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U.S. Securities and Exchange Commission
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
or
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ................. to .....................
Commission File Number 0-27024
METRO ONE TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0995165
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8405 S.W. Nimbus Avenue Beaverton, OR 97008
(Address of principal executive offices)
Registrant's telephone number, including area code: 503-643-9500
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 ___
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [ ]
Revenues for its most recent fiscal year. $13,074,206.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which stock was sold, or the average bid
and asked prices of such stock, as of a specified date within the past 60 days.
Not Applicable
The number of shares outstanding of the Registrant's common stock, as
of March 15, 1996, was 8,341,684.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 1996 Annual Meeting are
incorporated by reference into Part III of this Report.
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The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Annual Report is forward-looking and such-forward looking information involves
important risks and uncertainties that could significantly affect expected
results in the future from those expressed in any forward-looking statements
made by the Company. These risks and uncertainties include, but are not limited
to, uncertainties relating to economic conditions, personnel, technological and
informational developments, and changes in the competitive and regulatory
environment in which the Company operates.
PART I
ITEM 1. BUSINESS.
Metro One Telecommunications, Inc. ("Metro One" or the "Company") was
incorporated in 1989 under the laws of the State of Oregon and has its principal
executive offices at 8405 S.W. Nimbus Avenue, Beaverton, Oregon, 97008.
The Company develops, markets and provides telecommunications-based
enhanced directory assistance ("EDA") for the wireless communications industry,
including cellular and personal communication services ("PCS"), and, on a trial
basis, for the traditional landline telephone industry. The Company's
proprietary Enhanced Directory Assistance(R) system is designed to address the
public demand for more comprehensive, easy-to-use directory assistance
information delivered in an efficient, user-friendly manner. The Company's EDA
includes several features in addition to basic directory assistance services
such as call completion, categorical searches and local event information. Call
completion, as the name suggests, allows a caller to be directly connected to
the party about whom they were requesting the information, thus completing the
call without the caller's redialing. The Company uses "live" operators in
performing its EDA and strives for a high level of personal service. The Company
believes that the principal advantages its EDA offers to its carrier customers
are high levels of quality and service and, specifically in the case of the
Company's wireless carrier customers, increased billable air time through
completion of calls. The principal advantages offered to the carriers'
respective customers are quality, helpful service, ease of use and a greater
number of valuable features than alternative products.
In 1989, the Company was incorporated under the name Metro One Direct
Information Services, Inc., opened its first call center and began testing and
offering EDA services. In 1991, the Company entered into its first contract to
provide EDA services to a cellular carrier's subscribers on a charge-per-call
basis. The Company changed its name to Metro One Telecommunications, Inc. in
1995.
INDUSTRY BACKGROUND
For most of this century, the domestic telephone industry was dominated
by AT&T and its operating companies. As the parent company, AT&T was a holding
company which owned Bell Telephone Laboratories and Western Electric Company, a
manufacturer, purchaser and installer of telephone equipment. AT&T also owned 22
subsidiary telephone operating companies. AT&T, Western Electric, Bell Labs and
the operating companies were collectively known as the Bell System. By 1980, the
Bell System served over 80 percent of the domestic telecommunications market.
On August 24, 1982, Judge Harold H. Greene of the federal district
court in Washington, DC, approved a modified agreement (the "Modification of
Final Judgment" or the "Consent Decree") which terminated a civil antitrust suit
filed by the government against AT&T, Western Electric and Bell Labs. Most
important, the agreement required the divestiture of the Bell System operating
companies. Under that Agreement, as of January 1, 1984, the United States was
divided into approximately 160 local access and transport areas ("LATAs"). The
Bell operating companies, which were organized into seven regional holding
companies, were allowed to provide local telephone service only within the
LATAs. Under the Consent Decree, AT&T was prohibited from providing local
telephone service within the LATAs. The Regional Bell Operating Companies
("RBOCs") were forbidden from providing inter-LATA services, information
services (including electronic publishing), and from manufacturing
telecommunications products and customer premises equipment. However, they were
permitted to engage in the marketing of new customer premises equipment and they
retained control over the "Yellow Pages" directories. In 1991, the U.S. Court of
Appeals amended the Consent Decree to partially eliminate the prohibition
against RBOC-provided information services.
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In February, 1996, the President of the United States signed into law
the Telecommunications Act of 1996 (the "1996 Telecommunications Act") which
promotes competition in all aspects of telecommunications and could
significantly change the landscape of the telecommunications industry. The 1996
Telecommunications Act, among other things, effectively allows the RBOCs to
compete in the long-distance market and AT&T and other long-distance providers
to compete in the local telecommunications market. Eventually, it is expected
that consumers will be able to choose among many providers for local,
long-distance and wireless services either on a stand-alone or bundled basis. As
consumers are presented with an increasingly larger array of product offerings
and number of providers, the telecommunications market is expected to become
even more competitive.
The Wireless Telecommunications Industry. Since the 1980s, the
availability and use of wireless telecommunications services have grown
dramatically reflecting technological advances and increased customer demand for
access to affordable and high quality mobile telecommunication services.
Wireless telecommunications services generally refer to cellular, PCS,
specialized mobile radio ("SMR"), paging and other types of developing
technologies. Among the various types of wireless services, the market for
cellular communications is the largest.
Cellular technology achieved dramatic improvements over older two-way
radio communication with increased user access, higher voice transmission
quality, greater privacy and additional features such as three-way calling and
voice mail. Accordingly, cellular service has enjoyed tremendous growth and is
now available in substantially all areas of the U.S. While cellular telephone
services has historically been primarily a business tool, it is becoming
increasingly popular among consumers seeking convenience and security away from
home. According to the Cellular Telecommunications Industry Association
("CTIA"), cellular is currently the most widespread wireless technology with
more than 33 million domestic subscribers at the end of 1995, and is projected
to grow to 47 million subscribers by the year 2000.
A newer, competing series of technologies which comprise PCS are also,
according to industry experts, expected to grow rapidly in the near future.
Using digital technologies to carry more traffic in the radio spectrum bands,
PCS purports to be the second generation of cellular. Although several of the
PCS licensees with pioneer preferences have begun to offer their services to the
public, widespread deployment of PCS is not expected until late in 1996. Initial
PCS service, which is expected to have lower-priced service options than
cellular, will be comparable to digital cellular services and, in the future, is
expected to offer numerous enhanced services. PCS may also represent the
precursor to a service which will one day allow the consumer to have only one
telephone (a wireless phone) and one telephone number for multiple uses (home,
office, etc.). The Personal Communications Industry Association ("PCIA")
projects the number of PCS subscribers to grow from zero to almost 15 million
by the year 2000.
Another form of wireless communications is specialized mobile radio
("SMR") systems. Existing analog SMR operations are generally used by taxicabs
and tow truck services which need the ability to communicate in the field,
either on a one-to-one or one-to-many basis. However, recent regulatory changes
and technology advances are allowing SMR providers to offer high quality
services which compete directly with those offered by other wireless providers.
The growth in the wireless industry, coupled with the expected effects
of the 1996 Telecommunications Act, may force providers to differentiate their
services in an effort to attract and retain subscribers. The Company believes
that its EDA will help these providers differentiate themselves from
competitors.
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DOMESTIC DIRECTORY ASSISTANCE MARKET
The Company believes that approximately $2.0 billion is billed annually
to consumers and businesses in the United States for directory assistance
services. The majority of these directory assistance calls are handled for
landline telephone users by the RBOCs from their incumbent positions as the
local telephone carriers. The Company believes, however, that wireless directory
assistance, primarily cellular, represents the fastest growing segment of the
overall market due to the expected continued growth in the wireless market and
the natural attractiveness of delivering directory assistance for wireless,
typically mobile, users. Accordingly, the Company believes that the wireless
market will continue to present attractive market opportunities.
The domestic landline telecommunications market is dominated by AT&T
Corp., Sprint Corp. and MCI Communications Corp. in the long-distance market and
the RBOCs and GTE Corp. in the local telecommunications market. However, these
providers are entering each other's traditional markets and, along with new
market entrants such as competitive access providers, are causing the market to
become more competitive, thereby requiring the established carriers to examine
every facet of their business including, the Company believes, delivery of
directory assistance services. The wireless telecommunications market is also
dominated by the cellular and PCS affiliates of the established carriers as well
as a few large independents. The Federal Communications Commission ("FCC")
initially granted cellular licenses to only two systems (one for non-wireline
carriers and one for wireline carriers) in every metropolitan statistical and
rural service area. The largest U.S. cellular carriers include AT&T Wireless
Services, Inc., GTE Mobilenet, the cellular affiliates of the RBOCs, such as
Ameritech Cellular and US West NewVector Group, Inc., and several independents,
including AirTouch Communications, Inc. In 1995, the FCC completed the first
auction of PCS licenses to potential PCS providers and plans to award up to six
PCS licenses per market area. The largest PCS providers, in terms of population
base covered, include Sprint Spectrum, AT&T Wireless Services and PCS PrimeCo
LP. The entire telecommunications industry is currently undergoing various
regulatory, competitive and technological changes which the Company believes may
create new customers and affect existing customers of the Company. The Company
will continue to monitor the ongoing changes in the marketplace and consider
which developments provide the most favorable opportunities for the Company to
pursue.
CUSTOMERS
In 1995, seven customers accounted for substantially all of the
Company's $13.0 million in revenues. The Company's three largest customers, US
West NewVector, Ameritech Cellular and Bell Atlantic NYNEX Mobile, accounted for
approximately 29, 23, and 20 percent of revenues, respectively, in 1995. In
1994, six customers accounted for all of the Company's revenues and the top
three customers, US West NewVector, Bell South Cellular and AirTouch Cellular,
accounted for approximately 53, 15, and 13 percent of revenues, respectively. US
West NewVector and AirTouch are in the process of combining their wireless
operations and they have begun acting together in an alliance with Bell Atlantic
NYNEX Mobile Systems, collectively referred to as TOMCOM, in what the Company
believes to be an effort to offer uniform services nationally and gain
purchasing efficiencies. The creation of this alliance, together with any other
alliances or joint ventures, may adversely impact the Company if the partners to
any alliance or joint venture provide their directory assistance or enhanced
directory assistance through arrangements other than with the Company or can
exert substantial influence on the contract negotiation or renewal process.
The Company typically enters into a separate contract with a carrier
for each geographic market to be served by the Company. The Company is a party
to a single contract with Ameritech Cellular, however, pursuant to which the
Company provides or will provide enhanced directory assistance to Ameritech
cellular's subscribers in Chicago, Milwaukee, St. Louis, and Detroit. Under the
agreement, the Company will provide directory assistance to each of those
markets for a term of three years commencing on the date enhanced directory
assistance is made commercially available to subscribers in the market. The
additional terms of the agreement do not differ materially from the Company's
general EDA contracts.
The Company currently provides its EDA services under sixteen separate
contracts which range in term from one year to five years. These contracts are
generally non-exclusive and allow the Company to offer its EDA services to any
telecommunications carrier. In general, the Company contractually agrees, among
other things, to staff the EDA operations center 24 hours a day, 7 days a week,
365 days a year, with a sufficient number of operators to perform the contracted
services, within specified performance requirements. Generally, if the Company
fails in its material performance requirements, the carrier may terminate the
contract. The carrier customer, under the EDA contract, generally agrees to,
among other things, route all directory assistance traffic to the Company; bill
its caller subscribers for EDA services; and provide marketing and sales efforts
on a "good faith" basis. Generally, the Company may terminate the contract if
the carrier fails to route agreed upon directory assistance calls to the Company
or if an average volume of calls falls below a certain level when compared to
the prior year. During 1995, the Company's per call charges to it carrier
customers averaged approximately $.61 per call.
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PRINCIPAL PRODUCTS AND NEW PRODUCT DEVELOPMENT
Principal Products. With its proprietary systems, the Company provides
EDA primarily through wireless telephone carriers to their callers. The Company
believes that the principal advantages its EDA offers to its carrier customers
are high levels of quality and service and, specifically in the case of the
Company's wireless carrier customers, increased billable air time through
completion of calls. The principal advantages offered to the carriers'
respective customers are quality, helpful service, ease of use and a greater
number of valuable features than alternative products.
The call completion feature of the Company's EDA directly connects the
caller to the requested business or residence with no additional dialing
required of the caller. The Company believes that the wireless market is
receptive to the call completion feature because it offers practicality and
convenience by eliminating the need to write down or memorize a telephone number
received from traditional directory assistance and then dial that number to
reach the desired party. This advantage is most evident when the caller is
driving an automobile. The Company receives incoming calls by means of its
contractually assigned directory assistance number, which in most cases is 411,
555-1212 or another directory assistance number. In addition to facilitating
efficient call completion, the Company's system compiles billing information
that is furnished to the carrier for the carrier's subscriber billing and
collection purposes.
The Company believes that its EDA is superior to competitive products
because its service allows for a wide variety of features, in varying
combinations, to be offered to customers and their subscribers. StarBack(R), for
example, is a proprietary, patent-pending capability that the Company believes
to be unique to its services. StarBack allows a caller to return immediately to
an operator by simply pressing the star key (*) only once. In addition, whereas
traditional directory assistance provided by local telephone companies is
typically capable of locating telephone numbers based only on the exact name of
a business or individual, the value-added elements of the Company's EDA also
allow for categorical searches based on business type and/or other parameters.
