart from our current business plan or if we experience unforeseen delays, regulatory changes, cost overruns or other unanticipated expenses or if we elect to pursue possible acquisitions of complementary businesses or technologies, none of which is provided for in our current budget. Any of the foregoing events could require us to raise additional capital through the sale of equity or the incurrence of additional indebtedness in private or public financings. We cannot assure you that additional financing will be available on terms favorable to us, if at all. In addition, Vulcan Ventures' control position and MCI WorldCom's large investment in us may deter investors who S-13 16 otherwise might have provided financing to us. Furthermore, neither Vulcan Ventures nor MCI WorldCom is obligated to provide us with additional funds. If we are unable to secure additional financing, we may be required to delay or abandon our expansion plans, which could limit or prevent the implementation of our business strategy. Moreover, the sale of additional equity or equity-linked securities could be dilutive to holders of our common stock. WE EXPECT TO CONTINUE TO GENERATE LOSSES. We have a history of losses and expect to incur additional losses in the future. Expenditures associated with developing our high-speed service have contributed substantially to our cumulative net losses of approximately $282 million through September 30, 1999. We expect to incur significant operating losses and to generate negative cash flow from operating activities during the next several years while we continue to develop and deploy our network, market our high-speed service and build our user base. If we are unable to achieve or sustain profitability or positive cash flow from operating activities, we may be unable to develop our network or conduct our business effectively or competitively. We cannot assure you that we will be able to achieve or sustain profitability. OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY. We are unable to forecast our revenues with certainty because of the unknown demand for our high-speed service and the emerging nature of the mobile wireless data access industry. Our revenues could fall short of our expectations if we experience delays in building out our network or entering into agreements with additional channel partners. Our future operating results will be subject to annual and quarterly fluctuations due to several factors, some of which are outside our control. These factors include: - unanticipated costs of building our network; - delays in the introduction of our service; - rate of market acceptance of our high-speed service; - new offerings of, and pricing strategies for, competitive services; - changes in the regulatory environment; and - general economic conditions. As a result, it is likely that in some future quarters our operating results will be below the expectations of securities analysts and investors, which could cause the trading prices of our securities to decline, perhaps substantially. WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY. Competition in the market for communications and data access services is intense. A number of privately and publicly held communications and data access companies have developed or are developing new wireless and wired communications and data access services and products using technologies that compete with our own. Many of these companies have significantly greater resources, more established brand names and larger customer bases than we do. In addition, we may face competition from Internet service providers that could offer Internet, online or data access services at prices lower than those offered by our channel partners, which could limit our ability to increase our user base and cause us to incur additional selling, marketing and product development S-14 17 expenses. If we are unable to compete effectively, our business and results of operations would be impaired. WE OPERATE IN AN INDUSTRY WITH RAPIDLY CHANGING TECHNOLOGY, AND OUR SUCCESS WILL DEPEND ON OUR ABILITY TO DEVELOP PRODUCTS AND SERVICES THAT KEEP PACE WITH TECHNOLOGICAL ADVANCEMENTS. The market for data access and communications services is characterized by rapidly changing technology and evolving industry standards in both the wireless and wireline industries. Our success will depend to a substantial degree on our ability to develop and introduce, in a timely and cost-effective manner, enhancements to our high-speed service and new products that meet changing customer requirements and evolving industry standards. For example, increased data rates provided by wired data access technologies, such as digital subscriber lines, may affect customer perceptions as to the adequacy of our service and may also result in the widespread development and acceptance of applications that require a higher data transfer rate than our high-speed service provides. Our technology or systems may become obsolete upon the introduction of alternative technologies. If we do not develop and introduce new products and services in a timely manner, we may lose users to competing service providers, which would adversely affect our business and results of operations. WE DEPEND ON A NETWORK INFRASTRUCTURE LARGELY MAINTAINED BY THIRD PARTIES AND SUBJECT TO DISRUPTION BY EVENTS OUTSIDE OUR CONTROL. Our success will depend upon the adequacy, reliability and security of the networks used to carry data between our network and corporate networks and the Internet. Because those networks are owned or controlled by third parties, we have no control over their quality and maintenance. Currently, we have agreements with UUNet, a subsidiary of MCI WorldCom, and others to support the exchange of traffic between our wired access points, our network interface facilities, the telecommunications infrastructure and corporate networks and the Internet. Our operations also depend on our ability to avoid damages from fires, earthquakes, floods, power losses, communications failures, network software flaws, transmission cable cuts and similar events. The occurrence of any of these events could disrupt our service. Any failure of the Internet backbone, our network interface facilities or any other link in the delivery chain, whether from operational disruption, natural disaster or otherwise, resulting in an interruption in our operations, could harm our business and results of operations. IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR PLANNED RAPID GROWTH, OUR OPERATIONS COULD BE ADVERSELY AFFECTED. We expect to experience rapid growth in the future. Our plans call for us to manage a number of operations in geographically dispersed locations that we have little or no prior experience managing, including: - the design, deployment and installation of a nationwide mobile wireless data access network; - coordination and support of our channel partners; and - maintenance and support of our high-speed network. In addition, management of our growth will require, among other things: - continued development of our financial and management controls and management information systems, including our fixed asset management and billing systems; - accurate assessment of potential markets; S-15 18 - stringent cost controls; - increased marketing activities; and - retention of qualified personnel and training of personnel and third parties on whom we depend to deploy and maintain our service. If we are unable to effectively manage our expected rapid growth and development or if we experience any difficulties in managing the deployment of our network, our business and results of operations could be harmed. TO BE COMPETITIVE, WE NEED TO ACHIEVE COST REDUCTIONS. If we are to become profitable, our products and components must be manufactured in large quantities at competitive cost and quality. As a result, we will need to achieve significant product and component cost reductions. We are currently working with several companies to develop low-cost personal computer card modems, as well as smaller and lower cost external modems. If we are unable to develop these modems at a low cost, we may be unable to achieve the cost structure we anticipate in our business plan. Even if we achieve low-cost production, we must have adequate lead times and production capacity to meet user demand for our service if we are to increase revenues and achieve profitability. If we do not achieve product and component cost reductions, our competitive position and our ability to achieve profitability could be impaired. OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE TO PROTECT OUR PROPRIETARY RIGHTS, AND WE MAY NOT BE ABLE TO OBTAIN ALL OF THE INTELLECTUAL PROPERTY RIGHTS NECESSARY TO PROTECT OUR TECHNOLOGY. We rely on a combination of patent, copyright, trademark and trade secret protection laws and non-disclosure agreements to establish and protect our proprietary rights. We cannot assure you that patents will issue from any pending applications or, if patents do issue, that claims allowed will be sufficiently broad to protect our technology. Further, any of our current or future patents or trademarks may be challenged, invalidated, circumvented or rendered unenforceable, and the rights granted under those patents or trademarks may not provide us with significant proprietary protection or commercial advantage. Moreover, our patents may not preclude competitors from developing equivalent or superior products and technology. We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. Others may independently develop equivalent proprietary information or otherwise gain access to or disclose our information. We cannot assure you that the confidentiality agreements upon which we rely will provide meaningful protection of our trade secrets or adequate remedies in the event of unauthorized use or disclosure of confidential information or prevent our trade secrets from otherwise becoming known to or independently discovered by our competitors. Our commercial success may also depend in part on our not infringing the proprietary rights of others or not breaching technology licenses that cover technology we use in our products. Third-party patents may require us to develop alternative technology or to alter our products or processes, obtain licenses or cease some of our activities. If these licenses are required, we may be unable to obtain them on commercially favorable terms, if at all. If we are unable to obtain licenses to any technology that we may require to effectively deploy or market our products and service, our business could be harmed. S-16 19 WE ARE SUBJECT TO TELECOMMUNICATIONS INDUSTRY REGULATIONS, WHICH COULD ADVERSELY AFFECT THE NATURE AND EXTENT OF THE SERVICE WE OFFER. Many aspects of the telecommunications industry are subject to regulation at the federal, state and local levels. From time to time, the regulatory entities that have jurisdiction over our business adopt new or modified regulations or take other actions as a result of their own regulatory processes or as directed by other governmental bodies. This changing regulatory environment could adversely affect the nature and extent of the service we are able to offer. On the federal level, the FCC regulates our license-free equipment and operations, as well as the licensed operations and equipment that we deploy as part of our network. We cannot assure you that we will be able to secure the necessary FCC approvals for the equipment that we intend to deploy in 2000 and thereafter. The need to obtain these approvals could result in delays or additional costs. Our equipment shares the license-free frequency bands with other users. Licensed users in the band have priority over our license-free use, and the FCC requires that we not cause harmful interference to those users. In our licensed frequencies, we are subject to an FCC requirement that we not cause interference to certain services operating in nearby bands. Satisfying these requirements could involve substantial time and expense and, if we fail to satisfy them, could lead us to curtail our operations in the affected locations. In addition, the FCC requires that we accept interference to our operations. In the license-free spectrum, we operate on a co-equal basis with other license-free users and must accept any interference present in the bands. Even in our exclusive, licensed frequency bands, our operations may be subject to interference. For example, Mexico is currently in negotiations with the U.S. to use some of our licensed frequencies for a satellite service in Mexico. If implemented, this service could interfere with our licensed operations in certain markets. Excessive harmful interference in either the licensed or license-free frequency bands could discourage users from subscribing to or retaining our service, which would impair our business and results of operations. We may desire or, as a result of changes in regulations, be required to seek to operate in other license-free or licensed frequency bands. We cannot assure you that, if needed, we could obtain appropriate licensed or unlicensed spectrum on commercially acceptable terms, if at all. In addition, redesigning our products to operate in other frequency bands could be expensive and time-consuming, and we cannot assure you that any redesign would result in commercially viable products. On the state and local levels, some jurisdictions may attempt to impose additional regulatory requirements, including regulating the terms and conditions of our service. This regulation could hinder or limit the flexibility that we have to respond to changes in the markets we serve and otherwise adversely affect our business and results of operations. OUR SUCCESS DEPENDS ON OUR RETENTION OF KEY PERSONNEL AND OUR ABILITY TO ATTRACT ADDITIONAL KEY EMPLOYEES. We believe our success will depend largely on our ability to attract and retain highly skilled engineering and managerial personnel. The industry in which we operate is characterized by intense competition for these personnel and a high level of employee mobility. Many of our key employees hold stock options that are vested or may be fully vested before we achieve significant revenues or profitability. We intend to grant additional options and provide other forms of incentive compensation to attract and retain our key personnel, but we cannot guarantee these efforts will be successful. If we are unable to retain our management and engineering staff or if we fail to attract additional key personnel, we may have difficulty implementing our business plan, which would have an adverse effect on our business and results of operations. S-17 20 WE MAY BECOME SUBJECT TO RISKS RELATED TO INTERNATIONAL OPERATIONS. We are currently at the early stages of evaluating international expansion opportunities. Any international expansion plans we pursue could fail if we are unable to locate qualified local suppliers and other third parties to deploy our network or if we cannot establish agreements with channel partners to promote our service in foreign markets. In addition, international expansion could subject us to burdens of complying with a variety of foreign laws and trade standards, including regulatory requirements affecting wireless data and Internet access services, foreign taxes and tariffs, as well as financial risks, such as those related to foreign currency fluctuations. In addition, there is greater uncertainty regarding protection and enforcement of intellectual property rights in certain foreign countries. If we expand internationally, we also will be subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships. The risks associated with any international operations that we may pursue could adversely affect our business and results of operations. WE FACE RISKS IN CONNECTION WITH THE YEAR 2000. Many installed computer systems and software products were programmed to accept only two digits in the date code field. As of January 1, 2000, it became necessary for these code fields to accept four digit entries to distinguish years beginning with "19" from those beginning with "20." We have assessed all of our internal computer systems and software products, tested those systems and products and remedied any known problems. We have upgraded our business and financial systems to a version that our vendors have certified to be year 2000 compliant and also communicated with our key suppliers to assess whether or not the products, services, networks and technologies of these suppliers are year 2000 compliant. We have also completed an assessment of whether our networks that depend upon third parties for telecommunications services and power are year 2000 compliant. In the fourth quarter of 1999, we completed our year 2000 assessment, testing and remediation efforts. Because we have not yet launched our high-speed service and because many systems, whether or not they are information-technology systems, may contain embedded technology, we cannot assure you that we have identified and remedied all potential year 2000 problems that could arise in connection with our high-speed service. We have a contingency plan for handling year 2000 problems that were not detected and corrected prior to their occurrence, and we are continuing to assess any exposure areas in order to determine what additional steps are advisable. We are prepared to use backup systems and have developed other alternative contingency plans for other critical functions where computer systems are essential. To date, we have not experienced any material year 2000 problems. However, if all of our potential year 2000 problems were not properly identified or if adequate assessment and remediation are not timely effected with respect to any year 2000 problems, our business could be impaired significantly. Moreover, any year 2000 compliance problem facing our customers or third parties who provide our networks with telecommunications services and power could also harm our business. RISKS RELATING TO OUR CAPITAL STRUCTURE AND THIS OFFERING OUR PRINCIPAL STOCKHOLDERS CAN CONTROL OR MAY BE ABLE TO EXERT SUBSTANTIAL INFLUENCE OVER US, AND WE MAY EXPERIENCE SIGNIFICANT CONFLICTS OF INTEREST WITH THEM. Upon completion of this offering and assuming conversion of all of our outstanding preferred stock and convertible notes into common stock, Vulcan Ventures would hold approximately 44% of S-18 21 our common stock and MCI WorldCom would hold approximately 33% of our common stock, based on capital stock outstanding at December 31, 1999. In addition, as holders of our preferred stock, Vulcan Ventures and MCI WorldCom each has the right to elect one director. Vulcan Ventures, by reason of its large common stock holdings, will continue to have the ability to control most matters submitted to a vote of our stockholders, including significant corporate transactions and the election of a majority of our board of directors. Moreover, in light of MCI WorldCom's substantial preferred stock holdings and right to elect one director, MCI WorldCom may be able to substantially influence actions we take. Conflicts of interest may arise as a consequence of the positions of control and influence of Vulcan Ventures and MCI WorldCom. For example, conflicts of interest may arise when Vulcan Ventures or MCI WorldCom is faced with decisions that could have different implications for us, on the one hand, as compared with Vulcan Ventures or MCI WorldCom or their various affiliates, on the other hand. These decisions may relate to matters such as the following: - corporate opportunities that we or Vulcan Ventures or MCI WorldCom, or any of their affiliates, could pursue; - our strategic direction; - offers to acquire us; - potential acquisitions by us of other businesses; - contractual relationships between us and Vulcan Ventures or MCI WorldCom, or any of their affiliates; - network deployment priorities; - businesses that compete or potentially compete with us; - the issuance or disposition of our securities; and - the election of new or additional directors or officers. In particular, MCI WorldCom is currently our sole channel partner and has discretion to determine the extent of the marketing resources it devotes to help develop our user base. Moreover, MCI WorldCom has announced an agreement to acquire Sprint Corporation, which may offer a competing service. MCI WorldCom can terminate its agreement with us without penalty if we breach our material obligations under the agreement and fail to cure that breach. Although one of our agreements with Vulcan Ventures contains measures designed for the protection of our public stockholders with respect to Vulcan Ventures, such as requiring approval of three directors not affiliated with Vulcan Ventures for certain matters involving Vulcan Ventures, these stockholder protection measures may not be effective in any particular case. CONCENTRATION OF OUR OWNERSHIP BY VULCAN VENTURES AND MCI WORLDCOM COULD DETER, DELAY OR PREVENT CHANGE OF CONTROL OR OTHER TRANSACTIONS THAT COULD BE BENEFICIAL TO OUR STOCKHOLDERS. The concentration of our ownership by Vulcan Ventures and MCI WorldCom, as well as other rights of Vulcan Ventures and MCI WorldCom, could deter, delay or prevent third parties, particularly other data access or communications companies, from investing in us, reselling our service, or initiating or completing a potential merger with us, a tender offer for our shares, a proxy contest or other transaction intended to change control or management. These transactions could involve premium prices or other benefits to our stockholders. Concentration of ownership could also S-19 22 depress the market price of our common stock or otherwise adversely affect stockholders, or deter potential channel partners from entering into agreements with us. FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE. If our stockholders sell substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decline, possibly significantly. Based on shares outstanding as of December 31, 1999 and adjusting for the January 2000 conversion of all our then outstanding convertible notes into common stock, upon completion of this offering we will have outstanding approximately 29.6 million shares of common stock, all of which will be freely tradeable in the public market, subject in some cases to volume limitations and manner of sale restrictions imposed by Rule 144 under the Securities Act. An additional approximately 4.0 million shares issuable upon exercise of outstanding options as of December 31, 1999 will become eligible for sale in the public market subject to the expiration of vesting and lock-up restrictions and restrictions imposed by Rule 144. Upon completion of the concurrent notes and warrants offering, we expect to issue warrants to purchase an aggregate of 1,425,000 shares of our common stock. In addition to our outstanding common stock, options and warrants, these shares will be freely tradeable. Vulcan Ventures and MCI WorldCom each owns 30 million shares of our preferred stock, each of which is convertible into one share of common stock automatically upon transfer to an unaffiliated transferee. The shares of common stock issuable upon conversion of the preferred stock owned by Vulcan Ventures and MCI WorldCom will become eligible for sale in the public market, subject to volume limitations and manner of sale restrictions imposed by Rule 144, on November 15, 2000. Furthermore, subject to certain exceptions, Vulcan Ventures and MCI WorldCom, together with any person holding at least 500,000 shares of preferred stock, or common stock issued upon conversion thereof, transferred by either of them, are entitled to require us to use our best efforts to register their shares for resale under the Securities Act. Our directors and executive officers, Vulcan Ventures and MCI WorldCom, holding an aggregate of approximately 69.2 million shares of our common stock on an as-converted basis, have entered into lock-up agreements providing that they may not offer to sell, sell or otherwise dispose of, directly or indirectly, any shares of our common stock during the 90-day period following the date of this prospectus supplement without the prior written consent of Lehman Brothers and Salomon Smith Barney. THE MARKET PRICE OF OUR STOCK MAY BE HIGHLY VOLATILE. The market prices for securities of companies engaged in emerging industries, such as ours, have been highly volatile. Announcements we or others make could have a significant impact on the market price of our securities. These announcements may include: - technological innovations or new commercial services by us or our competitors; - comments made by securities analysts, including changes in securities analysts' estimates of our financial performance; - delays in deployment of our high-speed network or launch of our high-speed service; - quarterly fluctuations in our revenues and financial results; - regulatory developments in both the U.S. and foreign countries; - developments concerning proprietary rights, including patents; - litigation matters; S-20 23 - general market conditions; or - changes in key personnel. The stock market has from time to time experienced extreme price and volume fluctuations that have particularly affected the market prices for stocks of companies such as ours. These fluctuations have often been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a company's stock, securities class action litigation has been initiated against the issuing company. This type of litigation could result in substantial cost and a diversion of management's attention and resources, which could have an adverse effect on our revenues and earnings. Any adverse determination in this type of litigation could also subject us to significant liabilities. WE WILL HAVE A SUBSTANTIAL AMOUNT OF DEBT, WHICH COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Upon completion of the concurrent notes and warrants offering, we will have a large amount of indebtedness. On a pro forma basis adjusted for the completion of the offering of the notes and warrants that we expect will occur concurrently with the completion of this offering, we would have had approximately $237.0 million of long-term indebtedness outstanding at September 30, 1999. Of this amount, $236.4 million represents notes that will accrete to an aggregate principal amount at maturity of $300 million. We will need to raise more capital to finance our expansion and continued network deployment, which may be in the form of substantial additional indebtedness. The indenture and the supplemental indentures governing the notes we are concurrently offering will permit us to incur additional debt to fund the development, construction, expansion or operation of, or acquisition of assets used in or the majority of the voting stock of, communications and data access businesses and up to $275 million under one or more credit facilities. We can also incur additional indebtedness based on our financial performance and the amount of equity capital that we raise in the future. If additional debt is added to our debt levels following the completion of the concurrent notes and warrants offering, the related risks could intensify. This large amount of indebtedness could, for example: - make it more difficult for us to satisfy our obligations under the notes or other indebtedness and, if we fail to comply with the requirements of the indebtedness, could result in an event of default; - require us to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures and other general corporate purposes; - limit our ability to obtain additional financing in the future for working capital, capital expenditures and other general corporate purposes; - limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; - detract from our ability to successfully withstand a downturn in our business or the economy generally; and - place us at a competitive disadvantage against other less leveraged competitors. S-21 24 The occurrence of any one of these events could adversely affect our business, financial condition and results of operations. WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW TO MEET OUR EXPECTED DEBT SERVICE OBLIGATIONS. We cannot assure you that our future cash flow will be sufficient to meet the payment obligations under the notes expected to be issued in the concurrent notes and warrants offering when those payments become due. Our ability to generate cash flow from operations to make scheduled payments on our debt obligations as they become due will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control. If we do not generate sufficient cash flow from operations to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure you that any refinancing would be possible, that any assets could be sold or, if sold, of the timing of the sales and the amount of proceeds realized from those sales or that additional financing could be obtained on acceptable terms, if at all. If we are unable to generate sufficient cash flow to satisfy our debt obligations or to refinance our indebtedness on commercially reasonable terms, there could be an adverse effect on our business, financial condition and results of operations. THE TERMS OF THE NOTES WE ARE CONCURRENTLY OFFERING WILL IMPOSE RESTRICTIONS ON US THAT MAY AFFECT OUR ABILITY TO SUCCESSFULLY OPERATE OUR BUSINESS. We will be restricted by the terms of the notes we are concurrently offering from taking various actions, such as incurring additional indebtedness, paying dividends, repurchasing junior indebtedness, making investments, entering into transactions with affiliates, merging or consolidating with other entities and selling all or substantially all of our assets. These restrictions could also limit our ability to obtain future financings, make needed capital expenditures, withstand a future downturn in our business or the economy in general or otherwise conduct corporate activities. We may also be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants under the indenture and supplemental indentures. A breach of any of these provisions will result in a default under the indenture and supplemental indentures governing the notes and could result in a default under agreements relating to other indebtedness that we may have in the future that would allow those lenders to declare that indebtedness immediately due and payable. If we were unable to pay those amounts because we did not have sufficient cash on hand or were unable to obtain alternative financing on acceptable terms, the lenders could initiate a bankruptcy or liquidation proceeding or proceed against any assets that serve as collateral to secure that indebtedness. We cannot assure you that our assets would be sufficient to repay that amount and the amounts due under the notes in full. In addition, upon the occurrence of certain events specified in the notes we are offering, including in connection with certain types of changes in control, we will be required to make an offer to purchase all the outstanding notes at a premium, in which case we may not have sufficient funds to pay for all the notes that are tendered, which also would constitute an event of default. WE WILL HAVE BROAD DISCRETION OVER THE USE OF THE PROCEEDS FROM THIS OFFERING. Our management will have broad discretion over the use of the net proceeds from this offering as well as over the timing of their expenditure. Although we currently intend to use the proceeds of this offering to deploy our network and for the other purposes we describe, we operate in a dynamic and rapidly changing industry, and it is possible that unforeseen events will require us to adapt or S-22 25 change our plans in order to remain competitive. As a result, investors will be relying upon management's judgment with only limited information about its specific intentions for the use of proceeds of this offering. FORWARD-LOOKING STATEMENTS This prospectus supplement contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that are based on our current expectations about our company and our industry. We use words such as "plan," "expect," "intend," "believe," "anticipate," "estimate" and other similar expressions to identify some forward-looking statements, but not all forward-looking statements include these words. Some of these forward-looking statements relate to the timing and coverage of our planned network deployment, the launch of our high-speed service, our market opportunities, our strategy, our anticipated use of the proceeds of this offering and our concurrent notes and warrants offering, our anticipated revenues from MCI WorldCom, our ability to enter into agreements with new channel partners, our competitive position, our management's discussion and analysis of our financial condition and results of operations and the timing and extent of our funding needs. All of our forward-looking statements involve risks and uncertainties. Our actual results may differ significantly from our expectations and from the results expressed in or implied by these forward-looking statements. The section captioned "Risk Factors" appearing in this prospectus supplement describes those factors that we currently consider material and that could cause these differences. We urge you to consider these cautionary statements carefully in evaluating our forward-looking statements. Except as required by law, we undertake no obligation to publicly update any forward-looking statements to reflect subsequent events and circumstances. S-23 26 USE OF PROCEEDS We estimate that the net proceeds from the sale of the 5,000,000 shares of common stock we are selling in this offering will be approximately $411.3 million, based on the public offering price of $87.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses. If the underwriters exercise their option to purchase additional shares in the offering, we estimate the aggregate net proceeds to us will be approximately $473.2 million. Concurrently with this offering, we are offering $300 million aggregate principal amount of our 13% senior notes due 2010, together with warrants to purchase an aggregate of 1,425,000 shares of our common stock at an initial exercise price of $87.00 per share. We estimate that the net proceeds from the sale of the notes and warrants will be approximately $291.8 million, after deducting underwriting discounts and commissions. Upon completion of the notes and warrants offering, approximately $73.1 million of the net proceeds will be deposited in a pledge account and used to purchase U.S. government securities to secure the payment of the first four scheduled interest payments on the senior notes. We anticipate using our cash on hand, together with the net proceeds of this offering and, if completed, the available net proceeds of the concurrent notes and warrants offering, after establishing the required interest reserve on the senior notes, for deployment and commercialization of our network and for other general corporate purposes, principally working capital, funding our operating losses and capital expenditures. We believe that these cash resources will be sufficient to fund the deployment of our network through its second phase. However, the completion of this offering is not contingent upon the completion of the concurrent notes and warrants offering, and we cannot assure you that we will be able to complete the notes and warrants offering. Moreover, we will need additional funds to complete the third phase of our network deployment. Although it is not our current intention to do so, we may decide to use a portion of our cash resources to acquire licensed spectrum or to license, acquire or invest in new products, technologies or businesses that we consider complementary to our business. Our board of directors and management will have significant flexibility in applying the net proceeds of this offering. Pending these uses, we will invest the net proceeds of this offering in high-quality, short-term, interest-bearing securities. PRICE RANGE OF COMMON STOCK Our common stock is quoted on the Nasdaq National Market under the symbol "MCOM." The following table shows the intraday high and low sale prices per share of our common stock as reported on the Nasdaq National Market for the periods indicated:
HIGH LOW ------- ------ FISCAL YEAR 1998 First Quarter............................................... $ 13.25 $ 8.19 Second Quarter.............................................. 12.63 8.25 Third Quarter............................................... 10.50 4.78 Fourth Quarter.............................................. 8.75 3.00 FISCAL YEAR 1999 First Quarter............................................... $ 9.44 $ 5.00 Second Quarter.............................................. 20.19 6.50 Third Quarter............................................... 56.50 19.38 Fourth Quarter.............................................. 104.50 21.88 FISCAL YEAR 2000 First Quarter (through February 1, 2000).................... $109.50 $67.75
S-24 27 On February 1, 2000, the last reported sale price of our common stock on the Nasdaq National Market was $89.94 per share. As of December 31, 1999, there were 414 holders of record of our common stock. DIVIDEND POLICY The holders of the 60,000,000 shares of our outstanding preferred stock, which were originally issued on November 15, 1999, have the right to receive cumulative dividends payable, at our option, in cash or additional shares of preferred stock, at the annual rate of $.65 per share, until November 15, 2002. We currently expect to pay the dividends in cash. We have not declared or paid any cash dividends on our common stock. Other than the payment of dividends on the shares of preferred stock, we currently intend to retain any future earnings to finance the growth and development of our business, and we do not intend to pay any cash dividends on our common stock in the foreseeable future. Moreover, the terms of our outstanding preferred stock restrict, and the covenants we expect will be contained in the notes we are offering concurrently will restrict, our ability to pay cash dividends on our common stock. Subject to these restrictions, future dividends, if any, will be determined by our board of directors. CAPITALIZATION The table below shows our capitalization as of September 30, 1999. The pro forma data show our capitalization as of September 30, 1999, after giving effect to: - our sale in November 1999 of 60,000,000 shares of our preferred stock for gross proceeds of $600 million; - our purchase in November 1999 for $5 million of the minority interest in our former joint venture serving Washington, D.C.; - our repayment to Vulcan Ventures in November 1999 of a line of credit and a bridge loan, aggregating $60.5 million, including accrued interest, of which $50 million, plus accrued interest, was outstanding at September 30, 1999; and - the conversion into 3,064,963 shares of our common stock of $44.6 million aggregate principal amount of our remaining convertible notes. The pro forma as adjusted data show our capitalization on the same pro forma basis, as adjusted to give effect to: - the sale of 5,000,000 shares of common stock in this offering, at the public offering price of $87.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses; and - the sale of $300 million aggregate principal amount of our 13% senior notes due 2010, together with warrants to purchase an aggregate of 1,425,000 shares of our common stock at an initial exercise price of $87.00 per share, which we are offering in a separate, concurrent public offering. We estimate that the available net proceeds from the sale of these notes and warrants, after deducting underwriting discounts and commissions and establishing the required interest reserve on the senior notes, will be approximately $218.7 million. The portion of the net proceeds used to fund the required interest reserve will be treated as a restricted investment on our balance sheet. As of September 30, 1999, on an actual and pro forma basis, S-25 28 we had no restricted cash or restricted investments. The completion of this offering is not contingent upon the completion of the concurrent notes and warrants offering, and we cannot assure you that we will be able to complete the notes and warrants offering. The outstanding share information in the table below excludes: - 3,514,974 shares of common stock reserved for issuance under our stock option and stock purchase plans at September 30, 1999, of which 3,202,700 shares were subject to outstanding options with a weighted average exercise price of $8.13 per share; - 1,600,000 additional shares of common stock reserved for issuance under our stock option and stock purchase plans subsequent to September 30, 1999; - a warrant to purchase 150,000 shares of common stock at $7.50 per share, which was exercised on a net basis in November 1999, resulting in the issuance of 118,197 shares of common stock; and - approximately 1,425,000 shares of common stock issuable upon exercise of warrants that we expect to issue together with our 13% senior notes due 2010 in our concurrent notes and warrants offering.
