<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1997
or
[ ] TRANSITION 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 Identification No.)
incorporation or organization)
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
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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. $26,089,614.
------------
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.
$100,294,154.
The number of shares outstanding of the Registrant's Common Stock, as of
March 26, 1998, was 11,039,947.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 1998 Annual Meeting are
incorporated by reference into Part III of this Report.
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METRO ONE TELECOMMUNICATIONS, INC.
1997 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
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Page No.
<S> <C> <C>
Part I
ITEM 1 Business 3
ITEM 2 Properties 8
ITEM 3 Legal Proceedings 8
ITEM 4 Submission of Matters to a Vote 8
of Security Holders
Part II
ITEM 5 Market for Common Equity and 9
Related Stockholder Matters
ITEM 6 Management's Discussion and Analysis 9
of Financial Condition and Results of
Operations
ITEM 7 Financial Statements 15
ITEM 8 Changes In and Disagreements With 15
Accountants on Accounting and Financial
Disclosure
Part III
ITEM 9 Directors, Executive Officers, Promoters 16
and Control Persons; Compliance with
Section 16(a) of the Exchange Act
ITEM 10 Executive Compensation 16
ITEM 11 Security Ownership of Certain Beneficial 16
Owners and Management
ITEM 12 Certain Relationships and Related 16
Transactions
ITEM 13 Exhibits and Reports on Form 8-K 16
Signatures 18
</TABLE>
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PART I
ITEM 1. BUSINESS.
Metro One Telecommunications, Inc. (the "Company" or "Metro One") is a
leading independent developer and provider of Enhanced Directory
Assistance-Registered Trademark- ("EDA") for the wireless telecommunications
industry. The Company contracts with wireless and other telecommunications
carriers to provide enhanced directory assistance to a carrier's subscribers.
In 1989, the Company 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 operates call centers in many large metropolitan areas. In 1997,
the Company handled over 40 million requests for directory assistance on behalf
of carriers.
The Company's EDA provides callers with personalized, easy-to-use
directory assistance. The Company's operators provide EDA with a high level
of efficient, personalized service. The Company's EDA includes several
features in addition to those provided by traditional directory assistance,
including call completion, categorical search and local event information.
Call completion allows a caller to be directly connected with the number
requested, thus completing the call without the need for redialing. The
Company's StarBack -Registered Trademark- feature enables a subscriber to
return to an operator at any time during a call. The Company is developing
additional EDA features including a broader array of connectivity features
and increased information content. The Company believes that its EDA offers
the wireless consumer a feature-rich, user-friendly alternative to
traditional directory assistance.
In addition to addressing the needs of the wireless subscriber, the
Company believes that its EDA offers wireless carriers the opportunity to
differentiate their service by providing a high quality, value-added product
to subscribers, thereby assisting carriers in meeting heightened competition
in the telecommunications industry. The Company's array of connectivity
features and content, offered to subscribers in various configurations, allow
the wireless carrier to distinguish its services from competitors and
establish a separate identity in the marketplace. The Company believes that
its EDA also increases carriers' revenues through increased call volumes and
billable air time.
The Company was incorporated in 1989 under the laws of the State of
Oregon. The Company's principal executive office is located at 8405 SW
Nimbus Avenue, Beaverton, Oregon 97008.
Industry Background
Wireless telecommunications has been among the fastest growing segments
of the telecommunications industry during the 1990s. This growth stems
largely from technological advances that provide customers with affordable,
high quality mobile services. According to the Cellular Telecommunications
Industry Association ("CTIA"), the number of wireless subscribers at year-end
1997 was approximately 56 million. While this figure represents primarily
cellular subscribers, other types of wireless communications technologies,
such as Personnel Communication Services ("PCS") and specialized mobile radio
("SMR"), compete with cellular and have also experienced rapid growth.
Industry experts believe that the wireless telecommunications industry will
continue to see rapid growth.
Telecommunications carriers continue to face increasing competitive
pressures arising from the deregulation of the domestic telecommunications
industry. Because of this increasingly competitive environment,
telecommunications carriers confront intense pressure to differentiate their
products and establish brand loyalty. These pressures are particularly acute
for wireless carriers who seek to increase market penetration of their
services and increase revenues while addressing competition from rival
carriers and new technologies. As competition increases, wireless providers
often seek to differentiate themselves by incorporating value-added features
into their services. Directory assistance is one such feature that allows
wireless carriers to compete more effectively, while increasing usage and
subscriber satisfaction.
Wireless subscribers, at the same time, need convenient and practical
directory assistance in which they are not hampered by the limited functionality
of automated operators or required to write down or memorize phone numbers.
Wireless subscribers benefit from EDA in that it can deliver features beyond
mere phone listings. Such features include call connectivity, categorical
searches, local events and movie listings. In turn, carriers benefit from
increased subscriber loyalty and the revenues derived from more frequent usage.
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The Domestic Directory Assistance Market
The Company believes that over ten billion directory assistance calls are
made annually by consumers and businesses in the United States. The majority of
these directory assistance calls are handled for landline telephone users by the
Regional Bell Operating Companies ("RBOCs") from their incumbent positions as
the local telephone carriers. The Company believes, however, that wireless
directory assistance represents a significant and fast-growing segment of the
market due to the expected continued growth in the wireless market and the
natural attractiveness of delivering directory assistance for wireless users.
The wireless telecommunications market is 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 Mobilnet, the
cellular affiliates of the RBOCs such as Ameritech Cellular, and several
independents including AirTouch Communications Inc. and 360 Communications
Company. In early 1997, the FCC completed the auction of six PCS licenses in
each market area to potential PCS providers. In terms of population base
covered, the largest PCS providers include Sprint PCS, NextWave Telecom, AT&T
Wireless Services, Omnipoint Communications, Sprint Communications, PrimeCo
Personal Communications L.P. and Pacific Bell Mobile Services. During 1997, the
majority of PCS licensees either initiated service or continued the rollout of
PCS service started in late 1996. In addition, one specialized mobile radio
("SMR") provider, Nextel Communications, provides wireless communication
services utilizing SMR frequencies to customers in major metropolitan areas
throughout the U.S.
Directory assistance services for the cellular carriers were initially
provided exclusively by local exchange carriers, many of which were RBOCs.
However, because of an increasingly competitive marketplace, carriers have
sought ways to differentiate and improve their service, including outsourcing
services like directory assistance, in order to focus on their core
competencies. Meanwhile, PCS and other new providers also desire to outsource
their non-core operations, like directory assistance, and focus on ways to
acquire and retain new subscribers. Metro One believes it is uniquely
positioned to provide the type of feature rich, easy-to-use and personalized
enhanced directory assistance that carriers desire. The Company's operating
competencies, derived from the establishment and operation of a national call
center network, allow it to provide carriers with a reliable, high-quality
directory assistance product that enables carriers operating in multiple markets
to offer a consistent EDA, promoting greater system-wide marketing and brand
identification.
