History of the Firm

Ralph C. Derrickson and Glen Estell founded Metricom in 1985. Metricom is a leading high-speed wireless data company. Ricochet, its network, provides access to information from outside the confines of an office. Metricom’s product gives added value to its subscribers as the network is remote, and can be accessed from anywhere without attaching physically to the network. The network is also at a higher speed than standard 56 kbps, with a connection speed of 128 kbps. The network is targeted at mobile professionals because the these professionals often have a demand for high-performance, cost-effective access to the Internet, private intranets, LAN’s e-mail and other online service whilst outside of the office.

Ricochet at 128 kbps is available in Atlanta, Baltimore, Dallas, Denver, Detroit, Houston, Los Angeles, Minneapolis St. Paul, New York City, Philadelphia, Phoenix, San Diego and San Francisco and 15 airports nationwide. These areas join the Washington DC and Seattle 28.8 kbps service areas (with plans to upgrade to 128 kbps), allowing Ricochet users to take advantage of the freedom of wireless mobility on a nationwide basis. Ricochet plans to continue expanding its coverage to reach 46 markets in 2001, which will mean that most major metropolitan areas will be covered. See Exhibit 1 for a map showing US network coverage.

The Founders

Ricochet’s founders Ralph C. Derrickson and Glen Estell currently hold CEO and COO positions respectively. Ralph has 20 years of entrepreneurship experience and has worked in development and application of technology to a wide range of business scenarios. Ralph is founding partner of Watershed Capital, LLC a private equity investment-management company. He was Vice President of Product Development at Starwave Corporation. He also held senior management positions at NeXT Computer and Sun Microsystems. Mr. Derrickson holds a systems software undergraduate degree from the Rochester Institute of Technology and has completed graduate work in language and compilation systems at the University of New Hampshire.

Glen Estell has worked in BellSouth and many more big cellular companies at senior positions. He was responsible for Bell South’s Cellular business in Georgia. Estell also held senior management positions in the computer industry at IBM Corporation, responsible for sales, operations, customer service, field engineering, and account marketing. As President and Chief Operation Officer at Ricochet, Estell looks over day-to-day marketing and network operations. In addition, Estell also looks after Ricochet’s engineering, research and development efforts to ensure the Company maintains its leadership position.

About the Product

Wireless networks allow users to connect to the Internet while they're away from the office or home. There are many disadvantages to many of the wireless gadgets now being sold. Small gadgets like Palm VII have bigger screens with better resolution but their transmission rate is slow when compared to normal desktop computers. See Exhibit 2 for a Palm VII. Ricochet is easy to use, reliable, with a small mobile access device (modem) that is designed to work with laptop computers. They also have PCMCIA cards for mobile phones. Ricochet can offer transmission rates of 128 kbps 80% of the time and costs about $75 per month to access. This fee is paid to a reseller of the service (an Internet service provider). The reseller pays a license, and network access fee to Metricom. The Ricochet network raises the possible wireless transmissions speeds with the help of a technology known as frequency hopping. The network divides each digital signal into packets of data and transmits them at many different radio frequencies instead of a single channel.

The Ricochet model gives Added Value to subscribers in several ways. Firstly, the Network is the only wireless network available that allows for complete access to the Internet, whether accessing a corporate LAN, checking E-mail, or accessing the World Wide Web. In addition to this ‘Value Added’ is created, as the network speed is faster than most dial-up connections. A wireless network gives added value over traditional network access for mobile professionals, as there is no need to find a telephone connection whenever there is a need to connect to the Internet. Ricochet’s coverage will also mean that finding yourself out of network area will be uncommon.

Competition

Since Ricochet is unique, there are no major competitors in the companies exact market offering. Metricom is the only company to provide complete access to the Internet, whether it is accessing a corporate LAN, checking E-mail or accessing the World Wide Web. Products that can be considered to be in competition include cellular data communications technology (which do not provide access to the complete internet) and a new communication standard named Bluetooth. Bluetooth is not a product, but a standard agreed upon by several giants in the telecommunications industry (Ericcson, Microsoft, etc.) Theoretically, devices equipped with this standard would be able to communicate with each other using the unlicensed 2.4 gig/s bandwidth with Ricochet. These devices do not have the same reach as the Ricochet modem (30 feet max).