New Product Development. The Company intends to improve its EDA services by
adding to its functionality and ease of use from an operator point of view and
to its features from a customer point of view. During 1996, the Company plans to
introduce additional features that will further differentiate its EDA from the
closest competitive products. These additional capabilities are expected to
include automated features to return the caller to the operator upon detecting a
"busy" signal; return the requested number to the caller; or deliver a callers'
recorded message to the called party or any other desired party. The Company
expects a new version of the system it uses to provide its value added EDA to be
available for introduction to its wireless and landline customers by mid-1996.
This new system is expected to provide significant improvements in flexibility,
customization and end-user satisfaction. The Company also believes that the new
system will result in improved EDA search times and accordingly, faster call
processing times. No assurance, however, can be given that the new features or a
new version of the Company's EDA services will be offered or, if offered, that
they will provide the advantages described. The Company has experienced delays
in the development of new features in the past, including delays attributable
to the failure of vendors to timely deliver software and equipment and delays
attributable to the Company's limited technical staff. Although the Company has
sought to prevent future delays by supplementing the efforts of technical staff
through technical consulting contracts and through contracting with alternate
sources for certain aspects of feature development, there can be no assurance
that the Company will successfully complete the development or introduction of
new features and products on a timely basis or that such features and products
will achieve market acceptance.
OPERATIONS
The Company has contracts to provide its proprietary EDA services through
many of the cellular affiliates of the RBOCs and other major cellular carriers.
Under the Company's first EDA contract in mid-1991, the Company commenced
services with McCaw Cellular Communications, Inc. (now AT&T Wireless Services,
Inc.) in Portland, Oregon. Additional contracts were entered into over the next
few years to provide EDA service for US West NewVector Group, Inc., AirTouch
Communications, Inc., BellSouth Mobility, Inc., Bell Atlantic Mobile Systems,
Inc., and Ameritech Cellular. The Company provides its EDA services to more than
half of the ten largest cellular carriers in a portion of their service areas.
In connection with these contracts, the Company opened call centers in or near
the metropolitan areas of San Diego, Miami, Phoenix, Seattle, Minneapolis,
Denver, Chicago, Detroit, Philadelphia and Baltimore. Three of these markets,
Chicago, Baltimore/Washington D.C. and Detroit, are among the top five U.S.
cellular service markets in terms of estimated numbers of subscribers.
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The Company generally offers its services on behalf of the carrier under a
name chosen by that carrier (e.g. AT&T Wireless operates under "AT&T Connect" in
Oregon and BellSouth operates under "Info Connect" in south Florida.). The
Company is virtually invisible to each carrier's subscribers. The carrier is
generally responsible for all aspects of marketing, including advertising and
related costs. Additionally, the carrier is obligated to pay the Company within
a set number of days regardless of the collection results when it bills its
customers, minimizing the Company's billing costs and allowing the Company to
avoid any collection problems.
The Company's data acquisition, data retrieval and telecommunications
system was developed for its initial value-added EDA product. From this
development base, the Company engineered the addition of a cellular carrier
interface, including the processes of call tracking and billing data generation.
The Company acquires data and then formats and enhances data using a series of
processes utilizing both internally-developed and purchased software. Most
RBOCs and independent telephone companies historically have made their listing
information available for license by the Company in accordance with tariffs
established with state regulatory authorities or through license agreements.
Under the Telecommunications Act of 1996, all telecommunications carriers that
provide telephone exchange service are obligated to provide subscriber list
information under nondiscriminatory and reasonable rates, terms, and conditions.
The Company's database and software reside locally in each geographic location
where EDA is provided. The facilities and equipment in each call center have
been designed and configured to substantially support centrally managed
maintenance and trouble-shooting from the Company's headquarters in Beaverton,
Oregon.
The Company's proprietary system also allows for automated handling of the
repetitive portions of a call (i.e. the front-end greeting and back-end messages
and sign-off) through use of a voice response unit. The Company believes that
this enhancement has increased the quality of its service and resulted in
increased operational efficiency and profitability. The Company's systems also
generate statistical information on such items as call volume and duration. The
Company's management uses the information to assess the proper scheduling of
personnel and profit maximization. The Company's telecommunications system has
been customized to interface with the telecommunications system of each carrier
customer. In cooperation with carriers and telephone companies, the Company has
created the required interfaces to handle the various types of call switching.
To facilitate this interface, the Company maintains significant and valuable
relationships with major suppliers to provide hardware and other services
necessary to its operations.
MARKETING STRATEGY
The Company believes its success will be maximized by marketing its
services first to wireless carriers in major U.S. markets followed by efforts to
augment and, in some cases, compete with traditional landline directory
assistance in operation today. As part of this strategy, the Company plans to
deliver its EDA and other services to multiple customer groups through regional
centers, with each center serving a sizable geographic area. The first step of
that strategy, the establishment of the Company's EDA with cellular carriers
throughout the United States, is well underway. Moreover, the Company expects
EDA to become an increasingly standard product offering of many cellular
companies. The Company believes that, by subcontracting EDA from the Company,
cellular carriers benefit by: (1) offering a convenient service superior to that
of traditional directory assistance; (2) creating a powerful selling tool to
gain new customers and demonstrate "full service" status, thus enhancing their
respective competitive statures; and (3) generating additional air time revenue,
by increasing both call completion rates and the number of calls. The Company
believes that these benefits, coupled with the size and expected continued
growth in the cellular market, will continue to present the Company with
significant additional opportunities.
While the Company's principle focus continues to be the cellular market, it
has identified and is pursuing non-cellular markets such as the PCS and landline
markets. In November, 1995, the Company began providing its EDA services to one
of the PCS pioneer preference providers, American PCS LP, an affiliate of Sprint
Spectrum, in Washington D.C. under a multi-year contract. In addition, it has
signed one contract with, and is providing service, on a trial basis, for a
local telephone company subsidiary of Sprint Corporation. Both of these carriers
represent examples of the strategy to provide service to additional customers
out of existing call centers. Other potential additional markets include
alternative wireless carriers such as SMR providers, competitive access
providers, inter-exchange carriers (long-distance carriers), large corporate or
governmental customers and retail consumers. The Company believes that the
increased call volume resulting from serving multiple customers in the Company's
existing and future locations will increase operational efficiencies and is
necessary for the Company to achieve substantial profitability. No assurance may
be given that the Company will be successful in gaining multiple customers in
more or all of its geographic markets.
A key element of the Company's strategy in the wireless arena is its
ability, by the terms of its contracts, to provide EDA via traditional directory
assistance numbers, such as 411 and 555-1212. This enables the Company to
capture large volumes
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of existing directory assistance traffic, immediately upon the commencement of
service. It is also one of the principal reasons that the Company is able to
avoid extensive marketing expenditures, as these numbers are already well-known
and readily used. In the landline market, the Company's strategy is to provide
EDA and other services through subcontract arrangements with RBOCs, long
distance carriers, independent local telephone companies and corporate or
governmental customers using readily known and easily remembered numbers to
deliver such services. No assurance can be given that the Company will be
successful in its efforts to gain access to well-known and readily used
directory assistance numbers in all of its markets.
GOVERNMENT REGULATION
The Company's business depends upon relationships with companies that are
regulated by the FCC or state PUCs. Such regulation applies to all
communications common carriers, such as AT&T, the RBOCs and GTE. Enhanced
service companies such as the Company are subject to various levels of
regulation or are completely unregulated (depending on the state); although, in
order to conduct business, the Company must send information over the regulated
public switched network. The FCC regulates the telecommunications industry
pursuant to the Communications Act of 1934 (as amended). The FCC's authority
extends to all interstate and foreign communication by wire or radio. The FCC
requires common carriers to furnish communication service for a fee upon
reasonable request in a nondiscriminatory manner to any member of the public who
requests it and is qualified to receive it. The Commission also regulates rates
of common carriers (by tariff) to ensure that charges for telecommunication
services are "fair and reasonable." The FCC licenses common (versus private)
carriers, and state PUCs license carriers for intrastate activities. Thus, the
FCC and state PUCs have tremendous influence over the suppression or promotion
of competition. Regulatory decisions and policies over the years have been the
source of political, judicial and commercial controversy and disagreement.
In February 1996, the President signed into law the 1996 Telecommunications
Act. The legislation provides for, among other things, the development of
competitive local telecommunications market by allowing long-distance, cable and
other companies to offer local phone service; the development of a more
competitive long-distance telecommunications market by allowing the RBOCs,
subject to numerous new criteria and regulations, to offer long-distance
services; and the development of competitive cable TV markets by allowing local
phone companies and others to deliver video services to homes and businesses.
The 1996 Telecommunications Act provides wireless carriers opportunities to
emerge as full competitors to traditional telephone companies and is expected to
materially change the marketplace by promoting competition in all aspects of
telecommunications.
COMPETITION
The enhanced directory assistance market is characterized by rapidly
changing market forces, technological advancements, and increasing competition
from a number of both small and large companies. The Company believes that the
principal competitive factors in the enhanced directory assistance market are
quality of product, features and technological innovation, experience,
responsiveness, and price. The Company believes that it competes favorably with
respect to all principal competitive factors.
The Company believes that, with eleven operating call centers throughout
the United States, it is larger than any other independent provider of EDA
services. Primarily through its contracts with wireless carriers, the Company
believes it has handled more calls than any other independent provider. In
addition, the Company believes it was the first independent provider of EDA
services.
The Company operates under contracts with a limited number of large
customers primarily in the cellular market. Generally, there are only two
providers of cellular service in each market area. In several markets, the
Company has contracts with both providers. In the past, this would have
essentially prevented an EDA competitor from entering that wireless market so
long as the contracts were in force. With the advent of PCS and as many as six
additional carriers eventually serving any given market, this may cease to be
the case.
The Company competes with a number of companies, some of which are much
larger, more established and generally possess greater telecommunications
expertise, market recognition and management, financial and other resources than
the Company. These competitors are primarily the RBOC-owned or -affiliated
carriers, such as GTE or Pacific Bell,
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or non-RBOC affiliated carriers. The Company believes that its EDA services hold
a competitive advantage, because features such as StarBack (which give a caller
the opportunity to quickly be re-connected with an operator in the event of a
busy signal) allow it to provide superior service. No assurance may be given
that these carriers will not be able to provide, through technological
advancements or otherwise, comparable EDA services in a cost competitive manner
in the future. The Company also competes with several small, private independent
companies which have entered the business of providing EDA to markets targeted
by the Company. Although, to the Company's knowledge, none of these companies is
as experienced in providing EDA services as the Company, they may be more
established than the Company in other ways, including possession of greater
telecommunications expertise, market recognition, and management, financial and
other resources.
There are also several companies throughout the United States providing
simplified versions of value-added information EDA services. These operations
often employ small numbers of operators who use data purchased from Yellow Pages
publishers or other service providers in a CD ROM format. The providers of CD
ROM-based and on-line services-based directory assistance also compete, directly
or indirectly, with the Company. MCI and AT&T have also each introduced a
900-number national directory assistance service. In addition, Automatic
Directory Assistance Call Completion ("ADACC") is a technology designed by
Bellcore and marketed by virtually every RBOC. ADACC is available in several
U.S. cities through landline or cellular telephones. This system is highly
automated (there is no live operator to assist the caller) and, in the Company's
belief, is not particularly user-friendly. There can be no assurance that the
Company will be able to compete effectively against such competitors.
Traditional White Pages and Yellow Pages directories will continue to
compete with the Company's value-added EDA for caller usage. However, telephone
books are not always readily available to a caller and typically are updated
only annually. The Company's EDA is capable of providing more information than
that normally found in these books and can be inherently more accurate due to
more frequent updating.
EMPLOYEES
As of March 15, 1996, the Company had approximately 497 total employees.
None of the Company's employees are subject to a collective bargaining
agreement. Management of the Company considers its relationship with its
employees to be good.
ISSUES AND UNCERTAINTIES
Limited Operating History; Prior Losses. The Company was formed in 1989
and at December 31, 1995 had stockholders' equity of approximately $3.2 million.
To date, the Company has focused on developing, test-marketing and refining EDA
services that it believes possess significant long-term market potential as well
as expanding into new markets. Accordingly, the Company's financial results have
been characterized by a low but increasing revenue base, relatively high levels
of expenses, and net losses. The Company incurred net losses of $1,724,067,
$5,035,090, and $4,072,646 for the fiscal years ended December 31, 1995, 1994,
and 1993, respectively. The Company's operations continue to be subject to all
the risks inherent in the establishment of a new business enterprise. These
include, but are not limited to, factors relating to competition, complications
and setbacks in the further development of its EDA and other services and the
cost of establishing operations centers to service new markets.
Need for Expansion of Services to Additional Locations and Multiple
Customers. The Company believes that achievement of a substantial and
sustainable level of profitability is dependent on its ability to deliver EDA
and other services to multiple customers in each operating location. Although
the Company has a number of contracts for delivery of its EDA and other
services, there can be no assurance that the Company will be successful in
expanding its services to a sufficient number of customers or markets to achieve
substantial and sustainable profitability or that it will be able to sustain
past growth rates.