AS OF SEPTEMBER 30, 1999 ---------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ---------- ---------- ------------ (IN THOUSANDS EXCEPT SHARE INFORMATION) Cash, cash equivalents and short-term investments...................................... $ 21,653 $ 539,287 $1,169,215 Restricted investments............................. -- -- 73,077 ========= ========= ========== Short-term debt.................................... $ 20,155 $ 155 $ 155 ========= ========= ========== Long-term debt: 8% convertible subordinated notes due 2003....... $ 44,595 -- -- 13% senior notes due 2010........................ -- -- 236,382 Other long-term obligations...................... 30,594 594 594 Minority interest.................................. 5,184 -- -- Redeemable convertible preferred stock, $0.001 par value; 72,000,000 shares authorized; no shares issued or outstanding, actual; 60,000,000 shares issued and outstanding, pro forma and as adjusted......................................... -- 573,150 573,150 Stockholders' equity (deficit): Preferred stock, $0.001 par value; 8,000,000 shares authorized; no shares issued or outstanding................................... -- -- -- Common stock, $0.001 par value; 150,000,000 shares authorized; 21,099,247 shares issued and outstanding, actual; 24,164,210 shares issued and outstanding, pro forma; 29,164,210 shares issued and outstanding, as adjusted.... 21 24 29 Additional paid-in capital....................... 206,541 283,023 757,891 Accumulated deficit.............................. (281,690) (313,396) (313,396) --------- --------- ---------- Total stockholders' equity (deficit)............. (75,128) (30,349) 444,524 --------- --------- ---------- Total capitalization..................... $ 5,245 $ 543,395 $1,254,650 ========= ========= ==========
S-26 29 DILUTION The pro forma net tangible book value attributable to our common stock, after deducting the liquidation preference of our preferred stock, on September 30, 1999 was a deficit of approximately $59.6 million, or $2.47 per share. Our pro forma net tangible book value is determined by subtracting our total liabilities from our net tangible assets, after giving effect to: - our sale in November 1999 of 60,000,000 shares of redeemable convertible preferred stock for gross proceeds of $600 million; - our purchase in November 1999 for $5 million of the minority interest in our former joint venture serving Washington, D.C.; - our repayment to Vulcan Ventures in November 1999 of a line of credit and a bridge loan, aggregating $60.5 million, including accrued interest, of which $50 million, plus accrued interest, was outstanding as of September 30, 1999; and - the conversion into 3,064,963 shares of our common stock of $44.6 million aggregate principal amount of our remaining convertible notes. After giving effect to the sale of the 5,000,000 shares of common stock we are selling in this offering at the public offering price of $87.00 per share, the pro forma net tangible book value attributable to our common stock would have been approximately $351.7 million, or $12.06 per share. This represents an immediate increase in net tangible book value of $14.53 per share to existing holders of common stock and an immediate dilution in net tangible book value of $74.94 per share to new investors purchasing shares in this offering. The following table illustrates this dilution per share: Public offering price....................................... $87.00 Pro forma net tangible book value before this offering.... $(2.47) Increase attributable to new investors.................... 14.53 ------ Pro forma net tangible book value after this offering....... 12.06 ------ Dilution to new investors................................... $74.94 ======
S-27 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We currently derive substantially all of our revenues from subscriptions paid to us by users of our current Ricochet service, which we offer in a limited number of markets, and from the sale of customer-owned networks and related products to companies primarily engaged in utility businesses. Since 1998, we have concentrated our efforts primarily on completing the development and testing of the technology necessary to deliver our high-speed service, acquiring rights-of-way and other rights necessary for us to deploy our high-speed network, establishing manufacturing relationships for network components and wireless modems and supporting the subscribers to our current Ricochet service. After we launch our high-speed service, planned to occur during the late summer of 2000, we expect to derive substantially all of our revenues from subscription fees paid to us by channel partners, which will resell our service directly to their customers. In connection with the launch of our high-speed service, we expect to sell our existing subscriber accounts to one or more of our channel partners, and we will curtail our business operations related to our current Ricochet service. Historically, we have generated a significant portion of our revenues from sales of customer-owned networks and related products, known as Utilinet, to utility companies. We do not expect Utilinet to be a significant source of revenues in the future. We have included our historical financial statements and a discussion of our historical results of operations in the documents incorporated by reference in the prospectus to which this prospectus supplement relates. Because our historical financial results do not reflect our business as we anticipate it will develop, we believe those results and the related discussion may be of limited value in understanding our current business plan. Accordingly, in the following discussion, we analyze our expected sources of revenues and our expected operating expenses as we commence the deployment of our high-speed network and the launch of our high-speed service. Prospective investors should note, however, that we have a history of net losses and that we expect those net losses to continue for the foreseeable future. We cannot assure you that, as a result of deploying our high-speed network and launching our high-speed service, we will be able to achieve or sustain profitability. REVENUES SERVICE REVENUES. In the future, we expect to derive substantially all of our revenues from subscription fees paid to us by channel partners. We anticipate that our channel partners will pay us subscription fees based on flat rates for each user they enroll for our service. We will require each of our channel partners to charge its subscribers a flat rate for use of our service, although each channel partner will set the particular rate it charges its customers. We currently have one channel partner relationship. In June 1999, MCI WorldCom entered into an agreement with us to sell our high-speed service to its customers. Under that agreement, MCI WorldCom has agreed to pay us a per-subscriber fee, subject to an agreed minimum revenue level of at least $388 million over the five years following the launch of our service, assuming that our deployment schedule is not delayed, that we place our network into service on schedule and that we meet quality-of-service and network performance standards. Subject to these limitations, we currently S-28 31 expect MCI WorldCom to pay us the following minimum amounts during the first five years after we launch our service: First year....................................... $ 5.6 million Second year...................................... 40.6 million Third year....................................... 83.6 million Fourth year...................................... 117.4 million Fifth year....................................... 141.0 million
Notwithstanding the foregoing, if MCI WorldCom's sales efforts result in fewer subscribers than MCI WorldCom has agreed contractually to provide, but the number of subscribers provided by MCI WorldCom and its authorized resellers nevertheless represent more than a specified percentage of our total users, MCI WorldCom will pay us only the greater of a per-subscriber rate for each of its subscribers or the subscription fees we receive from all of our other channel partners, which could be substantially less than the minimum revenues we currently expect from MCI WorldCom. Accordingly, our ability to achieve the minimum revenue levels we expect from our agreement with MCI WorldCom may depend on our ability to enter into channel agreements with one or more large channel partners that can successfully sell subscriptions to our service so that subscribers provided by MCI WorldCom and its resellers represent less than the threshold percentage of our total users. In addition, if our deployment schedule is delayed or if we fail to meet deployment schedule deadlines or fail to comply with quality-of-service standards relating to data transmission performance, network availability, coverage and latency, ease of use and size of modems, all as specified in our agreement, MCI WorldCom may delay or reduce its minimum payments to us or, in the case of a deployment delay in excess of 12 months, may terminate the contract. PRODUCT ROYALTY REVENUES. As part of our manufacturing agreements with Sierra Wireless Data, Inc. and Novatel Wireless, Inc., which are developing wireless personal computer card modems for us, we have licensed some of our technology to them on a non-exclusive basis. We expect to receive royalty revenues from these and potentially other manufacturers, for the sale of modems or other products that incorporate the licensed technology. We do not expect royalty revenues to be a substantial portion of our total revenues. COSTS AND EXPENSES We expect our operating expenses to increase significantly from historical levels and to exceed revenues for the foreseeable future as we deploy our high-speed network and launch our high-speed service. Our principal operating expenses will consist of cost of service revenues, cost of product revenues, research and development and selling, general and administrative expenses. COST OF SERVICE REVENUES. Cost of service revenues consists primarily of network operations costs, real estate management costs and depreciation expense. Network operations costs include the costs associated with the field managers, engineers and technicians who will operate and maintain our high-speed network, as well as the costs associated with field offices we will maintain, including our network operations centers. We expect our personnel costs will increase significantly in the future as the scope of our operations increases. Network operations costs will also include the telecommunications costs we will incur to transmit data between our wired access points and network interface facilities and the Internet. We expect these costs to increase significantly as we deploy our high-speed network. Real estate management costs include the costs associated with the maintenance of lease agreements for our wired access points and network interface facilities and the ongoing rental payments for these sites. At December 31, 1999, we had future minimum rental commitments under S-29 32 these agreements of approximately $2.7 million per year. Our current lease agreements represent only a small portion of the lease agreements we will require to deploy our network. We expect rental payments to increase significantly as we enter into additional leases in the first half of 2000 and thereafter to support the widespread deployment of our high-speed network. Real estate management costs also consist of the internal and external labor costs associated with maintaining right-of-way and other real estate-related agreements in the markets where our network is currently deployed. As we commercially launch our high-speed service in each market, we will begin depreciating the network equipment and other capitalized costs associated with building our network infrastructure. Our capitalized costs represent costs incurred in designing the network, site acquisition, zoning, construction and installation of equipment. We will depreciate our capitalized network costs over a useful life of three to five years, depending on the particular asset being depreciated. We expect our capitalized costs to increase significantly in 2000 and 2001 as we complete the deployment of our network. Accordingly, depreciation expense will increase rapidly over the next several years. COST OF PRODUCT REVENUES. Cost of product revenues consists primarily of the inventory and manufacturing costs associated with modem and Utilinet product sales. We expect cost of product revenues to increase in 2000 as we sell modem inventory to MCI WorldCom or other channel partners, which, in turn, will sell these modems to new subscribers to our high-speed service. After 2000, we expect cost of product revenues to decrease as our channel partners begin to purchase modems directly from our licensed third-party manufacturers. RESEARCH AND DEVELOPMENT. Research and development costs include the costs incurred to develop our network technology and subscriber modems, as well as to obtain rights-of-way and related site agreements in markets where we plan to offer service. At December 31, 1999, we had outstanding commitments of approximately $5.2 million to third parties performing services associated with acquiring rights-of-way and related interests in real estate in new markets, the substantial majority of which we expect to spend in 2000. We plan to continue to spend a substantial amount on the development of our networking products to reduce the cost of our system components, increase the speed and performance of our services, develop additional applications for our services and to continue to improve and upgrade our network and service to address the emerging demands for mobile data access. As a result, we expect that research and development costs will continue to increase significantly in absolute dollars for the foreseeable future. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses include our corporate overhead and the costs associated with our efforts to obtain and support our channel partners, promote the Ricochet brand and our high-speed service, and develop and implement our marketing strategy for our service and modems. We expect these costs to increase significantly from historical levels as we implement our planned advertising campaign related to the launch of the various phases of our high-speed service. We expect to spend more than $50 million on sales and marketing efforts in 2000 and substantially more in 2001. We also expect to continue to expand our corporate and administrative infrastructure to support our planned growth. INTEREST INCOME AND INTEREST EXPENSE INTEREST INCOME. As a result of the November 1999 sale of our preferred stock for net proceeds of $573.2 million, and after completion of this offering and the concurrent notes and warrants offering, we will have substantial cash on hand. We expect to use these cash resources to fund the deployment of our network and to fund operating losses and working capital requirements through at least the first two phases of our network deployment. Pending these uses, we will invest this cash in high-quality, short-term, interest-bearing securities. Accordingly, we initially expect to generate a S-30 33 substantial amount of interest income, although this interest income will decline rapidly over time as we use this cash. INTEREST EXPENSE. Upon completion of our concurrent notes and warrants offering, we will incur a substantial amount of indebtedness. The senior notes will require semi-annual cash interest payments commencing August 15, 2000. We will deposit approximately $73.1 million of the net proceeds from the sale of the senior notes in a pledge account to secure the first four interest payments on these securities. We will record a substantial expense, a portion of which will be non-cash, for interest on these obligations. If we incur additional debt in the future to fund our expansion plans, our interest costs will increase. PREFERRED STOCK DIVIDENDS In November 1999, we issued 60,000,000 shares of preferred stock to Vulcan Ventures and MCI WorldCom for gross proceeds of $600 million. Each share of preferred stock bears a cumulative dividend at the rate of $.65 per year for the first three years after issuance, which we may pay in cash or in additional shares of preferred stock. We currently expect to pay dividends on the preferred stock in cash. Because the preferred stock sold to Vulcan Ventures is immediately convertible into common stock at the holder's option at a conversion price of $10.00 per share, which was below $11.06, the per share closing price of our common stock on the date immediately prior to our execution of the preferred stock purchase agreement, we will record an additional dividend of $31.8 million in the fourth quarter of 1999 to reflect the beneficial conversion privilege associated with this series of preferred stock. The preferred stock issued to MCI WorldCom is also deemed to have been issued with a beneficial conversion privilege. However, that series of preferred stock does not begin to become convertible into common stock at the holder's option until May 2002. As a result, we will amortize that discount, beginning in 1999, over the 48-month period during which this series of preferred stock becomes convertible into common stock at the holder's option. Accordingly, for both series of preferred stock in the aggregate, we will record preferred stock dividends in addition to our cash dividend on the preferred stock as follows: 1999.............................................. $33.2 million 2000.............................................. 10.1 million 2001.............................................. 10.1 million 2002.............................................. 7.8 million 2003.............................................. 2.6 million
NET INCOME (LOSS) AVAILABLE TO STOCKHOLDERS As a result of the foregoing, we expect to generate substantial net losses to common stockholders for the foreseeable future. See "Risk Factors -- We expect to continue to generate losses." LIQUIDITY AND CAPITAL RESOURCES Our principal uses of cash for the foreseeable future will be to fund the deployment of our high-speed network, to fund operating losses and to pay interest on our debt securities, following completion of our concurrent notes and warrants offering, and dividends on our preferred stock. Based on our current projections, we believe that, in addition to the funds currently on hand, we will require additional cash resources of approximately $1 billion to enable us to complete the three-phase deployment of our network, as well as for the other purposes described above. We estimate that approximately $703.0 million of these required resources will be funded from the net proceeds of this offering and the estimated net proceeds of the concurrent notes and warrants offering. Accordingly, S-31 34 based on our current projections, we believe that our cash, cash equivalents and short-term investments of approximately $500 million as of December 31, 1999, together with the net proceeds of this offering and the anticipated available net proceeds of the concurrent notes and warrants offering, will be sufficient to fund the first two phases of our network deployment. However, the completion of this offering is not contingent upon the completion of the concurrent notes and warrants offering, and we cannot assure you that we will be able to complete the notes and warrants offering. Moreover, we will need additional funds to complete the third phase of our network deployment, and the funds we may actually require to complete any phase of the deployment may vary materially from our estimates. In addition, we could incur unanticipated costs or be required to alter our plans in order to respond to changes in competitive or other market conditions, which could require us to raise additional capital sooner than we expect. Further, although it is not our current intention to do so, we may decide to use a portion of our cash resources to acquire licensed spectrum or to license, acquire or invest in new products, technologies or businesses that we consider complementary to our business. We cannot assure you that the additional capital we will require to complete the third phase of our network deployment or for these other purposes will be available on commercially reasonable terms or at all. If we are unable to secure additional financing as necessary, we may need to delay or curtail our expansion plans. See "Risk Factors -- We will require significant additional capital in the future to fund our continuing development, deployment and marketing of our high-speed network and service" and "-- We will have a substantial amount of debt, which could adversely affect our business, financial condition and results of operations." Our current and future operations will require substantial capital investments for the purchase of our network equipment, which consists primarily of network radios, wired access points and network interface facilities. Significant labor costs associated with deploying our network equipment include design of the network, site acquisition, zoning, construction and installation of equipment. In July 1999, we entered into an agreement with Sanmina Corporation to manufacture our poletop radios and network radios installed at wired access points. In October 1999, we entered into agreements with Wireless Facilities, Inc., General Dynamics Worldwide Telecommunications Systems and Whalen & Company to provide us with expertise and personnel to assist with the deployment of our network. At December 31, 1999, we had outstanding commitments to purchase approximately $219 million of network equipment and related labor from these suppliers. We also expect to incur significant expenditures to procure modems. We have agreed to purchase 47,700 modems from our current modem supplier, Alps Electric (USA), Inc., in 2000, representing a commitment of approximately $20 million. We have recently entered into agreements with two additional modem suppliers. We have also recently entered into agreements with Sierra Wireless and Novatel to develop and manufacture custom personal computer card modems. We have agreed with both Sierra Wireless and Novatel to purchase a minimum of 150,000 units in the first year of deliveries from each, representing a total commitment of approximately $68 million. We anticipate that deliveries from Alps will begin during the second quarter of 2000 and deliveries from Sierra Wireless and Novatel will begin in early 2001. In December 1999, we called our $44.6 million aggregate principal amount of convertible notes due 2003 for redemption on January 10, 2000. All of the note holders converted their notes into shares of our common stock at a conversion price of $14.55 per share prior to the redemption date. As a result of the conversion, we issued an aggregate of 3,064,963 shares of our common stock to the former convertible note holders. The preferred stock we issued to MCI WorldCom and Vulcan Ventures in November 1999 carries a 6.5% dividend payable annually for three years and no dividend thereafter. As a result, in December 1999, we paid to the preferred stockholders cash dividends totaling $3.2 million, representing the pro rata portion of the annual dividend accrued since the date of initial issuance of S-32 35 the shares. We expect to pay cash dividends of approximately $39 million in both 2000 and 2001 and $37 million in 2002 on our preferred stock. Assuming completion of the concurrent notes and warrants offering, we will have outstanding $300 million aggregate principal amount of 13% senior notes due 2010, which will require semi-annual cash interest payments of $19.5 million, commencing August 15, 2000. We will deposit approximately $73.1 million of the net proceeds from the sale of the senior notes in a pledge account to fund an interest reserve to secure the payment of the first four semi-annual cash interest payments on these notes. S-33 36 BUSINESS OVERVIEW We are a leading provider of mobile wireless data access to corporate networks and the Internet. We have designed our new high-speed service, marketed under the Ricochet brand name, to meet the needs of the growing number of professionals who require full access to their corporate networks and the Internet while away from the office. Our service will provide these mobile professionals with higher speed access to data than any other mobile wireless technology commercially available today. Our service will also appeal to consumers who desire high-speed mobile access to the Internet. Simply by connecting a wireless modem to a laptop computer or other portable electronic device, our users can access their corporate networks and the Internet whenever they want and wherever they are within our service areas, just as they would with a wired modem. Our users pay only a flat fee for our service, unlike many other remote access services. Our technology enables users to replicate wirelessly the look and feel of their desktop computers, providing them with the following features customarily associated with working on a desktop computer at the office: - ALWAYS ON. Our technology allows users to connect to their corporate networks and the Internet without a lengthy dial-up procedure and to remain connected as long as their computers are on. - HIGH-SPEED ACCESS. During the late summer of 2000, we expect to offer average downstream data transmission speeds greater than 128 kilobits per second, approximately two to four times faster than most remote wired connections and approximately seven to 14 times faster than most remote mobile wireless connections commercially available today. - SECURE DATA TRANSMISSIONS. Our frequency-hopping, spread spectrum wireless technology, combined with optional encryption, makes it very difficult for an unauthorized user to intercept data transmitted over our network. - RELIABLE SERVICE. Our packet-switched technology routes data around busy or nonfunctioning network radios, enabling multiple users to share our network capacity and virtually eliminating busy signals or the inability to connect to the network because of capacity constraints. We believe many mobile professionals and consumers will find our high-speed, unlimited network access service to provide a valuable capability, whether used alone or as a complement to the more limited data access services offered by mobile telephone providers. In November 1999, MCI WorldCom, and Vulcan Ventures, the private investment vehicle of Microsoft Corporation co-founder Paul Allen, each purchased shares of our preferred stock for $300 million in cash, providing us with funds to commence the deployment of our high-speed network. In addition, MCI WorldCom has entered into an agreement with us to sell subscriptions to our service and has agreed to pay us at least $388 million in revenue over the five years following the launch of our service, subject to the timely deployment of our network, our ability to meet agreed performance standards and our ability to attract a significant number of subscribers through other channel partners. This relationship provides us with immediate access to a large and sophisticated sales force that has experience selling products and services to businesses and consumers in our target market. We plan to deploy our high-speed network in three phases. We plan to launch our high-speed service during the late summer of 2000, and we expect that our initial service areas will cover a total S-34 37 population of approximately 62 million. After the third phase of our deployment, which we plan to complete by the end of the summer of 2001, we expect our service areas to cover a cumulative population of at least 100 million. When we launch our service, we plan to use channel partners to sell subscriptions to our service, bill our users and provide the first level of customer support. Currently, we have entered into an agreement with one channel partner, MCI WorldCom. We intend to co-brand our service with MCI WorldCom at our expense. We believe that co-branding our service with MCI WorldCom, together with our own independent promotional activities, will help us significantly increase user awareness of our brand and will make us a more attractive service for other potential channel partners. We are seeking to enter into agreements with other channel partners that, like MCI WorldCom, have experience selling products and services to businesses and consumers in our target market. Potential channel partners include local telephone companies, wireless carriers, digital subscriber line or other high-speed Internet access providers, laptop computer and other portable electronic device manufacturers and system integrators or networking consulting firms that recommend large-scale purchases of access services such as ours to their customers. MARKET OPPORTUNITY We believe the growing demand by organizations and individuals for mobile access to corporate networks and the Internet is driven primarily by four trends: - GROWTH IN THE NUMBER OF LAPTOP COMPUTERS AND SMART HANDHELD DEVICES. Laptop computers and smart handheld devices are becoming increasingly prevalent business tools to retrieve information from corporate networks and the Internet. In a 1999 study, IDC projected that unit shipments of portable computers and smart handheld devices in the U.S. will increase from 12 million in 1999 to 25 million in 2003, representing a compound annual growth rate of 21%. - GROWTH IN THE NUMBER OF INTERNET USERS. The number of workers and consumers making use of the Internet continues to grow rapidly. According to IDC, the number of Internet users in the U.S. is projected to increase from 70 million in 1998 to 179 million in 2003, representing a compound annual growth rate of 21%. - INCREASED IMPORTANCE OF NETWORK ACCESS. Corporate networks have become an increasingly important business tool, enabling workers across an organization to retrieve important data quickly and efficiently and enabling businesses to communicate with each other and integrate their operations more productively. IDC has projected that, in 1999, 40% of computer users worldwide working for mid-sized and large enterprise sites would remotely access corporate local area networks, or LANs. Increasingly, computer users are reliant on the information and communications capabilities provided by these networks, and their productivity can decline when users do not have network access. The emergence of e-mail as a major communications medium is an example of this trend. For example, the Yankee Group, a market research firm, estimates that mobile professionals use e-mail six to seven times more often than voicemail. - GROWTH IN NUMBER OF MOBILE WORKERS. The workforce is becoming increasingly mobile. IDC has projected that, by 2003, 47 million workers in the U.S. will spend at least 20% of their time away from their offices. We believe that significant improvements in the functions performed by, and significant declines in the prices of, laptop computers, which in many cases today provide users with processing speed and functions comparable to those provided by desktop computers, have contributed to the growth in the number of mobile workers. As the S-35 38 number of mobile workers continues to rise, we believe that these employees will demand high-speed access to information while outside of the office or travelling. We believe the increasing importance of access to corporate networks and the Internet and the dramatic growth in the number of mobile workers and other users of other portable