The entire telecommunications industry, including the landline
telecommunications market, 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 continues
to monitor the ongoing changes in the marketplace and consider which
developments provide the most favorable opportunities for the Company to pursue.
Metro One's Strategy
Metro One's mission is to be the leading provider of operator-assisted
enhanced directory assistance and information services. The key elements of
Metro One's strategy for fulfilling that mission are:
Continuously offer value-added products and features. Metro One endeavors
to define a new standard for directory assistance by delivering directory
assistance solutions which meet the particular needs of wireless
telecommunications consumers. Through continuous expansion of its features,
enrichment of its database and enhancement of its search capabilities, Metro One
believes it can attract and retain carriers and set an ever increasing
expectation for value-added enhanced directory assistance.
Expand into new geographic markets. Metro One expects to continue to
expand its national network of call centers into new geographic markets
served by existing and new carrier customers, which increasingly demand
consistent service across their national networks. Metro One believes its
operational competencies and extensive experience developing and maintaining
its existing call center network will help the Company to penetrate these new
geographic markets successfully.
Leverage existing infrastructure. Metro One intends to exploit its
national call center network to provide service to additional wireless carriers
and subscribers from existing call centers. By leveraging its established call
center network, Metro One expects to expand call volumes particularly by
providing EDA to subscribers who can now be served more readily as a result of
the deregulation of the telecommunications industry.
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Achieve greater operating efficiencies. Metro One is developing and
implementing software enhancements and adding new hardware to its EDA systems
that are intended to increase the productivity of its operators. Coupled with
improved personnel training programs and operator monitoring capabilities, these
enhancements are expected to permit the Company to deliver its EDA to carrier
subscribers more efficiently while increasing call center profitability.
Pursue opportunities to provide additional operator-assisted services.
Metro One intends to expand its product offerings to include information
services, such as direction and concierge services, that complement its enhanced
directory assistance. The development and implementation of these services are
intended to generate incremental revenue for the Company while raising consumer
expectation for operator assisted information services.
Customers and Markets
The Company provides its EDA to four of the nation's largest cellular
carriers in a portion of their service areas and to two of the largest PCS
carriers (in terms of population covered) and the first PCS carrier to establish
domestic PCS service. The Company has located call centers in sixteen of the
top 25 cellular markets (market size based on estimated subscribers). The
Company services the majority of the top 40 markets from these sixteen call
centers. The Company believes that the top 40 major metropolitan areas
represent its greatest opportunities for future growth. Wireless usage in these
markets has attained sufficient levels to provide profitable call volumes, while
competition among carriers for these subscribers increases carrier need for
features that can differentiate their services. The Company strives to expand
relationships with existing carrier customers and to establish relationships
with new carrier customers.
The Company provides substantially all of its EDA services under twelve
separate contracts that have terms that originally ranged from one to five
years. One of these contracts is month-to-month, while two of these contracts
expire in 1998, five expire in 1999 and four expire in 2000. Under the EDA
contracts, the carrier generally agrees to route all local directory assistance
calls to the Company. However, these contracts generally allow the Company to
offer EDA services to competing carriers. The Company contractually agrees to
staff its EDA operations centers 24 hours a day, seven days a week, 365 days a
year, with a sufficient number of operators to perform the contracted services
within specified performance requirements.
The Company offers its services on behalf of the carrier under a brand name
selected by that carrier. For example, the Company offers its EDA to AT&T
Wireless Services subscribers in various markets as "AT&T Connect." The carrier
is generally responsible for all aspects of marketing, including advertising and
related costs. Although each carrier establishes its own fee structure with its
subscribers, Metro One charges carriers for its service on a per call basis and
the carrier is obligated for the charges regardless of whether it is paid by the
subscriber. During 1997, the Company's per-call charges to its carrier
customers averaged approximately $0.61.
The Company typically enters into a contract with a carrier that covers
either a large geographic market or a group of geographic markets to be
served. For example, the Company is a party to a single contract with
Ameritech Cellular providing for the Company to deliver enhanced directory
assistance to Ameritech Cellular's subscribers in Chicago and Detroit. The
agreement provides for the Company to supply 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. Under this contract, Ameritech Cellular
accounted for approximately $6.2 million of revenue during 1997.
The Company is a party to a single contract with Sprint Spectrum L.P.,
doing business as Sprint PCS. Under the terms of this multi-year agreement,
the Company provides its local and nationwide EDA for each Sprint Spectrum
market and potentially for each Sprint Spectrum affiliate market. As of
March 1998, the Company was providing its EDA services from existing call
centers for the domestic markets in which Sprint PCS or its participating
affiliates have launched PCS service. The additional terms of the agreement
do not differ materially from the Company's general EDA contracts except that
the Company may be required to open additional call centers in major
metropolitan areas in 1998, depending on various milestones, the most
important of which is the attainment by Sprint PCS of minimum call volumes in
particular markets. The Company is also required, in conjunction with the
Sprint PCS contract, to develop and maintain an out-of-band signaling system
for each of its call centers.
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In 1997, eight customers accounted for the majority of the Company's
$26.1 million in revenues. The Company's four largest customers, US West
NewVector (which provides its wireless communications services under the
brand name of AirTouch), Ameritech Cellular, Bell Atlantic Mobile and Sprint
Spectrum, accounted for approximately 25, 24, 17 and 16 percent of revenues,
respectively. In 1996, eight customers accounted for the majority of the
Company's $17.8 million in revenues. The Company's three largest customers,
US West NewVector, Ameritech Cellular and Bell Atlantic Mobile, accounted for
approximately 28, 26 and 22 percent of revenues, respectively.
Principal Product and Product Features
Metro One delivers its EDA using a customized array of hardware and
software and the Company's proprietary database search engines. The Company
receives incoming calls by means of contractually assigned directory
assistance numbers, typically 411 or 555-1212. Calls are answered by the
Company's operators, identifying the EDA service using the carrier's brand
name. Upon receiving information requests from subscribers, Company
operators search the Company's local database utilizing its search engine.
The Company's EDA system allows the operator to connect the caller to a party
and/or supply the telephone number, address, or other information, including
movie listings, local events or businesses of a certain type within a
specific locality. The fee to a subscriber for this service is fixed by the
carrier, and typically ranges from $0.50 to $0.85 plus airtime charges.
The Company's EDA incorporates connectivity and content features
designed to make the phone easier to use. It includes an automatic all
completion feature, as well as connectivity features such as StarBack. The
StarBack feature allows a caller to return immediately to an operator simply
by pressing the (*) key once on the caller's telephone. In addition to the
connectivity features, the Company's EDA incorporates increased content to
provide the consumer with a broader, full service alternative to traditional
directory assistance. The Company's database system, which is derived from a
variety of sources, is supplemented by localized information, such as
information relating to local events and amenities. This allows the Company
to customize a local database to include specialized information at the
request of a carrier customer.
