-----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, BcUD8lM0U8meOWpSfbnbgTdH71vHtiBhp1qQo8bBUGttNTHxFkk2oAbt9WSkmjPB MWq/lkYKF9qFdAYlUVNiLQ== 0000950149-97-002260.txt : 19971224 0000950149-97-002260.hdr.sgml : 19971224 ACCESSION NUMBER: 0000950149-97-002260 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19971223 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: METRICOM INC / DE CENTRAL INDEX KEY: 0000884318 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 770294597 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-19903 FILM NUMBER: 97742775 BUSINESS ADDRESS: STREET 1: 980 UNIVERSITY AVE CITY: LOS GRATOS STATE: CA ZIP: 95030 BUSINESS PHONE: 4083998200 MAIL ADDRESS: STREET 1: 980 UNIVERSITY AVE CITY: LOS GATOS STATE: CA ZIP: 95030 10-K/A 1 AMENDMENT #2 TO FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A AMENDMENT NO. 2 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended Commission File Number December 31, 1996 0-19903 METRICOM, INC. (Exact name of Registrant as specified in its charter) DELAWARE 77-0294597 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 980 UNIVERSITY AVENUE, LOS GATOS, CA 95030-2375 (Address of principal executive offices, including zip code) (408) 399-8200 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001 PAR VALUE PER SHARE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ The approximate aggregate market value of the Common Stock held by non-affiliates of the Registrant, based upon the last sale price of the Common Stock reported on the Nasdaq National Market on March 17, 1997 was $94,275,297. The number of shares of Common Stock outstanding as of March 17, 1997 was 13,599,613. 2 SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those factors identified below under "Item 1 -- Business -- Risk Factors." DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Metricom, Inc. Annual Report to Stockholders for the fiscal year ended December 31, 1996 (the "Annual Report") are incorporated by reference into Part II of this Annual Report on Form 10-K. Certain parts of the Metricom, Inc. Proxy Statement relating to the annual meeting of stockholders to be held on May 1, 1997 (the "Proxy Statement") are incorporated by reference into Part III of this Annual Report on Form 10-K. 2. 3 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K. (a) FINANCIAL STATEMENTS. The consolidated financial statements and related notes, together with the report thereon of Arthur Andersen LLP, independent public accountants, are incorporated by reference herein from the Annual Report. (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the last quarter of the fiscal year ended December 31, 1996. (c) EXHIBITS. EXHIBIT NUMBER EXHIBIT 3.1(9) Restated Certificate of Incorporation of the Company, as amended. 3.2(1) Bylaws of the Company. 4.1 Reference is made to Exhibits 3.1 and 3.2. 4.2(1) Registration Rights Agreement between the Company and the other parties named therein, dated as of June 23, 1986, as amended. 4.3(1) Specimen stock certificate. 4.4(5) Fifth Amendment to Registration Rights Agreement. 4.5(5) Sixth Amendment to Registration Rights Agreement. 4.6(10) Form of 8% Convertible Subordinated Note due 2003. 4.7(10) Indenture, dated as of August 15, 1996, between the Company and U.S. Trust Company of California, N.A. 10.1(1) Form of Indemnity Agreement entered into between the Company and its directors and officers, with related schedule. 10.2(2)(5) 1988 Stock Option Plan (the "Option Plan"), as amended November 1, 1993. 10.3(1)(2) Form of Incentive Stock Option Agreement under the Option Plan. 10.4(1)(2) Form of Supplemental Stock Option Agreement under the Option Plan. 10.5(1)(2) Form of Notice of Exercise under the Option Plan, as amended. 10.6(1) Form of Restricted Stock Purchase Agreement and promissory note under the Option Plan. 10.7(1) Form of Market Stand-Off Agreement between the Company and various holders of Common Stock. 10.8(1)(2) 1991 Employee Stock Purchase Plan. 3. 4 EXHIBIT NUMBER EXHIBIT 10.9(1) Form of Co-Sale Agreement between the Company and various holders of Common Stock, with related schedule. 10.10(1) Form of Stock Repurchase Agreement between the Company and various holders of Common Stock, with related schedule. 10.11(1) Form of Series C Preferred Stock Purchase Warrant between the Company and various investors, with related schedule. 10.12(1) Manufacturing, Supply and Marketing Agreement between the Company, Mitsui & Co., Ltd., Mitsui Comtek Corp. and Oi Electric Co., Ltd. dated as of March 12, 1991. 10.13(1) Standard Industrial Lease between the Company and Pen Nom I Corporation dated as of October 17, 1991. 10.14(3) Agreement between the Company and Southern California Edison dated October 1, 1992. 10.15(2)(5) 1993 Non-Employee Directors' Stock Option Plan, as amended November 1, 1993 (the "Directors' Plan"). 10.16(2)(3) Form of Supplemental Stock Option under the Directors' Plan. 10.17(4) Purchase Agreement, dated October 3, 1993, between the Company and Vulcan Ventures Incorporated. 10.18(4) Warrant to Purchase 408,333 shares of Common Stock, dated October 28, 1993. 10.19(4) Purchase Agreement, dated October 8, 1993, between the Company and Donald H. Rumsfeld. 10.20(5) Common Stock Purchase Warrant for 350,000 shares dated March 25, 1993 granted to Sterling Payot Company. 10.21(5) Common Stock Purchase Warrant for 100,000 shares dated February 19, 1993 granted to Sterling Payot Company. 10.22(5) Letter Agreements between the Company and Sterling Payot Company dated February 19, 1993 and September 15, 1993. 10.23(6) Purchase Agreement, dated February 18, 1994, between the Company and Microsoft Corporation. 10.24(8) Common Stock Purchase Agreement for 200,000 shares dated September 27, 1994 granted to Sterling Payot Company. 10.25(8) Letter Agreement between the Company and Sterling Payot Company dated October 31, 1994. 10.26(7) Management Agreement of Metricom DC, L.L.C. 10.27(8) Option Agreement and Agreement and Plan of Reorganization, dated as of February 7, 1996, among the Company, Overall Wireless and the sole stockholder of Overall Wireless. 4. 5 EXHIBIT NUMBER EXHIBIT 10.28(8) Loan and Security Agreement, dated as of February 7, 1996, among the Company, Overall Wireless and the sole stockholder of Overall Wireless. 