electronic devices are creating significant growth in demand for mobile network access. As a result, we believe there is a large and rapidly growing market opportunity for low-cost providers of high-speed, reliable, mobile wireless data access. OUR SOLUTION AND COMPETITIVE ADVANTAGES Our high-speed service will provide users with secure and reliable high-speed mobile access to corporate networks and the Internet for a flat fee, regardless of the level of usage. We believe our competitive strengths effectively address the growing demand for high-speed mobile wireless data access through the following combination of benefits: HIGHER SPEED ACCESS TO DATA THAN ANY OTHER REMOTE MOBILE WIRELESS TECHNOLOGY COMMERCIALLY AVAILABLE TODAY. When we launch our high-speed service, expected during the late summer of 2000, we believe our network will provide higher effective data transfer rates than any other remote mobile wireless data access service commercially available today. We will provide users with an average downstream data transfer rate greater than 128 kilobits per second, which is faster than today's high-speed integrated service digital network, or ISDN, telephone lines. Our high-speed service will provide users with an average upstream data transfer rate of more than 50 kilobits per second, which is faster than the average data transmission rate of 33 kilobits per second typical of commonly available "56k" wired modems. We intend to continue to spend significantly on research and development so that our network speed continues to exceed those of competing services and so that our products and service continue to remain in the forefront of high-speed wireless data access technologies. LOOK AND FEEL OF A DESKTOP COMPUTER. Our target users are mobile workers who require full access to corporate resources from remote locations. Because of our fast data transfer speeds, we believe that a user working on a laptop computer connected to our network will perceive a substantial advantage over any other remote mobile wireless data access technology commercially available today. Moreover, we will offer mobile workers the ability to connect to their corporate networks and the Internet from any place within our service area, without the inconvenience of having first to locate a telephone modem dataport to establish a remote, and generally slower, connection to e-mail, databases and file and facsimile transmission servers. Furthermore, we have designed our service for laptop computers and other portable electronic devices with relatively large screen areas and relatively large storage capacities to enable our users to better emulate the look, feel and functionality of their desktop computers. By contrast, although data-enabled wireless telephones may offer a convenient means of engaging in simple tasks, such as checking stock prices or sports scores, they are not suitable for displaying data-rich graphics or creating and editing documents, functions frequently performed at desktop computers. Accordingly, we believe that we offer a service that is complementary to, rather than competitive with, data-enabled wireless telephones. PACKET-SWITCHED TECHNOLOGY. We believe that data networks, such as ours, that utilize packet-switched technology offer a number of advantages over circuit-switched 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 network software sends each discrete packet through the network via a uniquely selected path, with the software reassembling the packets into their proper order when they arrive at their destination. By allowing multiple users to share our network capacity, this technology can reduce network congestion and S-36 39 virtually eliminate busy signals. In addition, because our network does not require a dedicated connection between modems at each end of a circuit, users utilize our network capacity only when the network actually transmits data packets. A circuit-switched network, in contrast, requires a dedicated connection between modems at each end of a circuit, thus limiting network capacity to the number of circuits available and modems installed. Moreover, in a circuit-switched network, once the user establishes a connection, neither the modem nor the circuit in use 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 connections available. Further, many circuit-switched networks will "time out" a connection after the user has been connected for a specified time in order to create capacity for other users. Because our network uses packet-switched technology, our users can remain online indefinitely. In addition, the equipment required to construct our network is substantially less expensive than circuit-switched technology employed by traditional wireless carriers. SECURITY AND RELIABILITY. In addition to the reliability benefits that result from using packet-switched technology, our network's use of frequency-hopping, spread spectrum technology, combined with optional encryption, makes unauthorized interception of data packets extremely difficult and provides greater security than is generally available from other wired and wireless data communications services. Our very low equipment failure rate of only 0.2% contributes to the reliability of our service. Moreover, if a network radio is busy or not functioning properly, our network routes data along a different path to its destination within the network, minimizing apparent network disruption or reduced data transfer rates to our users. By providing secure and reliable access to corporate networks, our service should appeal to many organizations with mobile workforces. ACCESS TO MCI WORLDCOM'S LARGE AND SOPHISTICATED SALES FORCE. Under our agreement with MCI WorldCom, MCI WorldCom has agreed to market and sell subscriptions to our high-speed service. This relationship provides us with the immediate benefit of support from a large and sophisticated sales force that has experience selling products and services to businesses and consumers in our target market. Moreover, MCI WorldCom has indicated its intent to market and sell our high-speed service through multiple sales channels that have substantial experience with the needs of network and Internet users and users of other mobile access technologies. In addition, MCI WorldCom has committed to provide customer support to the users of our service. SCALABLE AND COST-EFFECTIVE NETWORK. Our network architecture will allow us to react quickly to expand our network to respond to positive consumer demand for our service. We can increase network coverage and capacity and reduce system congestion quickly and inexpensively by installing additional network or wired access point radios in areas of high use. Moreover, our network relies primarily on unlicensed radio frequency spectrum that we are able to use without paying any license fee or other similar acquisition cost. OUR STRATEGY Our objective is to be the leading provider of high-speed mobile wireless data access to users of laptop computers and other portable electronic devices. The key elements of our strategy are as follows: RAPIDLY DEPLOY A NATIONAL NETWORK. We intend to deploy our network in three phases. We plan to launch our high-speed service during the late summer of 2000, and we expect that our initial service areas will cover a total population of approximately 62 million. After the third phase of our deployment, which we plan to complete by the end of the summer of 2001, we expect our network to cover a cumulative population of at least 100 million in the U.S. Understanding that time-to-market S-37 40 is a critical competitive advantage, we have already obtained a substantial portion of the approvals for municipal rights-of-way necessary to meet our network deployment objectives for 2000. TARGET MOBILE PROFESSIONALS. Our advertising and marketing will focus on mobile professionals, particularly those who already use laptop computers or other portable electronic devices, and other people and businesses that are likely to require mobile access to information. Mobile workers, such as salespeople, consultants, lawyers and accountants, often require the flexibility to work outside of their offices and desire to maintain access to corporate networks and the Internet. CAPITALIZE ON THE DISTRIBUTION STRENGTH OF A SELECT GROUP OF CHANNEL PARTNERS. We intend to increase the number of users of our service through sales efforts by MCI WorldCom and other potential channel partners. We do not intend to sell our high-speed service or provide customer support directly to users. Instead, we will rely on our channel partners, which we expect will be organizations like MCI WorldCom with significant marketing and customer support experience, to generate demand for our service. These partners will market and sell subscriptions to our service to their customers on a co-branded basis. In selecting channel partners, we will focus on organizations with experience selling products and services to businesses and consumers in our target market. Potential channel partners include local telephone companies, wireless carriers, digital subscriber line or other high-speed Internet access providers, laptop computer and other portable electronic device manufacturers and system integrators or networking consulting firms that recommend large-scale purchases of access services such as ours to their customers. We currently are in discussions with a number of potential channel partners, with a goal of entering into agreements with additional channel partners in the second quarter of 2000. BUILD EQUITY IN THE RICOCHET BRAND. We intend to promote the Ricochet brand aggressively, seeking to gain widespread business and consumer recognition of our brand, thereby building significant commercial value for our company. Our brand awareness and brand identity strategy will focus on the mobile access benefits of our high-speed network, with the objective of making the Ricochet brand synonymous with speed, reliability and security. We plan to promote the Ricochet brand through co-branding arrangements that will require our channel partners to display the Ricochet name and logo in addition to their own in promotional and other materials they use to offer our service, and to display our name on the Ricochet modem. We also intend to engage in corporate promotional activity, including advertising in traditional media and on the Internet, designed to increase business and consumer awareness of the Ricochet brand and our service. We expect to spend over $50 million on sales and marketing efforts in 2000 and substantially more in 2001. MAINTAIN NETWORK PERFORMANCE AND COST ADVANTAGES. We intend to continue our commitment to research and development so that we can continue to offer our users faster data transmission rates on a more cost-effective basis than competing remote mobile wireless data access services. We believe our core technologies -- and particularly our utilization of packet-switched communications and unlicensed portions of the radio frequency spectrum -- will enable us to maintain performance and cost advantages over competing services in the future, as technological advancements increase the standard for data transmission speeds and network performance. Outsourcing some business functions is a key part of our strategy to maintain network performance and cost advantages for our users. We have contracted with several companies to fulfill our manufacturing and network deployment needs, and we plan to continue to utilize other companies to perform these functions in the future. The functions that we have outsourced include manufacturing network radios designed by us, manufacturing the modems used by our users, acquiring municipal rights-of-way and other similar rights necessary to deploy our network, physically installing our network equipment and provisioning the circuits required for our network to connect to the Internet or other corporate networks. We believe that, by outsourcing these functions to organizations for which they are core competencies, we can free our own resources to concentrate on developing positive recognition of the Ricochet brand, S-38 41 recruiting and managing channel partners, managing our network and advancing our core technologies to enhance our network's performance and cost-effectiveness in the future. PURSUE INTERNATIONAL OPPORTUNITIES. To date, we have concentrated almost exclusively on domestic opportunities and have engaged in only limited exploration of international opportunities. However, we intend to pursue opportunities to offer service based on our technologies in markets outside the U.S. We believe that the advantages of our core technologies, and particularly the relatively low deployment cost of our network, should enable us to provide a service that is attractive to customers in other countries that have large populations of knowledge workers. We plan to place greater emphasis on these opportunities after we have launched our domestic high-speed service and are satisfied with its performance. OUR NETWORK AND TECHNOLOGY When we launch our high-speed network, users will be able to connect to our network through wireless modems attached to laptop computers or other portable electronic devices. In the future, we also expect that users will be able to connect to our network through personal computer card modems. Our high-speed network architecture consists of four basic elements: - compact, inexpensive network radios, called poletop radios, which we deploy on streetlights, utility poles and building rooftops in a geographical mesh pattern and which communicate with our users' laptop computers or other portable electronic devices through wireless modems; - wired access points, which we deploy on building rooftops or other locations, many of which also serve as the sites for existing cellular or other wireless base stations and which connect our poletop radios with one of our network interface facilities via high-speed dedicated wired connections; - network interface facilities, which aggregate traffic to and from all wired access points in a market and provide connections to the Internet and other networks; and - our network operations centers, which provide central management of our entire network. Our network utilizes a hardware and software platform based on spread spectrum, frequency-hopping, packet-switched digital radio technology. In a packet-switched network such as ours and the Internet, data are communicated in discrete units, called packets, rather than in a continuous stream. With frequency-hopping radios such as our poletop and wired access point radios, the radios communicate with each other on multiple frequencies, or channels. Each radio changes the channel on which it is communicating frequently in a pattern that is known to the surrounding radios but difficult to predict. This unpredictability results in a high level of security by making interception of data by unauthorized users difficult. It also provides high network reliability, because if a radio encounters interference on any given channel, it automatically switches to another channel. We will incorporate an optional encryption capability for users desiring an additional level of security. Poletop radios are the primary component of our hardware platform, and we deploy them in a geographically dispersed pattern referred to as "mesh" architecture. Our mesh network architecture and proprietary technology for routing data packets across the network enable us to move the data packets along a number of alternative paths, thus allowing packets to be routed around busy or non-functioning radios. We believe that our mesh architecture provides advantages over the more typical network topology, known as the 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 resulting from weak signal strength must generally be addressed by installing another hub, typically a costly and time-consuming process. With our network, we can S-39 42 reduce system congestion and increase network coverage and capacity by installing one or more relatively inexpensive poletop or wired access point radios where needed. Upstream data transmitted from a user's wireless modem travels through one or more poletop radios wirelessly to a wired access point, from which the data is routed over high-speed dedicated wired connections to a network interface facility, where we connect our network directly to the Internet or another network, which in turn delivers the data packet to its destination. Downstream data travels to the user along a similar return route. We typically install our poletop radios at an average density of five radios per square mile and we generally install a wired access point approximately every 11.5 square miles. We have designed our network so that a data packet transmitted by a user typically requires no more than one or two transmissions, if any, from one poletop radio to another before reaching a wired access point. Each wired access point is connected by high-speed dedicated wired connections to one of our network interface facilities. Each network interface facility aggregates traffic to and from all wired access points in a market and connects to the Internet and other networks. Currently, we have agreements with UUNet, a subsidiary of MCI WorldCom, and others to support the exchange of traffic between our wired access points, our network interface facilities, the telecommunications infrastructure and corporate networks and the Internet. Our network architecture is graphically depicted in the following diagram. [Graphic representation of network architecture depicting the transmission of data from a user's wireless modem through our poletop radios and a wired access point and showing that data is then routed over a high-speed dedicated wired connection to a network interface facility, where we connect our network directly to the Internet and corporate networks.] Our network's performance will be monitored and controlled by our network operations center located in Houston, Texas. We intend to open an additional network operations center in S-40 43 Dallas, Texas in the first quarter of 2000. Even though we intend to have each of the two network operations centers monitor and control only fifty percent of our network, each center will have the capability to monitor and control our entire network. Our network will operate in the unlicensed 900 megahertz and 2.4 gigahertz frequency bands of spectrum. We also will operate in the 2.3 gigahertz frequency band pursuant to licenses purchased from the FCC in 1997. These licenses permit us to use the 2.3 gigahertz band 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. This licensed spectrum provides us with the ability to transmit at higher power in those regions and thus greater network coverage with fewer wired access points. In areas not covered by our licensed spectrum, we can achieve the same coverage results by deploying additional wired access points. We will use the 900 megahertz band primarily for transmissions to and from a user's modem to a poletop radio and from a poletop radio to a network radio or wired access point, and the 2.4 gigahertz band primarily for communication between network radios and between poletop radios and wired access points. Wired access points that use the 900 megahertz band and the 2.4 gigahertz band are referred to as industrial, scientific and medical band wired access points, called ISM WAPs. Wired access points that use the 2.3 gigahertz band are referred to as wireless communication service wired access points, or WCS WAPs. We intend to use the 2.3 gigahertz band only for downstream (toward the subscriber) traffic from wired access points to poletop radios and only where we have licenses to use 2.3 gigahertz spectrum and when we cannot route the downstream traffic to the user in one radio hop using the 2.4 gigahertz band. We do not currently intend to use the 2.3 gigahertz band for upstream traffic. Finally, we also provide a traditional dial-in service to enable users travelling outside our service areas to access their corporate networks or the Internet through standard telephone modems. NETWORK DEPLOYMENT We plan to deploy our high-speed network in three phases. We have chosen to deploy our network in areas based on numerous criteria, including the number of laptop computers, population density, Internet usage and other factors. The planned deployment of our network is set forth in the table below. We may, however, modify our deployment plans based on our initial experience with our high-speed service or other factors, such as our relative success in obtaining agreements necessary to deploy our network. S-41 44 RICOCHET NETWORK DEPLOYMENT
PHASE I PHASE II PHASE III ------- -------- --------- METROPOLITAN MARKETS...... Atlanta Baltimore 15+ additional markets Chicago Boston to be determined Dallas/Fort Worth Denver Houston Detroit Los Angeles Kansas City New York City Miami Philadelphia Minneapolis Phoenix St. Louis San Diego Salt Lake City San Francisco Seattle Washington, D.C. EXPECTED LAUNCH DATE...... Late Summer 2000 Early 2001 Summer 2001 CUMULATIVE COVERED POPULATION AFTER COMPLETION.............. 62 million 80 million 100+ million
The deployment process for our network involves: - obtaining agreements permitting us to deploy our poletop radios and wired access points, which include: -- agreements with municipalities, known as right-of-way use agreements, which grant us the right to enter and utilize a municipal right-of-way to deploy our poletop radios, the right to attach our poletop radios to municipally owned property, if any, in the public way and the right to attach our poletop radios to third-party owned property in the public way, such as utility property; -- pole attachment agreements with utility companies or municipalities governing the use of utility poles for the deployment of our poletop radios; -- supply agreements with utility companies governing the supply of electricity to our poletop radios; and -- lease agreements with the owners of buildings or radio towers governing the lease of space for the deployment of our wired access points; - designing the network configuration; - to the extent necessary, acquiring zoning and construction approvals to build or locate wired access points on radio towers or building rooftops; and - acquiring, installing and testing the network. Once we have obtained the necessary agreements and approvals, we expect to be able to install and test the network infrastructure in a market in two to three months. To date, we have obtained right-of-way approvals covering nearly 80% of the population included in the first phase of the deployment of our network. We install most of our poletop radios on street light arms or distribution poles owned by electric utilities, municipalities or other local government entities. In addition, we are required to enter into agreements with municipalities as owners of the rights-of-way in which street lights and distribution S-42 45 poles are located and supply agreements with providers of electricity to power our radios. Typically, the right-of-way agreements have terms of five to 10 years with three five-year renewal options. Many agreements require us to pay an annual right-of-way use fee, sometimes referred to as a franchise fee, to the municipality or other governmental agency that controls the right-of-way. Currently, these franchise fees typically average about 3% of the adjusted gross revenues collected from subscribers with billing addresses located in the municipality covered by the right-of-way agreement. The supply agreements typically have a term of 10 years and require us to pay an annual fee for electricity, which is determined by tariff, if appropriate, or by a private rate agreement and typically averages $25 for our poletop radios. In addition, we are typically required to pay an annual fee of $60 for the use of each street light or other pole to which a poletop radio has been directly attached. In the event we are unable to negotiate site agreements in a timely manner and on commercially reasonable terms or at all, we will seek to obtain sites to deploy radios on commercial buildings or similar structures. While deploying a large area in this manner could be significantly more expensive than installing radios on street lights, we did use this technique on a limited basis in connection with the deployment of our original service to reduce the delays experienced in the deployment process. We are sometimes required to obtain zoning approvals from local municipalities or other governmental entities to build or locate wired access points on radio towers or building rooftops. Zoning restrictions may impose limitations on the amount of electrical load on a rooftop, radio frequency emissions or aesthetic characteristics of our network radios. The zoning process and length of time involved in obtaining approval varies from city to city. We also must negotiate leases for our wired access points, which can take a substantial amount of time. The rate at which we are acquiring these leases has been slower and the cost has been higher than we anticipated. Consequently, we must commit more time, effort and capital resources to acquiring these leases in order to meet our deployment plans. We have entered into several agreements regarding the deployment of our network interface facilities. These agreements have been negotiated with private carriers housing large telecommunications facilities. These agreements typically have five-year terms. In October 1999, we entered into agreements with Wireless Facilities, Inc., General Dynamics Worldwide Telecommunications Systems and Whalen & Company to provide us with expertise and personnel to assist us with the deployment of our network. Wireless Facilities has agreed to assist us with radio frequency engineering related to the physical deployment of the wired access point components of our network. All three companies will be responsible for many of the tasks involved in the deployment of our network wired access points, including assisting us with acquiring sites for our wired access points, obtaining necessary zoning approvals, network architectural and engineering management, construction management and the installation of wired access point services. Our aggressive deployment schedule is critical to the success of our business and involves a number of risks. See "Risk Factors -- We must deploy our high-speed network in a limited time in order to compete effectively," "-- We depend substantially on third parties to deploy our high-speed network on a timely and cost-effective basis," "-- We depend on third parties to develop, assemble and manufacture the modems through which our users access our service" and "-- One of our manufacturers is experiencing shortages in the supply of components for our poletop and network radios and our other manufacturers may experience shortages of supply of components for our modems or other products, which could involve substantial cost and delay and reduce availability of our service." MARKETING, SALES AND CUSTOMER SUPPORT Unless we sign new channel partners by the time we launch our new high-speed service, expected during the late summer of 2000, our service will be available exclusively through our S-43 46 channel partner, MCI WorldCom. MCI WorldCom will market and sell subscriptions to our service and will bill and provide the initial level of customer support for users. We intend to capitalize on the distribution strength, customer support expertise and experience of MCI WorldCom and any other channel partners we may have in selling multiple services, such as long-distance, mobile voice or Internet services, to organizations and individuals. We do not plan to sell subscriptions or provide customer support directly to users. Instead, we will sell subscriptions to, and receive payment from, channel partners on a wholesale basis at flat monthly rates. Under our agreement with MCI WorldCom, MCI WorldCom has agreed to pay us a per-subscriber fee, subject to an agreed minimum revenue level of at least $388 million over the five years following the launch of our service, assuming that we deploy our network on a timely basis and meet quality-of-service and network performance standards. However, in the event that, in any agreement year, MCI WorldCom's sales efforts result in fewer subscribers than MCI WorldCom has agreed contractually to provide, but subscribers provided by MCI WorldCom and its authorized resellers nevertheless represent more than a threshold percentage of our total users, then MCI WorldCom will pay us only the greater of a per-subscriber rate for each of its users or the subscription fees we receive from all of our other channel partners, which could be substantially less than the minimum revenues we currently expect from MCI WorldCom. Accordingly, our ability to achieve the minimum revenue levels we expect from our agreement with MCI WorldCom may depend on our ability to enter into channel agreements with one or more large channel partners that can successfully sell subscriptions to our service so that subscribers provided by MCI WorldCom and its resellers represent less than the threshold percentage of our total users. Further, if our deployment schedule is delayed or if we fail to meet deployment schedule deadlines or fail to comply with quality-of-service standards relating to data transmission performance, network availability, coverage and latency, ease of use and size of modems, all as specified in our agreement, MCI WorldCom may delay or reduce its minimum payments to us or, in the case of a deployment delay in excess of 12 months, may terminate the contract. If we fail to correct any deficiency for sustained periods of time, MCI WorldCom may suspend its obligations to us under the agreement or terminate the agreement. Additionally, under this agreement, we have the right, at our expense, to co-brand our service with MCI WorldCom. With our consent, MCI WorldCom has agreed to display the Ricochet name and logo in all of the promotional and other materials it will use to offer our service to subscribers and to provide us with a six-month rolling forecast of projected new subscribers. In addition, we have agreed to provide sales support to MCI WorldCom's direct sales team. This agreement also contains a "most favored nation" clause, which assures MCI WorldCom no less favorable terms than we grant any other channel partner. The agreement also precludes us and any other channel partners that we may have from marketing our service to three specified entities with which MCI WorldCom may enter into reselling arrangements. Our agreement with MCI WorldCom can be canceled by either party upon 30 days written notice in the event the other party has failed to fulfill its material obligations under the agreement. MCI WorldCom and its affiliates are not prevented under the agreement from supporting competing technologies. We anticipate entering into other non-exclusive agreements containing similar terms with other channel partners, focusing on organizations that have demonstrated skills and experience selling products and services to businesses and consumers in our target market. We are currently in discussions with a number of potential channel partners and are seeking to establish relationships with additional channel partners during the second quarter of 2000. Our ability to achieve commercial success will depend upon the ability of our channel partners to sell subscriptions effectively and to support the users of our service. When we launch our high-speed service, we intend to rely on our channel partners to provide