Ricochet is also in competition with traditional network providers such as AOL and AT&T: these are the providers who provider subscribers access to the complete Internet through traditional wire networks. The Ricochet network has a competitive advantage over these networks are it can be accessed from any where without physically attaching to the network

Cellular communications have market segment which can be compared to the Ricochet network, the system has been around for several years. The differences between these data transfers and the Ricochet transfer are numerous. Ricochet is faster (128K/s versus 28K/s), and more cost effective than cellular phone data communications. The most popular cellular phone and PDA that use this WAP system of communications are the Sprint PCS phone and the Palm VII respectively. Each of these products relies on the WAP (wireless access protocol) and is incompatible with HTML. The small screens used, as well as the glacial data rates, ensure that the Ricochet modem is superior for mobile telecommunication.

Marketing Practices

Metricom does not advertise nor sell its Ricochet network directly to the public. Rather, it licenses the use of its network of pole top radios to other companies (resellers). These companies assume the responsibility of supplying customers with modems, technical support, and advertising efforts. In this way, Metricom is dealing with a few customers, who already may have a subscriber base (from dial up), which will allow the network to quickly reach a critical mass. By not becoming an ISP and selling directly to subscribers, Metricom can concentrate on its core competence: maintaining its network and managing its relationship with the resellers (who are generally more technologically savvy than individuals).

The use of resellers means that Metricom does not generate revenues directly from subscribers. Instead, the company generates its revenue through licensing the network to the resellers. For access to the network, the reseller will pay a license fee to Metricom, and will also pay a fee based upon the number of subscribers entering the network through that network subscriber. In addition to this, Metricom generates revenue through the direct sale of modems to the resellers subscribers.

Partnerships

Ricochet modem and service resellers include WorldCom, Juno Online, SkyTel (part of WorldCom), UUNet (part of WorldCom), Wireless WebConnect!, GoAmerica, EarthLink, Compaq, Aether Systems, and IP Communications. GoAmerica is involved in an active marketing campaign and may be responsible for the television commercials you may have seen about Ricochet. Ricochet is generally Co-Branded with these service providers, which will allow the company to build brand awareness. Prices for each reseller above can be found in Exhibit 3. As part of the licensing agreement, Metricom is involved in the pricing strategies of the resellers, which accounts for the similar pricing schedules between the different ISP’s.

Metricom does not build its technology for the network. The company has contracted several companies to construct the necessary components. Modems are contracted to three companies, Novatel, CO Wireless, and Natsteel. Samina is the contractor that provides the pole top radios that are a crucial component of the network. These suppliers provide Metricom with hardware that it uses to expand the coverage of its network and supply resellers with modems and PC cards. The importance of these suppliers means that Metricom is critically dependent on them, and late delivery may impede the future deployment of the network.

Industry Success Factors

One of the major critical success factors for Metricom is its relationship with its suppliers. Metricom is completely reliant on its resellers to provide the traffic on the Ricochet network. Metricom does not directly sell access to the end user. It is not an Internet Service provider. Instead, the company licenses the network to third party ISP’s such as GoAmerica. A complete list of Ricochet resellers can be found in Exhibit 3. Ricochets main sources of revenue are from the licensing arrangements, and from selling the wireless modems needed to gain access to the network. These modems range from $99 to $299 retail and can be bought directly from Ricochet or through third party suppliers such as Comp USA and other electronic superstores.

If the resellers fail to attract a critical mass of subscribers then the network will never become profitable. Although Metricom currently licenses the technology to several ISP’s, it is interested in partnering with several more to achieve a critical mass. Potential partners may be deterred, however, because of the current partner. In addition to this, as the product is a co-branded product (i.e. Ricochet by GoAmerica), bad customer service on the part of the reseller will have a negative impact on a brand that is currently being built. The company must ensure that the Resellers technical and customer support is of a satisfactory quality.

Metricom has ownership of one other critical success factors of the industry. The technology and infrastructure. Metricom developed the ricochet network and technology and does not face a threat of other companies copying the software. However, there is a problem with Metricom’s technology. 2.4 GHz band used by the Ricochet network is unlicensed. This greatly reduces no barriers to entry in this market. Any other company can devise a product using the same frequencies, increasing the interference that Ricochet users will experience The clarity of digital transmissions relies on having enough bandwidth to supply all users. . As long as the software is not the same as Ricochet, then Metricom will not be able to litigate in intellectual property infringement law, nor reduce any interference. Once the capacity of this bandwidth is reached, Metricom will have to find additional bandwidth to keep supplying subscribers. By the time this becomes an issue, technology should allow for greater bandwidth and this should not be a serious problem. However, Metricom should monitor any other companies developing a similar network, and should defend any intellectual property infringements. As long as Metricom is vigilant about these issues and implements any policies to deal with the situations quickly, then these issues should not become major problems.