10.29(10) Registration Rights Agreement, dated as of August 28, 1996, among the Company, Furman Selz LLC and Feshbach Brothers Investor Services, Inc. 10.30(10) Placement Agreement, dated as of August 20, 1996, among the Company, Furman Selz LLC and Feshbach Brothers Investor Services, Inc. 10.31(11) Letter Agreement, dated as of January 23, 1997, between the Company and Sterling Payot Company 13.1 Portions of the Company's Annual Report to Stockholders. 23.1 Consent of Independent Public Accountants. 24.1(5) Power of Attorney. - ---------- (1) Incorporated by reference from the indicated exhibit in the Company's Registration Statement on Form S-1 (File No. 33-46050), as amended. (2) Management contract or compensatory plan or arrangement. (3) Incorporated by reference from the Company's Form 10-K for the year ended December 31, 1992. (4) Incorporated by reference from the Company's Form 10-Q for the quarter ended October 31, 1993. (5) Incorporated by reference from the Company's Form 10-K for the year ended December 31, 1993. (6) Incorporated by reference from the Company's Form 10-K/A Amendment No. 1 to the Company's Form 10-K for the year ended December 31, 1993. (7) Incorporated by reference from the Company's Form 10-Q for the quarter ended June 30, 1995. (8) Incorporated by reference from the Company's Form 10-Q for the quarter ended June 28, 1996. (9) Incorporated by reference from the Company's Form 10-Q for the quarter ended September 27, 1996. (10) Incorporated by reference from the Company's Form 8-K filed September 11, 1996. (11) Incorporated by reference from the Company's Form 10-K for the year ended December 31, 1996. 5. 6 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, as amended, the Registrant has duly caused this Report on Form 10K/A to be signed on its behalf by the undersigned, thereunto duly authorized on the 22nd day of December, 1997. METRICOM, INC. By: /s/ Vanessa Wittmann --------------------------------- Vanessa Wittmann Vice President of Finance (Principal Financial and Accounting Officer) 6. 7 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT PAGE 3.1(9) Restated Certificate of Incorporation of the Company, as amended. 3.2(1) Bylaws of the Company. 4.1 Reference is made to Exhibits 3.1 and 3.2. 4.2(1) Registration Rights Agreement between the Company and the other parties named therein, dated as of June 23, 1986, as amended. 4.3(1) Specimen stock certificate. 4.4(5) Fifth Amendment to Registration Rights Agreement. 4.5(5) Sixth Amendment to Registration Rights Agreement. 4.6(10) Form of 8% Convertible Subordinate Note due 2003. 4.7(10) Indenture, dated as of August 15, 1996, between the Company and U.S. Trust Company of California, N.A. 10.1(1) Form of Indemnity Agreement entered into between the Company and its directors and officers, with related schedule. 10.2(2)(5) 1988 Stock Option Plan (the "Option Plan"), as amended November 1, 1993. 10.3(1)(2) Form of Incentive Stock Option Agreement under the Option Plan. 10.4(1)(2) Form of Supplemental Stock Option Agreement under the Option Plan. 10.5(1)(2) Form of Notice of Exercise under the Option Plan, as amended. 10.6(1) Form of Restricted Stock Purchase Agreement and promissory note under the Option Plan. 10.7(1) Form of Market Stand-Off Agreement between the Company and various holders of Common Stock. 10.8(1)(2) 1991 Employee Stock Purchase Plan. 10.9(1) Form of Co-Sale Agreement between the Company and various holders of Common Stock, with related schedule. 10.10(1) Form of Stock Repurchase Agreement between the Company and various holders of Common Stock, with related schedule. 10.11(1) Form of Series C Preferred Stock Purchase Warrant between the Company and various investors, with related schedule. 10.12(1) Manufacturing, Supply and Marketing Agreement between the Company, Mitsui & Co., Ltd., Mitsui Comtek Corp. and Oi Electric Co., Ltd. dated as of March 12, 1991.
7. 8
EXHIBIT NUMBER EXHIBIT PAGE 10.13(1) Standard Industrial Lease between the Company and Pen Nom I Corporation dated as of October 17, 1991. 10.14(3) Agreement between the Company and Southern California Edison dated October 1, 1992. 10.15(2)(5) 1993 Non-Employee Directors' Stock Option Plan, as amended November 1, 1993 (the "Directors' Plan"). 10.16(2)(3) Form of Supplemental Stock Option under the Directors' Plan. 10.17(4) Purchase Agreement, dated October 3, 1993, between the Company and Vulcan Ventures Incorporated. 10.18(4) Warrant to Purchase 408,333 shares of Common Stock, dated October 28, 1993. 10.19(4) Purchase Agreement, dated October 8, 1993, between the Company and Donald H. Rumsfeld. 10.20(5) Common Stock Purchase Warrant for 350,000 shares dated March 25, 1993 granted to Sterling Payot Company. 10.21(5) Common Stock Purchase Warrant for 100,000 shares dated February 19, 1993 granted to Sterling Payot Company. 10.22(5) Letter Agreements between the Company and Sterling Payot Company dated February 19, 1993 and September 15, 1993. 10.23(6) Purchase Agreement, dated February 18, 1994, between the Company and Microsoft Corporation. 10.24(8) Common Stock Purchase Agreement for 200,000 shares dated September 27, 1994 granted to Sterling Payot Company. 10.25(8) Letter Agreement between the Company and Sterling Payot Company dated October 31, 1994. 10.26(7) Management Agreement of Metricom DC, L.L.C. 10.27(8) Option Agreement and Agreement and Plan of Reorganization, dated as of February 7, 1996, among the Company, Overall Wireless and the sole stockholder of Overall Wireless. 10.28(8) Loan and Security Agreement, dated as of February 7, 1996, among the Company, Overall Wireless and the sole stockholder of Overall Wireless. 10.29(10) Registration Rights Agreement, dated as of August 28, 1996, among the Company, Furman Selz LLC and Feshbach Brothers Investor Services, Inc. 10.30(10) Placement Agreement, dated as of August 20, 1996, among the Company, Furman Selz LLC and Feshbach Brothers Investor Services, Inc. 10.31(11) Letter Agreement, dated as of January 23, 1997, between the Company and Sterling Payot Company
8. 9
EXHIBIT NUMBER EXHIBIT 13.1 Portions of the Company's Annual Report to Stockholders....................................................... 23.1 Consent of Independent Public Accountants............................. 24.1(5) Power of Attorney.