Concentration of Business; Limited Customer Base. Over the near term,
the Company is seeking to increase the number of its EDA contracts with cellular
and other telecommunications carriers. Each geographic cellular market is
generally serviced by only two cellular carriers, one owned or controlled by a
wireline telephone company and one
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originally owned or controlled by a non-wireline company. The cellular market is
dominated primarily by ten entities: AT&T Wireless Services (formerly McCaw
Cellular Communications), GTE Mobilenet, the RBOC-owned or -affiliated cellular
companies and several independents. In 1995 and 1994, approximately 72% and 81%,
respectively, of the Company's revenues were attributable to its top three
customers; all of which are among these ten largest entities. The Company is
held to strict performance standards in its contracts with its relatively few
customers. Carrier customers effectively have the ability to, and may for any
reason, impose additional performance standards or other additional requirements
upon the Company in the provision of its EDA. Additionally, depending upon the
circumstances, a carrier customer may effectively nullify a contract at its
discretion. As part of its strategy, the Company may offer a variety of EDA and
other telecommunications services over landline, cellular, PCS and SMR systems
in certain geographic areas that put it into direct competition with certain
RBOCs that also are cellular carriers and customers of or vendors to the
Company. In response, RBOC-owned or affiliated companies may exert their market
power and control over telecommunications facilities or services in a manner
that is unfavorable to the Company. It is essential that the Company implement
and manage its expansion into each geographic market in a manner that does not
adversely impact its relationships with existing and potential carriers. There
can be no assurance that the Company will be successful in doing so.
Rapidly Changing Telecommunications Market. Recent events, including
the PCS license auction and the passage of the 1996 Telecommunications Act, are
expected to result in a rapidly increasing number of telecommunications
providers operating in each market. This may result in competitive situations
which could unfavorably impact the Company such as the withdrawal of a customer
from a market which the Company services or the acquisition or merger of a major
customer, where the acquirer or surviving entity provides its directory
assistance or enhanced directory assistance through arrangements other than with
the Company or can exert substantial influence on the contract negotiation
process. In addition, the creation of alliances and joint ventures among
telecommunication providers may increase the negotiating leverage for these
carriers as they deal with providers of enhanced services such as the Company.
Although the Company believes that an increasing number of providers will be
beneficial to the Company as the providers look for ways to differentiate their
services, no assurance can be given that the Company, either directly or
indirectly, will not be adversely impacted by the potential changes in the
marketplace.
Competition. The Company expects competition in the enhanced directory
assistance market to intensify as the public's demand for more comprehensive,
easy-to-use directory assistance information increases and as new technologies
and systems are developed to deliver this information in a cost-effective and
convenient manner. The Company faces current or potential competition from RBOC
and non-RBOC cellular and landline carriers and from private sector companies.
Many of the Company's current competitors and those with which it may compete in
the future are more established and generally possess greater telecommunications
expertise, market recognition and management, financial and other resources than
the Company. There can be no assurance that the Company will be able to compete
effectively against such competitors.
Technological Change. Telecommunications and the related directory
assistance market are currently characterized as undergoing rapid technological
change. Although the Company is not aware of any existing enhanced directory
assistance services that it believes are superior to the Company's EDA, new
services may be developed, or existing services refined, which could render the
Company's EDA technologically or economically obsolete. Additionally,
information services provided by others, no matter how dissimilar to the
Company's EDA, may be perceived by end users as being equal or superior to the
Company's product offerings. The Company's success will be dependent, in part,
upon its ability to anticipate changes in technology and industry standards and
to successfully develop and introduce new and improved EDA and other
telecommunications services on a timely basis. There can be no assurance that
the Company will be able to do so, or that it will not encounter technical or
other difficulties that could delay the introduction of its services or
enhancements thereof.
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<PAGE> 10
Intellectual Property. The Company believes that its success in the
enhanced directory assistance market is due in part to its significant emphasis
on development and implementation of various computer-, software- and
telecommunications-based tools. To a limited extent, the Company relies upon a
combination of copyright, trade secret, patent and other intellectual property
law, non-disclosure agreements and other protective measures to preserve its
rights pertaining to its EDA and other services. Such protection, however,
should not be relied upon to preclude competitors from developing services
competitive with those of the Company. In the general telecommunications
environment where patents cannot easily be obtained, the Company depends to a
greater extent on its ability to arrange and maintain available software and
hardware technologies to its strategic advantage. There can be no assurance,
however, that the general telecommunications system will continue to be
compatible with the Company's software and hardware technologies, although it is
the Company's belief that major changes to the general telecommunications system
tend to occur slowly. In the wireless market, the Company relies on the
technologies of its carrier customers and on their technical arrangements with
required landline carriers. To remain competitive, the Company must adapt and
improve upon its current technology in response to changes in the technologies
in both the wireless and general telecommunications systems. There can be no
assurance that the Company will be successful in making such improvements or
adaptations on a timely basis or at all.
Dependence on Key Personnel. The success of the Company will depend to
a large extent on the abilities and continued participation of certain key
employees. The loss of these key employees could have a material adverse effect
on the business of the Company. Although the Company holds key person life
insurance on the lives of certain of its key management personnel, and has
entered into employment contracts with these persons, no assurance can be given
that the Company will not be adversely impacted in the future by the loss of one
or more of those or other key employees. The Company's future success will also
depend in part upon its ability to attract and retain additional qualified
employees. As the Company competes with other organizations for such employees,
there can be no assurance that it will be successful in hiring or retaining such
employees.
Reliance on Third Party Vendor. Currently the Company retains the
services of one value-added reseller to assist in programming the Company's
telecommunications switching equipment. As a result, this firm has significant
familiarity with the technological method by which the Company delivers its
EDA. Although the Company believes that such programming services are available
from multiple sources, if the Company were unable to obtain the services of
this firm, the Company might be required to retain similar services from other
parties or devote its own resources to such programming. The development of
such an alternative approach could involve significant time and expense and
diminish the Company's ability to provide quality service or even delay the
Company's ability to provide its EDA to its customers.
Regulation. The services provided by the Company to its carrier
customers are not directly subject to government regulation, although in many
states carriers are informally monitored by a variety of state and local
regulatory agencies. No assurance can be given that the Company's business may
not become subject to additional or increased government regulation in the
future.
Quality and Availability of Data. The Company's operations are
dependent upon access to names, telephone numbers and other information (data)
supplied to customers directly or used in providing call completion. The Company
obtains such data from a variety of sources, including purchase from RBOCs,
purchase from commercial vendors, electronic access for a fee, optical scanning
or other access through printed material. Such data vary widely across
geographic regions as to availability, quality and usefulness for the Company's
purposes, the effect of which may be to slow down the elapsed time in responding
to a caller inquiry or prevent that inquiry from being serviced effectively.
Additionally, due to persons or businesses moving or otherwise changing their
addresses and telephone numbers, data degrade over time and need to be updated
periodically. The frequency and completeness of such updating may also affect
the quality of the Company's EDA services and its operational efficiency.
Ultimately, satisfaction of the Company's carrier customers is dependent upon
the quality of service being provided to the carrier's subscribers. Although the
Company believes that it obtains its data in a manner that allows it to provide
quality service to its customers, no assurance can be given that data of a
satisfactory quality will continue to be available or obtained and updated in a
manner and at prices that allow the Company to successfully maintain or improve
current service levels.
Uncertainty of Market Acceptance of Enhanced Directory Assistance.
Traditional directory assistance simply provides callers with the phone numbers
of specific parties listed in the directory assistance provider's database. By
contrast, enhanced directory assistance supplies a broader range of information.
The EDA market is relatively new and evolving and it is difficult to predict the
future growth rate and size of the market. Market acceptance of the Company's
EDA will depend in part on the Company's ability to demonstrate to carriers the
benefits to be derived by them from providing EDA to carrier subscribers, on the
marketing efforts of carriers to promote EDA usage and on the subscribers'
acceptance of EDA in volumes and at rates that render the service profitable. No
assurance can be given that present levels of market acceptance will be
sustained, that the carriers' subscribers will not prefer traditional directory
assistance at a lower price, that markets for enhanced directory assistance will
develop further or, if they do, that the Company's EDA will achieve further
market acceptance. The Company's operating revenues have been and can be
expected to continue to be derived exclusively from EDA. Failure of the
Company's EDA to achieve further market acceptance could have a material adverse
effect on the Company's business, financial condition and results of operation.
Potential for Unionization; Staffing. The Company believes that one of
its principal competitive advantages is the absence of collective bargaining
units from its labor force. The telecommunications industry, particularly with
respect to larger telecommunications companies, is characterized by widespread
union membership among its operators and other workers. Although the Company
believes that its relations with its employees are good and further believes
that its relatively small staff in each operations center would not be
attractive to union organizers, no assurance can be given that unionization
would not occur in the future. The occurrence of such an event would likely have
a material adverse effect on the Company's business, financial condition, and
results of operations. Furthermore, the Company is dependent upon the available
labor pool for its operators and no assurance can be given that the Company will
be able to continue to attract qualified staff or attract qualified staff at
competitive wages.
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<PAGE> 11
Potential Liabilities Arising From Rescission Rights of Certain
Shareholders. Between 1989 and December 31, 1993, the Company financed
its activities through sales of 3,529,994 shares of Common Stock and debt
securities that were converted into 1,462,494 shares of its Common Stock, which
securities were sold directly to approximately 560 persons. During a review of
these past financing activities in 1993, the Company's management was unable to
conclude that all applicable state and federal securities laws had been complied
with in all material respects in connection with these offerings.
In 1994, the Company voluntarily executed a Consent Order (the
"Consent Order") with the State of Oregon Division of Finance and Corporate
Securities (the "Division") in which the Company agreed to cease and desist
from participating in any violations of Oregon securities laws and paid a civil
penalty of $20,000. In 1995, the Company offered to each holder of its Common
Stock as of March 31, 1995 who resided in Oregon the right to rescind the
holder's purchase of shares of the Company's Common Stock. Sales of 135,414
shares of the Company's Common Stock were rescinded pursuant to the rescission
offering, resulting in payment by the Company of approximately $738,660 to
certain of its former shareholders, which included interest of approximately
$124,900.
The Company believes that its potential rescission liability to
shareholders who received the rescission offer for possible violations of
Oregon and federal law has been effectively eliminated as a result of the
rescission offer or the running of applicable statutes of limitation. If,
notwithstanding the rescission offer, these Oregon holders were to successfully
assert claims against the Company to repurchase their shares, the Company could
be required to pay to these holders approximately $10,289,031, plus
approximately $3,345,000 in statutory interest. However, the Securities and
Exchange Commission ("SEC") takes the position that liabilities under the
federal securities laws are not terminated by the making of a rescission
offering.
In addition, the rescission offer was made to holders of 119,843
shares of the Company's Common Stock who resided in states in which the Company
did not register its rescission offer, and the rescission offer was not made to
holders of 528,215 shares of the Company's Common Stock who resided in states
whose securities laws do not permit rescission offerings or impose terms and
conditions on such offerings which were unacceptable to the Company. These
holders of 648,058 shares of Common Stock originally purchased such shares from
the Company at prices ranging from $0.88 to $8.05 a share; 515,064 of these
shares were purchased for $4.38 a share or less. Although the Company also
believes that its potential rescission liability to many of these shareholders
may have been eliminated by the running of applicable statutes of limitations,
there can be no assurance that claims asserting violations of federal or state
securities laws will not be asserted by any of these shareholders against the
Company or that certain holders will not prevail against the Company in the
assertion of such claims, thereby compelling the Company to repurchase their
shares. If all of the holders of the 119,843 shares who resided in states in
which the Company did not register its rescission offering successfully
asserted claims that the Company repurchase their shares, the Company could be
required to pay to these holders approximately $265,255, plus approximately
$68,000 in statutory interest, representing an average repurchase price of
approximately $2.78 per share. If all of the holders of the 528,215 shares who
resided in states whose securities laws do not permit rescission offerings or
impose terms and conditions on such offerings which were unacceptable to the
Company, which shareholders were not offered rescission by the Company,
successfully asserted claims that the Company repurchase their shares, the
Company could be required to repay these holders approximately $1,783,907, plus
approximately $457,000 in statutory interest, representing an average
repurchase price of approximately $4.24 per share. Even if the Company were
successful in defending any securities law claims, the assertion of such claims
against the Company additionally could result in costly litigation and
significant diversions of effort by the Company's management.
Lack of Liquidity for Common Stock. There is currently no public market
for the common stock of the Company. The Company is engaged in the process of
attempting to arrange for the listing of its common stock on the Nasdaq Stock
Market and has taken steps to arrange for broker-dealers to make a market in the
common stock should such listing be granted. The Company is in discussions with
investment banking firms about an initial public offering of the Company's
common stock. However, no assurance can be given that the Company will pursue an
initial public offering of stock or, should the Company proceed with an initial
public offering, that the offering price will exceed the prices paid by original
purchasers of the common stock. Moreover, no assurance can be given that a
public market for the common stock will develop in the foreseeable future or,
should a public market develop, that prevailing market prices will exceed those
paid by original purchasers of the common stock.
See also Item 3. Legal Proceedings.
ITEM 2. PROPERTIES.
The Company leases its principal executive and administrative offices
at 8405 S.W. Nimbus Avenue, Beaverton, Oregon, comprising approximately 15,400
square feet, for a remaining term of 6 years with a renewal option. The Company
also leases office facilities for its EDA operations in the markets it serves.
There are approximately 12 facility leases in effect at March 15, 1996 with
remaining terms ranging from one to six years.
The Company believes that its facilities are suitable and adequate for
its presently anticipated requirements and that it is not dependent upon any
individually leased premises.
ITEM 3. LEGAL PROCEEDINGS.