all first level customer support to the users of our service. This level of support requires our channel S-44 47 partners to receive and attempt to fulfill a subscriber's request for customer support. Typically, the provider of this level of customer support would handle all non-network related questions, such as those regarding features of our service, installation or formatting, how the service works or billing questions. We intend to provide all second and third level customer support to the users of our service. Second level customer support would include responding to network-related questions, directed to us by our channel partners' customer support personnel, not by the subscriber directly. Third level customer support would include repairing or modifying our network in response to customer problems. We intend to provide this second and third level support 24 hours a day, seven days a week. In addition to promoting the Ricochet brand through co-branding arrangements with our channel partners, we intend to aggressively promote the Ricochet brand independently. We have recently developed a new Ricochet logo, which appears on the cover of this prospectus supplement, and brand identity focusing on the mobile benefits of our high-speed service, with the objective of making the Ricochet brand synonymous with speed, reliability and security. We have hired an advertising firm and plan to conduct market tests in the second quarter of 2000 and begin an aggressive marketing campaign in the third quarter of 2000. We intend to engage in corporate promotional activity, including advertising in traditional media and on the Internet, designed to increase consumer awareness of the Ricochet brand and our service. We plan to spend more than $50 million on sales and marketing efforts in 2000 and substantially more in 2001. Although we substantially curtailed our marketing and sales activities with respect to our current Ricochet service, that service continues to be available directly to subscribers through our web site, inbound telesales and one reseller. We provide customer support to the approximately 30,000 current Ricochet subscribers Monday through Saturday through an inbound toll-free customer service line. When we have launched our high-speed service in metropolitan markets in which these subscribers are located, we plan to sell these subscriptions to one or more of our channel partners. COMPETITION We face intense competition in the market for mobile wireless data access services targeted at users of laptop computers and other portable electronic devices. The mobile wireless data access market has received increased attention in recent years, and a number of companies have developed or are developing mobile wireless data access services and products using competing technologies. In addition, a large number of companies in diverse industries are expected to enter the market in the future. We believe the principal factors on which companies compete in this market are effective data transmission rate, reliability, network coverage, ease of use and price. Except for our currently limited network coverage, we believe our existing Ricochet service compares favorably to available alternatives with respect to these competitive factors. We believe our high-speed service will compare favorably to available alternatives with respect to all of these competitive factors when our network has been deployed in sufficient metropolitan markets to cover a cumulative population of at least 100 million, as contemplated by our current deployment plan. However, the pace of innovation in the wireless communications industry is rapid, and we cannot be sure that our service will achieve or maintain competitiveness with available alternatives in the future. Our current and anticipated future competitors can be categorized based on the types of communications networks they use to transmit data. These networks include: terrestrial networks that are dedicated to data communications; terrestrial networks designed for cellular telephone service or personal communications services, or PCS; satellite communications networks; and traditional communications networks using wired fixed-point access, as well as future enhancements of other wireless technologies. S-45 48 SERVICES UTILIZING DEDICATED DATA COMMUNICATIONS NETWORKS. Two companies currently offer their subscribers general mobile data access services like ours utilizing terrestrial networks dedicated to data communications that have been operating for many years and are broadly deployed in major metropolitan markets. BellSouth Wireless Data LP offers a service utilizing a network formerly operated under the name RAM Mobile Data, and American Mobile Satellite Corporation offers a service utilizing the ARDIS network originally deployed by International Business Machines Corp. and Motorola, Inc. In addition to these general services, 3Com Corporation in 1999 began offering mobile data access services to users of its Palm VII personal digital assistant utilizing the RAM network. Further, two-way paging companies have begun to offer limited information access services, such as headline news and stock quotes. Based on published reports, we believe the effective data transmission rates available to customers of these services are limited to approximately eight kilobits per second. This limitation constrains the ability of users of these services to engage in relatively data-intensive applications, such as web browsing, file transfers and exchanging e-mail involving graphical or other large attachments. For example, web access for users of the Palm VII product is limited to those web sites that support the "web clipping" software application provided with the Palm VII device. This application permits a Palm VII user to download selected portions of the information available on participating Web sites but does not permit full access to the participating sites or any access to non-participating sites. We believe our high-speed service will be complementary to relatively low-speed services, such as those utilizing the RAM and ARDIS networks, and that many users of wireless data access services will find it valuable to have access to both types of service. Lower-speed services are ideally suited for providing rapid access to limited amounts of data, such as stock quotes or driving directions, while a higher-speed service such as Ricochet is required for effective access to larger amounts of data, such as full web browsing or transmitting e-mail with attachments. SERVICES UTILIZING CELLULAR TELEPHONE AND PCS NETWORKS. Many telecommunications companies that operate terrestrial networks designed to provide cellular telephone or PCS services are offering or have announced plans to offer their customers data communications services utilizing those networks. Subscribers to these services can transmit and receive data using a variety of electronic devices, including conventional mobile telephones functioning as modems and connected to laptop computers or other portable electronic devices, as well as newer mobile telephones with built-in Internet browsing capabilities. These services are or will be based on a number of different communications technologies that vary by network, including cellular digital packet data, or CDPD; code division multiple access, or CDMA; time division multiple access, or TDMA; and global standard mobile, or GSM. Cellular telephone and PCS networks have the advantage of being widely deployed in major metropolitan markets and elsewhere, which enables network operators to offer services that are widely available geographically. To date, however, based on published reports, we believe the effective data transmission rates available to customers of these services have been limited to an average data transmission rate approximately 10 kilobits per second. For this reason, these services are subject to the same limitations as the services based on existing dedicated data communications networks. In addition, the providers of cellular telephone and PCS services have available only a finite amount of licensed radio spectrum and must allocate this spectrum among the various voice and data communications services they elect to make available to their subscribers. The amount of spectrum these service providers will allocate to data communications services is uncertain. SERVICES UTILIZING SATELLITE COMMUNICATIONS NETWORKS. Many companies offer one-way and two-way paging or other data communications services utilizing satellite communications networks alone or in conjunction with terrestrial networks. In addition, Iridium LLC in 1998 began offering voice and paging services on a global basis utilizing its proprietary network of low earth orbiting, or LEO, S-46 49 satellites. Based on published reports, we believe the average data transmission rates offered by these systems are five kilobits per second or less. Due to the power and other requirements associated with transmitting data from the earth to an orbiting satellite and the difficulty of transmitting data directly between a satellite and a user working with a small, mobile device inside a building, we believe it will not be practicable in the foreseeable future for satellite system operators to offer commercial two-way mobile data access service at a competitive price. SERVICES UTILIZING WIRED FIXED-POINT ACCESS. Although not providing wireless mobility, wired fixed-point access to traditional communications networks offers virtually universal geographic coverage and very high potential data transmission rates. For example, commonly available "56k" wired modems that can be used to access the Internet through the public telephone network offer users average effective downstream data transmission rates of up to approximately 40 kilobits per second. In recent years, fixed-point network connections have been made available at an increasing number of locations frequented by visitors using laptop computers or other portable electronic devices. These locations include airports and other transportation hubs, hotels, business office conference rooms, government buildings, and eating and other retail establishments. If this trend toward increasing availability of fixed-point access to traditional communications networks continues, the mobility offered by wireless services such as ours could become less important to users, which would negatively affect our business. This could be true at current effective data transmission rates and would be particularly true if the effective data transmission rates available through fixed-point connections were to increase significantly. This could happen if, for example, it became easy for users at a wide range of commonly-visited locations to gain access to and communicate using services based on digital subscriber line, or DSL, technology. DSL technology enables service providers to offer users effective data transmission rates of 384 kilobits per second and higher. FUTURE ENHANCEMENT OF OTHER WIRELESS TECHNOLOGIES. In addition to Metricom, many other companies are aggressively seeking to develop or enhance the capabilities of their wireless communications technologies with the objective of providing increasingly high-speed wireless data access services. For example, it is widely believed that over the next several years there will be a worldwide evolution of cellular telephone and PCS networks -- whether currently based on GSM, TDMA or CDMA technology -- toward "third generation," or 3G, technologies. These 3G networks, utilizing approaches known as wideband CDMA, or WCDMA, and CDMA2000-3xRTT, are predicted to allow theoretical peak data transmission rates of 384 kilobits per second and average data transmission rates of 128 kilobits per second in many mobile applications and up to 2 megabits per second in some other applications in limited areas. We believe the commercialization of some of these emerging technologies will require access to radio spectrum that has not been allocated to date by the FCC. Prior to deployment of 3G network infrastructure, many networks are anticipated to evolve through intermediate stages involving escalating data transmission rates, including approaches known as high-speed circuit switched data, or HSCSD; general packet radio service, or GPRS; enhanced data rates for GSM evolution, or EDGE; and CDMA2000-1xRTT. In addition, QUALCOMM Incorporated, which developed CDMA technology that is widely used in existing cellular telephone and PCS networks, has developed a CDMA variant known as high data rate, or HDR, which it claims will provide effective data transmission rates comparable to 3G networks and will be commercially deployed as early as 2001. HDR requires the carrier to dedicate a separate channel to data transmission, which could require the carrier to carry fewer voice channels. Based on published information about the way multiple users are expected to share the available data and voice communications capacity of networks based on these technologies, we believe our technology is better designed to provide users with high effective data transmission rates in typical S-47 50 mobile data access applications at a lower cost per bit delivered. Further, we are pursuing various improvements in our data transmission speeds in an attempt to retain our current speed advantages. In addition to services based on terrestrial networks, Teledesic LLC has announced plans to offer, beginning in 2004, a very high-speed wireless "Internet-in-the-sky" service utilizing a proprietary network of LEO satellites. However, Teledesic has stated that handheld mobile service will not be available with this network. Moreover, Teledesic's laptop-sized terminals with large antennae, although transportable, are fixed-point devices that are unlikely to provide service inside buildings. For that reason, we do not believe the Teledesic service is intended to meet the wireless data access needs of mobile professionals. If network equipment based on 3G or other technologies were to succeed in cost-effectively providing users with higher effective data transmission rates than those available with our service or if Teledesic or others were to provide a satellite-based service with increased mobility or higher speeds, our business could be seriously harmed. Many of our present and future competitors have greater financial, marketing, technical and management resources than we have, and it is possible that our competitors will succeed in developing new technologies, products and services that achieve broader market acceptance or that render our high-speed service noncompetitive. Information on third-party systems under development that we have described in this prospectus supplement is based on available information and may be incomplete or inaccurate and is subject to change. RESEARCH AND DEVELOPMENT We intend to maintain a technology leadership position by continuing to invest heavily in research and development of our networking products to reduce the cost of our system components, to increase speed and performance of our services, to develop additional applications for our services and to continue to improve and upgrade our network and service to meet the emerging demands for mobile data access services. As of December 31, 1999, we had 60 design and radio frequency engineers, with 56 of those engineers in research and development and four in operations. Because the markets in which we participate and intend to participate are characterized by rapid technological change, we expect that for the foreseeable future, we will be required to make significant investments of resources in research and development. See "Risk Factors -- We operate in an industry with rapidly changing technology, and our success will depend on our ability to develop products and services that keep pace with technological advancements." MANUFACTURING We currently outsource all manufacturing of our subscriber modems and network components. The proprietary external modem that our current Ricochet subscribers use is manufactured by Alps Electric (USA), Inc. We have entered into a two-year agreement with Alps to custom manufacture external modems to be used in our high-speed service. We have committed to Alps to purchase a minimum of 47,700 units in 2000. The agreement provides for a four-month lead-time for the delivery of modems. We anticipate receiving the first delivery of modems under this agreement in the second quarter of 2000. We have recently entered into two-year agreements with NatSteel Electronics, Ltd. and Marconi Communications for the purchase of additional modems. We also are in discussions with another company to manufacture and supply external modems to us. We intend to develop a low-cost personal computer card modem for use with our high-speed service. We have recently entered into two-year agreements with Sierra Wireless and Novatel to custom develop and manufacture personal computer card modems for our high-speed service. We have committed to purchase a minimum of 150,000 units in the first year of deliveries and to reimburse these suppliers for a portion of their development costs. We anticipate receiving the first S-48 51 delivery of modems under these agreements by early 2001. Further, under these agreements, we have agreed to license to Sierra Wireless and Novatel our technology to build other modems or devices. We will receive royalty payments for any devices incorporating our technology that Sierra Wireless and Novatel sell to third parties. Our agreement with Alps provides for the manufacture of the quantity of modems we forecast that we will require through approximately the first three months following commercial launch of our high-speed service. We will need to arrange for additional modems to meet forecast demand for subsequent periods. If we cannot secure arrangements for the manufacture of additional modems beyond the initial period, users would be unable to subscribe to our service, which would harm our business. If any of our modem suppliers were to experience financial, operational, production or quality assurance difficulties, allocate resources to others in lieu of us or experience a catastrophic event that results in a reduction or interruption in supply of modems, our business would be impaired. In addition, if our channel partner sells more subscriptions than we anticipate or if we decide to accelerate deployment of our high-speed network, presently anticipated modem supplies may prove inadequate. If any of the foregoing events occurs, we cannot assure you that we will be able to obtain the modems we require from alternate suppliers at favorable prices, or at all. In July 1999, we entered into a two-year agreement with Sanmina Corporation to custom manufacture the poletop radios and network radios installed at our wired access points. Sanmina made the first delivery of radios under this agreement in November 1999. We will require more than 130,000 poletop radios to complete all three phases of our network deployment as planned. In January 2000, we reported that we have been affected by industry-wide component shortages, causing delays to production of these radios. See "Risk Factors -- One of our manufacturers is experiencing shortages of supply of components for our poletop and network radios and our other manufacturers may experience shortages of supply of components for our modems or other products, which could involve substantial cost and delay and reduce availability of our service." If we are to become profitable, our products and components must continue to be manufactured in large commercial quantities at competitive cost and quality. As a result, we will be required to achieve significant product and component cost reductions. We are currently working with several companies to develop efficient, low-cost personal computer card modems, as well as smaller, lower cost external modems. If we are unable to develop these modems at a low cost, we may be unable to achieve the cost structure we anticipate in our business plan. Even if we achieve low-cost production, we must have adequate lead times and production capacity to meet user demand for our service if we are to increase revenues and achieve profitability. If we do not achieve product and component cost reductions, our competitive position and our ability to achieve profitability could be impaired. Some of the component parts that our manufacturers use in our products, including our modems and poletop and network radios, are available only from sole or limited source vendors. Our manufacturers' reliance on these sole or limited source vendors involves risks, including the possibility of a shortage of key component parts and reduced control over delivery schedules, manufacturing capability, quality and costs. In addition, some key component parts require long delivery times. We have in the past experienced, and are currently experiencing, delays because key component parts have been unavailable from suppliers. If we were unable to obtain components, we may need to reconfigure our modems or radios, which could involve substantial cost and delay and reduce availability of our modems or radios necessary for the deployment of our network. This could delay our deployment, which would reduce the availability of our service to users. PATENTS, PROPRIETARY RIGHTS AND LICENSES We rely on a combination of patent, copyright, trademark and trade secret protection laws and non-disclosure agreements to establish and protect our proprietary rights. We have been issued S-49 52 28 patents in the U.S., and patents corresponding to some of our domestic patents have been granted in five foreign countries. Further patents are pending in the U.S. and foreign countries. Our patents expire in various years ranging from 2009 to 2016. We cannot assure you that patents will issue from any pending applications or, if patents do issue, that claims allowed will be sufficiently broad to protect our technology. We also own 16 U.S. trademark registrations and have registered trademarks in at least 20 foreign countries. Any of our current or future patents or trademarks may be challenged, invalidated, circumvented or rendered unenforceable, and the rights granted under the patents and trademarks may not provide significant proprietary protection or commercial advantage to us. Moreover, our patents may not preclude competitors from developing equivalent or superior products and technology. We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. Others may independently develop equivalent proprietary information or otherwise gain access to or disclose our information. It is our policy to require our employees, some contractors, consultants, directors and parties to collaborative agreements to execute confidentiality agreements upon the commencement of such relationships with us. However, we cannot assure you that these agreements will provide meaningful protection of our trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information. In addition, our trade secrets could otherwise become known or be independently discovered by our competitors. Our commercial success may also depend in part on our not infringing the proprietary rights of others or not breaching technology licenses that cover technology we use in our products. Third-party patents may require us to develop alternative technology or to alter our products or processes, obtain licenses or cease some of our activities. If any such licenses are required, we may be unable to obtain these licenses on commercially favorable terms, if at all. Our inability to obtain licenses to any technology that we may require to effectively deploy or market our products and services could have an adverse effect on our business. We may have to resort to potentially costly litigation to enforce any patents issued or licensed to us or to determine the scope and validity of third-party proprietary rights. GOVERNMENT REGULATION OF COMMUNICATIONS ACTIVITIES FEDERAL REGULATION. Many aspects of the telecommunications industry are subject to various regulations at the federal, state and local levels. This regulatory environment, which is subject to constant change, directly affects the breadth and quality of services we are able to offer, as well as the rates for, and terms and conditions of, those services. Any of the regulatory entities that have jurisdiction over our business may adopt regulations or take other actions as a result of its own regulatory process or as directed by legislation, the courts or executive directive, which could have an adverse affect on our business. The FCC regulates non-governmental use of the electromagnetic spectrum in the U.S., including the license-free frequency bands currently used by our radio products and the licensed bands on which we are proposing commercial operations in the near future. Operations are subject to specific FCC rules for particular services. Part 15 of the FCC's rules governs operations in license-free frequency bands, so-called because transmitters may be operated in these bands without a license. The rules require that only FCC-approved equipment may be operated. We also have licenses for, and will operate in, a licensed band, the Wireless Communications Service, or WCS, governed by Part 27 of the FCC's rules. FCC-approved equipment is also necessary for operation in this frequency band. We design our products to conform with, and be approved under, applicable FCC rules. We cannot assure you that we will be able to secure the necessary FCC approvals for the equipment that we intend to deploy in 2000 and thereafter. The need to obtain these approvals could result in delays or additional costs. S-50 53 In the license-free frequency bands, there are also various other uses by industrial, scientific and medical equipment, the U.S. government, amateur radio services and other licensed services. These other uses are governed by different rule provisions, and they have priority over the license-free operation of our products. Under applicable FCC rules, our products must not cause harmful interference to any authorized equipment operating in the band, and must accept interference from all authorized equipment operating in the band. If we are unable to eliminate harmful interference caused by our products through technical or other means or if interference to our service caused by others causes the performance of our service to be unattractive to users, we or our users could be required to cease operations in the band in the affected locations. Additionally, while we design our equipment to operate in the presence of other users, in the event the license-free bands become unacceptably crowded, our business could be adversely affected. We intend to operate in the WCS frequency band pursuant to licenses we purchased at an FCC spectrum auction. These licenses 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. While we believe we can obtain authority to operate WCS facilities in additional geographic areas, we cannot assure you that we will obtain such authorization. The WCS licenses have certain conditions associated with them. For example, we are required to provide protection for users of Wireless Cable and Instructional Television Fixed services in areas where we are providing WCS. While we believe we can provide the requisite protection, we cannot assure you that we can provide this protection in a technically or economically feasible manner. In addition, the WCS licenses, like all FCC licenses, are subject to subsequent Acts of Congress and international treaties and agreements to which the U.S. is a signatory. There are currently negotiations underway between the U.S. and Mexico concerning the use of WCS spectrum by Mexico to provide a satellite service for Mexican citizens. If Mexico provides this satellite service, certain areas in the U.S. where we hold WCS licenses could receive harmful interference from the satellite signal. While we will attempt to mitigate harmful interference to our WCS operations, the operation of our WCS facilities at particular locations could be adversely affected by Mexican satellite operations, which could have an adverse effect on our business, financial condition or operating results. On an ongoing basis, the FCC proposes and issues new policies, rules and amendments to existing rules that affect our business. We closely monitor the FCC's activities and, when appropriate, actively participate in policy and rulemaking proceedings. We are currently monitoring and participating in selected proceedings at the FCC that could potentially have an adverse impact on our business. For example, the FCC has issued a Notice of Proposed Rulemaking encouraging the further use of radio frequency lighting devices in one of the license-free frequency bands. While these industrial, scientific and medical devices would be accorded a higher priority than our use of the band, we have argued that the FCC must limit the high-powered emissions from radio frequency lighting devices in the band so that these devices and license-free devices can co-exist in the band as intended by the FCC. Changes in the regulations affecting our operations by the FCC, including changes in the allocation or availability of frequency spectrum, could require or prompt us to move to another of the license-free bands or to obtain the right to operate in additional licensed spectrum. Redesigning products to operate in other frequency bands could be expensive and time consuming, and we cannot assure you that redesign would result in commercially viable products. In addition, we cannot assure you that, if needed, we could obtain appropriate licensed or unlicensed spectrum on commercially acceptable terms, if at all. STATE AND LOCAL REGULATION. We often require the siting of our network radios and wired access points on public rights-of-way and other public property. Due to state and local right-of-way, zoning and franchising issues, we are not always able to place our radios in the most desirable locations, on S-51 54 an optimal schedule or in the most cost-effective manner. It is possible that state and local processes associated with radio location will harm our business. As a result of amendments to the Communications Act of 1934, some states may attempt to regulate us with respect to the terms and conditions of service offerings. While we believe that state regulations, if any, will be minimal, these regulations, if enacted, could harm our business. EMPLOYEES As of December 31, 1999, we employed approximately 438 people, all of whom were based in the U.S. Of our employees, 208 were in network operations and deployment and network real estate and customer support, 70 were in research and development, 74 were in administration, 42 were in sales and marketing and 44 were in manufacturing. The number of employees included in research and development reflects a combination of engineers, technicians and designers. We are highly dependent on some members of our management and engineering staff, the loss of the services of one or more of whom may impede the achievement of our development, deployment and commercialization of our products and services. With the exception of our chief executive officer, none of these individuals has an employment contract with us. None of our employees is represented by a labor union. We have not experienced any work stoppage and consider our relations with our employees to be good. LITIGATION We are not a party to any material legal proceedings. S-52 55 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding our executive officers and directors as of December 31, 1999.
