<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-27024
METRO ONE TELECOMMUNICATIONS, INC.
(INCORPORATED UNDER THE LAWS OF THE STATE OF OREGON)
8405 S.W. NIMBUS AVENUE, BEAVERTON, OREGON 97008
I.R.S. EMPLOYER IDENTIFICATION NUMBER 93-0995165
TELEPHONE - AREA CODE (503) 643-9500
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS 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 __
AT AUGUST 7, 1996, 8,527,658 COMMON SHARES WERE OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES __ NO X
<PAGE> 2
METRO ONE TELECOMMUNICATIONS, INC.
INDEX TO FORM 10 - QSB
<TABLE>
<CAPTION>
Page No.
Part I Financial information
<S> <C>
Condensed Statements of Operations (Unaudited)
Three and six months ended June 30, 1996 and 1995 1
Condensed Balance Sheets (Unaudited)
June 30, 1996 and December 31, 1995 2
Condensed Statements of Cash Flows (Unaudited)
Six months ended June 30, 1996 and 1995 3
Notes to Condensed Financial Statements 4-5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-9
Part II Other information
Item 1 Legal Proceedings 9
Item 6 Exhibits and Reports on Form 8-K 10
</TABLE>
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METRO ONE TELECOMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 4,516,123 $ 3,041,980 $ 8,744,436 $ 5,679,815
----------- ----------- ----------- -----------
Costs and expenses:
Direct operating 1,976,569 1,823,896 3,970,739 3,611,162
General and administrative 1,815,574 1,366,778 3,555,371 2,852,391
----------- ----------- ----------- -----------
3,792,143 3,190,674 7,526,110 6,463,553
----------- ----------- ----------- -----------
Income (loss) from operations 723,980 (148,694) 1,218,326 (783,738)
Other income (expense) (134,397) 118,747 (181,273) 121,381
Interest and loan fees (147,394) (333,594) (309,685) (609,646)
----------- ----------- ----------- -----------
Net income (loss) $ 442,189 $ (363,541) $ 727,368 $(1,272,002)
=========== =========== =========== ===========
Net income (loss) per common and
common equivalent share
Primary $ .05 $ (.07) $ .08 $ (.24)
=========== =========== =========== ===========
Fully diluted $ .05 $ (.07) $ .08 $ (.24)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
1
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METRO ONE TELECOMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
------------ ------------
1996 1995
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,189,521 $ 1,148,822
Accounts receivable 2,430,569 2,617,465
Other current assets 621,626 360,097
------------ ------------
Total current assets 5,241,716 4,126,384
Furniture, fixtures and equipment, net 4,559,474 4,187,554
Other assets 428,297 402,540
------------ ------------
$ 10,229,487 $ 8,716,478
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 782,289 $ 769,892
Current portion of long-term debt 100,000 2,045,897
Note payable, bank 550,000 --
Accounts payable and accrued expenses 1,373,093 1,160,049
------------ ------------
Total current liabilities 2,805,382 3,975,838
Capital lease obligations, less current portion 1,557,706 1,366,205
Long-term debt, less current portion 67,200 100,000
------------ ------------
4,430,288 5,442,043
------------ ------------
Commitments and contingencies (Note 3) -- --
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, 8,513,373 and 7,936,545 shares,
respectively, issued and outstanding 21,509,107 19,711,711
Accumulated deficit (15,709,908) (16,437,276)
------------ ------------
Net shareholders' equity 5,799,199 3,274,435
------------ ------------
$ 10,229,487 $ 8,716,478
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE> 5
METRO ONE TELECOMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1996 1995
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 727,368 $(1,272,002)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 553,475 490,973
Loss on disposal of fixed assets 319 2,299
Gain on settlement -- (98,918)
Changes in certain assets and liabilities:
Accounts receivable 186,896 (726,767)
Prepaid expenses and other assets (230,248) (133,456)
Accounts payable and accrued expenses 213,044 (120,972)
----------- -----------
Net cash provided by (used in) operating activities 1,450,854 (1,858,843)
----------- -----------
Cash flows from investing activities:
Capital expenditures (305,533) (56,131)
Collections on notes receivable 1,660 170,565
----------- -----------
Net cash provided by (used in) investing activities (303,873) 114,434
----------- -----------
Cash flows from financing activities:
Debt issue costs, net -- (209,781)
Repayment of capital lease obligations (474,980) (312,159)
Proceeds from issuance of bank debt 550,000 --