In May, 1993, as a means of rapidly responding to a market opportunity
in Arizona with US West NewVector, the Company entered into a Leasing and
Business Transfer Agreement (the "Leasing Agreement") with Metro Direct
Information Services of Phoenix ("Arizona Direct"), an unaffiliated third party
and former licensee of the Company's initial value-added EDA product. The
Leasing Agreement provided financing for the Company of substantially all
required equipment and furniture in its Arizona operations center and is
similar, in some respects, to a joint venture agreement. Equipment with the
approximate value of $200,000 was financed and obtained by the Company under
the Leasing Agreement, which amount was not repaid by the Company. The Leasing
Agreement provided a formula-based profit sharing between the Company and
Arizona Direct, which was to become effective after the Company had recouped all
start-up costs from the Arizona operation. At the earliest appropriate time, at
the Company's discretion, the Company was obligated to request that its rights
under the US West NewVector contract for Arizona be transferred to Arizona
Direct. If such a transfer had occurred, the profit sharing arrangement was to
be replaced by a royalty arrangement under which the Company would have received
a royalty for each cellular call handled by Arizona Direct. If the transfer had
been denied or otherwise did not occur, the formula-based profit sharing
arrangement was to govern the business relationship between the Company and
Arizona Direct until the transfer or the end of the US West NewVector agreement.
During 1993 and 1994, the Company and Arizona Direct were unable to come to an
agreement with respect to the amounts of equipment lease financing that had
been provided to the Company by Arizona Direct. In addition, disputes arose
regarding whether the Company had recouped start-up costs for the Arizona
operation as of May 1994. In June, 1994, Arizona Direct commenced an action
seeking rescission of the Leasing Agreement. In December, 1994, the Company
notified Arizona Direct that it believed Arizona Direct was in default of its
obligations under the Leasing Agreement. The Company has declared the Leasing
Agreement terminated. Arizona Direct has given the Company notice of its belief
that the Company has breached the Leasing Agreement as well. The Company has
denied those allegations.
In connection with the Leasing Agreement, the Company and several of
its officers have been named as defendants in a complaint filed in U.S. District
Court in the State of Arizona in June 1994 by Arizona Direct (and the purported
principal shareholders of Arizona Direct). The complaint alleges, among other
things, that the Company and its officers defrauded the plaintiffs by entering
into the Leasing Agreement and, further, violated securities laws as the
plaintiffs believe the Leasing Agreement to constitute a security as that term
is used in state and federal securities regulations. Additionally, the complaint
alleges that the Company and several of its officers violated securities laws by
selling securities in the plaintiff company to the individual plaintiffs in the
amount of $507,000 and otherwise causing the individual plaintiffs to invest in
the plaintiff company. The complaint seeks damages, including punitive damages,
in an amount to be determined by the court. The Company and its officers have
answered the complaint denying liability, and moved to dismiss the suit and, in
the alternative,
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<PAGE> 12
to change the venue from Arizona to Oregon. The court granted these motions,
transferred the case to the U. S. District Court in Oregon and gave the Arizona
Direct leave to re-plead. Arizona Direct filed an amended compliant in March,
1995 which did not materially alter the claims made. The Company moved to
dismiss certain claims, which motions were granted in part. The Company has
counterclaimed for breach of the Leasing Agreement and for tortuous interference
with the Leasing Agreement against Arizona Direct's principal shareholders. In
October of 1995, Arizona Direct filed an action against the Company in the U.S.
District Court for the District of Oregon seeking, among other things, damages
for alleged breach of the Leasing Agreement. This action has been consolidated
with the pending case originally filed in Arizona and subsequently transferred
to Oregon. Discovery is ongoing in both cases. The Company believes the
allegations to be without substantial merit. No assurance can be given that the
Company or any of its officers will be successful in defending this legal
action. The Company, after consultation with its legal counsel, Ater Wynne
Hewitt Dodson & Skerritt LLP, does not believe that liability with respect to
the alleged securities laws violations is "probable" within the meaning of
Financial Accounting Standards No. 5. Accordingly, no accrual for such
liability in excess of amounts which the Company believes are payable for the
equipment under the Leasing Agreement has been made in the Company's financial
statements.
In September, 1995, an action was filed in the U.S. District Court for
the District of New Mexico by Hebenstreit Communications Corporation and
Hebenstreit Communications of Dallas Limited Partnership (together
"Hebenstreit") against McCaw Cellular Communications, Inc., LIN Broadcasting
Corporation, Metrocel Cellular Telephone and the Company. In the case,
Hebenstreit alleges a variety of claims against the defendants arising from
assertions that defendants, other than the Company, appropriated confidential or
proprietary information from Hebenstreit to Hebenstreit's detriment. Without
specificity, the complaint further alleges that the Company received this
information in some form from the other defendants and that the information has
been used to Hebenstreit's detriment in competition with the Company. The action
seeks damages in an unspecified amount, as well as costs, disbursements,
attorneys fees and punitive damages. The Company has moved to dismiss the action
for lack of jurisdiction, as well as for failure to properly plead claims
against the Company with the required specificity. Other defendants, who are
parties to contractual agreements with Hebenstreit which provide for arbitration
of disputes, have moved to compel arbitration of the dispute. The motions are
pending argument before the court. Management believes that the claims against
the Company are without merit and intends to vigorously defend the action. No
assurance can be given that the Company will be successful in defending this
action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a Special Meeting of the Company's Shareholders on November 29,
1995, the shareholders elected one director and approved each of the proposals
set forth in the Company's Proxy Statement dated November 6, 1995, and briefly
described below:
(i) The shareholders were requested to elect one member of the Board of
Directors. The proposal was approved by the shareholders, as 6,396,397
votes were cast for the proposal and 51,508 votes were withheld. The
Director elected at the Special Meeting was William D. Rutherford.
(ii) The shareholders were requested to approve and adopt the Company's
1994 Stock Incentive Plan. The proposal was approved by the
shareholders, as 5,620,100 votes were cast for the proposal, 806,166
votes were against the proposal, 21,640 votes abstained and 0 votes
were broker non-votes.
(iii) The shareholders were requested to approve and adopt an amendment
to Article I of the Company's Restated Articles of Incorporation (the
"Restated Articles") to change to name of the Company to "Metro One
Telecommunications, Inc." The proposal was approved by the
shareholders, as 6,438,185 votes were cast for the proposal, 4,100
votes were against the proposal, 5,621 votes abstained and 0 votes were
broker non-votes.
(iv) The shareholders were requested to approve and adopt an amendment
to Article V of the Restated Articles to increase the number of
authorized shares of Preferred Stock. The proposal was approved by the
shareholders, as 5,588,366 votes were cast for the proposal, 816,482
votes were against the proposal, 43,058 votes abstained and 0 votes
were broker non-votes.
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(v) The shareholders were requested to approve and adopt an amendment
to the Company's Restated Articles to add a new Article XVI relating to
indemnification of officers, directors and employees of the Company and
limitations on the liability of directors. The proposal was approved by
the shareholders, as 5,746,242 votes were cast for the proposal,
691,314 votes were against the proposal, 10,349 votes abstained and 0
votes were broker non-votes.
(vi) The shareholders were requested to approve and adopt an amendment
to Article XII of the Restated Articles to provide for changes in the
election and removal of members of the Company's Board of Directors.
The proposal was approved by the shareholders, as 6,214,136 votes were
cast for the proposal, 150,071 votes were against the proposal, 83,699
votes abstained and 0 votes were broker non-votes.
(vii) The shareholders were requested to approve and adopt an amendment
to Article XI of the Restated Articles to permit the Board of
Directors, as well as the Company's shareholders, to amend the
Company's Articles of Incorporation and Bylaws. The proposal was
approved by the shareholders, as 6,143,792 votes were cast for the
proposal, 292,057 votes were against the proposal, 12,056 votes
abstained and 0 votes were broker non-votes.
(viii) The shareholders were requested to approve and adopt an
amendment to Article V of the Restated Articles to cause a reverse
stock split, whereby each outstanding share of the Company's no par
value Common Stock would be combined and reconstituted as 0.2857 shares
of no par value Common Stock (approximately a 1-for-3.5 reverse split).
The proposal was approved by the shareholders, as 6,300,530 votes were
cast for the proposal, 84,569 votes were against the proposal, 62,807
votes abstained and 0 votes were broker non-votes.
(ix) The shareholders were requested to approve and adopt an amendment
to the Company's Restated Articles to delete provisions that were no
longer applicable or required. The proposal was approved by the
shareholders, as 6,307,842 votes were cast for the proposal, 118,243
votes were against the proposal, 21,821 votes abstained and 0 votes
were broker non-votes.
(x) The shareholders were requested to approve and adopt an amendment
to the Company's Bylaws to permit the Board of Directors, as well as
the Company's shareholders, to amend the Company's Bylaws. The proposal
was approved by the shareholders, as 6,166,092 votes were cast for the
proposal, 255,083 votes were against the proposal, 26,731 votes
abstained and 0 were broker non-votes.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the common stock of
the Company. The Company had approximately 555 shareholders of record as of
March 15, 1996. The Company has not paid any dividends on its common stock and
presently intends to utilize all available funds for the development and
operation of the Company's business. The Company's credit agreement prohibits
the payment of cash dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
OVERVIEW
Metro One Telecommunications, Inc. (the "Company") develops, markets
and provides telecommunications-based enhanced directory assistance ("EDA") over
wireless telephones and, on a trial basis in one market, over landline
telephones.
The Company began testing directory assistance and call completion
hardware and software in 1989. In May 1991, the first call completion service
was provided in Portland, Oregon to McCaw Cellular Communications, Inc. (now
"AT&T Wireless Services"), which marketed the service to its subscribers as
"Cellular One Connect."
The Company currently provides EDA under sixteen separate contracts
with such entities as AT&T Wireless, the cellular affiliates of four Regional
Bell Operating Companies ("RBOCs"), a PCS provider and others, for eleven
geographic locations. The contracts are generally one to five years in length
and generally provide for revenues based on call volumes. One contract expired
in the first quarter of 1996 and although renewed on a short-term basis, is not
expected to be renewed on a long-term basis. One contract has been extended
prior to expiration for an additional two years.
The Company derives substantially all of its revenues from its 12 contracts
with wireless carriers. Revenue growth for the Company principally has resulted
from three factors: growth in call volumes from existing customer's subscribers
served by existing call centers, new carrier customers served by existing call
centers, and new customers served by new call centers. The Company's direct
operating costs are comprised entirely of costs associated with call center
operators and supervisory personnel and data costs. The Company's general and
administrative costs include corporate and call center management personnel,
facilities expenses including rental and maintenance costs, and depreciation.
The Company typically opens a new call center to service a carrier customer
in a new geographic market. The Company historically has experienced significant
costs in connection with the establishment of a new call center, including costs
associated with hiring and training of operators and facility preparation.
Initial call volumes at new call centers are typically low relative to the
subscriber base. Call volumes usually increase rapidly in the first year of
operation. Personnel productivity is generally low during initial months of a
call center's operation but improves as operators become more experienced and
efficient. In addition, personnel utilization improves at a call center as call
volumes rise due principally to increased scheduling efficiencies. Consequently,
as call volumes and labor productivity increase over time, a call center's
profitability improves.
The Company presently anticipates that it will open at least four new call
centers by the end of 1997. The Company typically opens a new call center only
if it has entered into a contract with an existing carrier customer to provide
service to a new geographic market or entered into a contract with a new carrier
to serve a geographic market where the Company presently does not maintain a
call center. Because the Company presently has not entered into any such
additional contracts, there can be no assurance that the Company will establish
new call centers during that period or that contracts to provide service, if
entered into, will require the establishment of call centers in new geographic
markets. Based on the Company's historical experience, establishment of a call
center typically costs approximately $500,000 to $700,000, exclusive of
initial operating losses. There can be no assurance, however, that costs
associated with the establishment of new call centers will be consistent with
costs experienced by the Company on a historical basis.
The telecommunications industry is currently undergoing various
regulatory, competitive and technological changes that make it impossible to
determine the form or degree of future regulation and competition affecting the
Company's operations. Reduced regulatory oversight of the RBOCs, and
encouragement of competition in local exchange services, as evidenced by the
1996 Telecommunications Act, has accelerated the growth of competitive access
providers. The FCC has allocated additional frequency spectrum for mobile
communications technologies that will or may be competitive with cellular and
landline, including PCS (for which the FCC began auctioning licenses in late
1994).
These market conditions create new potential customers and affect
existing customers of the Company. The Company is experiencing increased
competition in the provision of EDA services. The Company believes its product
provides high quality, helpful service, ease of use and a greater number of
features than alternative products and that its experience, emphasis on customer
service and development of new features make it a strong competitor. The Company
will continue to monitor the ongoing changes in regulation, competition and
technology and consider which developments provide the most favorable
opportunities for the Company to pursue.
RESULTS OF OPERATIONS
The results of operations for the fiscal years ended December 31, 1995,
1994, and 1993 are not necessarily indicative of the results to be expected for
any future period. Also, there can be no assurance that the Company will be able
to sustain past growth rates.
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The Company generated operating income (earnings before interest and
taxes or "EBIT") for the first time for the third quarter of 1995. The Company
also generated operating income for the fourth quarter of 1995.
The following table sets forth certain operating statistics for the
fiscal years ended December 31, 1995, 1994, and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues 100% 100% 100%
Direct operating costs 55% 95% 148%
General and administrative costs 46% 85% 230%
Operating loss (1)% (79)% (279)%
Interest and loan fees $ 1,371,936 $ 841,407 $ 85,003
Debt conversion expense $ 384,071 -- --
New call centers opened 1 6 3
</TABLE>
1995 COMPARED TO 1994
In 1995, unlike the previous years of 1994 and 1993, the Company chose
to focus on efficiencies of operation in existing call centers and chose not to
expand rapidly into new markets.