Operations
The Company maintains call centers in the New York, Dallas, Los Angeles,
Sacramento, Baltimore, Chicago, Denver, Detroit, Miami, Minneapolis,
Philadelphia, Phoenix, St. Louis, San Diego, Seattle and Portland, Oregon
metropolitan areas. Call center premises are leased by the Company and range
in size from approximately 4,000 to 15,000 square feet.
The Company develops a principal database for each call center, obtaining
data from a variety of sources including RBOCs, independent telephone companies
and other sources. The Company also utilizes national directory assistance
databases licensed by the Company from commercial sources. The Company's call
center network stations allow operators to efficiently query both their local
database and the national directory assistance database. The Company has
developed a database management system that it uses to maintain and update
directory listings in its database.
Metro One's EDA system incorporates programmable switching equipment,
host computers, voice response units and database servers. The Company
contracts with value-added resellers to assist in programming its switches
and host computer systems. This software enhances its call handling and
billing capabilities and provides the basis for the Company's connectivity
features. The Company has developed proprietary search engines to access
information within its databases and also licenses portions of its systems
from various vendors. In 1997, the Company upgraded its database management
system and search engines to increase the speed of information access and to
broaden the categorical search capabilities of its operators. The Company
believes that these tools have improved EDA search times, resulting in faster
call processing and lower data cost per call.
Particularly because the Company's EDA is provided to subscribers on a
branded basis, the Company believes that the quality and reliability of its EDA
services are important considerations in a carrier's decision to offer the
Company's EDA.
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The Company maintains a national training force and each call center employs
training personnel. The call center training personnel, along with the
national trainers, continually monitor, test and evaluate all of the
Company's call centers. The Company also monitors call center performance
for compliance with contract performance standards and reports this
information to carriers on a regular basis. Performance evaluations are also
solicited from customers on a regular basis. The Company's systems
maintenance and support personnel are accessible on a 24-hour basis through
the Company's Network Operations Center.
Marketing
The Company markets directly to telecommunications carriers. Sales and
technical support personnel are based at the Company's corporate headquarters
in Beaverton, Oregon. In addition, the Company's regional managers, who
oversee the Company's call center network, are a key element in the
maintenance and development of carrier relationships.
The Company's major marketing programs focus on product awareness
principally through trade shows, marketing materials, including brochures and
videotape presentations, and direct contacts with telecommunications
carriers. There are several major industry conferences that are important to
the Company's marketing program. The Company maintains communications with
its existing carrier customers through its quality assurance and customer
service programs, which afford the Company the opportunity to receive
information regarding evolving carrier needs. The Company also maintains an
active program to identify and meet with prospective carrier customers; both
existing carriers and new carriers in emerging technologies.
Competition
The directory assistance market is characterized by rapidly changing market
forces, technological advancements and increasing competition from large
carrier-affiliated companies and small, independent companies. The Company's
principal competitors include RBOC-owned or -affiliated carriers or non-RBOC
affiliated carriers, including GTE, that provide directory assistance both
in and outside their own operating regions. In addition to traditional
directory assistance, many of these competitors offer a directory assistance
call completion feature. Although the Company believes that none of these
competitors offers a form of directory assistance that incorporates all the
connectivity and content features of the Company's EDA, these competitors have
substantially greater financial, technical and marketing resources than the
Company and may be able to do so in the future. The Company also faces
competition in various markets from independent companies seeking to offer forms
of enhanced directory assistance.
The Company believes that the principal competitive factors in the
directory assistance market are quality of product, available features,
technological innovation, experience, responsiveness to customers and price.
Historically, the Company has sought to distinguish itself from competitors
based on the quality of its product, the development of useful features and its
experience derived from successfully establishing a national network of call
centers. The Company is subject to widespread competitive pressures with respect
to the pricing of its product and there can be no assurance that the Company
will not experience price or margin pressures in the future. The Company
believes, however, that its future growth will depend on its ability to maintain
and improve the quality of its product, to develop and successfully introduce
new connectivity features and content and to continue to provide superior
service.
Intellectual Property
The Company regards certain aspects of its products and their features and
processes as proprietary and relies on a combination of trademark, patent and
trade secrets laws and confidentiality procedures to protect its proprietary
rights. The Company has obtained trademark registration in the United States
for its product names "Enhanced Directory Assistance" and "StarBack," and
service mark registration for several of its other product feature names. The
Company's policy has been to enter into confidentiality agreements with all
employees and limit access to its documentation and other information related to
its intellectual property. The Company believes that its product development
and marketing capabilities have been of greater importance to the Company's
business than legal intellectual property protection.
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Government Regulation
The Company's business depends upon relationships with companies that are
regulated by the FCC or state public utility commissions. Such regulation
applies to all communications common carriers, such as AT&T, RBOCs and other
long distance and local exchange carriers. Enhanced service companies such as
the Company may be subject to various levels of regulation or are completely
unregulated on a state-by-state basis.
Employees
As of March 26, 1998, the Company had approximately 1,085 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.
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 four years with a renewal option. The
Company also leases office facilities for its EDA operations. There are
approximately 20 facility leases in effect at March 26, 1998 with remaining
terms ranging from one to six years.
The Company believes that expansion in its staff during the next year may
require the Company to lease additional executive and administrative offices.
The Company is not dependent upon any individually leased premises.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not aware of any pending legal proceedings other than
routine litigation that is incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the quarter ended December 31, 1997 to a
vote of security holders.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On August 23, 1996, the Company's Common Stock commenced trading on the
Nasdaq National Market System under the symbol "MTON." The high and low sales
prices as reported on the Nasdaq National Market System for the period from
August 23, 1996 to September 30, 1996 and for each subsequent quarter through
December 31, 1997 were as follows:
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1996 High Low
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August 23, 1996 to September 30, 1996 $16 1/4 $9
Quarter ended December 31, 1996 14 1/2 6 3/4
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1997 High Low
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<S> <C> <C>
Quarter ended March 31, 1997 $9 3/4 $5 5/8
Quarter ended June 30, 1997 8 1/4 5 1/4
Quarter ended September 30, 1997 9 1/2 6 1/2
Quarter ended December 31, 1997 11 7
</TABLE>
The approximate number of shareholders of record as of March 26, 1998 was
328. The Company believes it has approximately 3,789 shareholders including an
estimate of shareholders with shares held in street name.
The Company has never declared or paid cash dividends on its Common Stock.