- ---------- (1) Incorporated by reference from the indicated exhibit in the Company's Registration Statement on Form S-1 (File No. 33-46050), as amended. (2) Management contract or compensatory plan or arrangement. (3) Incorporated by reference from the Company's Form 10-K for the year ended December 31, 1992. (4) Incorporated by reference from the Company's Form 10-Q for the quarter ended October 31, 1993. (5) Incorporated by reference from the Company's Form 10-K for the year ended December 31, 1993. (6) Incorporated by reference from the Company's Form 10-K/A Amendment No. 1 to the Company's Form 10-K for the year ended December 31, 1993. (7) Incorporated by reference from the Company's Form 10-Q for the quarter ended June 30, 1995. (8) Incorporated by reference from the Company's Form 10-Q for the quarter ended June 28, 1996. (9) Incorporated by reference from the Company's Form 10-Q for the quarter ended September 27, 1996. (10) Incorporated by reference from the Company's Form 8-K filed September 11, 1996. (11) Incorporated by reference from the Company's Form 10-K for the year ended December 31, 1996. 9. EX-13.1 2 PORTION OF ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13.1 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Revenues: Product revenues ............ $ 3,423 $ 8,173 $ 19,580 $ 4,995 $ 4,996 Service revenues ............ -- -- 27 789 2,158 Development contract revenues .................. 2,982 1,884 1,957 -- -- -------- -------- -------- -------- -------- Total revenues ............ 6,405 10,057 21,564 5,784 7,154 -------- -------- -------- -------- -------- Costs and expenses: Cost of product revenues .... 3,197 6,401 15,116 3,134 2,528 Cost of service revenues .... -- -- 1,244 9,360 16,587 Cost of development contract revenues ......... 2,894 1,932 1,890 -- -- Research and development .... 1,809 3,256 8,668 9,145 9,896 Selling, general and administrative ............ 3,366 5,027 9,695 12,029 19,495 -------- -------- -------- -------- -------- Total costs and expenses... 11,266 16,616 36,613 33,668 48,506 -------- -------- -------- -------- -------- Loss from operations ...... (4,861) (6,559) (15,049) (27,884) (41,352) Interest expense .............. -- -- -- -- (1,310) Interest income, net .......... 408 410 3,300 4,363 3,317 -------- -------- -------- -------- -------- Net loss .................. $ (4,453) $ (6,149) $(11,749) $(23,521) $(39,345) ======== ======== ======== ======== ======== Net loss per share ............ $ (0.61) $ (0.74) $ (0.96) $ (1.79) $ (2.93) ======== ======== ======== ======== ======== Weighted average shares outstanding .................. 7,286 8,353 12,202 13,140 13,413 AS OF DECEMBER 31, ------------------------------------------------------------ 1992 1993 1994 1995 1996 -------- -------- -------- --------- -------- BALANCE SHEET DATA: Cash and investments .... $ 11,888 $ 25,020 $ 89,588 $ 64,415 $ 65,221 Working capital ......... 14,626 28,545 73,012 46,771 57,738 Property and equipment... 1,702 1,990 10,170 17,717 33,606 Total assets ............ 17,472 32,483 105,534 86,076 101,799 Long-term debt .......... -- -- -- -- 45,000 Stockholders' equity .... 15,739 29,171 101,516 80,374 43,306
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since inception, the Company has devoted significant resources to the development, deployment and commercialization of its wireless network products and services. A significant portion of the Company's revenues have been derived primarily from development contracts and sales of customer-owned networks and related products, known as UtiliNet, to Southern California Edison ("SCE") and other utility companies. In September 1995, the Company substantially completed deployment and commenced commercial service of its Ricochet network throughout California's Silicon Valley. In 1996, commercial service commenced in other parts of the San Francisco Bay Area and in the Seattle and Washington, D.C. metropolitan areas. As of February 28, 1997, there were approximately 10,700 Ricochet subscribers and the Company estimates that its networks covered a population of approximately 6.1 million people. The Company believes that it will derive an increasing percentage of its future revenues from Ricochet products and services. The Company has incurred cumulative net losses through December 31, 1996 of approximately $90.0 million. These losses resulted primarily from expenditures associated with the development, deployment and commercialization of the Company's wireless network products and services. The Company expects to incur significant operating losses and to generate negative cash flow from operating activities during the next several years while it continues to develop and deploy its Ricochet networks and build its customer base. There can be no assurance that the Company will achieve or sustain profitability or positive cash flow from operating activities in a timely manner or at all. The Company's future success depends on the successful deployment of Ricochet in major metropolitan areas of the United States. Deployment in each metropolitan area will require significant expenditures, a substantial portion of which is incurred before the realization of revenues from such area. Any inability to execute, or delays in execution of, such deployment plan could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance as to the timing or extent of the deployment of Ricochet. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of the Company's Annual Report on Form 10-K for the year ended December 31, 1996 entitled "Risk Factors," as well as those in this Annual Report. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain operational data as a percentage of total revenues:
YEAR ENDED DECEMBER 31, -------------------------- 1994 1995 1996 ---- ---- ---- REVENUES: Product revenues .......................... 91% 86% 70% Service revenues .......................... -- 14 30 Development contract revenues ............. 9 -- -- ---- ---- ---- Total revenues ........................ 100% 100% 100%
3 COSTS AND EXPENSES: Cost of product revenues .................. 70 54 35 Cost of service revenues .................. 6 162 232 Cost of development contract revenues ..... 9 -- -- Research and development .................. 40 158 138 Selling, general and administrative ....... 45 208 273 ---- ---- ---- Total costs and expenses .............. 170 582 678 ---- ---- ---- Loss from operations .......................... (70) (482) (578) Interest expense .............................. -- -- (18) Interest income, net .......................... 15 75 46 ---- ---- ---- Net loss ...................................... (54)% (407)% (550)% ==== ==== ====
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenues. Revenues consist of product, service and development contract revenues. Product revenues are derived from the sale of UtiliNet products and Ricochet modems and are recognized upon shipment. Service revenues are derived from subscriber fees and modem rentals for Ricochet and fees for UtiliNet customer support and are recognized ratably over the service period. Development contract revenues are recognized when the related development costs are incurred. Total revenues increased to $7.1 million in 1996 from $5.8 million in 1995 primarily due to increased service revenues, which increased to $2.1 million in 1996 from $789,000 in 1995. This increase was due to increases in Ricochet subscriber fees and modem rentals. Product revenues, derived primarily from the sale of UtiliNet products, were $5.0 million in 1996 and 1995. A significant portion of such revenue was derived from SCE, the Company's principal customer. Revenues from SCE accounted for 72% and 51% of total product revenues in 1995 and 1996, respectively. The Company generated no development contract revenues in 1996 and does not expect significant development funding in the future. Cost of Revenues. Cost of product revenues decreased to $2.5 million in 1996 from $3.1 million in 1995. The cost of product revenues as a percent of product revenues decreased to 51% in 1996 from 63% in 1995. This decrease was primarily due to a more favorable product mix of the Company's UtiliNet products in 1996 and provisions for the write-down of inventory related to certain Ricochet products in the first quarter of 1995. Cost of service revenues increased to $16.6 million in 1996 from $9.4 million in 1995. These costs represent certain costs incurred to design and operate Ricochet networks, the cost of efforts to obtain site agreements for the Company's network infrastructure and certain costs associated with manufacturing the Company's network components. The increase is due to a higher level of Ricochet network deployment in the San Francisco Bay Area and the Seattle and Washington, D.C. metropolitan areas and activities to obtain necessary site agreements in 1996 as compared to 1995. These costs are expected to continue to increase as a result of the continued deployment of Ricochet networks and, although the Company is making efforts to increase its service revenues through increased promotional activities and arrangements with new channel partners, these costs are expected to be greater than Ricochet service revenues for the foreseeable future. Research and Development. Research and development expenses increased to $9.9 million in 1996 from $9.1 million in 1995. The increase was due to development activities related to enhancements to the technology employed by the Company's Ricochet networks and development of Ricochet modems. The Company expects research and development expenses to continue to increase in absolute dollars in future periods. Selling, General and Administrative. Selling, general and administrative expenses increased to $19.5 million in 1996 from $12.0 million in 1995 primarily due to increased selling expense as a result of personnel increases and additional efforts to increase the number of Ricochet subscribers. General and administrative expenses also increased primarily as a result of personnel increases. These costs are expected to continue to increase as a result of the continued deployment of Ricochet networks. 