Repayment of debt (745,897) (250,000)
Proceeds from issuance of long-term debt 67,200 3,425,000
Proceeds from issuance of common stock and exercise
of warrants and stock options 497,395 80,000
----------- -----------
Net cash provided by (used in) financing activities (106,282) 2,733,060
----------- -----------
Net increase in cash and cash equivalents 1,040,699 988,651
Cash and cash equivalents, beginning of period 1,148,822 310,191
----------- -----------
Cash and cash equivalents, end of period $ 2,189,521 $ 1,298,842
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 326,706 $ 536,150
Equipment acquired by capital lease 678,877 412,109
Conversion of debt into common stock 1,300,000 --
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE> 6
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The interim financial data are unaudited, however, in the opinion of management,
the interim data include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods. The financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to ensure that the information presented is not misleading.
The organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the Company's
audited financial statements contained in and filed as part of the Form 10-KSB,
filed with the Securities and Exchange Commission. This quarterly report should
be read in conjunction with the audited financial statements.
Reclassification. Certain balances in the 1995 financial statements have been
reclassified to conform with 1996 presentation. Such reclassifications had no
effect on results of operations or shareholders' equity.
2. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net income (loss) per common and common equivalent share is computed using the
weighted average number of common and dilutive common equivalent shares assumed
to be outstanding during the period. Common equivalent shares consist primarily
of options and warrants to purchase common stock.
The weighted average number of common and common equivalent shares used to
compute earnings per share is:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Primary 8,948,730 5,227,754 8,751,097 5,220,497
Fully diluted 8,991,727 5,227,754 8,794,094 5,220,497
</TABLE>
3. 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, results of its operations or net cash flows.
4. BANK LINE OF CREDIT
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. At June 30, 1996 the average interest rate was 9.5
percent. 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. Availability of the
unused line of credit is subject to borrowing base requirements and compliance
with loan covenants. At June 30, 1996, the Company had $550,000 in borrowings
against this line of credit.
4
<PAGE> 7
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
5. ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based on the
fair value of the equity instrument awarded. Companies are permitted, however,
to continue to apply Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," which recognizes compensation cost
based on the intrinsic value of the equity instrument awarded. The Company will
continue to apply APB Opinion No. 25 to its stock based compensation awards to
employees and will disclose the required pro forma effect on net income and
earnings per share in its 1996 annual report.
5
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
The information which appears below relates to the current and prior
periods, the results of operations for which are not necessarily indicative of
the results which may be expected for any subsequent period.
The following is a discussion of the results of operations for the
second quarter and the first six months of fiscal 1996 compared to the same
periods of fiscal 1995 and a discussion of the changes in financial condition
during the first six months of fiscal 1996.
OVERVIEW
During the first quarter of 1996, the Company's contract with AirTouch
Cellular in the San Diego market expired. 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 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 infor-mation technology, create a national
distribution strategy and implement a 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 51.7% and 55.1% of the Company's revenues in the three months
ended June 30, 1996 and 1995, respectively, and 53.0% and 55.2% of the Company's
revenues in the six months ended June 30, 1996 and 1995, respectively.
Consequently, the failure of the Company to obtain the renewal of these
contracts or to obtain replacement contracts would have a material adverse elect
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.