The Company intends to retain earnings from operations for use in the operation
and expansion of its business and does not anticipate paying cash dividends with
respect to its Common Stock in the foreseeable future. The Company's existing
line of credit agreement prohibits the payment of cash dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
All statements and trend analyses contained in this item and elsewhere in
this report on Form 10-KSB relative to the future constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements are subject to the business and
economic risks faced by the Company and the Company's actual results of
operations may differ materially from those contained in the forward looking
statements. For a discussion of such risks, see "Issues and Uncertainties."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Results of operations for the periods discussed below should not be
considered indicative of the results to be expected in any future period and
fluctuations in operating results may also result in fluctuations in the market
price of the Company's Common Stock. The Company's quarterly and annual
operating results have in the past and may in the future vary significantly
depending on factors such as increased competition and expiration of Enhanced
Directory Assistance (EDA) contracts, the rapidly changing telecommunications
market, changes in pricing policies by the Company or its competitors, lengthy
sales cycles, lack of market acceptance or delays in the introduction of new
versions of the Company's product or features, the timing of the initiation of
wireless services or their acceptance in new market areas by telecommunications
customers, the timing and expense of the Company's expansion of its national
call center network, general economic conditions, and the other factors
discussed under the heading "Issues and Uncertainties" in this Item 6.
Overview
The Company is a leading independent provider of Enhanced Directory
Assistance-Registered Trademark- (EDA) for the wireless telecommunications
industry.
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The Company provides EDA under contracts with original terms ranging from
one to five years. Under the EDA contracts, carriers generally agree to route
all local directory assistance calls to the Company, bill their subscribers for
EDA calls and market the service. These contracts generally permit the Company
to offer its EDA services to competing carriers in the same market. Metro One
provides EDA to a carrier's subscribers under a brand name designated by the
carrier, such as "AT&T Connect." Although each carrier establishes its own EDA
fee structure for its subscribers, Metro One charges carriers directly for its
service on a per call basis and the carrier is obligated for the charges
regardless of whether it is paid by its subscriber.
The Company has twelve significant EDA contracts with six different
carriers to provide EDA in numerous metropolitan markets. The Company expects
to continue to expand its share of the wireless telecommunications directory
assistance market by adding customer carriers to the existing national network
of call centers and by expanding this network into new geographic markets to
serve new and existing carrier customers. The Company anticipates that it will
open several new call centers by the end of 1998. Based on the Company's
historical experience and technical upgrade plans, establishing a call center
generally costs $750,000 to $1,000,000, exclusive of initial operating losses.
There can be no assurance, however, that costs associated with establishment of
new call centers will be consistent with costs experienced by the Company on a
historical basis.
AirTouch Cellular has combined cellular operations with US West
NewVector (which provides its wireless communications services under the
brand name of AirTouch) and has also formed a partnership called TOMCOM,
L.P., with Bell Atlantic Mobile to pursue joint marketing strategies.
Subsequent to the establishment of this partnership, the Company's contracts
with AirTouch Cellular for the San Diego market and Bell Atlantic Mobile for
the Baltimore and Philadelphia markets were not extended or replaced upon
their expiration. Four contracts with US West NewVector, which were scheduled
to expire in 1998, were extended and now expire in 1999. There can be no
assurance that the Company will renew its contracts with US West NewVector
or that the Company will have the opportunity to obtain new contracts with
any of the TOMCOM carriers in the future.
In the fourth quarter of 1996, the Company signed a multi-year contract
with Sprint PCS to provide EDA services to Sprint PCS customers. In conjunction
with the introduction of services in new markets by Sprint PCS, the Company
expects to open new call centers in several major metropolitan areas in 1998.
In the second quarter of 1997, the Company signed a multi-year contract
with AT&T Wireless Services under which regions of AT&T Wireless Services and
its affiliates may elect to offer the Company's EDA service to their
subscribers. To date, the Company is providing service to AT&T Wireless
Services in several metropolitan markets and expects to roll out service to
other markets during 1998.
Results of Operations
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>
Years Ended December 31,
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1997 1996 1995
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<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Direct operating costs 49.9% 46.7% 54.7%
General and administrative costs 44.9% 42.7% 45.9%
Income (loss) from operations 5.2% 10.6% (.6)%
Interest and loan fees 1.3% 3.2% 10.5%
Net income (loss) 5.5% 6.5% (13.2)%
New call centers opened 4 1 1
Call centers in operation 16 12 11
</TABLE>
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1997 Compared to 1996
Revenues increased 46.3% to $26.1 million from $17.8 million. Call volume
increased to approximately 42 million calls in 1997 from approximately 30
million calls in 1996. This increase was due primarily to increases in call
volumes under existing contracts and additional call volumes from new contracts.
The Company will experience decreases in call volumes starting in the first
quarter of 1998 due to the expiration of two contracts to provide EDA services
to Bell Atlantic Mobile. The Company believes that this decrease will be
partially offset by an increase in call volumes from other carriers.
Direct operating costs consist of call center personnel and data costs.
These costs increased 56.2% to $13.0 million from $8.3 million. The increase in
direct operating costs was due primarily to increased call volumes and the cost
of operating several additional call centers in 1997. As a percentage of
revenues, direct operating costs increased to 49.9% from 46.7%, as personnel
costs increased due to the continuing build-out of the Company's national
network of call centers. The costs associated with the start-up of a new call
center increase personnel and data costs as a percentage of revenue for a period
of time as the call center launches service and prior to optimal utilization of
personnel and data. This increase was partially offset by higher call volumes
and the associated operating efficiencies due to improved personnel utilization
and the introduction of new technology designed to enhance productivity. The
Company anticipates that direct operating costs may increase from 1997 levels as
a percentage of revenue, during the period of time the build-out of its national
network of call centers continues. The Company expects to open several new call
centers in 1998. Additionally, the Company expects that data costs may increase
from 1997 levels as a percentage of revenue, as the Company continues to seek
additional data for enhancement of directory assistance listings and for new
markets that it serves. This data is made available in all call centers for
expanded geographic markets, often in advance of carrier customer service launch
or to serve new geographic areas for existing carrier customers.
General and administrative costs increased 53.8% to $11.7 million from
$7.6 million. This increase in costs was due primarily to the support of
increased operational activity overall and the costs associated with the
opening of several additional call centers in 1997. As a percentage of
revenues, general and administrative costs increased to 44.9% from 42.7%.
This increase resulted primarily from the investment in corporate services
necessary to support additional call centers. The Company anticipates that
general and administrative costs may decrease from 1997 levels as a
percentage of revenue, as less incremental investment in corporate services
should be necessary to support the continued build-out of the national network
of call centers. Depreciation and amortization increased by 71.2% to $2.3
million from $1.3 million due primarily to equipment purchased for new call
centers, upgrades for existing call centers and corporate research and
development activities.
Other income for the year ended December 31, 1997 was $408,000, and
consisted of interest income of $569,000, offset primarily by expenses of
$142,000 related to estimated litigation settlement costs and asset valuation
losses for assets taken out of service during the year. Other expense for
the year ended December 31, 1996 was $109,000, and consisted primarily of
estimated litigation settlement expenses of $280,000 and asset valuation losses
of $151,000 related to equipment taken out of service during the year, offset by
interest income of approximately $288,000.
Interest expense and loan fees declined 41.3% to $334,000 from $568,000.
This decline was attributable solely to the reduction in monthly average debt
outstanding to $1.6 million from $2.9 million.