NAME AGE POSITION ---- --- -------- Timothy A. Dreisbach................... 50 President, Chief Executive Officer and Director Lee M. Gopadze......................... 52 Senior Vice President of Field Operations Dale W. Marquart....................... 40 General Counsel, Senior Vice President of Administration and Secretary Robert W. Mott......................... 39 Senior Vice President of Engineering Robert H. Schellman.................... 49 Senior Vice President of Network Operations and Services James E. Wall.......................... 52 Chief Financial Officer John G. Wernke......................... 41 Senior Vice President of Sales and Marketing Robert S. Cline(1)..................... 62 Director Ralph Derrickson....................... 41 Director Robert P. Dilworth..................... 58 Director Justin L. Jaschke(2)................... 41 Director David M. Moore(1)...................... 45 Director William D. Savoy(2).................... 35 Director
- ------------------------- (1) Member of the Compensation Committee (2) Member of the Audit Committee Timothy A. Dreisbach has served as our President and Chief Executive Officer and one of our directors since May 1998. From January 1997 through January 1998, Mr. Dreisbach served as President and Chief Executive Officer of Premenos Technology Corporation, an electronic commerce software company that merged with Harbinger Corp. in December 1997. From April 1992 to December 1996, Mr. Dreisbach served as Senior Vice President, North American Sales and Service, for Boole & Babbage Inc., an enterprise management software company. Lee M. Gopadze has served as our Senior Vice President of Field Operations since September 1998, and our Vice President of Right of Way from April 1998 to September 1998. Mr. Gopadze served as our Vice President of Marketing and President of Ricochet LA from February 1997 to April 1998. Prior to joining us, Mr. Gopadze was the Chief Operating Officer and Executive Vice President of The National Dispatch Center, Inc., a provider of multilingual operator dispatch services, one-number services and wireless information services, from April 1994 to October 1996. Dale W. Marquart has served as our General Counsel, Senior Vice President of Administration and Secretary since June 1998. Prior to joining us, he served as General Counsel and Vice President of International Sales at Premenos Technology Corporation, an electronic commerce software company from June 1997 to June 1998. Previously, Mr. Marquart served as the Senior Director of Business Development and Field Operations at Boole & Babbage, an enterprise management software company, from April 1993 to June 1997. Robert W. Mott has served as our Senior Vice President of Engineering from August 1998 until December 1998, when he became Senior Vice President of Engineering and Manufacturing. Prior to joining us, he was the Vice President of Engineering for CSI ZeitNet, a subsidiary of Cabletron Systems, a network equipment company, from February 1997 to August 1998. Previously, Mr. Mott S-53 56 was a Manager with Pittiglio Rabin Todd & McGrath, a technology consulting company, from January 1996 to February 1997 and from April 1992 to March 1995; and Vice President of Engineering of KENETECH Windpower, a utility-grade wind turbine company, from April 1995 to January 1996. Mr. Mott has also held positions with KPMG Consulting, Booz-Allen & Hamilton, Inc. Consulting, as well as Hughes Aircraft Company. Robert H. Schellman has served as our Senior Vice President of Network Operations and Services since July 1999. Prior to joining us, Mr. Schellman was a Vice President of Operations of Telocity, Inc., a company that provides DSL and high-speed Internet services, from August 1998 to July 1999. Previously, Mr. Schellman was a Director for UUNET/MCI WorldCom, a telecommunications company, from May 1996 to July 1998; a Division Chief for the Department of the Army from September 1994 to May 1996; General Manager of Sandwell, Inc.'s DATAP Systems Division, a software and systems integration company, from September 1987 to August 1994; a Senior Manager at Sprint Corp. from May 1984 to September 1987; and a Manager at MCI Telecommunications from August 1981 to May 1984. James E. Wall has served as our Chief Financial Officer since August 1999. Prior to joining us, Mr. Wall served as Treasurer and Controller for AirTouch Communications, a multinational wireless telecommunications company, from September 1995 to August 1999. Previously, Mr. Wall served as Corporate Vice President and Treasurer for ICN Pharmaceuticals, Inc., a multinational pharmaceutical research, manufacturing and marketing company, from June 1994 to June 1995, and held senior executive positions for Ultramar Corporation, a multinational petroleum exploration, production, refining, marketing and shipping company, including Chief Financial Officer for Ultramar PLC Group international exploration and production subsidiaries and Vice President and Treasurer for Ultramar Corporation, from September 1976 to August 1993. Mr. Wall began his career with the Internal Revenue Service and is also a certified public accountant in the State of California. John G. Wernke has served as our Senior Vice President of Sales and Marketing since August 1998. Prior to joining us, Mr. Wernke was the Vice President of Enterprise Product Marketing for Harbinger Corporation, a business-to-business electronic commerce company, from March 1997 to August 1998. Previously, Mr. Wernke served as a Product Marketing Manager for OpenVision Technologies, Inc., a supplier of client/server systems management solutions, from September 1993 to March 1997. Robert S. Cline has served as one of our directors since January 1994. He currently serves as Chairman and Chief Executive Officer of Airborne Freight Corp., an air express company. Mr. Cline has been employed by Airborne Freight Corp. since 1968. In addition to Airborne Freight Corp., Mr. Cline is also a director of SAFECO Corp. and Esterline Technologies Corp. Ralph Derrickson has served as one of our directors since April 1998. Mr. Derrickson has been a partner of Watershed Capital, LLC, a private equity investment firm, since September 1998. Previously, Mr. Derrickson was employed at Vulcan Northwest Inc., a venture capital firm affiliated with Vulcan Ventures Incorporated, our largest stockholder, from December 1996 to September 1998; a Vice President of Product Development at Starwave Corporation, an internet technology company and creator and producer of online sports, news and entertainment services, from June 1993 to December 1996; and has held engineering and management positions with NeXT Computer, Sun Microsystems and Digital Research, Inc. Robert P. Dilworth has served as one of our directors since August 1987 and as our Chairman of the Board since March 1997. Since September 1999, Mr. Dilworth has been an independent consultant. From May 1998 through September 1999, Mr. Dilworth served as an Executive Vice President and a director of VLSI Technology, Inc., a semi-conductor manufacturer. Mr. Dilworth S-54 57 also served as our President from September 1987 to March 1997 and as our Chief Executive Officer from August 1987 to May 1998. Prior to joining us, 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 GraphOn Corporation and eOn Communications Corporation. Justin L. Jaschke has served as one of our directors since June 1996. Mr. Jaschke has served as Chief Executive Officer and a Director of Verio Inc, an Internet service provider, since April 1996. Prior to forming Verio, Mr. Jaschke served as Chief Operating Officer of Nextel Communications, a telecommunications company, following its merger in July 1995 with OneComm Corporation, a telecommunications company, from July 1995 to March 1996. From April 1993 to July 1995, he served as OneComm's president and a member of its Board of Directors. From May 1990 to April 1993, he served as President and Chief Executive Officer of Bay Area Cellular Telephone Company, a provider of cellular service in the San Francisco Bay Area and, from November 1987 to May 1990, as Vice President of Corporate Development for PacTel Cellular, a telecommunications company. Mr. Jaschke is also a director of Verio and Dobson Communications. David M. Moore has served as one of our directors since January 1999. Mr. Moore has served as Business Development Director of Vulcan Northwest, Inc., a venture capital firm affiliated with Vulcan Ventures Incorporated, our largest stockholder, since November 1998. Prior to joining Vulcan Northwest, Mr. Moore served as President of Paralex Corporation, a provider of technical due diligence and consulting services, from October 1997 to November 1998; Director of Development for Microsoft Corporation from June 1996 to October 1997; Director of Development for the Worldwide Product Group of Microsoft Corporation from September 1988 to June 1996. Mr. Moore is also a director of BSQUARE Corporation. William D. Savoy has served as one of our directors since January 1998. Mr. Savoy has served as President of Vulcan Northwest, Inc. since November 1990 and Vice President and a director of Vulcan Ventures Incorporated since November 1990. Mr. Savoy is a director of Charter Communications, Inc., CNET, Inc., Go2Net, Inc., Harbinger Corporation, High Speed Access Corp., Telescan, Inc., Ticketmaster Online-City Search, Inc., USA Networks, Inc. and Value America. S-55 58 EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS Each of our non-employee directors receives an annual retainer of $6,000 and a per meeting fee of $1,000 (plus $250 for each committee meeting attended by committee members). In the fiscal year ended December 31, 1999, the total compensation paid to non-employee directors was $41,500. Members of the Board of Directors are also eligible for reimbursement for their expenses incurred in connection with attendance at Board of Directors and committee meetings in accordance with our policy. Each of our non-employee directors also receives stock option grants under the 1993 Non-Employee Directors' Stock Option Plan. Only our non-employee directors or an affiliate of such directors (as defined in the Internal Revenue Code of 1986, as amended) are eligible to receive options under the Directors' Plan. Options granted under the Directors' Plan are intended by us not to qualify as incentive stock options under the Internal Revenue Code. Option grants under the Directors' Plan are non-discretionary. On January 1 of each year (or the next business day should that date be a legal holiday), each member of our Board of Directors who is not an employee, is automatically granted under the Directors' Plan, without further action by us, our Board of Directors or our stockholders, an option to purchase 7,000 shares of our common stock. No other options may be granted at any time under the Directors' Plan. The exercise price of options granted under the Directors' Plan is 100% of the fair market value of the common stock subject to the option on the date of the option grant. Options granted under the Directors' Plan may not be exercised until the date upon which the optionee has provided one year of continuous service as a non-employee director following the date of grant of option. At that time, the option will become exercisable as to one-third of the option shares and one-third of the option shares will become exercisable each year thereafter in accordance with its terms. The term of options granted under the Directors' Plan is 10 years. In the event of our merger with or into another corporation or a consolidation, acquisition of assets or other change-in-control transaction involving us, the vesting of each option will accelerate and the option will terminate if not exercised prior to the consummation of the transaction. During the last fiscal year, we granted options covering 7,000 shares to each of Messrs. Cline, Derrickson, Jaschke, Moore and Savoy, at exercise prices of $4.878 per share, except for the option granted to Mr. Moore, which had an exercise price of $6.00 per share. The exercise prices were also the respective fair market values of our common stock on the date of grant, based on the closing sale price reported on the Nasdaq National Market. During 1999, Mr. Derrickson exercised an option under the Directors' Plan for 2,333 shares. Upon sale of the shares, Mr. Derrickson realized proceeds of $39,150. During 1999, Mr. Cline exercised options under the Directors' Plan for an aggregate of 5,000 shares. Upon sale of the shares, Mr. Cline realized proceeds of $159,124. Directors who are our employees do not receive separate compensation for their service as directors. S-56 59 SUMMARY OF COMPENSATION The following table shows for the years ended December 31, 1999, 1998 and 1997 compensation awarded or paid to, or earned by, our chief executive officer, chief financial officer and the five other most highly compensated executive officers other than the chief executive officer and chief financial officer, referred to as the "Named Executive Officers": SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ---------------- AWARDS ---------------- ANNUAL COMPENSATION SHARES OF COMMON -------------------- STOCK UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION(1) YEAR SALARY(2) BONUS(3) OPTIONS(4) COMPENSATION(5) ------------------------------ ---- --------- -------- ---------------- --------------- Timothy A. Dreisbach............ 1999 $253,349 $ -- 75,000 $1,578 President and Chief Executive 1998 148,616 90,756 550,000 2,578 Officer Lee M. Gopadze.................. 1999 198,977 3,250 75,000 578 Senior Vice President of Field 1998 166,179 88,906 65,000 2,966 Operations 1997 122,950 49,317 20,000 -- Dale W. Marquart................ 1999 166,291 -- 75,000 1,251 General Counsel, Senior Vice 1998 83,654 45,000 75,000 258 President of Administration and Secretary Robert W. Mott.................. 1999 187,361 -- 75,000 1,226 Senior Vice President of 1998 53,846 85,000 75,000 1,220 Engineering and Manufacturing Robert H. Schellman............. 1999 79,478 -- 125,000 1,321 Senior Vice President of Network Operations and Services James E. Wall................... 1999 86,993 -- 125,000 449 Chief Financial Officer John G. Wernke.................. 1999 168,254 4,200 75,000 1,251 Senior Vice President of 1998 54,808 36,562 75,000 349 Marketing and Sales
- ------------------------- (1) Mr. Dreisbach joined us in May 1998. Mr. Gopadze joined us in February 1997. Mr. Marquart joined us in June 1998. Mr. Mott and Mr. Wernke joined us in August 1998. Mr. Schellman joined us in July 1999. Mr. Wall joined us in August 1999. (2) In accordance with the rules of the Securities and Exchange Commission, the compensation described in this table does not include medical or group life insurance or other benefits that are generally available to all salaried employees of ours or certain perquisites and other personal benefits received by the named executive officers that do not exceed the lesser of $50,000 or 10% of any such officer's salary and bonus disclosed in this table. (3) For 1998 and 1997, includes shares of stock issued in connection with our annual bonuses paid in cash and stock. In 1997, Mr. Gopadze received stock valued at $9,367, based on a per share value of $11.31, the fair market value of our common stock on the date bonuses were paid (based on the average of the previous day's high and low sales price reported in the Nasdaq S-57 60 National Market). In 1998, Messrs. Gopadze and Marquart received stock valued at $13,151 and $1,667, respectively, based on a per share value of $8.25, the fair market value of our common stock on the date bonuses were paid (based on the average of the previous day's high and low sales reported in the Nasdaq National Market). Included in Mr. Mott's bonus in 1998 is an advance payment of $37,500. In 1998, Mr. Wernke received an automobile allowance of $1,662. Mr. Dreisbach received stock valued at $90,756, based on a per share value of $7.56, the fair market value of our common stock on the date the bonus was paid (based on the average of the previous day's high and low sales reported in the Nasdaq National Market. In 1999, Messrs. Gopadze and Wernke received automobile allowances of $3,250 and $4,200, respectively. Performance bonuses for services rendered in 1999 will not be determined until after our 1999 year-end results are known. (4) In August 1997, the Board approved the replacement of each outstanding option held by an employee with a per share exercise price of $7.00 per share or greater, upon the timely request of the optionee, with a nonstatutory stock option having an exercise price of $4.53 per share and certain delayed exercise provisions. Amounts for 1997 include 20,000 shares subject to repriced options for Mr. Gopadze. (5) For 1998, includes our matching payment of $1,000 for each executive officer under our 401(k) plan, except for Messrs. Gopadze, Marquart, Mott and Wernke, who received $0, $0, $942 and $0 in matching payments, respectively. For 1999, includes our matching payment of $1,000 for each executive officer under our 401(k) plan, except for Messrs. Gopadze and Wall. For 1998, includes payments for term life insurance in the amounts of $1,578, $2,966, $258, $278 and $349 for Messrs. Dreisbach, Gopadze, Marquart, Mott and Wernke, respectively. For 1999, includes payments for term life insurance in the amounts of $578, $578, $251, $226, $321, $449 and $251 for Messrs. Dreisbach, Gopadze, Marquart, Mott, Schellman, Wall and Wernke, respectively. COMPENSATION PURSUANT TO PLANS Generally, we grant options to our executive officers under our stock option plans. The following tables show for the year ended December 31, 1999, certain information regarding options granted to, exercised by and held at year end by, the Named Executive Officers: OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ------------------------------------------------------- PERCENT OF POTENTIAL REALIZABLE VALUE NUMBER OF TOTAL AT ASSUMED ANNUAL RATES SHARES OF OPTIONS OF STOCK PRICE COMMON STOCK GRANTED TO APPRECIATION FOR UNDERLYING EMPLOYEES EXERCISE OPTION TERM(3) OPTIONS IN FISCAL PRICE PER EXPIRATION --------------------------- GRANTED(1) YEAR(2) SHARE DATE 5% 10% ------------ ---------- -------------- ---------- ------------ ------------ Mr. Dreisbach........ 75,000 3.9% $29.25 10/18/09 $1,379,637 $3,496,272 Mr. Gopadze.......... 75,000 3.9% $29.25 10/18/09 $1,379,637 $3,496,272 Mr. Marquart......... 75,000 3.9% $29.25 10/18/09 $1,379,637 $3,496,272 Mr. Mott............. 75,000 3.9% $29.25 10/18/09 $1,379,637 $3,496,272 Mr. Schellman........ 125,000 6.5% $26.34 08/02/09 $2,070,934 $5,248,153 Mr. Wall............. 125,000 6.5% $22.53 08/06/09 $1,770,849 $4,487,679 Mr. Wernke........... 75,000 3.9% $29.25 10/18/09 $1,379,637 $3,496,272
S-58 61 - ------------------------- (1) Options granted under our employee stock option plans typically vest at the rate of 25% after one year and approximately two percent per month thereafter, such that the options are fully vested in four years. (2) Based on options covering a total of 1,921,770 shares of common stock granted to employees in 1999. (3) For new grants, the potential realizable value is calculated based on the term of the option at the time of grant (10 years). Potential realizable value is calculated by assuming that the stock price on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. The 5% and 10% assumed rates of appreciation are derived from the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future common stock price. No gain to the optionee is possible unless the stock price increases over the option term, which will benefit all stockholders. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES OF COMMON STOCK UNDERLYING UNEXERCISED VALUE OF UNEXERCISED SHARES OF OPTIONS AT IN-THE-MONEY OPTIONS AT COMMON STOCK VALUE FISCAL YEAR-END FISCAL YEAR-END(2) ACQUIRED REALIZED --------------------------- --------------------------- ON EXERCISE (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ------------ ---------- ----------- ------------- ----------- ------------- Mr. Dreisbach........ 2,000 $ 87,785 215,708 407,292 $14,722,071 $26,382,054 Mr. Gopadze.......... 5,000 $ 249,568 30,103 124,897 $ 2,183,263 $ 7,315,642 Mr. Marquart......... 3,000 $ 139,379 24,083 122,917 $ 1,685,241 $ 7,061,955 Mr. Mott............. 5,000 $ 272,786 19,999 125,001 $ 1,439,928 $ 7,303,197 Mr. Schellman........ -- $ -- -- 125,000 $ -- $ 6,535,150 Mr. Wall............. -- $ -- -- 125,000 $ -- $ 7,012,313 Mr. Wernke........... 25,936 $1,221,080 1,563 125,001 $ 110,192 $ 7,228,196
- ------------------------- (1) Value realized is based on the fair market value of our common stock on the date of exercise (the closing sale price reported on the Nasdaq National Market on that date) minus the exercise price, and does not necessarily indicate that the optionee sold the stock. (2) Value of unexercised options at fiscal year-end is based on the fair market value of our common stock at December 31, 1999 of $78.63 (based on the closing sale price reported on the Nasdaq National Market on that date) minus the exercise price of the option. CHANGE IN CONTROL AND SEVERANCE ARRANGEMENTS EMPLOYMENT ARRANGEMENTS In May 1998, we entered into an employment agreement with Mr. Dreisbach, which provides for salary, bonus and option grants. In addition, under the agreement, in the event that we terminate Mr. Dreisbach's employment other than for cause, as defined in the agreement, at any time or if Mr. Dreisbach voluntarily terminates his employment for good reason, as defined in the agreement, within 90 days prior to or 180 days we have after a change in control, we are required to pay Mr. Dreisbach, for a period of 12 months, the base compensation and health benefits to which he was S-59 62 entitled on the date of his termination. In addition, under Mr. Dreisbach's non-plan option, in the event of a change in control, the option becomes fully vested if, within 90 days prior to or 180 days following the change in control, his employment is terminated for any reason other than for cause or if he terminates his employment for good reason. In addition, under the non-plan option, if Mr. Dreisbach is terminated without cause or voluntarily terminates his employment for good reason, he could exercise his options, to the extent exercisable, for up to two years following the termination. In addition, our employment arrangements with each of the current executive officers, other than Mr. Dreisbach, provide that upon a change in control that results in the elimination of, or a material reduction in, the scope of the officers' responsibilities, they are entitled to severance benefits consisting of six months' salary and continuation of benefits as well as the acceleration of vesting of their options for periods ranging from one to two years. ACCELERATION OF VESTING UNDER STOCK OPTION PLANS Two of our three stock option plans for the benefit of our employees and consultants, the 1997 Equity Incentive Plan and the 1997 Non-Officer Equity Incentive Plan, provide for acceleration of vesting under certain circumstances. Options to purchase approximately 2,030,657 and 827,513 shares of common stock, respectively, were outstanding under these plans as of December 31, 1999. The 1997 Equity Incentive Plan and the 1997 Non-Officer Equity Incentive Plan provide that, in the event an optionee is terminated other than for cause within 12 months after a change in control, as defined in the plans, the options held by the optionee under the plans will become fully vested. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION For 1999, the compensation committee was composed of Messrs. Cline and Moore. Mr. Moore is affiliated with Vulcan Ventures. In October 1998, we entered into a $30 million line of credit agreement with Vulcan Ventures, and in June 1999, we entered into a $30 million bridge loan with Vulcan Ventures. On November 15, 1999, we sold 30 million shares of series A1 preferred stock to MCI WorldCom and 30 million shares of series A2 preferred stock to Vulcan Ventures at a price of $10 per share to each purchaser. The net proceeds of the sale of preferred stock to Vulcan Ventures were used to repay outstanding indebtedness to Vulcan Ventures of approximately $60.5 million, including accrued interest, of which approximately $50 million, plus accrued interest, was outstanding at September 30, 1999. S-60 63 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to beneficial ownership of our common stock as of December 31, 1999 by: - each stockholder known to us to be the beneficial owner of more than 5% of our common stock; - our chief executive officer, chief financial officer and five other most highly compensated executive officers for the year ended December 31, 1999; - each of our directors; and - all of our executive officers and directors as a group. In addition to the outstanding common stock reflected in the table below, Vulcan Ventures holds 30,000,000 shares of our series A2 redeemable convertible preferred stock and MCI WorldCom holds 30,000,000 shares of our series A1 redeemable convertible preferred stock. The shares held by Vulcan Ventures are convertible on a one-for-one basis into shares of our common stock at Vulcan Ventures' option at any time. Accordingly, as required by applicable regulations of the Securities and Exchange Commission, the shares of common stock shown in the following table as being beneficially owned by Vulcan Ventures include the 30,000,000 shares of common stock issuable upon conversion of Vulcan Ventures' preferred stock. The shares of preferred stock held by MCI WorldCom are convertible into shares of our common stock, on a one-for-one basis, beginning in May 2002. Because these shares are not convertible into common stock within 60 days after December 31, 1999, MCI WorldCom is not deemed to beneficially own the underlying common stock for purposes of the following table. MCI WorldCom's ownership of shares of preferred stock will not change with this offering. If all of our convertible notes and outstanding shares of preferred stock were converted into common stock, the percentages of common stock beneficially owned by Vulcan Ventures and MCI WorldCom, respectively, would be approximately 46% and 35% before this offering and 44% and 33% after this offering (assuming the underwriters do not exercise their option to purchase up to 750,000 additional shares in this offering).