RESULTS OF OPERATION
The following table sets forth for the periods indicated selected items
of the Company's statements of operations as a percentage of its revenues.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- ------------------------------------
1996 1995 1996 1995
--------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Direct operating costs 43.8 60.0 45.4 63.6
General and administrative costs 40.2 44.9 40.7 50.2
Operating profit (loss) 16.0 (4.9) 13.9 (13.8)
Interest and loan fees 3.3% 11.0% 3.5% 10.7%
</TABLE>
6
<PAGE> 9
Comparison of Second Quarter Fiscal 1996 to Second Quarter Fiscal 1995
Revenues increased 48.5% to $4.5 million for the quarter ended June 30,
1996 from $3.0 million for the same period in the prior year. Revenues from
existing call centers grew 35.3% and accounted for $1.1 million of this increase
while revenues from one new call center accounted for $0.4 million of revenues
in the second quarter of 1996. The revenue growth was due exclusively to
increases in call volumes at these centers.
Direct operating costs increased 8.4% to $2.0 million for the quarter
ended June 30, 1996 from $1.8 million for the same period in the prior year. The
increase in direct operating costs was due primarily to the cost of operating an
additional call center during the second quarter of fiscal 1996. As a percentage
of revenues, direct operating costs declined to 43.8% for the three months ended
June 30, 1996 from 60.0% for the same period in the prior year. This decline
primarily resulted from higher call volumes and operating efficiencies due to
improved personnel and the introduction of new technology designed to enhance
productivity.
General and administrative costs increased 32.8% to $1.8 million for
the quarter ended June 30, 1996 from $1.4 million for the same period in the
prior year. This increase in costs was due primarily to higher overall salary
expenses and costs associated with the operation of an additional call center
during the three months ended June 30, 1996 and support of increased operational
activity overall. As a percentage of revenues, general and administrative costs
declined to 40.2% for the three months ended June 30, 1996 from 44.9% for the
same period in the prior year. This decline resulted primarily from the
achievement of substantially higher revenues in the three months ended June 30,
1996 compared to the same period in 1995. Depreciation and amortization
increased by 16.0% to $284,661 for the three months ended June 30, 1996, from
$245,468 for the same period in the prior year due primarily to the acquisition
of new equipment for one new call center and additional equipment for existing
call centers.
Net interest expense declined 55.8% to $147,394 for the quarter ended
June 30, 1996 from $333,594 for the same period in the prior year. This decline
was attributable solely to the reduction in average debt outstanding to $3.0
million from $10.2 million for the quarters ended June 30, 1996 and 1995,
respectively.
Other expense for the three months ended June 30, 1996, was $134,379,
and consisted primarily of estimated tax expense of $14,800, estimated
litigation settlement expenses of $103,178 and a $33,195 expense for the
remaining value of certain miscellaneous assets, offset by interest income of
approximately $16,487. Other income for the three months ended June 30, 1995,
was $118,747, and consisted primarily of interest income of $19,663 and
approximately $98,900 of income resulting from the settlement of a vendor claim.
Comparison of the First Six Months of Fiscal 1996 to the First Six Months of
1995
Revenues increased 53.9% to $8.7 million for the six months ended June
30, 1996 from $5.7 million for the same period in the prior year. Revenues from
existing call centers grew 40.6% and accounted for $2.3 million of this increase
while revenues from one new call center accounted for $0.7 million of revenues
in the first six months of 1996. The revenue growth at existing call centers was
due exclusively to increases in call volumes at these centers.
Direct operating costs increased 10.0% to $4.0 million for the six
months ended June 30, 1996 from $3.6 million for the same period in the prior
year. The increase in direct operating costs was due primarily to the cost of
operating an additional call center during the first six months of 1996. As a
percentage of revenues, direct operating costs declined to 45.4% for the six
months ended June 30, 1996 from 63.6% for the same period in the prior year.
This decline primarily resulted from higher call volumes and operating
efficiencies due to improved personnel utilization and the introduction of new
technology designed to enhance productivity.
General and administrative costs increased 24.6% to $3.6 million for
the six months ended June 30, 1996 from $2.9 million for the same period in the
prior year. This increase in costs was due primarily to higher overall salary
expenses and
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<PAGE> 10
costs associated with the operation of an additional call center during the
first six months of 1996. As a percentage of revenues, general and
administrative costs declined to 40.7% for the six months ended June 30, 1996
from 50.2% for the same period in the prior year. This decline resulted
primarily from the achievement of substantially higher revenues in the first six
months of 1996 compared with the same period in the prior year. Depreciation and
amortization increased by 12.7% to $553,475 for the six months ended June 30,
1996 from $490,973 for the same period in the prior year due primarily to the
acquisition of new equipment for the new call center and additional equipment
for existing call centers.