Income tax expense for the year ended December 31, 1997 was $13,000, for
an effective tax rate of approximately 0.9%. This rate differs from the
combined federal and state statutory rate of approximately 39% due to the use of
net operating loss carryforwards. Income tax expense for the year ended
December 31, 1996 was $41,000, for an effective tax rate of approximately 3.4%.
This rate also differs from the combined federal and state statutory rate of
approximately 39% due to the use of net operating loss carryforwards.
1996 Compared to 1995
Revenues increased 36.4% to $17.8 million from $13.1 million. Call volume
increased to approximately 30 million calls in 1996 from approximately 22
million calls in 1995. This increase was due primarily to increases in call
volumes under existing contracts and additional call volumes from new contracts,
offset by a decrease in call volume due to the completion of a contract with
AirTouch in the first quarter of 1996.
11
<PAGE>
Direct operating costs increased 16.4% to $8.3 million from $7.2 million.
The increase in direct operating costs was due primarily to the cost of
operating an additional call center in 1996. As a percentage of revenues,
direct operating costs decreased to 46.7% from 54.7%. This decline primarily
resulted from higher call volumes and the associated operating efficiencies due
to improved personnel utilization and the introduction of new technology
designed to enhance productivity.
General and administrative costs increased 26.9% to $7.6 million from $6.0
million. This increase in costs was due primarily to the support of increased
operational activity overall and costs associated with the operation of an
additional call center during 1996. As a percentage of revenues, general and
administrative costs declined to 42.7% from 45.6%. This decline resulted
primarily from the achievement of substantially higher revenues in 1996.
Depreciation and amortization increased by 32.7% to $1.3 million from $997,000
due primarily to equipment upgrades for existing call centers.
Other expense for the year ended December 31, 1996 was $109,000, and
consisted primarily of estimated litigation settlement expenses of $280,000 and
asset valuation losses of $151,000 related to equipment taken out of service
during the year, offset by interest income of approximately $288,000. Other
income for the year ended December 31, 1995 was $114,000, and consisted
primarily of interest income of $48,000, approximately $99,000 of income
resulting from the settlement of a vendor claim, offset by estimated litigation
settlement expenses of approximately $24,000.
Interest expense and loan fees declined 58.5% to $568,000 from $1.4
million. This decline was attributable solely to the reduction in monthly
average debt outstanding to $2.9 million from $8.9 million.
Income tax expense for the year ended December 31, 1996 was $41,000, for
an effective tax rate of approximately 3.4%. This rate differs from the
combined federal and state statutory rate of approximately 39% due to the use of
net operating loss carryforwards. The Company did not provide for income taxes
in 1995 due to net operating losses for that year.
Liquidity and Capital Resources
Working capital decreased to $9.8 million from $15.0 million at
December 31, 1997 and 1996, respectively. The Company's current ratio
decreased to 3.4:1 from 7.3:1 at December 31, 1997 and 1996, respectively.
These decreases were due primarily to use of cash for costs associated with
the continuing build-out of the Company's national network of call centers
and technical upgrades for existing call centers.
The Company has a $3.0 million secured operating line of credit with a
commercial bank. The line of credit expires in 1999. 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 0.25 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 December 31,
1997, the Company had no 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. Borrowing bears interest at the
prime rate plus 0.50 percent and is secured by the purchased equipment. As of
December 31, 1997, the Company had borrowings of $946,000 against this line of
credit. The Company believes that current cash and cash equivalents, cash flows
from operations and available credit facilities are sufficient to meet current
and anticipated future capital requirements through 1998.
The Company's cash and cash equivalents are recorded at cost which
approximates their fair market value. As of December 31, 1997, the Company had
$8.5 million in cash and cash equivalents compared to $14.1 million at December
31, 1996, a decrease of approximately $5.6 million resulting primarily from the
continuing build-out of the Company's national network of call centers.
Cash flow from operations. Net cash from operations for the twelve
months ended December 31, 1997 was $3.3 million, resulting primarily from net
income for that period.
Net cash from operations for the twelve months ended December 31,
1996 was $2.9 million, resulting primarily from net income for that period.
Net cash used by operations was $2.3 million in 1995. The use of cash by
operations in 1995 was primarily due to the Company's expansion of its
operations into six new markets in 1994. The costs associated with the
start-up of a new call center increase direct operating costs as a percentage
of revenue for a period of time as the call center launches service and prior
to optimal utilization of personnel and data.
12
<PAGE>
Cash flow from investing activities. Cash used in investing
activities was $10.1 million for 1997 and was related primarily to capital
expenditures for new call centers and the upgrade and expansion of existing
call centers. In the twelve months ended December 31, 1997, no additional
capital equipment was acquired through lease financing.
Cash used in investing activities was $3.4 million for 1996 and was
related primarily to capital expenditures for system redundancy capabilities and
equipment upgrades for certain locations. In the twelve months ended December
31, 1996, additional capital equipment for the same purposes was acquired
through lease financing in the amount of $679,000. Net cash provided by
investing activities was $97,000 in 1995. In 1995, capital equipment acquired
through lease financing was $1.1 million.
Cash flow from financing activities. Net cash provided by financing
activities for the twelve months ended December 31, 1997 was $1.2 million
resulting primarily from the exercise of warrants and options to purchase
182,789 shares of Common Stock resulting in net cash proceeds to the Company of
$993,000.
Net cash provided by financing activities for the twelve months ended
December 31, 1996 was $13.5 million resulting primarily from the proceeds of the
Company's initial public offering of $12.5 million and the exercise throughout
the year of warrants to purchase 818,756 shares of Common Stock resulting in net
cash proceeds to the Company of $2.6 million.
Net cash provided by financing activities was $2.9 million in 1995.
In 1995, the Company issued $3.9 million in principal amount of its 10%
Subordinated Notes to certain private investors to refinance similar notes
maturing in 1995, resulting in net cash proceeds to the Company of $250,000.
In 1995, the Company also issued $3.1 million in principal amount of its 8%
Convertible Secured Notes to certain private investors, resulting in net cash
proceeds to the Company of $3.1 million. During 1995, warrants for the
purchase of 327,412 shares of the Company's Common Stock were exercised,
resulting in net cash proceeds to the Company of approximately $1.1 million.
In 1995, the Company also repurchased 135,414 shares of its Common Stock for
$614,000 pursuant to a rescission offer.
Future capital needs and resources. The primary uses of capital are
expected to be the expansion of existing call centers, the funding of start-up
operating losses for newly opened call centers, the payment of principal and
interest on indebtedness, and the purchase of equipment and development of
technology for the improvement of existing and new call centers.
Under the terms of its contract with Sprint PCS, the Company may be
required to open additional call centers in major metropolitan areas in 1998,
depending on various milestones, the most important of which is the attainment
by Sprint PCS of minimum call volumes in particular markets. The Company is
also required, in conjunction with the Sprint PCS contract, to develop and
maintain an out-of-band signaling system for each of its call centers. The
Company anticipates that its capital expenditures, including those expenditures
related to Sprint PCS, will be approximately $8.0 million to $10.0 million
through the end of 1998, resulting primarily from the projected expansion and
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 1998.