4 Interest Income and Expense. Interest expense increased to $1.3 million in 1996 as a result of the issuance of $45 million in principal amount of 8% Convertible Subordinated Notes due 2003 in August 1996. Interest income decreased to $3.3 million in 1996 from $4.4 million in 1995 primarily due to a lower level of cash and cash equivalents in 1996 as compared to 1995. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Revenues. Total revenues decreased to $5.8 million in 1995 from $21.6 million in 1994 primarily due to lower product revenues, which decreased to $5.0 million in 1995 from $19.6 million in 1994. These decreases were primarily due to an expected decline in shipments of products to SCE as the majority of a large distribution automation project was completed in 1994. Revenues from SCE accounted for 84% and 72% of total product revenues in 1994 and 1995, respectively. Service revenues increased to $789,000 in 1995 from $27,000 in 1994 primarily due to certain fees for UtiliNet customer support, which were reimbursed under development contract revenues prior to 1995, as well as Ricochet subscriber fees and modem rentals. The Company generated no development contract revenues in 1995 due to the completion in 1994 of a development contract with SCE that provided substantially all of the Company's development contract revenue in 1994. The Company does not expect significant development funding in the future. Cost of Revenues. Cost of product revenues decreased to $3.1 million in 1995 from $15.1 million in 1994 due to a decrease in product revenues. Cost of product revenues as a percentage of product revenues decreased to 63% in 1995 from 77% in 1994. This decrease was primarily due to a more favorable mix of UtiliNet products and lower provisions in 1995 for the write-down of inventory related to certain UtiliNet products. The decrease was partially offset by a lower volume of product shipments in 1995, which affected the Company's ability to realize economies of scale. Cost of service revenues increased to $9.4 million in 1995 from $1.2 million in 1994 primarily due to expenses associated with a higher level of Ricochet network operations, deployment and site agreement acquisition activities. Research and Development. Research and development expenses increased to $9.1 million in 1995 from $8.7 million in 1994. The increase was due to development activities related to Ricochet network equipment and Ricochet modems. In 1995, research and development expense also included costs to redesign certain portions of the Company's Ricochet radios and modems as a result of network performance problems discovered during the initial deployment of the Ricochet network in the Silicon Valley. Selling, General and Administrative. Selling, general and administrative expenses increased to $12.0 million in 1995 from $9.7 million in 1994 primarily due to increased selling expense as a result of personnel additions and increased marketing and promotional activity. General and administrative expenses also increased primarily as a result of increases in personnel. Interest Income, Net. Interest income, net, increased to $4.4 million in 1995 from $3.3 million in 1994 due to higher commercial interest rates. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has devoted significant resources to the development, deployment and commercialization of wireless network products and services. As a result, as of December 31, 1996, the Company had incurred $90.0 million of cumulative net losses. The Company's operations have required substantial capital investments for the purchase of Ricochet network equipment, Ricochet modems and computer and office equipment. Capital expenditures were $8.2 million, $8.4 million and $15.9 million in 1994, 1995 and 1996, respectively. The Company expects that it will continue to have substantial capital requirements in connection with the development 5 and deployment of Ricochet networks and efforts to attract Ricochet subscribers. The Company also expects that, to the extent its subscriber base grows, increasingly significant capital expenditures will be required to procure Ricochet modems. The Company has financed operations primarily through the public and private sale of equity and convertible debt securities. Since inception, the Company has completed (i) private placements of preferred stock with net proceeds to the Company of approximately $18.9 million, of which $3.0 million was repurchased and the balance converted to Common Stock at the time of the Company's initial public offering in 1992, (ii) an initial public offering of Common Stock with net proceeds to the Company of approximately $8.8 million in 1992, (iii) private placements of Common Stock with net proceeds to the Company of approximately $18.6 million in 1993, (iv) public and private placements of Common Stock with net proceeds to the Company of approximately $75.2 million in 1994 and (v) a private placement of 8% Convertible Subordinated Notes due 2003 with net proceeds to the Company of approximately $43.4 million in 1996. The Company expects to make significant capital expenditures in connection with the development, deployment and communication of its Ricochet networks. The Company also expects that to the extent the Ricochet subscriber base grows, significant capital expenditures will be required to procure Ricochet modems rented to subscribers. The amount and timing of expenditures, however, may very significantly depending on numerous factors including market acceptance; availability of Ricochet radios and modems; availability of sufficient financial, management, marketing and technical resources, and technological feasibility. The Company anticipates that its existing cash and investments, interest income from investments and contributions received from its existing joint venture partner will be adequate to satisfy its capital expenditure, operating loss and working capital requirements at least through 1997. The Company believes that additional capital will be required in the future to fund further deployment and operating activities of Ricochet. There can be no assurance that such funds would be available on commercially reasonable terms or at all. As of December 31, 1996, the Company had cash and cash equivalents and short and long term investments of $65.2 million and working capital of $57.7 million. The Company's accounts receivable increased to $1.1 million as of December 31, 1996 from $439,000 as of December 31, 1995 due to increased revenues in the first quarter of 1996 as compared to the fourth quarter of 1995. Inventories decreased to $3.1 million as of December 31, 1996 from $4.5 million as of December 31, 1995 due to improved inventory management in 1996. The Company believes that both accounts receivable and inventories will increase in the future in order to support the deployment and commercialization of Ricochet. In 1995, Metricom Investments DC, Inc. ("Metricom Investments"), a subsidiary of the Company, and PepData, Inc. ("PepData"), a subsidiary of Potomac Electronic Power Company, formed Metricom DC, L.L.C ("Metricom DC") to own and operate a wireless data communications network in the metropolitan Washington D.C. area. Metricom Investments contributed $1,000, as well as the right to use the Company's proprietary technolgy to display and operate a Ricochet network in the Washington, D.C. area, in exchange for an 80% ownership interest in Metricom DC. PepData will contribute up to $7.0 million in exchange for a 20% ownership interest in Metricom DC. Metricom DC will distribute available cash first to PepData, until PepData has received cumulative distributions equal to its capital contributions, and second to PepData and Metricom Investments in proportion to their respective ownership interests. As of December 31, 1996, PepData had contributed $2.4 million to the joint venture. In addition, the Company has agreed to loan up to $2.0 million to Overall Wireless, of which approximately $500,000 had been loaned as of December 31, 1996, in connection with the construction of a wireless communication system in the 220 to 222 MHz frequency band. The Company has also purchased an option to acquire Overall Wireless Communications Corporation that will terminate in July 1997. The additional consideration payable upon exercise of the option includes a combination of cash and stock valued at $7.3 million in the aggregate. 