BENEFICIAL OWNERSHIP(1) ---------------------------------- PERCENT OF TOTAL -------------------- NUMBER BEFORE AFTER NAME OF SHARES OFFERING OFFERING ---- ---------- -------- -------- Vulcan Ventures Incorporated(2).......................... 39,121,745 71.6% 65.6% 110 110th Avenue NE, Suite 550 Bellevue, WA 98004 Robert S. Cline(3)....................................... 57,999 * * Ralph Derrickson(3)...................................... 2,333 * * Robert P. Dilworth(3).................................... 17,333 * * Timothy A. Dreisbach(3).................................. 258,607 * * Lee M. Gopadze(3)........................................ 37,391 * * Justin L. Jaschke(3)..................................... 49,499 * * Dale W. Marquart(3)...................................... 31,054 * * David M. Moore(3)(4)..................................... 39,099,078 71.6 65.6 Robert W. Mott(3)........................................ 23,125 * * William D. Savoy(3)(4)................................... 39,103,744 71.6 65.6 Robert H. Schellman...................................... -- * * James E. Wall............................................ -- * * John G. Wernke(3)........................................ 4,689 * * Directors and executive officers as a group (13 persons)(5)............................................ 39,588,107 71.9 65.9
S-61 64 - ------------------------- * Less than one percent (1) This table is based upon information supplied by directors, executive officers and principal stockholders and Schedules 13D and 13G filed with the Securities and Exchange Commission. Unless otherwise indicated below, the persons named in the table have sole voting and investment power with respect to all shares beneficially owned by them, subject to community property laws where applicable. For purposes of this table, shares held by stockholders include any shares held as tenants in common or joint tenants with spouses. Percentages are based on a total of shares of common stock outstanding on December 31, 1999 and shares of common stock outstanding after completion of this offering, adjusted in accordance with the rules promulgated by the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are exercisable within 60 days of the date of this table and shares of common stock issuable to that person upon conversion of convertible preferred stock that is convertible within 60 days of the date of this table are also deemed outstanding. These shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. (2) Based on a Schedule 13D filed with the Securities and Exchange Commission on October 28, 1993, and most recently amended on November 30, 1999. Includes 25,000 shares held by Paul Allen, the sole stockholder of Vulcan Ventures. Also includes 30,000,000 shares of redeemable convertible preferred stock held by Vulcan Ventures. Vulcan Ventures' preferred shares are convertible into shares of our common stock, on a one-for-one basis, at Vulcan Ventures' option at any time. (3) Includes shares of common stock subject to options exercisable within 60 days of the date of this table as follows: 54,999 for Mr. Cline, 2,333 for Mr. Derrickson, 2,333 for Mr. Dilworth, 238,624 for Mr. Dreisbach, 34,791 for Mr. Gopadze, 45,999 for Mr. Jaschke, 27,728 for Mr. Marquart, 2,333 for Mr. Moore, 23,125 for Mr. Mott, 6,999 for Mr. Savoy and 4,689 for Mr. Wernke. (4) Includes 39,096,745 shares owned directly by Vulcan. Messrs. Moore and Savoy are affiliated with Vulcan Northwest, Inc., a venture capital fund affiliated with Vulcan. Messrs. Moore and Savoy disclaim beneficial ownership of these shares within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934. The addresses of Messrs. Moore and Savoy are the same as that of Vulcan Ventures. (5) Includes the information reflected in the notes above, as applicable. S-62 65 U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS The following summary describes the material U.S. federal income and estate tax consequences of the ownership and disposition of our common shares by a non-U.S. holder who acquires and owns our shares as a capital asset within the meaning of section 1221 of the Internal Revenue Code. A non-U.S. holder is any person other than: - a citizen or resident of the United States; - a corporation or partnership created or organized in the U.S. or under the laws of the United States or of any state; - an estate whose income is includable in gross income for U.S. federal income tax purposes regardless of its source; or - a trust if a court within the U.S. is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. For purposes of the withholding tax on dividends discussed below, a non-resident fiduciary of an estate or trust will be considered a non-U.S. holder. An individual may, subject to certain exceptions, be deemed to be a resident alien (as opposed to a non-resident alien) by virtue of being present in the United States on at least 31 days in the calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year (counting for these purposes all of the days present in the current year, one third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year). Resident aliens are subject to U.S. federal tax as if they were U.S. citizens and, thus, are not non-U.S. holders for purposes of this discussion. This discussion does not consider specific facts and circumstances that may be relevant to a particular non-U.S. holder's tax position, including the fact that in the case of a non-U.S. holder that is a partnership, the U.S. tax consequences of holding and disposing of common shares may be affected by certain determinations made at the partner level, and does not consider U.S. state and local or non-U.S. tax consequences. Further, it does not consider non-U.S. holders subject to special tax treatment under the federal income tax laws, including banks and insurance companies, dealers in securities and holders of securities held as part of a straddle, hedge or conversion transaction. In addition, persons that hold the common shares through hybrid entities may be subject to special rules and may not be entitled to the benefits of a U.S. income tax treaty. A hybrid entity is treated as a partnership for U.S. tax purposes and as a corporation for foreign law purposes. The following discussion is based on provisions of the Internal Revenue Code and administrative and judicial interpretations as of the date hereof, all of which are subject to change, possibly on a retroactive basis. Any change could affect the continuing validity of this discussion. The following summary is included herein for general information. Accordingly, if you are a non-U.S. holder, we urge you to consult a tax advisor with respect to the U.S. Federal Tax Consequences of holding and disposing of our common shares, as well as any tax consequences that may arise under the laws of any U.S. state, local or other non-U.S. taxing jurisdiction. DIVIDENDS. In general, if we have tax earnings and profits at the time of any dividends, dividends paid to a non-U.S. holder will be subject to withholding of U.S. federal income tax at a 30% rate unless this rate is reduced by an applicable income tax treaty. Dividends that are effectively connected with the holder's conduct of a trade or business in the United States, or, if a tax treaty S-63 66 applies, attributable to a permanent establishment, or in the case of an individual, a fixed base, in the U.S. ("U.S. trade or business income") are generally subject to U.S. federal income tax at regular rates and not subject to withholding if the non-U.S. holder files the appropriate U.S. Internal Revenue form with the payor. Any U.S. trade or business income received by a non-U.S. corporation may also be subject to an additional "branch profits tax" at a 30% rate, or any lower rate that may be applicable under an income tax treaty. Under current law, dividends paid to an address in a foreign country are presumed, absent actual knowledge to the contrary, to be paid to a resident of that country for purposes of the withholding discussed above. The same presumption applies under the current interpretation of U.S. Treasury regulations, for purposes of determining the applicability of a tax treaty rate. Under final U.S. Treasury regulations, effective January 1, 2001, however, a non-U.S. holder of common shares who wishes to claim the benefit of an applicable treaty rate would be required to satisfy applicable certification and other requirements, including filing a Form W-8 BEN that contains the holder's name and address. A non-U.S. holder of common shares that is eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate claim for a refund with the U.S. Internal Revenue Service. We do not expect to pay dividends on our common stock for the foreseeable future. DISPOSITION OF COMMON SHARES. Except as described below, a non-U.S. holder generally will not be subject to U.S. federal income tax in respect of gain recognized on a disposition of common shares, provided that: - the gain is not U.S. trade or business income; - the non-U.S. holder is an individual who is not present in the U.S. for 183 or more days in the taxable year of the disposition and who meets certain other requirements; - the non-U.S. holder is not subject to tax pursuant to the provisions of U.S. tax law applicable to certain U.S. expatriates; and - we have not been and do not become a "U.S. real property holding corporation" for U.S. federal income tax purposes. We believe that we have not been, are not currently, and are not likely to become, a U.S. real property holding corporation. However, we cannot assure you that we will not be a U.S. real property corporation when a non-U.S. holder sells our common shares. FEDERAL INCOME TAXES. In general, an individual who is a non-U.S. holder for U.S. estate tax purposes will incur liability for U.S. federal estate tax if the fair market value of property included in the individual's taxable estate for U.S. federal estate tax purposes exceeds the statutory threshold amount. For these purposes, common shares owned or treated as owned, by an individual who is a non-U.S. holder at the time of death will be included in the individual's gross estate for U.S. federal tax purposes unless an applicable estate tax treaty provides otherwise. U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX. We are required to report annually to the Internal Revenue Service and to each non-U.S. holder the amount of dividends paid to, and the tax withheld with respect to, each non-U.S. holder. These reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities in the country in which the non-U.S. holder resides. Under current regulations, the U.S. backup withholding tax, which generally is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish the information reporting requirements, will generally not apply to dividends paid on the common shares to a non-U.S. holder at an address S-64 67 outside the United States. Under final Treasury regulations, effective January 1, 2001, a non-U.S. holder generally would not be subject to backup withholding at a 31% rate if the beneficial owner certifies to that owner's foreign status on a valid Form W-8 BEN. Non-U.S. holders will not be subject to information reporting or backup withholding with respect to the payment of proceeds from the disposition of common shares effected by a foreign office of a foreign broker. If, however the broker is a U.S. person or a U.S. related person, information reporting, but not backup withholding, would apply unless the broker received a signed statement from the owner, certifying its foreign status or otherwise establishing an exemption, or the broker had documentary evidence in its files as to the non-U.S. holder's foreign status and the broker had no actual knowledge to the contrary. For this purpose, a "U.S. related person" is: - a controlled foreign corporation for U.S. federal income tax purposes; - a foreign person 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment (or for the part of the period that the broker has been in existence) is derived from activities that are effectively connected with the conduct of a U.S. trade or business; - a foreign partnership that is either engaged in a U.S. trade or business or in which U.S. persons hold more than 50% of the income or capital interest; or - certain U.S. branches of foreign banks or insurance companies. Non-U.S. holders will be subject to information reporting and backup withholding at a rate of 31% with respect to the payment of proceeds from the disposition of common shares effected by, to or through the United States office of a broker, unless the non-U.S. holder certifies as to its foreign status or otherwise establishes an exemption. Any amounts withheld under the backup withholding rules from a payment to a non-U.S. holder will be allowed as a credit against the non-U.S. holder's U.S. federal income tax, and any amounts withheld in excess of the non-U.S. holder's federal income tax liability will be refunded, provided that the required information is furnished to the Internal Revenue Service. S-65 68 UNDERWRITING GENERAL We have entered into an underwriting agreement under which we have agreed to sell to each of the underwriters named below, for whom Lehman Brothers Inc., Salomon Smith Barney Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Hambrecht & Quist LLC and J.P. Morgan Securities Inc. are acting as representatives, and each of those underwriters has agreed to purchase from us the respective number of shares of common stock shown opposite its name below:
UNDERWRITERS NUMBER OF SHARES - ------------------------------------------------------------ ---------------- Lehman Brothers Inc. ....................................... 1,425,000 Salomon Smith Barney Inc. .................................. 1,425,000 Merrill Lynch, Pierce, Fenner & Smith Incorporated.................................. 950,000 Hambrecht & Quist LLC....................................... 240,000 J.P. Morgan Securities Inc. ................................ 240,000 ABN AMRO Incorporated....................................... 60,000 Bear, Stearns & Co. Inc. ................................... 60,000 Credit Suisse First Boston Corporation...................... 60,000 Fidelity Capital Markets, a division of National Financial Services Corp............ 60,000 Goldman, Sachs & Co. ....................................... 60,000 ING Barings LLC............................................. 60,000 PaineWebber Incorporated.................................... 60,000 Warburg Dillon Read LLC..................................... 60,000 Ameri-First Securities...................................... 30,000 William Blair & Company, L.L.C. ............................ 30,000 Legg Mason Wood Walker, Incorporated........................ 30,000 Pacific Crest Securities.................................... 30,000 Brad Peery Inc. ............................................ 30,000 Raymond James & Associates, Inc. ........................... 30,000 The Robinson-Humphrey Company, LLC.......................... 30,000 Sands Brothers & Co., Ltd. ................................. 30,000 --------- Total............................................. 5,000,000 =========
The underwriting agreement provides that the underwriters' obligations to purchase shares of common stock are subject to conditions, including the delivery of legal opinions by their counsel. If the underwriters purchase any shares of common stock under the underwriting agreement, they must purchase all of the shares of common stock. COMMISSIONS AND EXPENSES The representatives have advised us that they propose to offer the shares of common stock directly to the public at the public offering price set forth on the cover page of this prospectus supplement, and to certain selected dealers, who may include the underwriters, at such public offering price less a selling concession not in excess of $2.61 per share. The underwriters may allow, and the selected dealers may reallow, a concession not in excess of $0.10 per share to certain brokers and dealers. After the offering, the underwriters may change the offering price, the concession to selected dealers and the reallowance to the other dealers. S-66 69 The following table summarizes the compensation and estimated expenses we will pay.
TOTAL ------------------------------- PER WITHOUT WITH SHARE OVER-ALLOTMENT OVER-ALLOTMENT ----- -------------- -------------- Underwriting discounts and commissions paid by us...... $4.35 $21,750,000 $25,012,500
We estimate that total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $2 million. OVER-ALLOTMENT OPTION We have granted the underwriters an option to purchase up to an aggregate of 750,000 shares of common stock, exercisable solely to cover over-allotments, if any, at the public offering price less the underwriting discounts and commissions shown on the cover page of this prospectus supplement. The underwriters may exercise that option at any time, and from time to time, until 30 days after the date of the underwriting agreement. To the extent that the underwriters exercise this option, each underwriter will be committed, subject to certain conditions, to purchase a number of additional shares of common stock proportionate to such underwriter's initial commitment, as indicated in the preceding table, and we will be obligated, under the over-allotment option, to sell those shares of common stock to the underwriters. LOCK-UP AGREEMENTS We and our directors and executive officers, together with Vulcan Ventures and MCI WorldCom, holding an aggregate of 69,169,154 million shares of common stock, on an as-converted basis, have agreed not to offer to sell, sell or otherwise dispose of, directly or indirectly, any shares of our common stock during the 90-day period following the date of this prospectus supplement without the prior written consent of Lehman Brothers and Salomon Smith Barney, except that we may issue, and grant options to purchase, shares of common stock under our option plans. INDEMNIFICATION We have agreed to indemnify the underwriters against liabilities related to the offering, including liabilities under the Securities Act, and to contribute, under defined circumstances, to payments that the underwriters may be required to make in respect thereof. STABILIZATION, SHORT POSITIONS AND PENALTY BIDS Until the distribution of the common stock is completed, rules of the Securities and Exchange Commission may limit the ability of the underwriters and certain selling group members to bid for and purchase shares of common stock. As an exception to these rules, the representatives are permitted to engage in transactions that stabilize the price of common stock. These transactions may consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the common stock. If the underwriters create a short position in the common stock in connection with the offering (i.e., they sell more shares than are set forth on the cover page of this prospectus supplement), the representatives may reduce that short position by purchasing common stock in the open market. The representatives also may elect to reduce any short position by exercising all or part of the over-allotment option described above. S-67 70 The representatives also may impose a penalty bid on underwriters and selling group members. This means that if the representatives purchase shares of common stock in the open market to reduce the underwriters' short position or to stabilize the price of the common stock, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares as part of the offering. In general, purchases of a security for the purpose of stabilization or to reduce a syndicate short position could cause the price of the security to be higher than it might otherwise be in the absence of those purchases. The imposition of a penalty bid could have an effect on the price of a security to the extent that it were to discourage resales of the security by purchasers in an offering. As permitted by Rule 103 of Regulation M promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, the underwriters, if any, that are market makers, referred to as passive market makers, in our common stock, may make bids for or purchases of our common stock on the Nasdaq National Market until such time, if any, when a stabilizing bid for such securities has been made. Rule 103 generally provides that: - a passive market maker's net daily purchases of the common stock may not exceed 30% of its average daily trading volume in such securities for the two full consecutive calendar months, or any 60 consecutive days ending with the 10 days, immediately preceding the filing date of the registration statement of which this prospectus supplement and prospectus form a part. - a passive market maker may not effect transactions or display bids for the common stock at a price that exceeds the highest independent bid for the common stock by persons who are not passive market makers; and - bids made by passive market makers must be identified as such. Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters makes any representation that the representatives will engage in these stabilizing transactions or that these transactions, once commenced, will not be discontinued without notice. OFFERS AND SALES OUTSIDE THE U.S. This prospectus supplement is not, and under no circumstances is to be construed as, an advertisement or a public offering of shares of our common stock in Canada or any province or territory of Canada. Any offer or sale of shares of our common stock in Canada will be made only under an exemption from the requirements to file a prospectus and an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. Each underwriter has represented and agreed that: - it has not offered or sold and will not offer or sell, in the United Kingdom by means of any document, any shares of our common stock other than to people whose ordinary business it is to buy, hold, manage or dispose of investments, whether as principal or agent for purposes of their business or otherwise in circumstances that do not constitute an offer to the public in the United Kingdom with the meaning of the Public Offers of Securities Regulations 1995; - it has complied and will comply with all applicable provisions of the Financial Securities Act of 1986 in relation to the shares of our common stock; S-68 71 - it has only issued or passed on, and will only issue and pass on, to any person in the United Kingdom, a document received by it in connection with the offering of the shares of our common stock if that person is of the kind described in Article 11(3) of the Financial Services Act of 1986 (Investment Advertisements) (Exemptions) Order 1996, or is a person to whom the document may otherwise be lawfully issued or passed on. The shares offered in this prospectus supplement are only being registered for offering in the United States. No action will be taken by us or by the underwriters in any other jurisdiction where action is required to permit a public offering of the shares offered in this prospectus supplement. People who obtain this prospectus supplement are required by us and by the underwriters to inform themselves about and to observe any restrictions on the offering of the shares and the distribution of this prospectus supplement. Purchasers of the shares of common stock offered in this prospectus supplement may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover of this prospectus supplement. MISCELLANEOUS Fidelity Capital Markets, a division of National Financial Services Corporation, is acting as an underwriter in this offering and will be facilitating electronic distribution of information through the Internet, intranet and other proprietary electronic technology. LEGAL MATTERS Cooley Godward LLP, San Francisco, California, will pass upon for us the legality of the shares of common stock we are offering under this prospectus supplement. Certain legal matters in connection with this offering will be passed upon for the underwriters by Weil, Gotshal & Manges LLP, New York, New York. Attorneys with Cooley Godward LLP own an aggregate of 1,675 shares of our common stock. EXPERTS The audited financial statements and schedule incorporated by reference in the prospectus to which this prospectus supplement relates and included elsewhere in the registration statement of which this prospectus supplement and the related prospectus are a part have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are incorporated by reference herein in reliance upon the authority of said firm as experts in giving said reports. S-69 72 PROSPECTUS $1,200,000,000 METRICOM, INC. RICOCHET LOGO COMMON STOCK DEBT SECURITIES GUARANTEES OF DEBT SECURITIES METRICOM FINANCE, INC. DEBT SECURITIES GUARANTEED AS SET FORTH IN THIS PROSPECTUS BY METRICOM, INC. Metricom, Inc. may offer shares of common stock from time to time at prices and on terms to be determined by market conditions at the time it makes the offer. Metricom, Inc. and Metricom Finance, Inc., a wholly owned subsidiary of Metricom, Inc., referred to as Metricom Finance, may, as co-issuers and co-obligors, offer one or more series of debt securities from time to time at prices and on terms to be determined by market conditions at the time of the offering. The obligation of Metricom Finance under these securities will be fully and unconditionally guaranteed by Metricom, Inc. as set forth in this prospectus. We will provide the specific terms of each series of debt securities in supplements to this prospectus. Before you invest in the securities, you should carefully read this prospectus and the prospectus supplement related to the securities offered. Metricom, Inc.'s common stock is traded on the Nasdaq National Market under the symbol "MCOM." On December 29, 1999, the last reported sale price of the common stock on the Nasdaq National Market was $80 5/8 per share. ------------------------ THE SECURITIES WE MAY OFFER INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON PAGE 5. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ If we sell the securities through agents or underwriters, we will include their names and the fees, commissions and discounts they will receive, as well as the net proceeds to us, in the applicable prospectus supplement. The date of this prospectus is December 30, 1999 73 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 5 Forward-Looking Information........... 5 Deficiency of Earnings to Fixed Charges............................. 5 Use of Proceeds....................... 5 Description of Debt Securities........ 6
PAGE ---- Description of Capital Stock.......... 14 Plan of Distribution.................. 18 Legal Matters......................... 18 Experts............................... 19 Where You Can Find More Information... 19