Effect of inflation. The effect of inflation was not a material
factor affecting the Company's business during the twelve months ended December
31, 1997.
Issues and Uncertainties
Metro One does not provide forecasts of future financial performance.
While Metro One's management is optimistic about the Company's long-term
prospects, the following issues and uncertainties, among others, should be
considered in evaluating its outlook.
Need for expansion. Although the Company has a number of contracts for
delivery of its EDA services, there is no assurance that the Company will be
successful in expanding its services to a sufficient number of new customers or
markets to achieve substantial and sustainable profitability or that it will be
able to sustain past growth rates.
13
<PAGE>
Concentration of business; Limited customer base. Although the Company
seeks to increase the number of its EDA contracts with wireless carriers, the
nature and ownership and/or operational control of the major wireless
licensees limits the Company's potential customers and expansion
opportunities. Furthermore, a small number of companies dominate the cellular
market. Three of these dominant cellular carriers represented approximately
66 percent, 76 percent and 72 percent of the Company's revenue in 1997, 1996
and 1995, respectively. The failure of the Company to maintain a satisfactory
relationship with any significant customer could have a material adverse
effect on the Company's business, financial condition and results of
operation.
Expiration of EDA agreements. The Company has twelve significant EDA
contracts with six different carriers. Of these contracts, one is
month-to-month, two come up for renewal in 1998, five come up for renewal in
1999 and four are up for renewal in 2000. Efforts to renew existing and enter
into new contracts may face lengthy sales cycles and increased competitive,
pricing and service pressures.
Rapidly changing telecommunications market. The telecommunications
environment is characterized by rapid change and uncertainty due to merger,
acquisition, alliances and introduction of new carrier licensees into the
wireless market. This may result in competitive situations which could
unfavorably impact the Company, such as the withdrawal of a customer from a
market that the Company serves or increased negotiation leverage for carriers in
contract discussions for EDA services.
Changes in wireless usage by subscribers. The usage patterns of wireless
subscribers are impacted by a number of factors, including pricing, safety
concerns, government regulation, and various other items. Any factor that
causes wireless subscribers to decrease their usage could have an adverse impact
on the results of operations of the Company.
Competition. The Company intends to compete to attract and retain
customers principally on the basis of services and features of its EDA, and its
emphasis on quality and customer care. The Company's ability to compete
successfully will also depend, in part, on its ability to anticipate and respond
to various competitive factors affecting the industry, including new services
that may be introduced, changes in customer preferences, economic conditions and
discount pricing strategies by competitors, all of which could adversely affect
the Company's business, financial condition and results of operation.
Prices. Prices the Company can obtain for its services are subject to the
changing telecommunications market, the relative leverage of negotiating parties
and the overall competitive landscape. There can be no assurance that as
existing contracts are renewed, if they are renewed, or as new contracts are
entered into, that the contracts will not provide for lower prices than the
Company currently experiences. This could have an adverse impact on the
business, financial condition and results of operations of the Company.
Technology. Telecommunications and the related directory assistance market
are characterized by rapid technological change, frequent introductions of new
and enhanced products and service, and changing consumer demands. 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, which may require
substantial expenditures. There is no assurance that the Company will be able
to do so, that it will have adequate financial resources to undertake such
development, or that it will not encounter technical or other difficulties that
could delay the introduction of its services or enhancements thereof.
Reliance on third party vendors. The Company relies on key vendors to
supply programming and engineering services and to license technology. Although
there are a limited number of such service providers, the Company believes that
other providers could provide for the Company's needs on comparable terms.
Abrupt changes in the arrangements could, however, cause a disruption in
operations or a delay in development efforts, either of which could affect
adversely affect the Company's business, financial condition and results of
operation.
Quality, cost and availability of data. The Company's operations are
dependent upon its access to names, telephone numbers and other information
supplied to callers directly or used in providing call completion. Such data
vary widely across geographic regions as to availability, cost, quality and
usefulness for the Company's purposes. Ultimately, the 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, there is no assurance that the Company will have access to sufficient
and quality data or that the Company can obtain and update data in a manner and
at prices that allow the Company to successfully and economically maintain or
improve current service levels.
14
<PAGE>
Potential for unionization and staffing. 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, no assurance can be given that unionization will not occur in the
future. The occurrence of such an event could 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 assurances can be given that the Company will be able to
continue to attract qualified staff at competitive wages.
Intellectual property. To a limited extent, the Company relies upon a
combination of trade secret, patent and other intellectual property law,
non-disclosure agreements and other protective measures to preserve its rights
pertaining to its EDA, but there is no assurance that the Company can
meaningfully protect its intellectual property. Further, the Company is not
aware of any pending or threatened claims that affect any of the Company's
intellectual property rights. If any infringement claim is asserted against the
Company, the Company may seek to obtain a license of the other party's
intellectual property rights. There is no assurance that a license would be
available on reasonable terms or at all. Litigation with respect to patents or
other intellectual property matters could result in substantial costs and
diversion of management and other resources and could have a material adverse
effect on the Company's business, financial condition and results of operations.
Year 2000 Compliance. The Company believes it has identified all
significant applications that will require modification to ensure Year 2000
Compliance. The Company plans on completing the testing process of all
significant applications by December 31, 1998. In addition, the Company has
communicated with others with whom it does significant business to determine
their Year 2000 Compliance readiness and the extent to which the Company is
vulnerable to any third party Year 2000 issues. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company. The total cost to the Company of
these Year 2000 Compliance activities has not been and is not anticipated to be
material to its financial position or results of operations in any given year.
These costs and the date on which the Company plans to complete the Year 2000
modification and testing processes are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans.
Future Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 130
establishes requirements for disclosure of comprehensive income and becomes
effective for the Company's fiscal year ending December 31, 1998. SFAS No.
131 establishes standards for disclosure about operating segments in annual
financial statements and selected standards for related disclosures about
products and services, geographic areas and major customers. The Company
believes the adoption of SFAS No. 130 and No. 131 will have no material
impact on current disclosures.
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.
15
<PAGE>
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 1998 Annual Meeting under the caption of
"Management."
ITEM 10. EXECUTIVE COMPENSATION.
The information required by Item 10 is incorporated by reference to the
Company's Proxy Statement for its 1998 Annual Meeting under the caption of
"Executive Compensation."
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 1998 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 1998 Annual Meeting under the caption of
"Certain Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<S> <C>
3.1 Third Restated Articles of Incorporation of Metro One Telecommunications,
Inc.