Net interest expense declined 49.2% to $309,685 for the six months
ended June 30, 1996 from $609,646 for the same period in the prior year. This
decline was attributable solely to the reduction in average debt outstanding to
$3.7 million from $9.2 million for the six months ended June 30, 1996 and 1995,
respectively.
Other expense for the six months ended June 30, 1996, was $181,273 and
consisted primarily of estimated tax expense of $22,750, estimated litigation
settlement expenses of approximately $155,000 and a $33,195 expense for the
remaining value of certain miscellaneous assets, offset by interest income of
approximately $29,710. Other income, for the six months ended June 30, 1995, was
$123,681, and consisted primarily of interest income of $23,350 and
approximately $98,900 of income resulting from the settlement of a vendor claim.
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. For the six months ended June 30, 1996, the
Company generated net income of $727,368; however, the Company generated net
losses of $1,724,067, $5,035,090, and $4,072,646 in fiscal 1995, 1994, and 1993,
respectively. As of June 30, 1996, the Company's accumulated deficit was
approximately $15.7 million. Cash flow solely from operations has been
insufficient to fund all of the Company's capital and other non-operating needs.
As of June 30, 1996, the Company had approximately $2,189,521 in cash and cash
equivalents and approximately $2,436,335 in working capital.
In addition to cash from operations, the Company's principal source of
liquidity is a $3.0 million bank line of credit. Availability under the line of
credit is subject to borrowing base requirements and compliance with loan
covenants. Under the terms of the agreement, outstanding borrowings bear
interest at the prime rate plus 1.25 percent and all assets of the Company are
pledged to the bank as collateral. The agreement contains minimum net worth and
working capital requirements as well as certain other restrictive covenants and
prohibits the payment of cash dividends by the Company. As of June 30, 1996, the
Company was eligible to borrow $1,822,000 under the line of credit and had
$550,000 of borrowings against this line of credit. The Company also has a
credit facility under which the Company may borrow up to $1.0 million to finance
purchases of capital equipment. Borrowings bear interest at the prime rate plus
1.75 percent and are secured by the purchased equipment. As of June 30, 1996,
the Company had $67,200 of borrowings against this line of credit.
Cash Flow from Operations. Net cash from operations for the six months
ended June 30, 1996 was $1,450,854, resulting primarily from the operating
income for that period. No new call centers were opened and most existing call
centers operated profitably and contributed to cash flow from operations during
the six months ended June 30, 1996.
Cash Flow from Investing Activities. Cash used in investing activities
was $303,873 for the six months ended June 30, 1996 related primarily to capital
expenditures for system redundancy capabilities and equipment upgrades for
certain existing locations. In the six months ended June 30, 1996, additional
capital equipment for the same purposes was acquired through lease financing in
the amount of $678,877.
Cash Flow from Financing Activities. Net cash used by financing
activities for the six months ended June 30, 1996 was $106,282, resulting
primarily from the exercise of warrants to purchase 328,948 shares of the
Company's Common Stock resulting in net cash proceeds to the Company of $497,397
and proceeds from borrowing on the line of credit and the secured equipment term
loan of $617,200, offset by $745,897 in principal payments related to current
notes payable and $474,980 in payments related to existing capital lease
obligations.
8
<PAGE> 11
Future Capital Needs and Resources. The primary uses of capital are
expected to be the expansion of existing call centers, funding of start-up
operating losses for newly opened call centers, principal and interest payments
on indebtedness, and the purchase of equipment for the improvement of existing
and furnishing of new call centers.