------------------------- No dealer, sales person or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the securities offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. Metricom(R) and Ricochet(R) are Metricom, Inc. trademarks. Trade names and trademarks of other companies appearing in this prospectus are the property of their respective holders. 2 74 PROSPECTUS SUMMARY The following is a summary of Metricom, Inc.'s business. This summary highlights selected information from this prospectus and does not contain all the information that may be important to you. To understand the terms of the securities, you should read this prospectus with the accompanying prospectus supplement carefully. Together, these documents describe the specific terms of the securities we are offering. You should also carefully read the section entitled "Risk Factors" in this prospectus and the accompanying prospectus supplement and the documents identified under the caption "Where You Can Find More Information." References to "Metricom, Inc." refer to Metricom, Inc. and references to "Metricom Finance" refer to Metricom Finance, Inc. Unless the context requires otherwise, references to "we," "us" or "our" refer to Metricom, Inc. and Metricom Finance, collectively. Metricom, Inc. is a leading provider of mobile wireless data access to corporate networks and the Internet. Metricom, Inc. has designed its new high speed service, marketed under the Ricochet(R) brand name, to meet the needs of the growing number of professionals who require full access to their corporate networks and the Internet while away from the office. Metricom, Inc.'s service will also appeal to consumers who desire high-speed mobile access to the Internet. Simply by connecting a wireless modem to a laptop computer or other portable electronic device, users can access their corporate networks and the Internet whenever they want and wherever they are within Metricom, Inc.'s service areas, just as they would with a wired modem. Metricom, Inc. was incorporated in California in December 1985 and reincorporated in Delaware in April 1992. Its principal office is located at 980 University Avenue, Los Gatos, California 95030-2375. Its telephone number at that location is (408) 399-8200, and its Web sites are located at www.metricom.com and www.ricochet.net. Information contained on these Web sites does not constitute part of this prospectus. Metricom Finance is a wholly owned subsidiary of Metricom, Inc., newly formed for the purpose of allowing Metricom, Inc. to consummate a holding company reorganization. THE SECURITIES WE MAY OFFER Metricom, Inc. may offer shares of its common stock, and Metricom, Inc. and Metricom Finance may offer various series of debt securities, with a total value of up to $1.2 billion, from time to time, under this prospectus at prices and on terms to be determined by market conditions at the time of offering. This prospectus provides you with a general description of the securities we may offer. Each time we offer a type or series of securities, we will provide a prospectus supplement that will describe the specific amounts, prices and other important terms of the securities, including, to the extent applicable: - designation or classification; - aggregate principal amount or aggregate offering price; - maturity, if applicable; - rates and times of payment of interest or dividends, if any; - redemption, conversion or sinking fund terms, if any; - voting or other rights, if any; - conversion prices, if any; and - important federal income tax considerations. The prospectus supplement may also add, update or change information contained in this prospectus or in documents we have incorporated by reference. THIS PROSPECTUS MAY NOT BE USED TO COMPLETE ANY SALE OF SECURITIES UNLESS IT IS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT. 3 75 We may sell the securities directly to or through agents, underwriters or dealers. We, and our agents or underwriters, reserve the right to accept or reject all or part of any proposed purchase of securities. If we do offer securities through agents or underwriters, we will include in the applicable prospectus supplement: - the names of those agents or underwriters; - applicable fees, discounts and commissions, to be paid to them; and - the net proceeds to us. Common Stock. Metricom, Inc. may offer its common stock from time to time. Holders of common stock are entitled to one vote per share on all matters submitted to a vote of stockholders, except those matters that are submitted solely to a vote of the holders of preferred stock. Subject to any preferences of outstanding shares of preferred stock, holders of common stock are entitled to dividends when and if declared by the board of directors. Debt Securities. We may offer debt securities from time to time, in one or more series, as either senior or subordinated debt or as senior or subordinated convertible debt. The senior debt securities will rank equally with all of our other unsecured and unsubordinated debt. The subordinated debt securities will be subordinate and junior in right of payment, to the extent and in the manner described in the instrument governing that debt, to all of our senior indebtedness. Convertible debt securities will be convertible into Metricom, Inc.'s common stock. Conversion may be mandatory or at your option and would be at prescribed conversion rates. The debt securities will be issued under indentures between us and Bank One Trust Company, N.A., referred to as Bank One, as trustee. In this prospectus, we have summarized certain general features of the debt securities. We urge you, however, to read the prospectus supplements related to the series of debt securities being offered, as well as the complete indentures, which contain the terms of the debt securities. The indentures have been filed as exhibits to the registration statement of which this prospectus is a part. Guarantees. Metricom, Inc. will fully and unconditionally guarantee the obligations of Metricom Finance under the debt securities. Each guarantee with respect to senior debt securities will constitute part of Metricom, Inc.'s senior debt. Each guarantee with respect to subordinated debt securities will be subordinated to Metricom, Inc.'s senior indebtedness on the same basis as the applicable security. Upon the completion of a holding company reorganization, that guarantee automatically, and without further notice to or action by the holders of the debt securities, will be released entirely and will cease to be of any force and effect. After that time, all references in the indenture and any supplemental indentures to an obligor of the debt securities will refer only to the holding company. 4 76 RISK FACTORS The prospectus supplement applicable to each type or series of securities we offer will contain a discussion of risks applicable to an investment in Metricom, Inc. and/or Metricom Finance and to the particular types of securities that we are offering under that prospectus supplement. Prior to making a decision about investing in our securities, you should carefully consider the specific factors discussed under the caption "Risk Factors" in the applicable prospectus supplement, together with all of the other information contained in the prospectus supplement or appearing or incorporated by reference in the registration statement of which this prospectus is a part. FORWARD-LOOKING INFORMATION This prospectus contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that are based on the current expectations that we have about Metricom, Inc. and its industry. Words such as "expect," "anticipate," "estimate," "believe," "intend," "plan" and other similar expressions are used to identify some forward-looking statements, but not all forward-looking statements include these words. Some of these forward-looking statements relate to commercial acceptance of Metricom, Inc.'s service and the holding company reorganization. All forward-looking statements involve risks and uncertainties. Metricom, Inc.'s actual results may differ significantly from our expectations and from the results expressed in or implied by these forward-looking statements. The section captioned "Risk Factors" that appears in Metricom, Inc.'s annual report on Form 10-K, as amended, for the year ended December 31, 1998 and Metricom, Inc.'s current report on Form 8-K filed with the SEC on July 9, 1999, as subsequently amended, as well as the section captioned "Risk Factors" that will appear in prospectus supplements accompanying this prospectus describe some, but not necessarily all, of the factors that could cause these differences. We urge you to read those sections carefully. Except as may be required by law, we undertake no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. DEFICIENCY OF EARNINGS TO FIXED CHARGES Metricom, Inc.'s earnings were insufficient to cover fixed charges during each of the periods described below. For the purpose of these calculations, "earnings" consist of income before taxes, plus fixed charges, and "fixed charges" consist of interest expense incurred and the portion of rental expense deemed by Metricom, Inc. to be representative of the interest factor of rental payments under leases.
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------- -------------- 1994 1995 1996 1997 1998 1998 1999 ----- ----- ----- ----- ----- ----- ----- (DOLLARS IN MILLIONS) (UNAUDITED) Deficiency of earnings to fixed charges..... $11.7 $23.5 $39.3 $59.3 $84.2 $45.9 $48.2
USE OF PROCEEDS Unless otherwise described in a prospectus supplement, we will use the net proceeds from the offering of the securities for deployment and commercialization of Metricom, Inc.'s network and for other general corporate purposes, principally working capital, funding operating losses, capital expenditures and operating expenses related to Metricom, Inc. When we offer a particular type or series of securities, the prospectus supplement relating to those securities will describe our intended use of the net proceeds we will receive from the sale of those securities. Unless otherwise described in a prospectus supplement, pending application for specific purposes, the net proceeds of any offering of securities may be invested in short-term investments and marketable securities. 5 77 DESCRIPTION OF DEBT SECURITIES We may offer the debt securities from time to time as either senior or subordinated debt or as senior or subordinated convertible debt. We will issue senior debt securities under an indenture between us, as joint and several obligors, and Bank One, as trustee. We will issue subordinated debt securities under another indenture between us, as joint and several obligors, and Bank One, as trustee. The terms of the indentures are also governed by the provisions of the Trust Indenture Act. The following is a summary of the material provisions of the debt securities; however, we urge you to review the senior debt indentures and the subordinated debt indenture, which are filed as exhibits to the registration statement of which this prospectus is a part. See "Where You Can Find More Information." Unless the context requires otherwise, whenever we refer to the indentures, we also are referring to any supplemental indentures that specify the terms of a particular series of debt securities. In this description, the phrases "we," "our" and similar terms refer only to Metricom, Inc. and Metricom Finance as co-issuers and as co-obligors and not to any future subsidiaries that Metricom, Inc. may create or acquire. GENERAL The indentures allow us to issue debt securities in series up to the aggregate amount we authorize from time to time for each series. We will describe the following terms of the debt securities, to the extent those terms are applicable, and other information that we consider relevant relating to a particular series of debt securities in a prospectus supplement: - the designation and title of the debt securities; - the classification of those securities as senior or subordinated debt securities; - the aggregate principal amount, or principal amount at maturity, as applicable, of the debt securities; - the percentage of the principal amount, or principal amount at maturity, as applicable, at which we will issue and sell the debt securities; - the date or dates on which the debt securities will mature; - the rate or rates per annum, if any, which may be fixed or variable, at which the debt securities will bear or accrete interest, or the method of determination of the interest rate or rates; - the times and places at which the interest, if any, will be payable; - provisions for sinking, purchase or other analogous funds, if any; - the date or dates or particular events, if any, after which we may, or must, redeem the debt securities, as well as the redemption price or prices; - the date or dates or particular events, if any, after which we must offer to repurchase the debt securities from their holders, as well as the repurchase price or prices; - the date or the dates, if any, after which the holders may convert the debt securities into shares of our common stock and the terms for that conversion; and - any other material terms of, including any covenants or defined terms applicable to, the debt securities. We will pay the principal, premium, if any, and interest, if any, on debt securities by wire transfer of immediately available funds to the holder of any debt securities held in global form and at the office of the trustee maintained for that purpose with respect to any certificated notes. With respect to certificated debt securities, we may pay interest, if any, at our option by check mailed to the address of the person entitled to payment as it appears in our security register or by wire transfer of immediately available funds in accordance with instructions provided by the registered holders of certificated debt securities. Debt securities will be transferable at the office of the trustee maintained for that purpose. 6 78 We may issue debt securities in registered form and, unless otherwise specified in the applicable prospectus supplement, only in denominations of $1,000 and integral multiples of $1,000. We may also issue debt securities in book-entry form, without certificates. We will describe the procedures relating to an issue of book-entry debt securities in the prospectus supplement relating to those debt securities. We will not require a service charge for any transfer or exchange of the debt securities, but we or the trustee may require payment of a sum sufficient to cover any transfer tax or other similar government charge payable in connection with a transfer or exchange. We may issue debt securities under the indentures at a substantial discount from their stated principal amount at maturity. We will describe any U.S. federal income tax consequences and other considerations applicable to debt securities issued with "original issue discount" in the prospectus supplement relating to those debt securities. CONVERSION RIGHTS The prospectus supplement will describe, if applicable, the terms on which the holders may convert debt securities into common stock. The conversion may be mandatory or may be at the option of the holder of debt securities. The prospectus supplement will describe how the number of shares of common stock to be received upon conversion would be calculated. MERGER, CONSOLIDATION AND SALE OF ASSETS Unless we provide otherwise in the prospectus supplement relating to a particular series of debt securities, the indentures will not permit us to consolidate with or merge into any other person or sell, convey, transfer or lease all or substantially all of our properties and assets as an entirety to any person, unless: - the person formed by the consolidation or into which we are merged, or the person that acquires our properties and assets by sale, conveyance or transfer or which leases our properties and assets substantially as an entirety: - is a corporation, validly existing under the laws of the United States of America, any state of the United States, or the District of Columbia, and - expressly assumes, by a supplemental indenture, executed and delivered to the trustee, in form reasonably satisfactory to the trustee, our obligations for the due and punctual payment of the principal of, premium, if any, and interest on all the debt securities and the performance and observance of every covenant of the indentures; - immediately after giving effect to the transaction, no default or event of default shall have occurred and be continuing with respect to the applicable debt securities; and - the person formed by the consolidation or surviving the merger or acquiring or leasing our properties and assets delivers an officers' certificate and an opinion of counsel to the trustee, each stating that the consolidation, merger, conveyance, transfer or lease and the supplemental indenture comply with these provisions of the indentures and that all conditions precedent provided for under the indentures that relate to the transaction have been satisfied. These provisions apply only to a merger or consolidation in which we are not the surviving corporation and to sales, conveyances, leases and transfers by us as transferor or lessor. We use the term "person" to mean any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision of a government entity. The indentures also provide that, upon completion of any of the transactions described above in accordance with the preceding paragraphs, the person formed by the consolidation or surviving the merger or acquiring or leasing our properties and assets will be substituted for us and will succeed to, and may exercise, all of our rights and powers under the indentures with the same effect as if that person had been named as the 7 79 obligor under the indentures. Also, upon completion of any of these transactions, except in the case of a lease, we will be discharged from all our obligations and covenants under the indentures and the debt securities. Notwithstanding the foregoing provisions, nothing in this "Merger, Consolidation or Sale of Assets" covenant will prohibit us from completing the holding company reorganization, provided that the completion of that transaction is solely for the purpose of effecting the holding company reorganization and not for the purpose of circumventing any other provision of the indenture or any supplemental indentures. EVENTS OF DEFAULT Unless we provide otherwise in the prospectus supplement relating to a particular series of debt securities, the following will be events of default under the indentures: (1) default in the payment of interest on any debt securities when the interest becomes due and payable, if the default continues for 30 days; or (2) default in the payment of the principal of, or premium, if any, on, any debt securities of that series at its maturity or upon any redemption; or (3) default in the deposit of any sinking fund payment when and as due pursuant to the terms of the debt securities of that series and the indentures and such default shall continue for a period of 30 days; or (4) default in the performance, or breach, of any covenant or warranty in the indentures, other than a default in the performance, or breach, of a covenant or warranty that is specifically dealt with elsewhere under this "events of default" section, if the default or breach continues for 60 days after the trustee or the holders of at least 25% in principal amount, or principal amount at maturity, as applicable, deliver a written "notice of default" to us specifying the default or breach and requiring it to be remedied; or (5) the entry of a decree or order by a court with appropriate jurisdiction adjudging us bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition with regard to us under the Federal Bankruptcy Code or any other applicable federal or state law, or appointing a receiver, liquidator, assignee, trustee, sequestrator, or other similar official with regard to us or any substantial part of our property, or ordering the winding up or liquidation of our affairs, if such a decree or order continues unstayed and in effect for a period of 60 consecutive days; or (6) our institution of proceedings to be adjudicated bankrupt or insolvent, or our consent to the institution of bankruptcy or insolvency proceedings against us, or our filing of a petition or answer or consent seeking reorganization or relief under the Federal Bankruptcy Code or any other applicable federal or state law, or our consent, to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator, or other similar official regarding us or of any substantial part of our property, or our making of an assignment for the benefit of creditors; or (7) any other event of default provided with respect to debt securities of that series. In each case, "default" means any event which is, or after notice or passage of time or both would be, an event of default. Unless we provide otherwise in the prospectus supplement relating to a particular series of debt securities, if an event of default described in clause (1), (2), (3), (4) or (7) above occurs and is continuing, then in every case the trustee or the holders of not less than 25% in principal amount, or principal amount at maturity, as applicable, of the outstanding debt securities of that series may declare the principal amount or, if the debt securities of that series are original issue discount securities, the portion of the principal amount as may be specified in the terms of that series, of all of the debt securities of that series to be due and payable immediately, by a notice in writing to us, and to the trustee if given by holders, and upon any declaration the principal amount or specified portion of the principal amount will become immediately due and payable. If an 8 80 event of default described in clause (5) or (6) above occurs and is continuing, then the principal amount of all the debt securities will automatically be immediately due and payable without any declaration or other act on the part of the trustee or any holder of those debt securities. At any time after a declaration of acceleration with respect to debt securities of any series or all series, as applicable, has been made, the holders of a majority in principal amount, or principal at maturity, as applicable, of the outstanding debt securities of that series, or of all series, as the case may be, by written notice to us and the trustee, may rescind and annul the declaration and its consequences if the rescission would not conflict with any judgment or decree and if all existing events of default have been cured or waived except nonpayment of principal or interest that has become due solely because of acceleration. Such a rescission will not affect any subsequent default or impair any right consequent to a subsequent rescission. Except as otherwise provided in each indenture, or any supplement thereto, the holders of not less than a majority in principal amount, or principal amount at maturity, as applicable, of the outstanding debt securities of any series may, on behalf of the holders of all the debt securities of such series, waive any past default, described in clause (1), (2), (3), (4) or (7) of the first paragraph of this section, or, in the case of a default described in clause (5) or (6) of the first paragraph of this section, the holders of not less than a majority in principal amount, or principal amount at maturity, as applicable, of all outstanding debt securities may waive any such past default, and its consequences, except a default: - respect of the payment of the principal of, or premium, if any, on, or interest on any debt security, or - in respect of a covenant or provision which under the indentures cannot be modified or amended without the consent of the holders of all or more than a majority in principal amount, or principal amount at maturity, as applicable, of the outstanding debt security of the affected series. A default will cease to exist upon a waiver and any event of default arising from that default will be deemed to have been cured for every purpose of the indentures, but the waiver will not extend to any subsequent or other default or event of default. Except to enforce the right to receive payment of principal, premium, if any, or interest on any debt security, no holder of any debt security of any series will have any right to institute any proceeding, judicial or otherwise, with respect to the indentures, or for the appointment of a receiver or trustee, or for any other remedy thereunder, unless: - that holder has previously given written notice to the trustee of a continuing event of default with respect to the debt securities of that series; - the holders of not less than 25% in principal amount, or principal amount at maturity, as applicable, of the outstanding debt securities of that series in the case of any event of default under clause (1), (2), (3), (4) or (7) of the first paragraph of this section, or, in the case of any event of default described in clause (5) or (6) of the first paragraph of this section, the holders of not less than 25% in principal amount, or principal amount at maturity, as applicable, of all outstanding debt securities delivers a written request to the trustee to institute proceedings in respect of the event of default in its own name as trustee under each of the indentures; - that holder or holders offer the trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with the request to institute proceedings; - the trustee fails to institute a proceeding for 60 days after receiving the notice, request and offer of indemnity; and - no direction inconsistent with such written request has been given to the trustee during such 60-day period by the holders of at least a majority in principal amount, or principal amount at maturity, as applicable, of the outstanding debt securities of that series in the case of any default under clause (1), (2), (3), (4) or (7) of the first paragraph of this section, or, in the case of any event of default described in clause (5) or (6) of the first paragraph of this section, by the holders of at least 9 81 a majority in principal amount, or principal amount at maturity, as applicable, of all outstanding debt securities. During the existence of an event of default, the trustee must exercise the rights and powers vested in it under either indenture in good faith. Subject to the provisions of the indentures relating to the duties of the trustee, in case an event of default occurs and is continuing, the trustee under the indentures is not under any obligation to exercise any of its rights or powers under the indentures at the request or direction of any of the holders unless these holders offer the trustee reasonable indemnity. Subject to provisions of the indentures concerning the rights of the trustee, with respect to the debt securities of any series, the holders of not less than a majority in principal amount, or principal amount at maturity, as applicable, of the outstanding debt securities of that series will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee, or exercising any trust or power conferred on the trustee under the indentures. Within 90 days after the occurrence of any default with respect to debt securities of any series, the trustee will transmit notice of any default known to it to the holders of the affected debt securities in the manner and to the extent provided in Section 313(c) of the Trust Indenture Act, unless the default is cured or waived; however, except in the case of a default in the payment of the principal of, or premium, if any, on, or interest on any debt securities of that series, or in the payment of any sinking fund installment with respect to debt securities of that series, the trustee will be protected in withholding that notice if and so long as the trustee in good faith determines that the withholding of that notice is in the interest of the holders of debt securities of that series. We are required to deliver a brief certificate of our compliance with all of the conditions and covenants under the indentures to the trustee within 120 days after the end of each fiscal year. DEFEASANCE OR COVENANT DEFEASANCE We may, at our option and at any time, terminate our obligations with respect to the outstanding debt securities of any series, referred to as "defeasance." Defeasance means that we will be deemed to have paid and discharged the entire indebtedness represented by the outstanding debt securities, except for the following provisions, which will survive until otherwise terminated or discharged under the indentures: - the rights of holders of the outstanding debt securities - to receive, solely from the trust fund described in the indentures, payments in respect of the principal of, and premium, if any, on, and interest on those debt securities when those payments are due, and - to receive shares of common stock or other securities from us upon conversion of any convertible debt securities issued thereunder; - our obligations to issue temporary debt securities, register the transfer or exchange of any debt securities, replace mutilated, destroyed, lost or stolen debt securities, maintain an office or agency for payments in respect of the debt securities and, if we act as our own paying agent, hold in trust, money to be paid to the persons entitled to payment, and with respect to "additional amounts," if any, on those debt securities as contemplated in the indentures; - the rights, powers, trusts, duties and immunities of the trustee under the indentures; and - the defeasance provisions of the indentures. In addition, we may, at our option and at any time, elect to terminate our obligations with respect to selected covenants that are set forth in the indentures and any omission to comply with those obligations will not constitute a default or an event of default with respect to the debt securities, referred to as "covenant defeasance." 10 82 In order to exercise either defeasance or covenant defeasance: - we must irrevocably deposit or cause to be deposited with the trustee, in trust, for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the applicable debt securities, - money, or - Government Obligations that mature not later than one day before the due date of any payment of principal, premium, if any, and interest, under the applicable debt securities, or - a combination of money and Government Obligations as described immediately above, - the money or Government Obligations, or both, must in any case, be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay and discharge - the principal of, and any premium and all installments of interest on, the outstanding debt securities on the stated maturity date (or any redemption date that we select, if applicable), and - any mandatory sinking fund payments or analogous payments applicable to the outstanding debt securities on the day on which those payments are due and payable; however, we must deliver to the trustee irrevocable instructions to apply the money or the proceeds of the Government Obligations to the payments required to be made with respect to those debt securities; - the defeasance or covenant defeasance of the debt securities will not result in a breach or violation of, or constitute a default under, the indentures or any other material agreement or instrument to which we are a party or by which we are bound; - we must effect the defeasance or covenant defeasance of the debt securities in compliance with any additional or substitute terms, conditions or limitations set forth in the prospectus supplement relating to a particular series of debt securities; and - we must deliver an officers' certificate and an opinion of counsel to the trustee, each stating that all conditions precedent under the indentures to either defeasance or covenant defeasance, as the case may be, have been satisfied. "Government Obligations" means direct obligations, or certificates representing an ownership interest in such obligations, of the United States, including any agency or instrumentality of the United States, for the payment of which the full faith and credit of the United States is pledged and which are not callable or redeemable at the issuer's option. Before we make a deposit to effect a defeasance or covenant defeasance of the debt securities, we may give to the trustee, in accordance with the redemption provisions in the indentures, a notice of our election to redeem all or any portion of the outstanding debt securities at a future date in accordance with the terms of the debt securities of that series and the redemption provisions of the indentures, which notice must be irrevocable. If we deliver such an irrevocable redemption notice, it will be given effect in applying the foregoing. With respect to subordinated debt securities, money and securities held in trust pursuant to the defeasance and covenant defeasance provisions of the indentures, will not be subject to the subordination provisions of the subordinated indenture. 