3.2 Amended and Restated Bylaws of Metro One Telecommunications, Inc. (1)
10.1 Form of Enhanced Directory Assistance Agreement (2)
10.2 Enhanced Directory Assistance Agreement between Ameritech Mobile
Communications, Inc. and the Company dated June 16, 1994 (1)(7)
10.3 1994 Stock Incentive Plan (3)
10.31 Amendment to 1994 Stock Incentive Plan (4)
10.4 Consulting Agreement with G. Raymond Doucet, dated December 1, 1996 (5)
10.5 Loan and Security Agreement between Silicon Valley Bank and the Company
dated March 15, 1996 (6)
10.51 Loan modification agreement between Silicon Valley Bank and the Company
dated March 14, 1997
10.6 1995 Employment Agreement with Timothy A. Timmins (6)
10.7 1995 Employment Agreement with Patrick M. Cox (6)
10.8 Lease Agreement between and among Petula Associates, Ltd., Koll Creekside
Associates and the Company (2)
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
23.1 Consent of Deloitte & Touche LLP, independent certified public accountants
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
</TABLE>
______________________
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-1 dated August 22, 1996, File No. 333-05183.
(2) Incorporated herein by reference to the Company's Registration Statement on
Form SB-2, File No. 33-88926-LA.
(3) Incorporated herein by reference to the Company's Registration Statement on
Form S-8 dated January 24, 1997, File No. 333-20387.
(4) Incorporated herein by reference to the Company's Registration Statement on
Form S-8 dated February 5, 1998, File No. 333-45643.
(5) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB dated March 31, 1997, Commission No. 0-27024.
(6) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB dated August 20, 1996, Commission No. 0-27024.
(7) Certain portions of Exhibit 10.2 are the subject of a request for
confidential treatment and have been omitted from the
Exhibit and have been filed separately with the Commission.
(b) Reports Filed on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
17
<PAGE>
SIGNATURE
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, thereunto duly authorized.
Metro One Telecommunications, Inc.
By: /s/ Timothy A. Timmins
-------------------------------------
Timothy A. Timmins
President and Chief Executive Officer
Date: March 30, 1998
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:
Signature Title Date
/s/ Timothy A. Timmins President, Chief Executive March 30, 1998
- ---------------------------- Officer and Director
Timothy A. Timmins
/s/ Stebbins B. Chandor, Jr. Senior Vice President and March 30, 1998
- ---------------------------- Chief Financial Officer
Stebbins B. Chandor, Jr.
/s/ Karen L. Johnson Vice President, March 30, 1998
- ---------------------------- Corporate Development
Karen L. Johnson Principal Accounting Officer
/s/ A. Jean de Grandpre Chairman of the March 30, 1998
- ---------------------------- Board of Directors
A. Jean de Grandpre
/s/ G. Raymond Doucet Director March 30, 1998
- ----------------------------
G. Raymond Doucet
/s/ William D. Rutherford Director March 30, 1998
- ----------------------------
William D. Rutherford
/s/ James M. Usdan Director March 30, 1998
- ----------------------------
James M. Usdan
18
<PAGE>
INDEPENDENT AUDITORS REPORT
- ----------------------------------------------------------------------------
To The Board of Directors and Shareholders of
Metro One Telecommunications, Inc.
Beaverton, Oregon
We have audited the accompanying balance sheets of Metro One Telecommunications,
Inc. as of December 31, 1997 and 1996 and the related statements of operations,
shareholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all respects, the
financial position of Metro One Telecommunications, Inc. as of December 31, 1997
and 1996 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
February 20, 1998
The accompanying notes are an integral part of these statements.
F-1
<PAGE>
Metro One Telecommunications, Inc.
Statements of Operations
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues $ 26,089,614 $ 17,833,975 $ 13,074,206
------------- ------------- -------------
Costs and expenses:
Direct operating 13,016,659 8,334,014 7,156,855
General and administrative 11,701,923 7,615,397 5,999,548
------------- ------------- -------------
24,718,582 15,949,411 13,156,403
------------- ------------- -------------
Income (loss) from operations 1,371,032 1,884,564 (82,197)
Other income (expense) 407,509 (108,868) 114,137
Debt conversion expense -- -- (384,071)
Interest and loan fees (333,692) (568,085) (1,371,936)
------------- ------------- -------------
Income (loss) before income taxes 1,444,849 1,207,611 (1,724,067)
Income tax expense 12,607 41,123 --
------------- ------------- -------------
Net income (loss) $ 1,432,242 $ 1,166,488 $ (1,724,067)
------------- ------------- -------------
------------- ------------- -------------
Income (loss) per common share (Note 9)
Basic $ .13 $ .13 $ (.31)
Diluted $ .13 $ .12 $ (.31)
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
Metro One Telecommunications, Inc.
Balance Sheets
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 8,554,301 $ 14,136,574
Accounts receivable 4,628,992 2,722,544
Prepaid costs and other current assets 694,025 533,768
------------- -------------
Total current assets 13,877,318 17,392,886
Furniture, fixtures and equipment, net 14,632,340 6,759,759
Other assets 615,737 376,700
------------- -------------
$ 29,125,395 $ 24,529,345
------------- -------------
------------- -------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,302,372 $ 353,479
Accrued liabilities 991,743 741,357
Accrued payroll and related costs 1,022,708 548,712
Current portion of capital lease obligations 638,200 736,941
Current portion of long-term debt 78,161 --
------------- -------------
Total current liabilities 4,033,184 2,380,489
Capital lease obligations 548,620 1,168,204
Long-term debt 867,641 --
------------- -------------
5,449,445 3,548,693
------------- -------------
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized, no shares issued or
outstanding -- --
Common stock, no par value; 50,000,000 shares authorized, 10,925,676 and 10,692,887
shares, respectively, issued and outstanding 37,514,496 36,251,440
Accumulated deficit (13,838,546) (15,270,788)
------------- -------------
Net shareholders' equity 23,675,950 20,980,652
------------- -------------
$ 29,125,395 $ 24,529,345
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Metro One Telecommunications, Inc.
Statements of Shareholders' Equity (Deficit)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
Subject to Potential
Rescission
-----------------------
Shares Amount
---------- -----------
<S> <C> <C>
Balances at December 31, 1994 5,210,871 $12,314,191
Common stock purchased in
rescission offering (135,414) (613,760)
Reclassified upon completion
of rescission offering (5,075,457) (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 -- $ --
---------- -----------
---------- -----------
Common stock issued in public
offering
Stock options/warrants
exercised, net
Conversion of long-term debt
to common stock
Net income
Balances at December 31, 1996
Stock options/warrants
exercised, net
Stock issued for legal
settlement
Net income
Balances at December 31, 1997
<CAPTION>
Shareholders' Equity (Deficit)
--------------------------------------------------------
Common Stock
----------------------- (Accumulated Net Shareholders'
Shares Amount Deficit) Equity (Deficit)
---------- ----------- ------------ -----------------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 -- -- $(14,713,209) $ (14,713,209)
Common stock purchased in
rescission offering -- -- -- --
Reclassified upon completion
of rescission offering 5,075,457 $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 7,936,804 $19,711,711 $(16,437,276) $ 3,274,435
Common stock issued in public
offering 1,675,000 12,514,921 -- 12,514,921
Stock options/warrants
exercised, net 818,756 2,624,808 -- 2,624,808
Conversion of long-term debt
to common stock 262,327 1,400,000 -- 1,400,000
Net income -- -- 1,166,488 1,166,488
---------- ----------- ------------ -----------------
Balances at December 31, 1996 10,692,887 $36,251,440 $(15,270,788) $ 20,980,652
Stock options/warrants
exercised, net 182,789 993,056 -- 993,056
Stock issued for legal
settlement 50,000 270,000 -- 270,000
Net income -- -- 1,432,242 1,432,242
---------- ----------- ------------ -----------------
Balances at December 31, 1997 10,925,676 $37,514,496 $(13,838,546) $ 23,675,950
---------- ----------- ------------ -----------------
---------- ----------- ------------ -----------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Metro One Telecommunications, Inc.