Metricom also faces the threat of litigation from other providers who may want a court ruling for the network to become open. The network (not the bandwidth) is currently proprietary to Metricom and opportunists may attest that Metricom has a monopoly in the high-speed internet market. The company may also have to become involved in litigation if others copy Metricom’s technology. Metricom must also ensure that they do not violate and technology licenses or infringe other companies’ intellectual property.

For Metricom to survive in the industry, it must face and resolve its financial issues. Metricom currently has a negative cash flow and will be forced to scale back its operations if additional funding is not found before August. Understandably, funding is hard to come by as the company has shown a loss every year since inception, and the cost of additional capital will be high as Metricom is in a high risk industry with a significant chance of default on capital investment.

Another critical success factor in this industry is the fact that Metricom is reliant on component suppliers to expand its network. If delivery is late or the components are not of a satisfactory quality then network deployment may be delayed. Metricom is critically reliant on the suppliers of components of the network. It is also an area that is beyond the company’s control. Whilst expanding in new areas, Metricom must gain permission from municipal authorities before expanding into an area. In addition the company is subject to national telecom regulations, which may impede the expansion of the network. Another problem that may be faced when expanding is the location of building top transmitters. If suitable buildings cannot be found or cannot be found at a reasonable price then the expansion could be affected. Finally, Metricom has had to scale back the speed of its expansion in order to improve its cash flow, which is currently negative.

Finally, Metricom must deal with the influence of its two largest shareholders, Vulcan Ventures, and WorldCom who currently hold 60% of the outstanding shares. This position gives the investors a huge amount of influence on the company’s future direction. Metricom is concerned about this amount of influence, as they believe that if something else becomes a priority, that Metricom will be put on the sidelines.

Metricom’s Performance

Financially, Metricom is in a delicate situation. The company has had to invest significant amounts of money in upgrading the network to 128 kbps and has suffered financially as a result. The company undertook the upgrade using projected earnings that have proved so far to be inaccurate. Subscription to the service has been at half the level forecast by Metricom. This means that this company will not reach its target sales or revenues in 2001, and will take much longer to breakeven and become profitable.

In addition to this, from the consolidated financial statements, it can be seen that the company has a preference to financial its capital expenditure through the heavy use of debt, and not by further equity placements. This is reflected in the financial statements by a debt to assets ration of 104% and equity to assets ratio of 9%. This heavy reliance on debt financing will mean that unless the company can accelerate its subscriptions, and subsequently its revenues, the company will face high levels of interest charges in the future, and reluctance by companies to issue further debt to the company. This heavy reliance on debt funding also explains the small number of stockholders in the company, a mere 34,000 investors in the first quarter of 2001. Metricom’s biggest investors are WorldCom, and Paul Allen (Vulcan ventures) Microsoft’s co-founder, who currently holds a 60% stake in the company

All companies in the sector have been suffering with the recent economic downturn and two companies in related fields NorthPoint communications inc, and E. Spire have filled for bankruptcy protection, as theirs as well as Metricom’s junk bonds have posted losses for 5 straight quarters (www.bloomberg.com). Metricoms earning growth rate for the last 5 years was –287%.

An updated release to the financial statements shows that Metricom only has $327 million in working capital meaning that the company will fall short by August, as the company needs approximately $500 million in working capital to last the year. (Bloomberg). This negative cash flow illustrates further the perilous financial situation of the company. The company has announced that if further funding for working capital is not found then, operations will be significantly scaled back. The company will not declare bankruptcy. Further information about the company’s financial state can be found at Bloomberg and the organizations financial statements are in Exhibit 4.

As of December 31^st 2000, the Ricochet Network has approximately 34,000 Subscribers. Of these, 21,800 are subscribers to the 28.8kbs service, and 12,200 subscribers to the high speed 128kbs. The majority of the subscribers to the slower service are in areas where the faster service is not yet available, and these people are expected to use the faster service when it becomes available. This is in a total network coverage of 37 million. Ricochet is targeting at a very small area of this population, as the service demands a premium, which is not attractive to all consumers. Ricochet is instead targeted at the mobile business professionals who will not object to paying a premium for a mobile service. This is why Metricom has expanded into airport areas, in many cases even when the rest of that metropolitan area is not covered. Aether Systems and IP communications are new reselling partners and their current subscriber base is not included in these numbers.