In 1995, revenues increased approximately 159% to $13.0 million,
compared to $5.0 million in 1994. This $8.0 million increase was due primarily
to a full twelve months of operations in 1995 for the six call centers
opened during 1994 ("New 1994 Call Centers") and due to growth in call volumes.
In 1995, the New 1994 Call Centers represented approximately $8.0 million in
revenue compared to approximately $2.0 million in 1994. In 1995, the monthly
average growth rate for revenues in the New 1994 Call Centers was 4.5%. For the
four call centers open for the full 12 months of both 1995 and 1994, the average
monthly growth rate was approximately 1.6% for 1995 reflecting lower growth
rates as a function of greater volume. The increase in revenues was entirely a
result of an increased number of calls handled and not as a result of increased
prices. There can be no assurance that as contracts are renewed, if they are
renewed, that the contracts will not be renewed or renegotiated at lower prices
which could have an adverse impact on the Company's revenues and profitability.
Direct operating costs increased approximately 49% in 1995 to $7.2
million, from $4.8 million in 1994. The increase in costs was due to the greater
number of call centers in operation for a full year in 1995 compared to 1994.
In 1995, direct operating costs were 55% of revenues compared to 95% of revenues
for fiscal year 1994. This change is due to 1995 increases in call volumes and
associated improved operating efficiencies and utilization of personnel.
General and administrative costs increased approximately 41% in 1995 to
$6.0 million, from $4.3 million in 1994. Again, the increase in expenses was due
to the greater number of call centerss in operation for a full year in 1995
compared to 1994. General and administrative costs as a percent of revenue
decreased in 1995 to 46% from 85% in 1994 due to operating efficiencies.
Depreciation and amortization increased 34% in 1995 to approximately
$997,000, from $742,000 in 1994, reflecting the effect of increased fixed asset
balances depreciated over a full 12 month operating period in 1995.
Interest and loan fees were $1,371,936 in fiscal year 1995, compared to
$841,407 in fiscal year 1994. The increase of $530,529 in 1995 was primarily due
to the following: (i) completion in 1995 of the 8% Convertible Secured Note
financing, and (ii) the 1995 Rescission Offer. The debt conversion expense of
$384,071 recognized in 1995 was a result of the conversion of the 8% Convertible
Secured Notes discussed below.
15
<PAGE> 16
(i) 8% Convertible Secured Note Financing. In the fourth quarter of
1994, the Company 1994, the Company commenced an offering of $5.0
million in principal amount of its 8% Convertible Secured Notes.
Approximately $3.1 million of the 8% Convertible Secured Notes were
sold in 1995. These Notes bore interest at 8% per annum, paid monthly.
Interest expense on these notes in 1995 was approximately $290,000,
compared to approximately $13,000 in 1994.
In the fourth quarter of 1995, the holders of the 8% Convertible
Secured Notes exercised conversion rights and converted the entire $5.0
million of principal into 2,164,402 shares of the Company's common
stock. The Company recognized $384,071 of expenses related to the
conversions of these notes.
(ii) Rescission Offer. For most of the first six years of its
existence, the Company operated with limited capital, most of which was
raised through offerings of equity, debt and convertible debt
securities. Specifically, between 1989 and 1993, the Company financed
its activities through sales of 3,529,994 shares of its Common Stock
and debt securities that were converted into 1,462,494 shares of its
Common Stock, which securities were sold directly to approximately 560
persons. Management conducted a review of past operations, including
financing activities, and concluded that the record with respect to
such activities was sufficiently incomplete that a conclusion could not
be drawn with certainty that all applicable state and federal
securities laws were complied with in all material respects. As a
result, management determined that the Company would offer rescission
to certain purchasers of its common stock.
After voluntarily bringing its financing activities into compliance
with securities laws, the Company voluntarily contacted the State of
Oregon, Division of Finance and Corporate Securities (the "Oregon
Securities Division"), to discuss its concerns with its past financing
activities and the terms under which it would offer rescission.
Following a detailed review of the Company's securities activities, the
Oregon Securities Division determined that the Company sold certain of
its securities without complying with the securities registration
requirements or the securities salesperson registration requirements.
In 1994, the Company voluntarily signed a Consent Order in which it
agreed to cease and desist from participating in any violations of the
Oregon Securities Law and paid a civil penalty of $20,000.
In 1995, the Company filed a registration statement with the Securities
and Exchange Commission and certain state securities regulators for a
rescission offering whereby it offered to certain holders of its common
stock the right to rescind their purchase of shares of the Company's
common stock and to receive, in exchange for the common stock
relinquished to the Company, a payment equal to the purchase price of
such securities plus interest from the date of purchase at the
applicable statutory rate of the state in which they reside. The
securities intended to be the subject of the Rescission Offer included
4,699,539 shares of common stock outstanding at March 31, 1995 and
purchased or converted from debt securities by persons who resided in
Oregon and certain other states.
The rescission offer closed in July 1995. As a result of the rescission
offer, the sales of 135,414 shares of common stock were rescinded and
such shares were purchased by the Company for approximately $738,660,
including interest of approximately $124,900. The Company believes that
its potential rescission liability was effectively eliminated with
respect to shareholders who received a rescission offer. In total,
shareholders representing approximately $1,877,500 and 528,215 shares
of common stock at March 31, 1995 did not receive a rescission offer.
The operating losses in 1995 and 1994 were $82,197 and $4,010,799,
respectively. The Company believes achievement of a substantial and sustainable
level of profitability is dependent upon its ability to deliver EDA and other
services to multiple customers in each operating location. The Company provides
services to five additional customers in existing call centers. The Company is
in the process of negotiating additional contracts for delivery of its EDA and
other services, but there can be no assurance that the Company will be
successful in expanding its services to new and to existing market areas.
16
<PAGE> 17
The growth in new call centers and markets served declined in 1995
compared to 1994, primarily due to the strategic focus of the Company in 1995 on
profitability and quality of service rather than on market expansion.
Other income for the year ended December 31, 1995, was $122,670, and
consisted primarily of interest income of $47,918, approximately $98,900 of
income resulting from the settlement of a vendor claim, offset by estimated
litigation settlement expenses of approximately $24,000. Other expense, for the
year ended December 31, 1994, was $131,310, and consisted primarily of
estimated litigation settlement expenses of $200,000, offset by interest income
of $56,055, and a refund of moving expenses of approximately $10,948.
1994 COMPARED TO 1993
Revenues for 1994 increased approximately 250% to $5.0 million in 1994,
compared to $1.4 million in 1993. Revenue growth was attributable to both
increases in revenue from existing call centers and revenue from new call
centers opened in 1994. Revenues from existing call centers increased $2.0
million from $0.9 million in 1993. Revenues from new call centers opened in 1994
amounted to $1.8 million. The increase in revenues was entirely a result of an
increased number of calls handled and not as a result of increased prices.
Direct operating costs increased approximately 124% in 1994 to $4.8
million, from $2.1 million in 1993. The increase in costs was due to the greater
number of call centers in operation for a full year in 1994 compared to 1993. In
1994, direct operating costs were 95% of revenue compared to 148% of revenue in
1993. This change is due to 1994 increases in call volumes and associated
improved operating efficiencies and utilization of personnel.
General and administrative costs increased approximately 28% in 1994 to
$4.3 million, from $3.3 million in 1993. The increase in expenses was due to the
greater number of call centerss in operation for a full year in 1994 compared to
1993. General and administrative costs as a percent of revenue decreased in 1994
to 85% from 230% in 1993 due to operating efficiencies and the greater number of
call centers in operation and producing revenues.
Depreciation and amortization increased 95% in 1994 to approximately
$742,000, from $380,000 in 1993, reflecting the effect of increased fixed asset
balances depreciated over a full twelve month operating period in 1994. At
fiscal year-end 1994, the net balance of furniture, fixture and equipment was
$4,067,928, compared to $1,925,863 at fiscal year-end 1993.
Interest and loan fees increased approximately $756,000 in 1994 to
$841,407, compared to fiscal year 1993. The increase was primarily due to the
two debt issues in 1994: (i) the 10% Subordinated Notes and (ii) the 8%
Convertible Secured Notes, together comprising approximately $689,000 of
interest and loan fees. Also reflected in the 1994 change from 1993 is an
increase in acquisition of equipment through lease financing. In 1994, the
interest charges for lease financing were approximately $118,000 compared to $0
in 1993.
The operating losses in 1994 and 1993 were $4,010,799 and $4,020,930,
respectively. 1994 was a year of increased market expansion, resulting in
increased start-up losses for new call centers opened.
Other expense for the year ended December 31, 1994, was $131,310, and
consisted primarily of estimated litigation settlement expenses of $200,000,
offset by interest income of $56,055, and a refund of moving expenses of
approximately $10,948. Other income for the year ended December 31, 1993, was
$44,345 and consisted primarily of interest income of approximately $33,752.
LIQUIDITY AND CAPITAL RESOURCES
The Company has consistently used external sources of funds, primarily
from the issuance of equity and debt securities, to fund the Company's operating
needs and capital expenditures. The Company generated net losses of $1,724,067,
$5,035,090, and $4,072,646 in the years 1995, 1994, and 1993, respectively. Cash
flow solely from operations remains insufficient to fund all of the Company's
budgeted capital and other non-operating needs. In 1996, the Company anticipates
using its existing cash and cash equivalents, cash flow from operations, as well
as externally generated funds from debt and equity sources as discussed below to
cover future needs, including the expansion of its operations and development of
additional products.
Working capital was $150,546 and $(350,791) at December 31, 1995 and
1994, respectively. The improvement reflects primarily: (i) increased accounts
receivable balances as a result of growth in revenues; and (ii) infusion of cash
from the issuance of equity and debt, some of which debt converted to equity in
the fourth quarter of 1995. (See Cash Flow from Financing Activities discussion
below regarding 8% Convertible Secured Notes and 10% Subordinated Notes.)
17
<PAGE> 18
Cash Flow from Operations. Net cash used by operations was $2,255,035,
$4,403,703 and $3,653,316 in 1995, 1994, and 1993, respectively. In 1994 and
1993, the Company expanded its operations into six and three new markets,
respectively, which required the use of cash to fund start-up costs for new call
centers. The reduction in use of cash by operations in 1995 was primarily due to
the opening of only one new call center and to the growth in revenues in
existing markets. The reduction in use of cash by operations also reflects the
Company's efforts to reduce costs and increase efficiency through more effective
personnel scheduling and technology enhancements allowing faster call processing
time without compromise of quality of service. Quality of service remains a high
priority and, if necessary, the efficiencies of scheduling will be adjusted in
order to maintain the desired quality, which could have an adverse effect on
operating profitability.
The Company expects that in 1996, operations of existing call centers
will contribute to cash flow, but there can be no assurance that the Company
will be successful in its continuing efforts to increase call volumes and
operating efficiencies, while controlling costs.
Cash Flow from Investing Activities. Net cash provided or (used) by
investing activities was $100,616; $(914,974); and $(1,293,289) in 1995, 1994,
and 1993, respectively. Primarily, the market expansion in 1994 and 1993
required the use of proceeds for capital equipment. In 1994 and 1993, capital
equipment acquired through lease financing was $1,929,810 and $95,680,
respectively, reflected in the relatively lower use of Company proceeds for
investing activities in 1994. In 1996, the Company expects to continue to
primarily use debt sources and lease financing for its capital equipment needs.
Cash Flow from Financing Activities. Net cash provided by financing
activities was $2,993,050; $5,328,596; and $4,749,679 in 1995, 1994, and 1993,
respectively.
In 1995, several financing transactions resulted in the proceeds and
uses of cash. The 1995 10% Subordinated Notes were issued to refinance the
maturing 1994 10% Subordinated Notes, resulting in net proceeds to the Company
of $250,000. The 8% Convertible Secured Notes offering was completed, resulting
in proceeds to the Company of $3,050,000. During the year, warrants for the
purchase of 327,411 shares of the Company's common stock were exercised,
resulting in proceeds to the Company of approximately $1,088,080. The completion
of the rescission offer resulted in the Company's purchase of approximately
135,414 shares of common stock, a use of proceeds of $613,760 plus interest of
$124,900.
In 1994, the issuance of debt and equity resulted in the following
proceeds to the Company: (i) the 1994 10% Subordinated Notes provided $3,610,000
in proceeds; (ii) the initial portion of the $5,000,000 offering of the
Company's 8% Convertible Secured Notes resulted in $1,950,000 in proceeds; and
(iii) warrants and options were exercised resulting in proceeds to the Company
of $338,089.
In 1993, the primary source of proceeds from financing activity was the
issuance of equity.
Future Capital Needs and Resources. The primary uses of capital are
expected to be expansion of existing markets, funding of start-up operating
losses for newly opened markets, principal and interest payments on
indebtedness, and purchase of equipment for improvement of existing and
furnishing of additional operating sites.
In 1995, the future debt obligations of the Company were significantly
reduced through the conversion of a portion of its debt into equity. Subsequent
to December 31, 1995, $400,000 of the remaining 1995 10% Subordinated Notes were
converted to equity. From July 1996 through January 1997, the remaining portions
of the Subordinated Notes mature, reflecting an obligation for principal
payments of $1,550,000.
Subsequent to December 31, 1995, certain warrants for the purchase of
the Company's common stock were exercised, resulting in cash proceeds to the
Company of approximately $597,000.