In late 1995 and in the first three months of 1996, the debt
obligations of the Company were significantly reduced through the exchange of
$3,210,000 in principal amount of its 10% Subordinated Notes for 611,440 shares
of Common Stock and conversion of $5,000,000 in principal amount of its 8%
Convertible Secured Notes into 2,164,402 shares of Common Stock. In the second
quarter of 1996, the Company paid $550,000 in principal amount of the 10%
Subordinated Notes. In September 1996, the remaining 10% Subordinated Note will
mature, resulting in an obligation of the Company to make a principal payment of
$100,000, to the extent that the Note is not converted into Common Stock of the
Company.
Although the Company currently has no material commitments for capital
expenditures, it anticipates that its capital expenditures will be up to
approximately $3,000,000 through the end of 1996, resulting primarily from
projected expansion and discretionary planned improvements. The Company believes
its existing cash and cash equivalents, credit facilities and cash from
operations will be sufficient to fund its operations through the end of fiscal
1997. However, because the Company's growth may require the opening of new call
centers in addition to those projected, the Company's capital requirements
cannot be predicted with certainty and there is no assurance that the Company
will not require additional financing during this period. There is no assurance
that any required additional financing will be available on terms satisfactory
to the Company or not disadvantageous to the Company's shareholders.
Effect of Inflation. The effect of inflation was not a material factor
affecting the Company's business during the six months ended June 30, 1996.
PART II. OTHER INFORMATION
ITEM 1. 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 for a formula-based profit sharing arrangement 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 bv 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. 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 for the District 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
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<PAGE> 12
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
Arizona Direct. The complaint seeks damages, including punitive damages, in an
amount to be determined by the court. The Company and its officers answered the
complaint denying liability, and moved to dismiss certain aspects of the suit
and to change the venue from Arizona to Oregon. The court granted these motions,
transferred the case to the U.S. District Court for the District of Oregon and
gave Arizona Direct leave to re-plead. Arizona Direct filed an amended complaint
in March, 1995 which did not substantially alter the claims previously 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 tortious
interference with the Leasing Agreement against Arizona Direct's principal
shareholders. In October 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 merit because it does not believe
the Leasing Agreement constituted a security for purposes of applicable federal
and state securities laws. The Company further believes that even if such
Leasing Agreement constituted a security, it was exempt from registration under
such securities laws. The Company further believes that it did not make material
misrepresentations or omit to state material facts in connection with the
negotiation of the Leasing Agreement, and at all such times it intended to
perform under the Leasing Agreement. Finally, the Company believes that the
litigation commenced by the plaintiffs against the Company constituted a
repudiation of the contract, precluding the plaintiffs from seeking its
enforcement. Notwithstanding the foregoing, there can be no assurance that the
Company or any of its officers will be successful in defending this legal
action.
On May 20, 1996, Richard and John Budinich, two of the Company's
shareholders, filed a civil action in the Superior Court of the State of
Washington for King County in which the plaintiffs allege that the Company
violated securities laws of the State of Washington by selling the plaintiffs
44,532 shares of the Common Stock of the Company in 1993 which had not been
registered under Washington law and by omitting material facts and making untrue
statements in connection with those sales. In their complaint, the plaintiffs
seek damages in the amount of the consideration paid for the shares, $332,560,
together with interest at the Washington statutory rate of 8% per annum.
Although the Company believes that it has meritorious defenses to the
plaintiffs' claims and intends to vigorously defend the litigation, there can be
no assurance that the Company will prevail in the litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
There are no exhibits to this report.
(b) Reports filed on Form 8-K
In the second quarter of fiscal 1996, the Registrant filed the
following current report on Form 8-K:
Date of Report Items Reported
-------------- --------------
May 10, 1996 Non-renewal of Enhanced Directory Assistance contract
10
<PAGE> 13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Metro One Telecommunications, Inc.
----------------------------------
Registrant
Date: August 7, 1996
__Stebbins B. Chandor, Jr._______
Stebbins B. Chandor, Jr.
Senior Vice President
Chief Financial Officer
__Karen L. Johnson_______
Karen L. Johnson
Vice President
Controller
11
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE
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TO SUCH FINANCIAL STATEMENTS.
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