6 METRICOM, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, ----------------------- 1995 1996 --------- --------- ASSETS Current assets: Cash and cash equivalents ................................................. $ 5,201 $ 15,246 Short-term investments .................................................... 40,090 46,825 Accounts receivable, net .................................................. 439 1,126 Inventories ............................................................... 4,467 3,115 Prepaid expenses and other ................................................ 1,666 1,744 --------- --------- Total current assets ............................................. 51,863 68,056 Property and equipment, net ........................................................ 14,923 26,776 Long-term investments .............................................................. 19,124 3,150 Other assets ....................................................................... 166 3,817 --------- --------- Total assets .............................................................. $ 86,076 $ 101,799 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .......................................................... $ 3,296 $ 5,517 Accrued liabilities ....................................................... 1,796 4,801 --------- --------- Total current liabilities ........................................ 5,092 10,318 --------- --------- Long-term debt ..................................................................... -- 45,000 Other liabilities .................................................................. 510 768 Minority interest .................................................................. 100 2,407 Commitments (Note 5) Stockholders' equity: Preferred Stock, $.001 par value per share: authorized - 2,000,000 shares; issued and outstanding - none ............................................ Common Stock, $.001 par value per share: authorized - 50,000,000 shares; issued and outstanding - 13,291,025 shares in 1995 and 13,555,445 shares in 1996 ............................................................ 13 14 Additional paid-in capital ......................................................... 130,831 133,298 Unrealized holding gain (loss) on investments ...................................... 155 (36) Accumulated deficit ................................................................ (50,625) (89,970) --------- --------- Total stockholders' equity ......................................................... 80,374 43,306 --------- --------- Total liabilities and stockholders' equity ......................................... $ 86,076 $ 101,799 ========= =========
The accompanying notes are an integral part of these consolidated statements. 7 METRICOM, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ---------------------------------- 1994 1995 1996 -------- -------- -------- REVENUES: Product revenues ...................... $ 19,580 $ 4,995 $ 4,996 Service revenues ...................... 27 789 2,158 Development contract revenues ......... 1,957 -- -- -------- -------- -------- Total revenues ...................... 21,564 5,784 7,154 -------- -------- -------- COSTS AND EXPENSES: Cost of product revenues .............. 15,116 3,134 2,528 Cost of service revenues .............. 1,244 9,360 16,587 Cost of development contract revenues.. 1,890 -- -- Research and development .............. 8,668 9,145 9,896 Selling, general and administrative.... 9,695 12,029 19,495 -------- -------- -------- Total costs and expenses ............ 36,613 33,668 48,506 -------- -------- -------- Loss from operations .................... (15,049) (27,884) (41,352) Interest expense ........................ -- -- (1,310) Interest income ......................... 3,300 4,363 3,317 -------- -------- -------- Net loss ................................ $(11,749) $(23,521) $(39,345) ======== ======== ======== Net loss per share ...................... $ (.96) $ (1.79) $ (2.93) ======== ======== ======== Weighted average shares outstanding ..... 12,202 13,140 13,413 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 8 METRICOM, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
Unrealized Holding Additional Gain COMMON STOCK Paid-in (Loss) on Accumulated SHARES Amount Capital Investments Deficit Total ---------- ----------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1993..... 9,389,486 $ 9 $ 44,517 $ -- $ (15,355) $ 29,171 Sale of common stock .......... 2,616,699 3 75,184 -- -- 75,187 Exercise of common stock warrants ...................... 869,342 1 8,868 -- -- 8,869 Exercise of common stock options ....................... 57,516 -- 241 -- -- 241 Common stock issued to employees ..................... 45,634 -- 470 470 Unrealized holding loss on investments ................... -- -- -- (673) -- (673) Net loss ...................... -- -- -- -- (11,749) (11,749) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1994..... 12,978,677 13 129,280 (673) (27,104) 101,516 Exercise of common stock warrants ...................... 72,896 -- 64 -- -- 64 Exercise of common stock options ....................... 198,566 -- 894 -- -- 894 Common stock issued to employees ..................... 40,886 -- 593 -- -- 593 Unrealized holding gain on investments ................... -- -- -- 828 -- 828 Net loss ...................... -- -- -- -- (23,521) (23,521) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1995..... 13,291,025 13 130,831 155 (50,625) 80,374 Exercise of common stock options ................. 81,573 -- 497 -- -- 497 Common stock issued to employees ..................... 110,465 1 1,354 -- -- 1,355 Exercise of common stock warrants ...................... 72,382 -- -- -- -- -- Warrant issued in exchange for services rendered ......... -- -- 616 -- -- 616 Unrealized holding loss on investments ................... -- -- -- (191) -- (191) Net loss ...................... -- -- -- -- (39,345) (39,345) ---------- ----------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1996..... 13,555,445 $ 14 $ 133,298 $ (36) $ (89,970) $ 43,306 ========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements. 9 METRICOM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Year Ended December 31, ---------------------------------- 1994 1995 1996 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ................................................................ $(11,749) $(23,521) $(39,345) Adjustments to reconcile net loss to net cash used in operating activities - Depreciation and amortization ................................................ 634 1,902 4,135 Provision for obsolete inventory ............................................. 1,011 523 -- (Increase) decrease in accounts receivable, prepaid expenses and other current assets ....................................... 321 1,333 (765) (Increase) decrease in inventories ........................................... (2,194) (1,121) 1,352 Increase in accounts payable, accrued liabilities and other liabilities ............................................................. 706 1,584 5,484 -------- -------- -------- Net cash used in operating activities ........................................ (11,271) (19,300) (29,139) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ........................................... (8,180) (8,421) (15,910) (Increase) decrease in other assets .......................................... (75) 69 (1,463) (Increase) decrease in investments ........................................... (39,825) (4,258) 9,048 -------- -------- -------- Net cash used in investing activities ........................................ (48,080) (12,610) (8,325) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock ....................................... 84,767 1,551 1,852 Proceeds from issuance of long-term debt ..................................... -- -- 45,000 Debt issuance costs .......................................................... -- -- (1,650) Contribution from minority interest .......................................... -- 100 2,307 -------- -------- -------- Net cash provided by financing activities .................................... 84,767 1,651 47,509 -------- -------- -------- Net increase (decrease) in cash and cash equivalents ......................... 25,416 (30,259) 10,045 Cash and cash equivalents, beginning of year ................................. 10,044 35,460 5,201 -------- -------- -------- Cash and cash equivalents, end of year ....................................... $ 35,460 $ 5,201 $ 15,246 ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 10 METRICOM, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS I. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES. ORGANIZATION AND BASIS OF PRESENTATION. Metricom, Inc. (the "Company") designs, develops and markets wireless network products and services that provide low cost, high performance, easy to use, data communications that can be used in a broad range of personal computer and industrial applications. The Company's primary service, Ricochet, provides subscriber-based, wireless data communications for users of portable and desktop computers and hand-held computing devices. Ricochet is currently available in the San Francisco Bay Area, in the Seattle and Washington, D.C. metropolitan areas and in a number of airports and college and university campuses across the United States. In the future, the Company plans to deploy Ricochet in major metropolitan areas throughout the United States. The Company's UtiliNet products provide customer-owned wireless data communications for industrial control and monitoring primarily in the electric utility, waste water and natural gas industries. The Company's UtiliNet products are sold throughout the United States. Since its inception, the Company has incurred significant operating losses. These losses resulted primarily from expenditures associated with the development, deployment and commercialization of the Company's wireless network products and services. The Company expects to incur significant operating losses and to generate negative cash flows from operating activities during the next several years while it continues to develop and deploy Ricochet networks and build its customer base. The ability of the Company to achieve profitability will depend in part upon the successful and timely deployment of Ricochet in major metropolitan areas of the United States and its successful marketing, as to which there can be no assurance. A broad market for wide area wireless data communications has not yet developed. As a result, the extent of the potential demand for Ricochet cannot be reliably estimated. In addition, the Company is subject to additional risks, including the risks of developing technology, competition from companies with substantially greater financial, technical, marketing and management resources than the Company and potential changes in the regulatory environment. The accompanying consolidated financial statements include the accounts of the Company and all subsidiaries after elimination of significant intercompany accounts and transactions. Certain amounts have been restated from the previously reported balance to conform to the 1996 presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS. All highly liquid monetary instruments with an original maturity of 90 days or less from the date of purchase are considered to be cash equivalents. Cash paid during fiscal 1994, 1995 and 1996 for interest and income taxes was not significant. CONCENTRATION OF CREDIT RISKS. Financial instruments that may potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents, investments in marketable securities and accounts receivable. The Company's investment policy limits investments to short-term, low-risk instruments. A significant portion of accounts receivable are due from a small number of electric utilities and are unsecured. To date, the Company has not incurred any significant losses due to uncollectible accounts receivable. 11 INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out) or market and include purchased parts, labor and manufacturing overhead. Inventories consisted of the following (in thousands):
DECEMBER 31, ------------------------------- 1995 1996 --------- -------- Raw materials and component parts................................. $ 1,786 $ 656 Work-in-process................................................... 1,459 1,606 Finished goods and consigned inventory............................ 1,222 853 --------- --------- TOTAL ............................................................ $ 4,467 $ 3,115 ========= ========
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost and are depreciated using the straight-line method over the shorter of their estimated useful lives of three to five years or the lease term. As of December 31, 1995 and 1996, network equipment included approximately $4.3 million and $3.8 million, respectively, of raw materials, work-in-process and finished goods related to network equipment that is manufactured by the Company for its Ricochet networks. Depreciation of this equipment will commence when it is placed in service. Property and equipment consisted of the following (in thousands):
DECEMBER 31, ------------------------------- 1995 1996 --------- --------- Machinery and equipment............................................. $ 4,685 $ 7,958 Network equipment................................................... 10,961 19,118 Ricochet modems..................................................... 108 4,158 Furniture and fixtures.............................................. 1,214 1,290 Leasehold improvements.............................................. 749 1,082 ---------- --------- 17,717 33,606 Less--Accumulated depreciation and amortization..................... (2,794) (6,830) ---------- --------- TOTAL .............................................................. $ 14,923 $ 26,776 ========== =========
In March 1995, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("Statement 121"). Statement 121 requires that long-lived assets be reviewed for impairment and, if necessary, an impairment loss be recorded whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Statement 121 is effective for fiscal year 1996. The adoption of Statement 121 did not have a material effect on the financial position or results of operations of the Company. ACCRUED LIABILITIES. Accrued liabilities consisted of the following (in thousands):
DECEMBER 31, ------------------------------ 1995 1996 --------- ------- Interest .......................................................... $ -- $ 1,220 Employee stock purchase plan....................................... 241 299 Deferred Revenue................................................... 110 1,021 Payroll and related................................................ 621 1,148 Royalties.......................................................... 274 244 Sales taxes........................................................ 118 338 Warranty........................................................... 256 256 Other.............................................................. 176 275 -------- -------- TOTAL ............................................................. $ 1,796 $ 4,801 ======== ========
DEBT ISSUANCE COSTS. Debt issuance costs are amortized over the life of the respective debt instruments. Such amortization is reflected as a component of interest expense as an adjustment for the yield on the respective debt instruments. 12 REVENUE RECOGNITION. Product revenues are recognized upon shipment. Cash received from customers in advance of product shipment is deferred as an accrued liability in the accompanying consolidated balance sheets. Service revenues consist of subscriber fees and equipment rentals from Ricochet and fees for UtiliNet customer support and are recognized ratably over the service period. Development contract revenues are recognized when the related development costs are incurred (see Note 4). RESEARCH AND DEVELOPMENT EXPENDITURES. Research and development expenditures are charged to operations as incurred. NET LOSS PER SHARE. Net loss per share data has been computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from options and warrants to purchase common stock have been excluded from the calculation as their effect would be anti-dilutive. II. SHORT-TERM AND LONG-TERM INVESTMENTS. The Company's investments in debt and equity securities are considered available-for-sale and are recorded at their fair value as determined by quoted market prices with any unrealized holding gains or losses classified as a separate component of stockholders' equity. Upon sale of the investments, any previously unrealized gains or losses are recognized in results of operations. As of December 31, 1996, the aggregate fair value, cost basis and unrealized holding loss on investments consisted of the following (in thousands):
UNREALIZED SECURITY TYPE FAIR COST HOLDING VALUE BASIS LOSS ----- ----- ---- United States Treasury and Agencies.................................. $ 23,309 $ 23,336 $ (27) Corporate debt securities............................................ 26,666 26,675 (9) -------- -------- --------- TOTAL $ 49,975 $ 50,011 $ (36) ======== ======== =========