Subsequent to December 31, 1995, the Company entered into a $3,000,000
Secured Operating Line of Credit with a commercial bank. Availability under the
line of credit is subject to borrowing base requirements and compliance with
loan covenants. As of March 15, 1996, there was no borrowing on this line of
credit.
18
<PAGE> 19
In addition, most existing call centers are currently providing cash
flow from operations. The Company anticipates that its available cash, existing
and anticipated credit facilities, and cash flow from operations will be
sufficient to fund working capital requirements related to existing operations,
the repayment of debt, the anticipated expansion of its operations to new
markets in 1996, and continued growth, including development of new product
features and improvement of technology.
However, if the Company should obtain substantial new business, there
can be no assurance that existing capital resources would be sufficient to fund
the necessary expansion. If adequate funds are not available, the growth of the
Company would be significantly impaired. Also, the cancellation or non-renewal
of a material existing contract by a carrier could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is in discussions with investment banking firms about an
initial public offering of the Company's common stock. However, no assurance can
be given that the Company will pursue an initial public offering of stock or,
should the Company proceed with an initial public offering, that the offering
price will exceed the prices paid by original purchasers of the common stock.
The proceeds of such an offering would be used for a variety of purposes,
including market expansion, development of product features and retirement of
debt.
Effect of Inflation. The effect of inflation was not a material factor
affecting the Company's business during 1995, 1994, or 1993.
SUBSEQUENT EVENTS
During the first quarter of 1996, the Company's contract with AirTouch
Cellular in the San Diego market expired. During 1995, this contract accounted
for approximately seven percent of the Company's revenues. Although the Company
participated in a competitive bidding process, the Company was unable to secure
renewal on terms and conditions that were acceptable to the Company. During the
negotiations, the carrier sought rates below prior contract rates and an
exclusivity commitment in markets served by the carrier. In the second quarter
of 1996, the Company ceased providing EDA service to AirTouch Cellular in San
Diego under the terms of the prior contract and another vendor began
handling calls for AirTouch Cellular in San Diego.
In July 1994, AirTouch Cellular and US West NewVector announced their
intention to combine their cellular properties in a multi-phase transaction.
AirTouch Cellular has also formed a partnership, called TOMCOM, L.P., with Bell
Atlantic and NYNEX to develop common service standards, pursue national
marketing strategies, development information technology, create a national
distribution strategy and implement joint purchasing arrangement. Unlike the
AirTouch Cellular/US West NewVector partnership, however, TOMCOM does not
contemplate a merger of cellular properties. Two of the Company's contracts with
certain of those TOMCOM participants are up for renewal in 1997, with four other
contracts up for renewal in subsequent years.
While the implications of the non-renewal of the AirTouch Cellular EDA
contract for its San Diego market are unclear, the Company believes this
decision may serve as a precedent for AirTouch Cellular and the other TOMCOM
participants as they establish or consider the renewal of EDA contracts in other
markets in the future. Accordingly, there can be no assurance that the Company
will renew its contracts with US West NewVector or any other TOMCOM participant
or that the Company will have the opportunity to obtain new contracts with any
of these carriers in the future. If these contracts are not renewed, there is no
assurance that the Company will be able to replace these contracts with
contracts with other carriers. Contracts with TOMCOM participants accounted for
approximately 56% of the Company's revenues in 1995. Consequently, the failure
of the Company to obtain the renewal of these contracts or to obtain replacement
contracts would have a material adverse effect on the Company's business,
financial condition and results of operation. The Company intends to provide its
EDA under its current contracts with TOMCOM participants through their
respective termination dates upon which it will seek renewal on terms acceptable
to the Company.
ITEM 7. FINANCIAL STATEMENTS.
See pages F-1 through F-12.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None. See Form 8-K dated November 30, 1995 regarding Change in
Registrant's Certifying Accountant.
19
<PAGE> 20
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by Item 9 is incorporated by reference to the
Company's Proxy Statement for its 1996 Annual Meeting under the caption of
"Management."
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth, for the fiscal year ended December 31,
1995, certain summary information concerning compensation of the persons serving
as the Company's Chief Executive Officer (the "Named Executive Officers"). No
other executive officer received compensation exceeding $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS COMPENSATION
- ---------------------------------------------- ---- -------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Timothy A. Timmins............................ 1995 $ 96,750 -- 399,981 --
President and Chief Executive Officer(1) 1994 79,961 -- -- --
Robert J. Cymbala............................. 1995 79,615 -- 208,919 $ 98,193(2)
President and Chief Executive Officer(1) 1994 135,923 -- -- --
</TABLE>
- ---------------
(1) Mr. Cymbala resigned as the Company's President and Chief Executive Officer
on July 20, 1995. Mr. Timmins was elected as the Company's President and
Chief Executive Officer on July 28, 1995.
(2) These amounts were paid to Mr. Cymbala pursuant to an agreement with the
Company entered upon Mr. Cymbala's resignation which provided for the
payment to Mr. Cymbala of nine months compensation in biweekly installments.
Of this total amount, $39,808 was paid to Mr. Cymbala during 1996.
OPTION GRANT TABLE
The following table provides information regarding options to purchase
Common Stock granted to the Named Executive Officers pursuant to the Company's
Stock Incentive Plan (the "Stock Incentive Plan") during the year ended December
31, 1995.
OPTIONS GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE OF
ASSUMED ANNUAL
RATES OF STOCK
PRICE
PERCENT OF APPRECIATION
TOTAL OPTIONS FOR OPTION
NUMBER OF SECURITIES GRANTED TO TERM(1)
UNDERLYING OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION --------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE(2) 5%($) 10%($)
- --------------------------- -------------------- --------------- -------------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Timothy A. Timmins......... 399,981 33.4% $ 8.05 7/28/05 0 0
Robert J. Cymbala.......... 208,919 17.4% 8.05 (3) (3) (3)
</TABLE>
- ---------------
(1) The potential realizable value is based on the term of the option at the
time of grant (ten years). Potential gains are net of the exercise price but
before taxes associated with the exercise. Amounts represent hypothetical
gains that could be achieved for the respective options if exercised at the
end of the relevant option term. The assumed 5% and 10% rates of stock
appreciation are based on appreciation from the exercise price per share
established at the relevant grant date. These rates are provided in
accordance with the rules of the SEC and do not represent the Company's
estimate or projection of the future Common Stock price. Actual gains, if
any, on the stock option exercises are dependent on the future financial
performance of the Company, overall market conditions and the option
holders' continued employment through the vesting period. This table does
not take into account any appreciation in the price of the Common Stock from
the date of grant, other than the columns reflecting assumed rates of
appreciation of 5% and 10%.
(2) The options vest over a period of four years and the term of each option is
10 years. The options may terminate before their expiration dates if the
optionee's status as an employee is terminated or upon the optionee's death
or disability.
(3) Mr. Cymbala resigned as the Company's President and Chief Executive Officer
on July 20, 1995. Mr. Cymbala's options expired on November 20, 1995.
YEAR-END OPTION TABLE
The following table provides information regarding exercises of options
during 1995 and unexercised options held as of December 31, 1995, by the Named
Executive Officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
ACQUIRED UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
ON VALUE OPTIONS AT YEAR-END YEAR-END
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- --------------------------- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Timothy A. Timmins......... -- -- 249,988/149,993 (1)
Robert J. Cymbala.......... -- -- (2) (1)(2)
</TABLE>
- ---------------
(1) There is no established public trading market for the Company's Common
Stock. The Value of Unexercised In-the-Money Options is the difference
between the fair market value of the Common Stock at December 31, 1995 and
the applicable exercise price. This difference was estimated to be less than
or equal to zero.
(2) Mr. Cymbala resigned as the Company's President and Chief Executive Officer
on July 20, 1995. Mr. Cymbala's options expired on November 20, 1995.
The Company has entered into employment contracts with Messrs. Timmins and
Cox that allow for a base annual compensation and increases based upon
achievement of certain corporate goals and upon a formula tied to the
profitability of the Company and for employment of them for five-year periods
ending in July of 2000. The agreements provide for annual base salaries for
Messrs. Timmins and Cox of $120,000 and $110,000, respectively, that are
eligible for a one-time increase of $30,000 and $25,000, respectively, based
upon the occurrence of (i) a public offering of the Company's Common Stock at
price of $10.50 per share resulting in aggregate gross proceeds to the Company
of $10,000,000 or (ii) a sale or merger of the Company resulting in $10.50
consideration per share or (iii) the achievement of three consecutive calendar
quarters of earnings by the Company before interest, taxes and depreciation of
$250,000 in addition to the trading of the Company's Common Stock at $10.50 per
share for a specified period (each such base salary, if increased, hereafter an
"adjusted based salary"). The employment agreements provide for annual bonuses
for 2 percent up to 100 percent of base salary or adjusted base salary, as
applicable, based upon the Company's achievement of earnings per share from $.07
to $4.45 in the year in which net earnings are first achieved and annual bonuses
from 2 percent to 100 percent of base salary or adjusted base salary, as
applicable, for earnings per share growth from 8 percent to 30 percent growth in
subsequent years. The employment agreements also provide for payment to Messrs.
Timmins and Cox of one additional year of base salary or adjusted base salary,
as applicable, in the event of the termination of their respective employment
for reasons other than cause and six months additional base salary or adjusted
base salary, as applicable, if for cause, for disability or upon their death.
Under the employment agreements, Messrs. Timmins and Cox have been granted
certain indemnification rights. In addition, the employment agreements prevent
Messrs. Timmins and Cox from competing with the Company or soliciting the
employment of other individuals employed by the Company during Messrs. Timmins'
and Cox's respective employment and for a period of one year thereafter. Under
the employment agreements, Messrs. Timmins or Cox may not disclose the Company's
confidential information to outsiders during their respective employment and for
a period of two years thereafter.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 11 is incorporated by reference to the
Company's Proxy Statement for its 1996 Annual Meeting under the caption of
"Principal Shareholders."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 12 is incorporated by reference to the
Company's Proxy Statement for its 1996 Annual Meeting under the caption of
"Certain Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
3.1 Second Restated Articles of Incorporation of Metro One
Telecommunications, Inc. *
3.2 Amendment to the Bylaws of Metro One Telecommunications, Inc. *
3.3 Bylaws of Metro One Direct Information, Inc. (1)
10.1 Form of Enhanced Directory Assistance Agreement (1)
10.2 Enhanced Directory Assistance Agreement between Ameritech Mobile
Communications, Inc. and the Company dated June 16, 1994 (2)
10.3 Lease Agreement between and among Petula Associates, Ltd., Koll
Creekside Associates and the Company (1)
10.4 8% Convertible Secured Note Purchase Agreement dated as of November 30,
1994 together with related exhibits (1)
10.5 Enhanced Directory Assistance Trial Agreement between United Telephone
of Minnesota and the Company dated December 5, 1994 (1)
20
<PAGE> 21
10.6 Consulting Agreement with G. Raymond Doucet (1)
10.7 Loan and Security Agreement between Silicon Valley Bank and the Company
dated March 15, 1996 *
10.8 1994 Stock Incentive Plan *
10.9 1995 Employment Agreement with Timothy A. Timmins *
10.10 1995 Employment Agreement with Patrick M. Cox *
(b) REPORTS FILED ON FORM 8-K
In the last quarter of 1995, the Registrant filed the following current
reports on Form 8-K:
<TABLE>
<CAPTION>
Date of Report Items Reported
-------------- --------------
<S> <C>
November 30, 1995 Change in Registrant's Certifying Accountant
</TABLE>
- ----------------------------
* Previously filed as an exhibit to this Form 10-KSB.
(1) Filed as an Exhibit to Registrant's Registration Statement on Form SB-2
(No. 33-88926-LA) and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form
S-1 (Commission File No. 333-05183) and incorporated herein by
reference.
21
<PAGE> 22
INDEPENDENT AUDITORS REPORT
- --------------------------------------------------------------------------------
To The Board of Directors and Stockholders of
Metro One Telecommunications, Inc.
Portland, Oregon
We have audited the accompanying balance sheet of Metro One Telecommunications,
Inc. (formerly Metro One Direct Information Services, Inc.) as of December 31,
1995 and the related statement of operations, shareholders' equity (deficit),
and cash flows for the year then ended. 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 audit. The financial
statements of the Company for the years ended December 31, 1994 and 1993 were
audited by other auditors whose reports, dated February 6, 1995 and April 29,
1994, expressed an unqualified opinion on those statements and included an
explanatory paragraph describing that the financial statements had been prepared
assuming that the Company would continue as a going concern.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1995 and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Portland, Oregon
March 18, 1996
F-1
<PAGE> 23
Report of Independent Accountants
February 6, 1995
To the Board of Directors and Shareholders of
Metro One Telecommunications, Inc.