11 83 SATISFACTION AND DISCHARGE The indentures will, upon a written request or order signed by one of our designated officers and delivered to the trustee, cease to be of further effect with respect to any series of debt securities, except as to any surviving rights of registration of transfer or exchange or conversion of debt securities of that series expressly provided for, and the trustee will be required to execute proper instruments acknowledging satisfaction and discharge of such indenture as to that series when either: - we have delivered to the trustee for cancellation all debt securities of that series previously authenticated and delivered, other than: - debt securities that have been destroyed, lost or stolen and which have been replaced or paid, as provided in the indentures, and - debt securities for which money sufficient to make all payment on the debt securities has previously been deposited in trust with the trustee or any paying agent or segregated and held in trust by us with any remaining amounts to thereafter be repaid to us, as provided in the indentures, or - all debt securities, other than convertible debt securities, of the series: - have become due and payable, or - will become due and payable at their stated maturity within one year, or - if redeemable at our option, are to be called for redemption within one year under arrangements reasonably satisfactory to the trustee for the giving of notice of redemption by the trustee in the name, and at our expense; and we irrevocably deposit or cause to be deposited with the trustee as trust funds in trust an amount of money or Government Obligations sufficient to pay and discharge the entire indebtedness on those debt securities not previously delivered to the trustee for cancellation, including all principal of and any premium and installments of interest to the date of such deposit in the case of debt securities which have become due and payable or to the stated maturity or redemption date of the debt securities, as applicable. In addition, in order to satisfy and discharge the securities, we will be required to: - pay or cause to be paid all other sums payable under the debt securities by us; and - deliver an officers' certificate and an opinion of counsel to the trustee, each stating that all conditions precedent provided for relating to the satisfaction and discharge of the indentures as to such series have been satisfied. AMENDMENTS AND WAIVERS Under the indentures, we and the trustee may at any time and from time to time, without the consent of any holder of debt securities, enter into one or more supplemental indentures to: - cure ambiguities, defects or inconsistencies, or to make any other provisions with respect to questions or matters arising under the indentures; - effect or maintain the qualification of the indentures under the Trust Indenture Act; - secure any debt securities; - add covenants for the protection of the holders of debt securities; - establish the forms or terms of debt securities of any series; - make any other change that does not adversely affect in any material respect the rights under such indenture of the holders of debt securities thereunder; 12 84 - add a guarantee of our payment obligations under the indentures by a subsidiary or other party; - evidence the acceptance of appointment by a successor trustee; - evidence the succession of another person to us and the assumption by any such successor of our obligations in accordance with the indentures and the debt securities; and - evidence the release of any obligations of a co-obligor or guarantor in connection with the holding company reorganization. Other amendments and modifications of the indentures or the debt securities may be made by us and the trustee with the consent of the holders of not less than a majority of the aggregate principal amount, or principal amount at maturity, as applicable, of all of the then outstanding debt securities of the affected series; however, no such modification or amendment may, without the consent of the holder of each outstanding debt security affected thereby, - change the stated maturity of the principal of, or any installment of interest on, any debt security; - reduce the principal amount or the rate of interest or any premium payable upon the redemption of any debt security; - change any obligation of us to pay any "additional amounts" contemplated by each indenture (except as contemplated and permitted by certain provisions of the indentures); - reduce the accreted amount of an original issue discount security that would be due and payable upon a declaration of acceleration of the maturity of the debt securities under the indentures or the amount of the debt securities provable in bankruptcy pursuant to the indentures; - adversely affect, after the event giving rise to any right of repayment occurs, any right of repayment at the option of any holder of any debt security, or change any place of payment described in the indentures where any debt security or any premium or the interest thereon is payable; - impair the right to institute suit for the enforcement of any payment on or after the stated maturity of the debt securities, or, in the case of redemption or repayment of the debt securities, on or after the redemption date or repayment date, as applicable; - adversely affect any right to convert any debt securities as may be provided under the indentures; or - reduce the percentage in principal amount, or principal amount at maturity, as applicable, of the outstanding debt securities of any series, the consent of whose holders is required for any such supplemental indenture, for any waiver of compliance with provisions of the indentures or defaults thereunder and their consequences provided for in the indentures. SENIOR DEBT The debt securities that will be senior debt securities will be issued under the senior debt indenture and will rank on an equal basis with all of our other unsecured and unsubordinated debt. SUBORDINATED DEBT The debt securities that will be subordinated debt securities will be issued under the subordinated debt indenture and will be subordinate and junior in right of payment, to the extent and in the manner set forth in the subordinated debt indenture, to all of our "Senior Indebtedness." Unless we provide otherwise in the prospectus supplement relating to a particular series of debt securities, the subordinated debt indenture will define "Senior Indebtedness" as obligations, or obligations guaranteed or assumed by us, for borrowed money or evidenced by bonds, debentures, notes or other similar instruments, and amendments, renewals, extensions, modifications and refundings of any such indebtedness or obligations, other than nonrecourse obligations, the subordinated debt securities or any other obligations specifically designated as not constituting, or as being subordinate in right of payment to, Senior Indebtedness. 13 85 In the event: - of any insolvency or bankruptcy proceedings, or any receivership, liquidation, reorganization or other similar proceedings in respect of us or a substantial part of our property, or - that a default occurs with respect to the payment of principal of, and any premium or interest on, or other monetary amounts due and payable on any Senior Indebtedness or - that there occurs an event of default, other than a default in the payment of principal, and any premium or interest, or other monetary amounts due and payable, with respect to any Senior Indebtedness, permitting the holder or holders of that Senior Indebtedness to accelerate the maturity of that Senior Indebtedness, with notice or lapse of time, or both, and such event of default continues beyond the period of grace, if any, in respect of that default or event of default, and the default or event of default is not cured or waived or ceases to exist, or - that the principal of and accrued interest on, or the accreted amount of, the subordinated debt securities is declared due and payable as a result of an event of default of the subordinated debt indenture and that declaration is not rescinded and annulled as provided under the subordinated debt indenture, then the holders of all Senior Indebtedness will be entitled to receive payment, in cash or cash equivalents, of the full amount unpaid on that Senior Indebtedness first, or provision will be made for that payment in money or money's worth, before the holders of any of the subordinated debt securities are entitled to receive a payment on account of the principal of, and any premium or interest on, the indebtedness evidenced by such subordinated debt securities. If this prospectus is being delivered in connection with a series of subordinated debt securities, the accompanying prospectus supplement or the information incorporated by reference will set forth the approximate amount of Senior Indebtedness outstanding as of the end of the most recent fiscal quarter. Moreover, that prospectus supplement will contain more specifically the subordination provisions applicable to the particular series of subordinated debt securities being offered. GUARANTEES The obligations of Metricom Finance under the debt securities will be fully and unconditionally guaranteed by Metricom, Inc. Each guarantee of Metricom Finance's obligations under senior debt securities will constitute part of the senior debt of the Metricom, Inc. and will rank pari passu with all other unsecured and unsubordinated debt of Metricom, Inc. Each guarantee with respect to subordinated debt securities will be subordinated to Metricom, Inc.'s senior indebtedness on the same basis as provided above with respect to the subordination of the relevant subordinated debt securities to senior indebtedness of Metricom Finance. Upon completion of a holding company reorganization, the guarantee automatically, and without further notice to or action by the holders of the debt securities, will be released entirely and will cease to be of any force and effect. GOVERNING LAW The indentures and the debt securities will be governed by and construed in accordance with the laws of the State of New York. The indentures are subject to the provisions of the Trust Indenture Act that are required to be a part thereof and will, to the extent applicable, be governed by such provisions. DESCRIPTION OF CAPITAL STOCK GENERAL Metricom, Inc. has authorized capital stock of 150 million shares of common stock, $0.001 par value per share, and 80 million shares of preferred stock, $0.001 par value per share. As of October 29, 1999, there 14 86 were 21,982,627 shares of Metricom, Inc.'s common stock and 60 million shares of its preferred stock outstanding. Metricom Finance has authorized capital stock of 1,000 shares of common stock, $0.001 par value. As of December 22, 1999, 1,000 shares were issued, outstanding and held of record by Metricom, Inc. Metricom, Inc.'s Restated Bylaws divide its board of directors into three classes as nearly equal in size as possible with staggered three-year terms. Metricom Finance's board of directors will be divided into three classes upon the effectiveness of the registration statement, if any, covering a class of equity securities under the Securities Exchange Act of 1934, as amended. The classification of the board of directors could delay or deter a third party from acquiring control of Metricom, Inc. or Metricom Finance. Metricom, Inc. is currently subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. Section 203 prevents certain Delaware corporations, including those whose securities are listed on the Nasdaq National Market, from engaging, under certain circumstances, in a "business combination," which includes a merger or sale of more than 10% of the corporation's assets, with any interested stockholder for three years following the date that the stockholder became an interested stockholder. An interested stockholder is a stockholder who acquired 15% or more of the corporation's outstanding voting stock without the prior approval of the corporation's board of directors. At Metricom, Inc.'s annual meeting of stockholders held on October 15, 1999, its stockholders elected not to be governed by Section 203. The election will become effective 12 months after adoption of the election. Metricom Finance's stockholder has made the same election, which election is currently effective. The following summaries of certain provisions of our common stock and preferred stock do not purport to be complete and are subject to, and are qualified in their entirely, by the provisions of Metricom, Inc.'s Restated Certificate of Incorporation, and Amended and Restated Bylaws, and by Metricom Finance's Certificate of Incorporation, as amended, and Bylaws, which are incorporated by reference into the registration statement of which this prospectus is a part. COMMON STOCK Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available for the payment of dividends at the times and in the amounts that the board of directors may determine from time to time. Except, with regard to Metricom, Inc., as discussed below under the caption "Preferred Stock," each stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in Metricom, Inc.'s restated certificate or Metricom Finance's certificate, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election (other than directors to be elected solely by the holders of the series of preferred stock). The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon a liquidation, dissolution or winding-up, the assets legally available for distribution to stockholders are distributable ratably among the holders of the common stock and any participating preferred stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding preferred stock and payment of other claims of creditors. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, validly issued, fully paid and nonassessable. The transfer agent and registrar for Metricom, Inc.'s common stock is Boston Equiserve. PREFERRED STOCK Metricom, Inc.'s restated certificate authorizes 80 million shares of preferred stock, of which 36 million shares are designated Series A1 preferred stock, 36 million shares are designated Series A2 preferred stock and 8 million shares are not currently designated. The material terms of the Series A1 and Series A2 preferred stock are summarized below. Metricom, Inc.'s board of directors has the authority to issue the remaining undesignated shares of preferred stock in additional series and to fix the rights, preferences, privileges and restrictions of any new series, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or 15 87 the designation of such series, without further vote or action by our stockholders, subject to rights of the holders of outstanding preferred stock. The preferred stock may have the effect of delaying, deterring or preventing a change in our control without further action by Metricom, Inc.'s stockholders and may adversely affect the voting and other rights of the holders of Metricom, Inc.'s common stock. Metricom Finance's certificate of incorporation does not currently authorize preferred stock. SERIES A1 AND A2 PREFERRED STOCK OF METRICOM Dividends. The holders of shares of each of the Series A1 preferred and Series A2 preferred have the right to receive cumulative dividends payable, at Metricom Inc.'s option, in cash or additional shares of Series A1 preferred or Series A2 preferred, as the case may be, at the annual rate of 6.5% of the original issue price of $10 per share, until November 15, 2002 after which date the right to such cumulative dividends shall terminate, and holders of shares of each of the Series A1 and Series A2 preferred stock shall be entitled to dividends only when, as and if declared by Metricom Inc.'s Board of Directors. Cumulative dividends payable to the holders of Series A1 preferred stock will be prior and in preference to any dividends payable to the holders of common stock and Series A2 preferred stock. Cumulative dividends payable to the holders of Series A2 preferred stock will be prior and in preference to the dividends payable to the holders of common stock. Voting Rights. For so long as more than 7.5 million shares of each of the Series A1 preferred and Series A2 preferred are outstanding, the affirmative vote of the holders of at least a majority of the outstanding shares of each of the Series A1 and Series A2 preferred will be required to: - amend any provision of Metricom, Inc.'s restated certificate that changes the rights and preferences of that series so as to adversely affect the rights of the Series A1 preferred or Series A2 preferred, as the case may be, in a manner different from other classes or series of stock; - issue any new class or series of stock ranking senior in liquidation preference or dividends to the Series A1 preferred or Series A2 preferred, as the case may be; - issue any debt securities convertible into Metricom, Inc.'s equity securities at a price lower than $10 per share, subject to adjustment for any stock dividend, split, combination or other similar event; - redeem or repurchase, under specified circumstances, any series of stock junior to the Series A1 preferred or Series A2 preferred, as the case may be; or - declare or pay any dividend on outstanding common stock, subject to specified exceptions. In addition, for so long as more than 7.5 million shares of either of the Series A1 preferred or Series A2 preferred are outstanding, the holders of shares of those series of preferred stock, voting as separate classes, will be entitled to elect one member of Metricom, Inc.'s board of directors to represent each series. Holders of outstanding shares of Series A1 preferred may waive this right from time to time and instead designate an observer to attend meetings of the board of directors. Liquidation Rights. If Metricom, Inc. is liquidated, dissolved or wound up, the holders of Series A1 preferred and holders of Series A2 preferred will be entitled to be paid out of Metricom, Inc.'s assets, before any distribution to the holders of common stock, an amount equal to the greater of the original issue price plus accrued but unpaid dividends or the amount the holders would have received if the shares had been converted to common stock. For this purpose, "liquidation" includes: - a consolidation, merger or other reorganization in which Metricom, Inc.'s stockholders prior to the transaction own less than 50% of its voting power after such transaction or other transaction or series of transactions to which Metricom, Inc. is a party in which over 50% of its voting power is transferred; or - a sale, lease or other disposition of all or substantially all of Metricom, Inc.'s assets. 16 88 Redemption. On November 15, 2009, Metricom, Inc. must redeem all outstanding shares of Series A1 and Series A2 preferred. In the event of a change of control or major acquisition by Metricom, Inc., each holder of Series A1 and Series A2 preferred will have the right to require Metricom, Inc. to redeem all, but not less than all, of the shares of preferred stock held by that holder. For purposes of this provision, a "change of control" means an event by which any person or group, other than Vulcan Ventures Incorporated, MCI WorldCom, Inc. and their respective affiliates: - becomes a beneficial owner of more than 30% of Metricom, Inc.'s outstanding equity securities, or - acquires the right to elect at least 30% of the board of directors. For purposes of this provision, a "major acquisition" means the acquisition by Metricom, Inc. of more than 50% of the outstanding equity securities or all or substantially all of the assets of any entity, or Metricom, Inc.'s merger with another entity in which Metricom, Inc. is the surviving entity, in each case, for equity consideration exceeding 25% of Metricom, Inc.'s outstanding equity securities. Conversion. Holders of each of the Series A1 and Series A2 preferred have the right to convert their shares into common stock, subject to the limitation that Series A1 preferred shares do not become convertible until May 2002, at which time 25% of the Series A1 preferred stock originally issued will become convertible. Following each six-month period thereafter, an additional 25% of the Series A1 preferred stock originally issued will become convertible. Each share of Series A1 and Series A2 preferred is initially convertible into one share of common stock. The conversion rates and prices for each of the Series A1 and Series A2 preferred will be adjusted in the event of any stock split or combination, dividend payment or distribution on the common stock, reclassification or other change to the common stock, or reorganization, merger or sale of assets. Each of the Series A1 and Series A2 preferred will automatically be converted into shares of common stock in the event that shares of either series are transferred by the original purchaser to a person other than Vulcan, MCI WorldCom or their respective affiliates. If the holders of the Series A2 preferred stock exercise their right to convert their shares into common stock, then upon conversion we must pay to those holders who convert all accrued but unpaid dividends on the shares being converted. Dividends may not be paid on Series A2 preferred stock until all dividends payable on Series A1 preferred stock are fully paid, or declared and funds set aside for payment. Therefore, a conversion by holders of Series A2 preferred stock into common stock will also require us to pay all accrued but unpaid dividends on the Series A1 preferred stock and to declare and set aside funds for the then-current dividend period. Registration Rights. Under Metricom, Inc.'s Amended and Restated Registration Rights Agreement, dated November 15, 1999, the holders of 60,000,000 shares of Metricom, Inc.'s currently outstanding series of redeemable convertible preferred stock are entitled to certain registration rights with respect to the shares of common stock issuable upon conversion of the preferred stock. Subject to certain exceptions, including the right of Metricom, Inc. to defer a demand registration under specified conditions, holders that, in the aggregate, hold at least 500,000 shares of registrable securities have the right to require that Metricom, Inc. use its best efforts to register under the Securities Act their registrable securities, the anticipated offering price of which, net of underwriting discounts and commissions, would exceed $10,000,000. Additionally, in the event that Metricom, Inc. registers any of its common stock, either for its own account or for the account of any other stockholder, Metricom, Inc. is required to notify holders of registrable securities and, subject to certain limitations, to include in that registration the registrable securities of holders requesting registration. Registrable securities need not be included in registration statements relating to employee benefit plans or with respect to corporate reorganizations or other transactions under Rule 145 of the Securities Act. Metricom, Inc. is also required, subject to certain limitations, to give notice of and effect certain short-form registrations upon request of holders of registrable securities. Metricom, Inc. is not required to effect more than two registrations on Form S-3 in any 12-month period unless the registration is requested by Vulcan Ventures or MCI WorldCom or certain of their affiliates; however, Metricom, Inc. is not required to effect this registration if it has effected one or more registrations upon one of these holders' requests within the preceding 12-month period. 17 89 PLAN OF DISTRIBUTION We may sell the securities being offered by this prospectus through agents, underwriters or dealers. Agents designated by us from time to time may solicit offers to purchase the securities offered by this prospectus. Any agent involved in the offer or sale of those securities may be deemed to be an underwriter under the Securities Act and we will name that agent and describe any commissions payable by us to that agent in a prospectus supplement. Any agent appointed by us will be acting on a reasonable efforts basis for the period of its appointment or, if indicated in the applicable prospectus supplement, on a firm commitment basis. We may be obligated under agreements with these agents to indemnify them against civil liabilities, including liabilities under the Securities Act. These agents may also engage in transactions with or perform services for us in the ordinary course of business. If we utilize any underwriters in any sale of the securities in respect of which this prospectus is delivered, we will enter into an underwriting agreement with those underwriters at the time of sale to them, and the names of the underwriters and the terms of the transaction will be set forth in the prospectus supplement. That prospectus supplement will be used by the underwriters to make resales of the securities in respect of which this prospectus is delivered to the public. We may be obligated under the underwriting agreements with these underwriters to indemnify them against civil liabilities, including liabilities under the Securities Act. These underwriters may also engage in transactions with or perform services for us in the ordinary course of business. If we utilize a dealer in any sale of the securities in respect of which the prospectus is delivered, we will sell the securities to the dealer, as principal. The dealer may then resell those securities to the public at varying prices to be determined by the dealer at the time of resale. We may be obligated under agreements with these dealers to indemnify them against civil liabilities, including liabilities under the Securities Act. These dealers may also engage in transactions with or perform services for us in the ordinary course of business. If so indicated in the applicable prospectus supplement, we will authorize agents, underwriters or dealers to solicit offers from purchasers to purchase the securities from us at the public offering price set forth in the prospectus supplement under delayed delivery contracts providing for payment and delivery of those securities on a specified date in the future. These delayed delivery contracts will be subject to only those conditions set forth in the prospectus supplement, and we will set forth the commission payable for solicitation of these offers in the prospectus supplement. LEGAL MATTERS Cooley Godward LLP, San Francisco, California will provide us with an opinion as to the legality of the securities we are offering. Weil, Gotshal & Manges LLP, New York, New York, will serve as counsel to underwriters, dealers or agents purchasing any of the securities we are offering by this prospectus. Attorneys with Cooley Godward LLP own an aggregate of 1,675 shares of Metricom's common stock. 18 90 EXPERTS The audited financial statements and schedules incorporated by reference in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. WHERE YOU CAN FIND MORE INFORMATION Metricom, Inc. files annual, quarterly and current reports, proxy statements and other information with the SEC. We have filed with the SEC a registration statement on Form S-3 under the Securities Act. This prospectus does not contain all of the information set forth in the registration statement and the exhibits to the registration statement. For further information with respect to us and the securities we are offering under this prospectus, we refer you to the registration statement and the exhibits and schedules filed as a part of the registration statement. You may read and copy the registration statement, as well as Metricom, Inc.'s reports, proxy statements and other information at the SEC's public reference rooms at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the SEC's regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661 and at Seven World Trade Center, New York, New York 10048. You can request copies of these documents by writing to the SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the public reference rooms. Metricom, Inc.'s SEC filings are also available at the SEC's web site at "http://www.sec.gov." In addition, you can read and copy Metricom, Inc.'s SEC filings at the office of the National Association of Securities Dealers, Inc at 1735 K Street, N.W., Washington, D.C. 20006. The SEC allows us to "incorporate by reference" information that we file with it, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus. This prospectus and the information that we file later with the SEC may update and supersede the information incorporated by reference. We incorporate by reference the documents listed below and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to the termination of the offering of all securities to which this prospectus relates: - Annual Report on Form 10-K of Metricom, Inc. for the year ended December 31, 1998, as amended; - Quarterly Report on Form 10-Q of Metricom, Inc. for the quarter ended March 31, 1999; - Quarterly Report on Form 10-Q of Metricom, Inc. for the quarter ended June 30, 1999; - Quarterly Report on Form 10-Q of Metricom, Inc. for the quarter ended September 30, 1999; - Current Report on Form 8-K of Metricom, Inc. filed with the SEC on July 9, 1999, as subsequently amended; and - The description of common stock of Metricom, Inc. contained in our registration statement on Form 8-A filed with the SEC on February 28, 1992. You may request of copy of these filings at no cost, by writing or telephoning us at the following address: Corporate Secretary Metricom, Inc. 980 University Avenue Los Gatos, California 94030 (408) 399-8200 19 91 Inside back cover: [A graphic representation titled "Ricochet Solution - Replicating the Desktop" and which depicts photographs of various people using laptops and identifies certain features of our service such as: Mobile access; always on, always available; high speed, high performance; low, flat, predictable cost; secure and reliable; and complements data capabilities of mobile phones.] 92 5,000,000 Shares RICOCHET LOGO METRICOM, INC. Common Stock ----------------------------------------- PROSPECTUS SUPPLEMENT February 1, 2000 ----------------------------------------- Joint Book-Running Managers LEHMAN BROTHERS SALOMON SMITH BARNEY ------------------------- Co-Managers MERRILL LYNCH & CO. CHASE H&Q J.P. MORGAN & CO. -----END PRIVACY-ENHANCED MESSAGE-----