As of December 31, 1996, investments in obligations of the United States Treasury and Agencies and corporate debt securities had remaining contractual maturities of 1-2 years. III. INVESTMENT IN METRICOM DC, L.L.C. On June 8, 1995, Metricom Investments DC, Inc. ("Metricom Investments"), a subsidiary of the Company, and PepData, Inc. ("PepData"), a subsidiary of Potomac Electric Power Company, formed Metricom DC, L.L.C. ("Metricom DC") to own and operate a Ricochet network in the Washington, D.C. metropolitan area. Metricom Investments contributed $1,000, as well as the right to use the Company's proprietary technology to deploy and operate a Ricochet network in the Washington, D.C. area, in exchange for an 80% ownership interest in Metricom DC. PepData will contribute up to $7 million in exchange for a 20% ownership interest in Metricom DC. Metricom DC will distribute available cash first to PepData, until PepData has received cumulative distributions equal to its capital contributions, and second to PepData and Metricom Investments in proportion to their respective ownership interests. As of December 31, 1996, PepData had contributed $2.4 million to the joint venture, which is reflected as a minority interest in the accompanying consolidated financial statements. IV. DEVELOPMENT CONTRACTS. In October 1992, the Company entered into a development and supply agreement with Southern California Edison ("SCE") that superseded a prior agreement in force since 1986. Under the terms of the new agreement, which expired in December 1994, SCE provided the Company with funding for certain development activities. Although SCE will be entitled to utilize the technology for its own internal purposes, the Company retains title to the technology. In connection with the development agreement, the Company agreed to give specified discounts to SCE on future purchases of standard commercial equipment for a period of 15 years. Additionally, the Company agreed to pay a royalty of 2% of its annual gross revenues on sales or leases to third parties of contractual products, as defined. The Company also agreed to pay a royalty for the internal use of contractual products at the rate of 2% of the fair value of the products, as defined. The royalty payment is to be made annually beginning in 1996. The 13 royalty payments cease to accrue after 25 years from the date of the last reimbursement of development activities. Accrued royalties are included in accrued liabilities in the accompanying consolidated balance sheets. For the years ended December 31, 1994, 1995 and 1996, combined product and development contract revenues from SCE accounted for 84%, 72% and 51%, respectively, of total revenues. V. COMMITMENTS. The Company leases various facilities and equipment under operating lease agreements. Rent expense under these agreements for the years ended December 31, 1994, 1995 and 1996, was approximately $638,000, $1.1 million and $1.4 million, respectively. The lease agreement for the Company's primary facility provides for escalating rent payments over a 12-year term ending February 2004, however rent expense is recognized ratably over the lease term. As of December 31, 1995 and 1996, the Company had accrued approximately $510,000 and $469,000, respectively, of deferred rental payments under this agreement, which are included in other liabilities in the accompanying consolidated balance sheets. Approximate future minimum rental payments under operating lease agreements are as follows (in thousands):
YEARS ENDING DECEMBER 31, 1997............................................................................................. $ 1,730 1998............................................................................................. 1,584 1999............................................................................................. 1,473 2000............................................................................................. 1,238 2001............................................................................................. 982 Thereafter....................................................................................... 1,680 --------- Total......................................................................................... $ 8,687 =========
The Company has also entered into various agreements with electric utilities and municipalities for the use of utility poles on which network equipment is installed. Payment under these agreements is generally contingent upon the number of network radios installed during the year. Rent expense under these agreements for the year ended December 31, 1995 and 1996, was approximately $69,000 and $430,000, respectively. In February 1996, the Company purchased an option to acquire Overall Wireless Communications Corporation ("Overall Wireless"), a corporation that holds a nationwide, wireless communications license issued by the FCC authorizing operations on 50 kHz of radio spectrum in the 220 to 222 MHz frequency band. The Company paid $700,000 for the option and agreed to loan to Overall Wireless up to $2.0 million for the construction of a system utilizing the license, of which approximately $500,000 had been loaned as of December 31, 1996. In January 1997, the Company paid $500,000 to extend the option from January 1997 to July 1997. The additional consideration payable upon exercise of the option includes a combination of cash and stock valued at $7.3 million in the aggregate. The Company's ability to exercise the option is conditioned upon the occurrence of a number of events, including Overall Wireless' completion of 40% of the system prior to July 29, 1997 and approval by the FCC of the transfer of the license. There can be no assurance that these conditions will be met prior to expiration of the option. If the option expires unexercised under certain circumstances, the Company may be required to pay a termination fee of up to $2.0 million, which may be paid through cancellation of the indebtedness of Overall Wireless. VI. LONG-TERM DEBT. On August 28, 1996, the Company issued $45 million principal amount of unsecured, 8% Convertible Subordinated Notes (the "Notes") due September 15, 2003. Interest is payable semi-annually on March 15 and September 15, commencing March 15, 1997. The Notes are convertible into shares of the Company's common 14 stock at a conversion price of $14.55 per share, subject to adjustment in certain events. The Notes are redeemable, in whole or in part, at the option of the Company at any time on or after September 15, 1999, at the following redemption prices if redeemed during the 12- month period commencing September 15 of the years indicated below:
YEAR PERCENTAGE 1999 104.0 2000 102.7 2001 101.3 2002 100.0
In the event of a change of control, as defined in the indenture, each holder of the Notes will have the right to require the Company to purchase all or any part of such holder's Notes at 101% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any. VII. COMMON STOCK. In March 1994, the Company completed a public offering of 2,103,454 shares of common stock at $30.25 per share for aggregate net proceeds of approximately $59.7 million. Concurrent with the public offering, the Company completed two registered private placements for the sale of a total of 513,245 shares of common stock at $30.25 per share for aggregate net proceeds of approximately $15.5 million. COMMON STOCK WARRANTS. In September 1994, the Company issued warrants to purchase 200,000 shares of common stock at $13.75 per share in exchange for certain investment banking services. These warrants are exercisable in cash or via a net exercise, expire five years from the date of issuance and provide for certain registration rights. The Company has the right to repurchase the 100,000 shares of Common Stock underlying the warrants for $0.01 per share. This right expires on March 31, 1997. In connection with a March 1994 registered private placement, the Company issued an investor a warrant to purchase 75,000 shares of common stock at $37.50 per share. These warrants are exercisable immediately, expire three years from the date of issuance and provide for certain registration rights. In connection with an October 1993 private placement, the Company issued an investor a warrant to purchase 408,333 shares of common stock at $20.00 per share. This warrant was exercised in January 1994. In February and March 1993, the Company issued warrants to purchase a total of 450,000 shares of common stock at $5.75 per share in exchange for certain investment banking services. In March 1994, 364,463 shares were issued upon a net exercise of these warrants. Upon closing of the Company's initial public offering in May 1992, warrants to purchase 368,000 shares of Series C preferred stock at $7.81 per share were converted to warrants to purchase 395,541 shares of common stock at $7.27 per share. During 1996, 72,382 shares were issued upon a net exercise of 168,451 of these warrants. As of December 31, 1996, no additional warrants were outstanding. STOCK OPTIONS. In March 1988, the Company adopted the 1988 Stock Option Plan. Under the plan, as amended, the Company is authorized to grant up to 4,119,500 incentive or non-qualified stock options to purchase shares of common stock. Incentive stock options may be granted to employees at prices not lower than the market value of the stock at the date of grant. Non-qualified stock options may be granted to employees, officers, directors and consultants at prices not lower than 85% of the market value of the stock at the date of the grant. Options granted under the plan are exercisable at any time, as determined by the Board of Directors, and will expire no later than ten years from the date of grant. Options generally vest 25% after the first year and ratably over the following three years. In January 1996, the Board of Directors approved the replacement of each outstanding option with a per share exercise price of $14.00 or greater, upon the request of the optionee, with a stock option having an exercise price of $13.125 per share and certain extended vesting terms. A total of 982,263 options with exercise prices ranging from $15.00-$28.75 per share were replaced. 15 In February 1993, the Company adopted the 1993 Non-Employee Directors' Stock Option Plan. Under the plan, as amended, the Company is authorized to grant up to 300,000 non-qualified stock options to purchase shares of common stock at the market value at the date of grant. Options granted under the plan are exercisable in three equal annual installments commencing one year from the date of grant and will expire no later than 10 years from the date of grant. During 1993, 1994 and 1995, the Company issued members of the Board of Directors and Advisory Board options to purchase 75,000, 75,000 and 50,000 shares, respectively, of common stock at fair market value of the stock at the date of grant. These options vest 25% after the first year and ratably over the following three years and will expire no later than ten years from the date of grant. Stock option activity under the 1988 Stock Option Plan, the 1993 Non-Employee Directors' Stock Option Plan and options issued to members of the Board of Directors and Advisory Board for the fiscal years ended December 31, 1994, 1995 and 1996 was as follows:
SHARES WEIGHTED AVAILABLE AVERAGE FOR FUTURE OPTIONS EXERCISE GRANT OUTSTANDING PRICE ---------- ----------- -------- Balance, December 31, 1993.................................. 974,434 1,578,999 $ 9.90 Authorized......................................... 75,000 -- -- Grants............................................. (923,500) 923,500 $18.54 Exercises.......................................... -- (57,516) $ 4.10 Cancellations...................................... 50,331 (50,331) $ 9.34 --------- --------- ------ Balance, December 31, 1994.................................. 176,265 2,394,652 $13.33 Authorized......................................... 950,000 -- -- Grants............................................. (705,250) 705,250 $16.48 Exercises.......................................... -- (198,566) $ 4.53 Cancellations...................................... 253,517 (253,517) $18.12 ---------- ---------- ------ Balance, December 31, 1995.................................. 674,532 2,647,819 $14.36 Authorized......................................... 475,000 -- -- Grants............................................. (1,050,500) 1,050,500 $13.87 Exercises.......................................... -- (85,092) $ 6.08 Cancellations...................................... 245,358 (245,358) $18.01 ---------- --------- ------ Balance, December 31, 1996.................................. 344,390 3,367,869 $12.45 =========== ========= ======
16 The following table summarizes information concerning stock options outstanding and exercisable as of December 31, 1996:
Options Outstanding Options Exercisable ----------------------------- ------------------------------- Weighted Weighted Weighted Range of Average Average Average Exercise Shares Remaining Exercise Shares Exercise Prices Outstanding Life Price Exercisable Price $ 0.20 - $ 3.00 152,890 3.84 $ 2.54 152,890 $ 2.54 $ 3.01 - $11.25 548,911 5.77 $ 6.12 508,231 $ 5.87 $11.26 - $14.25 1,946,013 9.10 $13.16 76,768 $12.21 $14.26 - $18.50 514,993 8.61 $16.23 149,146 $15.89 $18.51 - $23.37 205,062 7.02 $20.66 140,044 $20.71 --------- ---- ------ --------- ------ 3,367,869 8.12 $12.45 1,027,079 $ 9.33 ========= ==== ====== ========= ======
STOCK PURCHASE PLAN. In 1991, the Board of Directors adopted the 1991 Employee Stock Purchase Plan (the "Purchase Plan"). An aggregate of 350,000 shares of common stock have been reserved for issuance under the Purchase Plan. Employees may designate up to 15% of their earnings, as defined, to purchase shares at 85% of the lesser of the fair market value of the common stock at the beginning of the offering period or on any purchase date during the offering period, as defined. In 1994, 1995 and 1996, the Company issued 41,884, 35,886 and 49,944 shares, respectively, under this plan. STOCK-BASED COMPENSATION. In January 1996, the Company adopted FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"). Statement 123 defines a fair value method of accounting for stock-based compensation plans. Under the fair value method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. As permitted under Statement 123, the Company continues to apply the provisions of Accounting Principals Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans and, accordingly, does not recognize compensation cost. If the Company had elected to recognize compensation cost based on the fair value of the stock options and employee purchase rights under the Purchase Plan at the grant date as prescribed by Statement 123, net income and earnings per share would have been as follows (in thousands, except per share amounts):
1995 1996 ---- ---- Net loss - As reported $23,521 $39,345 Net loss - Pro forma $24,822 $44,178 Loss per share - As reported $1.79 $2.93 Loss per share - Pro forma $1.89 $3.29
The weighted average fair value of stock options granted during 1995 and 1996 was $6.34 and $4.51 per share, respectively. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model assuming a risk free interest rate of 6%, dividend yield of 0%, volatility factor of the expected market price of the Company's Common Stock of 0.48 and a weighted average expected option life of 0.68 years from the vest date. The weighted average fair value of employee stock purchase rights granted during 1995 and 1996 was $1.69 and $1.44 per share, respectively. The fair value for these purchase rights was estimated at the date of grant using a Black-Scholes option pricing model assuming a risk free interest rate of 5%, dividend yield of 0%, volatility factor of the expected market price of the Company's Common Stock of 0.48 and a weighted average expected purchase right life of six months. 17 COMMON STOCK RESERVED FOR FUTURE ISSUANCE. As of December 31, 1996 the Company had reserved the following shares of common stock for future issuance:
Exercise of stock options.......................................................................... 3,712,259 Conversion of 8% Convertible Subordinated Notes due 2003........................................... 3,092,783 Exercise of common stock warrants.................................................................. 275,000 Employee stock purchase plan....................................................................... 193,045 ---------- TOTAL 7,273,087 ==========
VIII. 401(k) PLAN. In November 1987, the Company adopted a tax-qualified savings and retirement plan (the "401(k) Plan"). Pursuant to the terms of the 401(k) Plan, employees may elect to contribute up to 15% of their gross compensation. The Company matches employee contributions at the rate of 50% for the first $2,000 contributed. Contributions by the Company to date have not been material. IX. INCOME TAXES. Deferred taxes are provided to reflect the net tax effects of temporary differences between the financial reporting and income tax bases of assets and liabilities using the currently enacted tax rate. The tax effect of temporary differences and carryforwards, which give rise to a significant portion of deferred tax assets, consisted of the following (in thousands):
December 31, 1995 1996 ---- ---- Reserves and other $ 2,423 $ 2,902 Capitalized research and development 999 1,495 --------- -------- TOTAL 3,422 4,397 NOL and other credit carryforwards 17,602 31,993 Valuation allowance (21,024) (36,390) -------- ------- TOTAL $ -- $ -- ======== =======
As of December 31, 1995 and 1996, a valuation allowance was provided for the net deferred tax assets as a result of uncertainties regarding their realization. During 1996, the valuation allowance increased by approximately $15.4 million due to increases in temporary differences and additional losses incurred during the year. Approximately $1.8 million of the valuation allowance will be credited directly to stockholders' equity and will not be available to reduce the provision for income taxes in future years. As of December 31, 1996, the Company had net operating loss carryforwards for Federal and California income tax purposes of approximately $83.4 million and $28.3 million, respectively, and research and development tax credit carryforwards of approximately $1.9 million. To the extent not used, these carryforwards expire at various times through 2011. The Company's ability to utilize the net operating loss carryforwards in any given year may be limited upon the occurrence of certain events, including significant changes in ownership interests. 18 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF METRICOM, INC.: We have audited the accompanying consolidated balance sheets of Metricom, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Metricom, Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP San Jose, California January 22, 1997 EX-23.1 3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23.1 METRICOM, INC. CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K/A, into the Company's previously filed Registration Statements on Form S-8, File Nos. 33-47688, 33- 63076, 33-63088, 33-91746, 33-95070, 333-09001, 333-09005 and 333-18319, and on Form S-3, File Nos. 33- 78286 and 333-15169. /s/ ARTHUR ANDERSEN LLP San Jose, California December 22, 1997 -----END PRIVACY-ENHANCED MESSAGE-----