In our opinion, the accompanying balance sheet and the related
statements of operations, of common stock subject to rescission and
shareholders' deficit, and of cash flows present fairly, in all material
respects, the financial position of Metro One Telecommunications, Inc. (formerly
Metro One Direct Information Services, Inc.) at December 31, 1994, and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1994, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. We have not audited the
financial statements of Metro One Telecommunications, Inc. for any period
subsequent to December 31, 1994.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has suffered recurring
losses from operations and, at December 31, 1994, has an accumulated deficit
of $14,713,210. In addition, as more fully discussed in Note 9 to the
financial statements, the Company has filed with certain securities regulators
registration statements pertaining to a planned rescission offering for certain
purchasers' equity securities because Company management cannot draw a
conclusion with certainty that all applicable state and federal securities laws
were complied with in all material respects in connection with the issuance of
such securities. Such factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in the accompanying financial statements. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Portland, Oregon
F-2
<PAGE> 24
METRO ONE TELECOMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $13,074,206 $ 5,050,202 $ 1,442,071
----------- ----------- -----------
Costs and expenses:
Direct operating 7,156,855 4,793,416 2,140,711
General and administrative 5,999,548 4,267,585 3,322,290
----------- ----------- -----------
13,156,403 9,061,001 5,463,001
----------- ----------- -----------
Loss from operations (82,197) (4,010,799) (4,020,930)
Other income (expense) 122,670 (131,310) 44,345
Loss on asset dispositions (8,533) (51,574) (11,058)
Debt conversion expense (384,071) -- --
Interest and loan fees (1,371,936) (841,407) (85,003)
----------- ----------- -----------
Net loss $(1,724,067) $(5,035,090) $(4,072,646)
=========== =========== ===========
Weighted average number of common shares outstanding 5,562,959 5,039,272 4,023,233
Loss per share $ (.31) $ (1.00) $ (1.01)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE> 25
METRO ONE TELECOMMUNICATIONS, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,148,822 $ 310,191
Accounts receivable 2,617,465 1,357,925
Notes receivable -- 174,555
Current portion notes receivable from officers/shareholders 2,900 903
Prepaid costs and other current assets 357,197 71,048
------------ ------------
Total current assets 4,126,384 1,914,622
Furniture, fixtures and equipment, net 4,187,554 4,067,928
Notes receivable from officers/shareholders, less current portion 25,858 32,315
Other assets 376,682 283,917
------------ ------------
$ 8,716,478 $ 6,298,782
============ ============
LIABILITIES, COMMON STOCK SUBJECT TO POTENTIAL RESCISSION
AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations $ 769,892 $ 518,849
Current portion of long-term debt 2,045,897 400,000
Accounts payable and accrued expenses 1,160,049 1,346,564
------------ ------------
Total current liabilities 3,975,838 2,265,413
Capital lease obligations, less current portion 1,366,205 1,272,387
Long-term debt, less current portion 100,000 5,160,000
------------ ------------
5,442,043 8,697,800
------------ ------------
Commitments and contingencies (Notes 9 and 11) -- --
Common stock subject to potential rescission;
5,210,612 shares issued and outstanding -- 12,314,191
------------ ------------
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares
authorized, no shares issued or outstanding -- --
Common stock, no par value; 490,000,000 shares
authorized, 7,936,545 issued and outstanding 19,711,711 --
Accumulated deficit (16,437,276) (14,713,209)
------------ ------------
Net shareholders' equity (deficit)(1) 3,274,435 (14,713,209)
------------ ------------
$ 8,716,478 $ 6,298,782
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE> 26
METRO ONE TELECOMMUNICATIONS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
SUBJECT TO POTENTIAL RESCISSION
---------------------------------
SHARES AMOUNT
------------ ------------
<S> <C> <C>
Balances at December 31, 1992 2,861,928 $ 5,655,920
Common stock issued for cash 581,774 4,579,273
Stock options/warrants exercised 85,288 154,261
Common stock issued for services 745 6,000
Common stock issued upon conversion of
debentures and related accrued interest 1,462,494 1,584,281
Stock options issued for services -- 22,050
Stock issuance fees -- (25,683)
Net loss -- --
------------ ------------
Balances at December 31, 1993 4,992,229 11,976,102
Stock options/warrants exercised, net 218,383 338,089
Net loss -- --
------------ ------------
Balances at December 31, 1994 5,210,612 12,314,191
Common stock purchased in rescission offering (135,414) (613,760)
Reclassified upon completion of rescission offering (5,075,198) (11,700,431)
Stock options/warrants exercised -- --
Stock issued for services -- --
Conversion of long-term debt to common stock -- --
Net loss -- --
------------ ------------
Balances at December 31, 1995 0 $ 0
=========== =============
<CAPTION>
SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------------
COMMON STOCK
-------------------------------- (ACCUMULATED NET SHAREHOLDERS'
SHARES AMOUNT DEFICIT) EQUITY (DEFICIT)
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Balances at December 31, 1992 -- -- $ (5,605,473) $ (5,605,473)
Common stock issued for cash -- -- -- --
Stock options/warrants exercised -- -- -- --
Common stock issued for services -- -- -- --
Common stock issued upon conversion of
debentures and related accrued interest -- -- -- --
Stock options issued for services -- -- -- --
Stock issuance fees -- -- -- --
Net loss -- -- (4,072,646) (4,072,646)
------------ ------------ ------------ ------------
Balances at December 31, 1993 -- -- (9,678,119) (9,678,119)
Stock options/warrants exercised, net -- -- -- --
Net loss -- -- (5,035,090) (5,035,090)
------------ ------------ ------------ ------------
Balances at December 31, 1994 -- -- (14,713,209) (14,713,209)
Common stock purchased in rescission offering -- -- -- --
Reclassified upon completion of rescission offering 5,075,198 $ 11,700,431 -- 11,700,431
Stock options/warrants exercised 327,412 1,088,080 -- 1,088,080
Stock issued for services 5,714 13,200 -- 13,200
Conversion of long-term debt to common stock 2,528,221 6,910,000 -- 6,910,000
Net loss -- -- (1,724,067) (1,724,067)
------------ ------------ ------------ ------------
Balances at December 31, 1995 7,936,545 $ 19,711,711 $(16,437,276) $ 3,274,435
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 27
METRO ONE TELECOMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,724,067) $(5,035,090) $(4,072,646)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 996,834 742,135 379,904
Loss on disposal of fixed assets 8,533 51,574 11,058
Gain on settlement of disputed payable (98,918) -- --
Reduction of notes receivable 4,400 -- --
Services paid with debt and equity instruments 13,200 150,000 28,050
Debt conversion expense 255,780 -- --
Changes in certain assets and liabilities:
Accounts receivable (1,259,540) (921,528) (174,725)
Prepaid expenses and other assets (393,707) (173,754) (45,171)
Accounts payable and accrued expenses (57,550) 782,960 220,214
----------- ----------- -----------
Net cash used in operating activities (2,255,035) (4,403,703) (3,653,316)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (74,422) (955,963) (1,314,070)
Issuance of notes receivable from shareholders -- -- (22,200)
Issuance of notes receivable -- (150,000) (61,406)
Collections on notes receivable from shareholders 3,398 175,806 38,146
Collections on notes receivable 171,640 15,183 66,241
----------- ----------- -----------
Net cash provided by (used in) investing activities 100,616 (914,974) (1,293,289)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of bank debt -- 470,000 --
Repayment of bank debt -- (470,000) --
Repayment of capital lease obligations (721,387) (234,254) (1,491)
Proceeds from issuance of notes payable -- -- 236,431
Repayment of debt (309,883) (185,239) (193,112)
Proceeds from issuance of long-term debt 3,550,000 5,410,000 --
Proceeds from issuance of common stock and exercise
of warrants and stock options 1,088,080 338,089 4,707,851
Common stock purchased in rescission offering (613,760) -- --
----------- ----------- -----------
Net cash provided by financing activities 2,993,050 5,328,596 4,749,679
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 838,631 9,919 (196,926)
Cash and cash equivalents, beginning of year 310,191 300,272 497,198
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,148,822 $ 310,191 $ 300,272
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE> 28
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
I. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NAME CHANGE. In 1995, the Board of Directors and shareholders approved an
amendment to the Restated Articles of Incorporation changing the name of the
Company to Metro One Telecommunications, Inc.(the "Company") The former name of
the Company was Metro One Direct Information Services, Inc.
NATURE OF OPERATIONS. The Company provides enhanced directory assistance
services to telecommunications carriers and their customers. Revenues are
derived principally through fees charged to telecommunications carriers. The
Company has call centers located throughout the United States in or near
metropolitan areas, such as Chicago; Baltimore; San Diego; Seattle; Ft.
Lauderdale; Detroit; Denver; and others.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents includes cash deposits in
banks and highly liquid investments maturing within approximately 9o days of
purchase.
REVENUE RECOGNITION. Under existing contracts with telecommunications carriers,
the Company records as revenue charges for the amount of telecommunications
services rendered, generally as measured by the number of calls processed.
Revenue is recognized as services are provided.
MAJOR CUSTOMERS. In 1995, twelve customers accounted for substantially all
revenue reported and comprised the entire accounts receivable balance at
December 31. The Company's three largest customers accounted for approximately
29%, 23%, and 20%, respectively, of revenue in 1995. In 1994, six customers
accounted for all revenue reported and comprised the entire accounts receivable
balance at December 31. In 1993, five customers accounted for approximately 78
percent of revenue and also comprised the entire accounts receivable balance at
December 31, 1993. Historically the Company has not incurred significant losses
related to its accounts receivable.
FURNITURE, FIXTURES AND EQUIPMENT. Furniture, fixtures and equipment are stated
at cost and are depreciated over their estimated useful lives of three to seven
years using the straight-line method. Leasehold improvements are amortized over
the lesser of the remaining lease term or the useful life. Expenses for repairs
and maintenance are expensed as incurred, and renewals and betterments are
capitalized. When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are eliminated from the accounts and the resulting
gains or losses are reflected in the statement of operations.
PER SHARE AMOUNTS. All share and per share amounts have been restated to reflect
a .2857-for-one (approximately a one-for-three and one-half) reverse stock
split. The effective date of the reverse stock split was December 12, 1995. The
per share amounts are based on the weighted average number of shares of common
stock outstanding during the period of computation. Common stock equivalents,
including shares subject to debt conversion, warrants and options, have been
excluded from the computation because their effect would be antidilutive.
PATENTS AND TRADEMARKS. Patents and trademarks are carried at cost less
accumulated amortization. Costs are amortized over the estimated useful lives of
the related assets of five to ten years. In the event that facts and
circumstances indicate that the cost of patents, or trademarks may be impaired,
an evaluation of recoverability would be performed and the asset's carrying
amount would be reduced to market value or discounted cash flow value.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Accounts receivable and payable as reported
on the accompanying balance sheets are collectible and payable, respectively,
within 60 days and, as a result, approximate fair value. The Company's notes
receivable and payable and subordinated notes bear interest rates that
approximate current market rates; thus, the recorded value of these notes is
considered to be at fair value.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principals requires management to make estimates
and assumptions that effect reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the fiscal year.Actual results could differ from those
estimates.
F-7
<PAGE> 29
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RECLASSIFICATION. Certain balances in the 1993 and 1994 financial statements
have been reclassified to conform with 1995 presentations. Such
reclassifications had no effect on results of operations or accumulated earnings
(deficit).
2. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment by major classification are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------
1995 1994
---------------------------------------- ---------------------------------------
LEASED OWNED TOTAL LEASED OWNED TOTAL
---------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Equipment $2,461,270 $ 2,213,755 $ 4,675,025 $1,788,388 $2,047,065 $ 3,835,453
Furniture and fixtures 594,186 879,749 1,473,935 360,823 862,936 1,223,759
Leasehold improvements - 110,958 110,958 - 185,609 185,609
---------- ----------- ----------- ---------- ---------- -----------
3,055,456 3,204,462 6,259,918 2,149,211 3,095,610 5,244,821
Less accumulated depreciation
and amortization (614,803) (1,457,561) (2,072,364) (197,346) (979,547) (1,176,893)
---------- ----------- ----------- ---------- ---------- -----------
$2,440,653 $ 1,746,901 $ 4,187,554 $1,951,865 $2,116,063 $ 4,067,928
========== =========== =========== ========== ========== ===========
</TABLE>
3. NOTES RECEIVABLE FROM OFFICERS/SHAREHOLDERS
Notes receivable from officers/shareholders are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
---------- ----------
<S> <C> <C>
Unsecured notes receivable including interest at 7.89%
per annum $ 28,758 $ 33,218
Less current portion 2,900 903
---------- ----------
Notes receivable from officers/shareholders, less current portion $ 25,858 $ 32,315
========== ==========
</TABLE>
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
---------- ----------
<S> <C> <C>
8% Convertible Secured Notes, interest payable monthly,
due June 1996 -- $1,950,000
10% Subordinated Notes, unsecured, interest payable monthly, due July 1996
through January 1997 $1,950,000 3,610,000
Unsecured notes, payable in monthly installments of $33,415, due
through June 1996, including interest at 8% 195,897 --
---------- ----------
2,145,897 5,560,000
Less current portion 2,045,897 400,000
---------- ----------
Long-term debt, less current portion $ 100,000 $5,160,000
========== ==========
</TABLE>
F-8
<PAGE> 30
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8% CONVERTIBLE SECURED NOTES. In 1994 and 1995, the Company issued $5,000,000 in
8% Convertible Secured Notes. The Convertible Secured Notes bore interest at 8%
per annum and were (i) secured by the Company's assets, (ii) payable on June 30,
1996, and (iii) convertible into the Company's common stock at a rate of $2.31
per share. During the fourth quarter of 1995, these Convertible Secured Notes
were converted into 2,164,402 shares of the Company's common stock.
In connection with the conversion, the Company recognized a charge for early
conversion in the amount of $384,071, including the write-off of approximately
$128,000 in offering costs previously capitalized.
10% SUBORDINATED NOTES. In 1995, the Company issued $3,860,000 of new 10%
subordinated notes with warrants (the "1995 Subordinated Notes"), the proceeds
of which were primarily used to refinance $3,610,000 in subordinated notes
("1994 Subordinated Notes"). The 1995 Subordinated Notes have maturities of no
less than 18 months and bear interest at 10% per annum payable monthly. These
1995 Subordinated Notes can be paid before maturity at the option of the
Company, with no penalty. In the event of an initial public offering, the then
outstanding 1995 Subordinated Notes are convertible, at the option of the
holder, into common stock at a price equal to 80% of the initial public offering
price.