In the last three years, revenue generation has moved from a mix of service revenues and product revenues (54% and 47% respectively in 1998) to a service dominated revenue model (74% and 26% respectively). These two categories consist of the total revenue generation activities for the company.

Projections for the future

In non-financial terms, Metricom is doing well. According to the Lehman Brothers, Ricochet subscribers are predicted to grow to 642,500 subscribers by the end of 2001. However, new 2.5G and 3G cellular phones and PDAs will have faster data rates and wider screens. Ricochet will have to continually update its network and increase its data rates to maintain a competitive edge.

Financially, if the company can survive to the end of 2001, then the future should look brighter. In order to do this, the company will have to secure a cash injection to deal with the problem of its negative cash flow. This could be done in several ways: The company could issue additional debt or equity, or could make a strategic alliance with one of its resellers, in which the partner could fund some of the company’s research and development activities.

The addition of further resellers should help the Network reach critical mass. The addition of two additional partners earlier this year shows that there is still significant interest in the market despite the recent economic downturn.

Conclusions

Metricom and its Ricochet network is a novel project in an interesting and dynamic marketplace. Although the company has had its ups and downs, the perseverance of investment in Research and Development and deployment of the network has allowed the company to achieve a first mover advantage and niche position in a very competitive market place.

Metricoms partnerships with resellers have allowed the company to concentrate on its core competences, network development and deployment. This has allowed the company to build a subscriber base to the network, without incurring significant marketing costs, or by having to hire and develop a infrastructure to support a sales and marketing division.

Exhibit 1

Exhibit 2


PRODUCT DETAILS
Size and Weight	5.25" x 3.25" x 0.75" ; 6.7oz
Operating System	Palm OS® Software v. 3.5
Palm™ VIIx handheld Applications	Date Book • Address Book • To Do List • Memo Pad • Calculator • Web Clipping Application • iMessenger® Application • Expense • Desktop e-mail connectivity* • HotSync® Manager • Security • Games • HotSync® technology for local and remote synchronization with your PC.
Palm™ Desktop Software	Date Book •Address Book • Mail* • To Do List • Memo Pad • Expense • Calculator • Security • Games • HotSync® technology for local and remote synchronization with your PC • Drag and drop links to Microsoft Excel and Word • Desktop import and export formats: CSV, TAB delimited, and TXT
Web Clipping Applications Included with Handheld	Communications: • Juno Air™ • Rovenet P-7-fax • ThinAirMail • Yahoo! Mail Financial: • CBS MarketWatch.com • ETrade • Fidelity Investments • Prudential • USABancShares.com News & Sports:* • ABCNEWS.com • ESPN.com • Real Cities • USAToday.com • The Wall Street Journal (Interactive Edition) References & Directories: • Ask Jeeves • BarPoint Shopper™ • Brittanica.com • Excite Mobile • Merriam-Webster • MyInfo Powered by Yodlee • Palm, Inc. • Switchboard Yellow Pages • Yahoo! People Search Shopping: • Amazon.com • Barnes & Noble.com • Buy.com • SNAZ.com • Vicinity Brandfinder • Palm, Inc. Travel & Entertainment: • American Airlines • Continental Airlines • Delta Airlines • Etak Traffic Touch • MapBlast! • MapQuest.com • Moviefone.com • TicketMaster • TravelerSOS • Travelocity.com • United Airlines • Weather.com
Display	Enhanced Screen Technology - easier to see at nearly all angles, in dim light, and in bright sunlight.
Hardware Expansion	Built-in connector used to attach expansion devices.
Battery Life	Two AAA batteries last two to four weeks.
Internet-ready Connectivity	Internet-ready with TCP/IP software to support Internet-based Web Clipping Applications and e-mail.
Infrared Port	Beam your business card, phone lists, memos, and add-on applications to other IR-enabled Palm OS devices. Use third-party beaming applications with IR-enabled phones, printers, etc.
Storage Capacity	Highly efficient operating system can store: Thousands of addresses • Years of appointments • Hundreds of to-do items • Hundreds of notes and memos • Hundreds of e-mail messages • More than 50 add-on applications (based on an average size of 50k. Size of applications may vary). • Storage Capacity of 8MB
Flash Memory	Allows Palm OS software upgrades.