Issued with each note was a warrant for the purchase of that number of shares of
the Company's common stock equal to the principal amount of the note divided by
$8.75. The exercise prices of the warrants related to the 1994 Subordinated
Notes and the 1995 Subordinated Notes are $5.25 and $2.31, respectively, and the
warrants are exercisable at any time on or before three years from the date of
issuance.
In 1995, a certain noteholder exercised warrants for the purchase of 293,130
shares of the Company's common stock.
In 1995, the Company extended an offer to holders of 1995 Subordinated Notes to
convert their notes to common stock of the Company at $5.25 per share. Principal
in the amount of $1,910,000 was converted into 363,819 shares of the Company's
common stock. The remaining 1995 Subordinated Notes are due as follows:
$1,850,000 in 1996 and $100,000 in 1997. See Note 13 Subsequent Events.
5. LEASE OBLIGATIONS
The Company entered into $1,066,249 of new capital leases during 1995 and
$1,929,810 during 1994. Interest paid for capital lease obligations was
approximately $405,120, $117,933 and $0 in 1995, 1994 and 1993, respectively.
The Company also leases office, operating facilities and equipment under
operating leases with unexpired terms of one to six years. Rental expense for
operating leases was approximately $780,000, $528,000 and $313,000 for 1995,
1994 and 1993, respectively.
Minimum annual rentals for the five years subsequent to 1995 and in the
aggregate thereafter are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 CAPITAL LEASES OPERATING LEASES
------------------ ----------------- -----------------
<S> <C> <C>
1996 $ 1,127,956 $ 820,810
1997 785,646 849,687
1998 525,871 742,270
1999 377,450 632,405
2000 56,547 494,901
Thereafter - 270,081
-------------- ---------------
Total minimum lease payments 2,873,470 $ 3,810,154
===============
Less interest portion 737,373
--------------
Present value of net minimum
lease payments, capital leases 2,136,097
Less portion due within one year 769,892
--------------
$ 1,366,205
</TABLE>
F-9
<PAGE> 31
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK. In 1995, the Company's Board of Directors and shareholders
approved a .2857-for-one (approximately a one-for-three and one-half) reverse
split of the Company's common stock. All share and per share amounts have been
restated to retroactively reflect the reverse stock split.
PREFERRED STOCK. In 1995, the Board of Directors and the shareholders approved
an amendment to the Restated Articles of Incorporation to increase the number of
authorized shares of preferred stock, without par value, from 10,000 to
10,000,000.
COMMON STOCK OPTIONS AND WARRANTS. The Company has issued nonqualified stock
options and/or warrants to certain shareholders, consultants and other parties.
Generally, these options and warrants vested immediately upon grant and are
exercisable at prices determined by the Board of Directors.
In 1994 and 1995, the Board of Directors and shareholders, respectively,
approved a Stock Incentive Plan (the "Plan"). The Plan provides for the award of
incentive stock options to key employees and the award of non-qualified stock
options, stock sales and grants to employees, outside directors, independent
contractors and consultants, with 1,428,500 shares of common stock reserved for
issuance under the Plan. It is intended that the Plan will be used principally
to attract and retain key employees of the Company.
The option price per share of an incentive stock option may not be less than the
fair market value of a share of common stock as of the date such option is
granted. The option price per share of a non-qualified stock option may be at
any price established by the Board of Directors or a committee thereof
established for purposes of administering the plan. Options become exercisable
at the times and subject to the conditions prescribed by the Board of Directors.
Generally, options vest over a period of four years and the term of each option
may not exceed ten years. Payment for shares purchased pursuant to options may
be made in cash or by delivery of shares of common stock having a market value
equal to the exercise of the option. As of December 31, 1995, 363,221 incentive
options and 740,223 non-qualified options had been granted under the Plan, at
an exercise price of $8.05 per share of common stock. At December 31, 1995,
approximately 758,009 of the options granted under the Plan were exercisable.
Stock option and warrant activity is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES PRICE RANGE
---------------- -----------
<S> <C> <C>
Balance at December 31,1992 802,816 $ .04 - 5.25
Granted 92,853 1.75 - 8.05
Cancelled/Expired - -
Exercised (85,288) 1.75 - 3.50
----------------- ------------------
Balance at December 31, 1993 810,381 .04 - 8.05
Granted 561,116 5.25 - 8.05
Cancelled/Expired - -
Exercised (218,383) .04 - 1.75
----------------- ------------------
Balance at December 31,1994 1,153,114 1.75 - 8.05
Granted 1,756,340 8.05
Cancelled/Expired (208,918) 8.05
Exercised (327,412) 1.75 - 5.25
----------------- ------------------
Balance at December 31, 1995 2,373,124 $ 1.75 - 8.05
================= ==================
</TABLE>
F-10
<PAGE> 32
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. RELATED PARTIES
During 1994 and 1995, the Company entered into various capital lease
arrangements for furniture, fixtures and equipment with a company owned by a
shareholder of the Company. Minimum capital lease obligations to this related
party totalled $1,024,380 and $1,017,759 at December 31, 1995 and 1994,
respectively.
8. INCOME TAXES
In 1993, the Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("FAS 109"). The Company recognizes deferred
tax liabilities and assets for the expected future tax consequences of temporary
differences between the book basis and tax basis of the Company's assets and
liabilities. The adoption of this statement had no effect on pre-tax loss from
continuing operations. Deferred taxes are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Tax depreciation in excess of book $ 456,353 $ 280,999 $ 120,734
----------- ----------- -----------
Gross deferred tax liabilities 456,353 280,999 120,734
----------- ----------- -----------
Net operating loss carryforwards (6,492,802) (6,178,885) (3,594,814)
Expenses not currently deductible (142,566) (56,706) (98,306)
Tax credit carryforwards (7,221) -- --
----------- ----------- -----------
Gross deferred tax assets (6,642,589) (6,235,591) (3,693,120)
Deferred tax asset valuation allowance 6,186,236 5,954,592 3,572,386
----------- ----------- -----------
Net deferred tax asset $ -- $ -- $ --
=========== =========== ===========
</TABLE>
For financial reporting and income tax purposes, the Company has net operating
loss carryforwards aggregating approximately $16.7 million at December 31, 1995.
Such carryforwards are available to offset taxable income in future years
through their expiration in 2004 to 2010. The issuance of common stock since the
Company's inception has resulted in changes in ownership which limit the annual
utilization of these net operating loss carryforwards.
9. POTENTIAL RESCISSION LIABILITY
Between 1989 and December 31, 1993, the Company financed its activities through
sales of 3,529,994 shares of Common Stock and debt securities that were
converted into 1,462,494 shares of its Common Stock, which securities were sold
directly to approximately 560 persons. During a review of these past financing
activities in 1993, the Company's management was unable to conclude that all
applicable state and federal securities laws had been complied with in all
material respects in connection with these offerings.
In 1995, the Company filed a registration statement with the Securities and
Exchange Commission and certain state securities regulators for a rescission
offering whereby it offered to certain holders of its Common Stock as of March
31, 1995 who resided in Oregon and certain other states the right to rescind
their purchase of shares of the Company's Common Stock and to receive, in
exchange for the Common Stock relinquished to the Company, a payment equal to
the purchase price of such securities plus interest from the date of purchase at
the applicable statutory rate of the state in which they reside.
The rescission offer closed in July 1995. As a result of the rescission offer,
the sales of 135,414 shares of common stock were rescinded and such shares were
purchased by the Company for approximately $738,660, including interest of
approximately $124,900. In total, shareholders representing approximately
$1,783,907 and 528,215 shares of Common Stock outstanding at March 31, 1995 did
not receive a rescission offer and holders representing approximately $265,255
and 199,843 shares of Common Stock received the rescission offer but lived in
states where the Company did not register the rescission offer. The Company
believes that its potential rescission liability to many of these shareholders
may have been eliminated by the running of applicable statutes of limitations,
however, there can be no assurance that claims asserting violations of federal
or state securities laws will not be asserted by any of these shareholders
against the Company or that certain holders will not prevail against the
Company in the assertion of such claims, thereby compelling the Company to
repurchase their shares. If all of these holders sucessfully asserted claims
that the Company repurchase their shares, the Company could be required to pay
to these holders approximately $2,049,162, plus approximately $525,000 in
statutory interest, to repurchase 648,058 shares of the Company's Common Stock,
representing an average repurchase price of approximately $3.97 a share.
F-11
<PAGE> 33
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. BENEFIT PLANS
During 1992, the Company established a deferred compensation savings plan for
the benefit of its eligible employees. The plan permits certain voluntary
employee contributions to be excluded from the employees' current taxable income
under the provisions of Internal Revenue Code Section 401(k). Upon reaching the
age of twenty-one, each employee becomes eligible to participate in the savings
plan six months following the initial date of employment. The employee must also
complete 1,000 hours of service in any twelve-month period. Under the plan, the
Company can make discretionary contributions to the plan as approved by the
Board of Directors. Participants' interest in Company contributions to the plan
vest over a four-year period. The Company has made no contributions since the
plan's inception.
11. COMMITMENTS AND CONTINGENCIES
The Company is party to various legal actions and administrative proceedings
arising in the ordinary course of business. The Company believes that the
disposition of these matters will not have a material adverse effect on its
financial position or results of its operations.
12. STATEMENT OF CASH FLOWS
Supplemental disclosure of Cash Flow information:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Equipment acquired by capital lease $1,066,249 $1,929,810 $ 95,680
Conversion of debt into common stock 6,910,000 -- --
Conversion of debentures and related
accrued interest into common stock -- -- 1,584,281
Note receivable offset against debenture
and related accrued interest balances -- -- 14,007
</TABLE>
Cash paid for interest in 1995, 1994 and 1993 was $1,477,860, $468,155 and
$41,566, respectively.
13. SUBSEQUENT EVENTS
In March 1996, the Company entered into a $3,000,000 Secured Operating Line of
Credit with a commercial bank. Under the terms of the agreement, outstanding
borrowings bear interest at prime rate plus 1.25 percent and all assets of the
Company are pledged as collateral. The agreement contains minimum net worth and
working capital requirements as well as certain other restrictive covenants, as
defined by the agreement, and prohibits the payment of cash dividends. At March
18, 1996, the Company has no borrowings against this line of credit.
In March 1996, $400,000 in principal of the 1995 Subordinated Notes was
converted to equity, resulting in the issuance of 76,191 shares of the Company's
common stock.
In January and February 1996, warrants for the purchase of 341,370 shares of
common stock were exercised, resulting in $597,387 proceeds to the Company.
F-12
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant has duly caused this report to be signed on its behalf by
the undersigned duly authorized.
METRO ONE TELECOMMUNICATIONS, INC.
By: /s/ Timothy A. Timmins
-----------------------
Timothy A. Timmins
President & Chief Executive Officer
August 20, 1996
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Timothy A. Timmins President, Chief Executive Officer August 20, 1996
- ---------------------------- and Director
Timothy A. Timmins
/s/ Patrick M. Cox Executive Vice President, August 20, 1996
- ---------------------------- Chief Operating Officer and Director
Patrick M. Cox
/s/ Stebbins B. Chandor, Jr. Senior Vice President and Chief August 20, 1996
- ---------------------------- Financial Officer
Stebbins B. Chandor, Jr.
/s/ Karen L. Johnson Vice President and Controller, August 20, 1996
- ---------------------------- Principal Accounting Officer
Karen L. Johnson
/s/ Jean de Grandpre Chairman of the Board of Directors August 20, 1996
- ----------------------------
Jean de Grandpre
/s/ G. Raymond Doucet Director August 20, 1996
- ----------------------------
G. Raymond Doucet
/s/ William D. Rutherford Director August 20, 1996
- ----------------------------
William D. Rutherford
</TABLE>
<PAGE> 35
EXHIBIT INDEX
No. Description
- --- -----------
3.1 Second Restated Articles of Incorporation of Metro One
Telecommunications, Inc. *
3.2 Amendment to the Bylaws of Metro One Telecommunications, Inc. *
3.3 Bylaws of Metro One Direct Information, Inc. (1)
10.1 Form of Enhanced Directory Assistance Agreement (1)
10.2 Enhanced Directory Assistance Agreement between Ameritech Mobile
Communications, Inc. and the Company dated June 16, 1994 (2)
10.3 Lease Agreement between and among Petula Associates, Ltd., Koll
Creekside Associates and the Company (1)
10.4 8% Convertible Secured Note Purchase Agreement dated as of November 30,
1994 together with related exhibits (1)
10.5 Enhanced Directory Assistance Trial Agreement between United Telephone
of Minnesota and the Company dated December 5, 1994 (1)
10.6 Consulting Agreement with G. Raymond Doucet (1)
10.7 Loan and Security Agreement between Silicon Valley Bank and the Company
dated March 15, 1996 *
10.8 1994 Stock Incentive Plan *
10.9 1995 Employment Agreement with Timothy A. Timmins *
10.10 1995 Employment Agreement with Patrick M. Cox *
- -------------------------
* Previously filed as an exhibit to this Form 10-KSB.
(1) Filed as an Exhibit to Registrant's Registration Statement on Form SB-2
(No. 33-88926-LA) and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on From S-1
(Commission File No. 333-05183) and incorporated herein by reference.