EXHIBIT 3 Ricochet Service Price and Availability
Ricochet Reseller Partners	Service price (monthly)	Modem price	Operating Systems

866.472.7638	$74.95	Merlin $299.95 Merlin w/PCMCIA jacket for the iPAQ Pocket PC $449.95	Merlin: Win 95/98/NT/2000/Pocket PC

800.244.5849	$79.95 ⁵	GS $49.95 ⁶	Check with service provider


888.462.4600	$74.95	GS $99 ¹	GS/GT: Win 95/98/2000/ME/NT 4.0 No Mac support

800.811.7426	$74.95 $825 ³ annually	GS $99 ² Merlin $299 AirCard $299	GS/GT: Win 95/98/2000/ME/NT 4.0 Mac 9.x Merlin: Win 98SE/2000/NT/CE Mac 8.6 - 9.x AirCard: Win 98/NT/2000/Pocket PC No Mac support

800.501.4018	$79.95 ⁴	GS $99	GS/GT: Win 95/98/2000/ME/NT 4.0 No Mac support

800.635.0373 *	$59.95 ⁷ $79.95 ⁸	GS $100 ⁹	Check with service provider


¹ Requires one year commitment ² GS modem free for current Ricochet customers upgrading from 28.8 kbps service to 128 kbps service ³ $30 activation fee waived with annual service prepayment of $825 ⁴ Includes free personal web site, up to 15 e-mail accounts, free dial-up service and live customer support ⁵ 5%, 10%, or 15% discounts available depending upon a 1, 2, or 3 year contract, respectively ⁶ Sign up for service before June 30, 2001 and the GS modem is only $49.95. ⁷ Existing EarthLink customers in addition to current access fees ⁸ Unlimited dial-up access, up to 6 e-mail accounts, free personal web site, customer and technical support ⁹ Currently, EarthLink customers must purchase their modem directly from EarthLink

Exhibit 4
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

	DECEMBER 31,

	1998	1999
ASSETS
Current assets:
Cash and cash equivalents	19,141	354,820
Short-term investments		144,521
Accounts receivable, net	1,450	2,387
Inventories	3,046	586
Prepaid expenses and other	1,522	3,116

Total current assets	25,159	505,430
Property and equipment, net	5,555	12,233
Network construction in progress		22,034
Other assets, net	3,752	6,950

Total assets	34,466	546,647

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable	5,061	9,649
Accrued liabilities	10,662	12,642
Notes payable	40	4,521

Total current liabilities	15,763	26,812

Long-term debt	55,098	385

Other liabilities	680	321

Minority interest	5,184

Redeemable convertible preferred stock, $0.001 par value per share:
authorized - 72,000,000 shares; issued and outstanding -
60,000,000 shares in 1999		573,329

Stockholders' equity (deficit):
Preferred stock, $0.001 par value per share, 8,000,000 shares authorized; no shares
issued or outstanding
Common stock, $0.001 par value per share: authorized - 150,000,000 shares;
issued and outstanding - 24,344,697 shares in 1999 and 18,793,055
shares in 1998	19	25
Additional paid-in capital	191,184	283,763
Accumulated deficit	(233,462)	(337,988)

Total stockholders' equity (deficit)	(42,259)	(54,200)
Total liabilities and stockholders' equity (deficit)	34,466	546,647

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEAR ENDED DECEMBER 31,

1997

1998

1999

Revenues:

Service revenues

6,642

8,419

10,088

Product revenues

6,797

7,440

8,437

Total revenues

13,439

15,859

18,525

Costs and expenses:

Cost of service revenues

27,866

28,310

21,319

Provision for network replacement

14,392

Cost of product revenues

4,558

5,050

6,014

Research and development

13,212

27,313

35,681

Selling, general and administrative

21,189

22,934

20,737

Provision for Overall Wireless

3,611

Total costs and expenses

70,436

97,999

83,751

Loss from operations

(56,997)

(82,140)

(65,226)

Interest expense

(4,151)

(3,939)

(5,884)

Interest income

1,820

1,915

4,818

Net loss

59,328

(84,164)

(66,292)

Preferred stock dividends

38,234

Net loss attributable to common stockholders

(59,328)

(84,164)

(104,526)

Basic and diluted net loss attributable to common

stockholders per share

(4)

(5)

Weighted average shares outstanding

13,641

18,195

20,375

Pro forma amounts assuming the new capitalization policy

for network equipment is applied retroactively -