Statements of Cash Flows
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,432,242 $ 1,166,488 $ (1,724,067)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,263,460 1,322,497 996,834
Loss on disposal of fixed assets 80,621 151,094 8,533
Deferred income taxes (12,400) (33,000) --
Debt conversion expense -- -- 255,780
Changes in certain assets and liabilities:
Accounts receivable (1,906,448) (105,079) (1,259,540)
Prepaid expenses and other assets (237,559) (73,350) (342,662)
Accounts payable, accrued liabilities and payroll costs 1,673,275 483,499 (186,515)
-------------- ------------- -------------
Net cash provided by (used in) operating activities 3,293,191 2,912,149 (2,251,637)
-------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures (10,095,997) (3,408,399) (74,422)
Collections on notes receivable -- -- 171,640
-------------- ------------- -------------
Net cash provided by (used in) investing activities (10,095,997) (3,408,399) 97,218
-------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of debt 945,802 1,121,236 3,550,000
Repayment of debt -- (1,867,133) (309,883)
Repayment of capital lease obligations (718,325) (909,830) (721,387)
Proceeds from issuance of common stock and exercise of warrants
and stock options 993,056 2,624,808 1,088,080
Proceeds from initial public offering of common stock, net of
expenses -- 12,514,921 --
Common stock purchased in rescission offering -- -- (613,760)
-------------- ------------- -------------
Net cash provided by financing activities 1,220,533 13,484,002 2,993,050
-------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (5,582,273) 12,987,752 838,631
Cash and cash equivalents, beginning of year 14,136,574 1,148,822 310,191
-------------- ------------- -------------
Cash and cash equivalents, end of year $ 8,554,301 $ 14,136,574 $ 1,148,822
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Metro One Telecommunications, Inc.
Notes to Financial Statements
- -------------------------------------------------------------------------------
1. Summary of Operations and Significant Accounting Policies
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 operates call centers located in many metropolitan areas throughout the
United States.
Cash and Cash Equivalents. Cash and cash equivalents includes cash deposits
in banks and highly liquid investments with original maturity dates of three
months or less.
Revenue Recognition. Under existing contracts with telecommunications
carriers, the Company records as revenue charges for the number of calls
processed. Revenue is recognized as services are provided.
Major Customers. Twelve customers in 1997, 1996 and 1995 accounted for
substantially all revenue reported and the accounts receivable balance at
December 31. The Company's four largest customers accounted for approximately
25%, 24%, 17% and 16%, respectively, of revenue in 1997. The Company's three
largest customers accounted for approximately 28%, 26% and 22%, respectively, of
revenue in 1996, and 29%, 23% and 20%, respectively, of revenue in 1995.
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. Capital lease assets were
$2,792,311 and $3,037,051 at December 31, 1997 and 1996, respectively.
Accumulated amortization for capital leases is included in accumulated
depreciation.
Patents and Trademarks. Patents pending and trademarks are included in
other assets and 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. The carrying value of cash and cash
equivalents, accounts receivable and payable, and accrued liabilities
approximate fair value due to the short-term maturities of these assets and
liabilities.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles 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.
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 operations,
or net cash flows.
Future Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes requirements for disclosure of
comprehensive income and becomes effective for the Company's fiscal year
ending December 31, 1998. SFAS No. 131 establishes standards for disclosure
about operating segments in annual financial statements and selected
standards for related disclosures about products and services, geographic
areas and major customers. The Company believes the adoption of SFAS No. 130
and No. 131 will have no material impact on current disclosures.
Reclassification. Certain balances in the 1995 and 1996 financial
statements have been reclassified to conform with 1997 presentations. Such
reclassifications had no effect on results of operations or accumulated earnings
(deficit).
F-6
<PAGE>
Metro One Telecommunications, Inc.
Notes to Financial Statements
- -------------------------------------------------------------------------------
2. Furniture, Fixtures and Equipment
Furniture, fixtures and equipment by major classification are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
------------- ------------
<S> <C> <C>
Equipment............................................................................ $ 16,409,296 $ 8,390,468
Furniture and fixtures............................................................... 2,403,383 1,162,450
Leasehold improvements............................................................... 911,441 138,988
------------- ------------
19,724,120 9,691,906
Less accumulated depreciation and amortization....................................... (5,091,780) (2,932,147)
------------- ------------
$ 14,632,340 $ 6,759,759
------------- ------------
------------- ------------
</TABLE>
3. Long-Term Debt
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Secured Term Loan............................................................................. $ 945,802 $ --
Less current portion.......................................................................... (78,161) --
---------- ---------
Long-term debt, less current portion.......................................................... $ 867,641 $ --
---------- ---------
---------- ---------
</TABLE>
Secured Term Loan. In 1997, the Company entered into a $1,000,000 Secured
Term Loan agreement with a commercial bank. Under the terms of the agreement,
outstanding borrowings bear interest at prime rate (8.5 percent at December 31,
1997) plus 0.5 percent and all assets of the Company are pledged as collateral.
The terms of the loan call for an 18-month interest only accumulation period
through August 1998 followed by 42 monthly payments of principal plus interest.
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. This loan bears an interest rate that
approximates current market rates; thus, the recorded value of this loan is
considered to be at fair value.
Line of Credit. At December 31, 1997, the Company had in place 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 0.25 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 December 31, 1997, the Company had no borrowings against this
line of credit.
4. Lease Obligations
The Company leases operating facilities and equipment under operating leases
with unexpired terms of one to seven years. Rental expense for operating leases
was approximately $1,388,000, $942,000 and $780,000 for 1997, 1996 and 1995,
respectively.
F-7
<PAGE>
Metro One Telecommunications, Inc.
Notes to Financial Statements
- -------------------------------------------------------------------------------
Minimum annual rentals for the five years subsequent to 1997 and in the
aggregate thereafter are as follows:
<TABLE>
<CAPTION>
Year Ending Capital
December 31, Leases Operating Leases
- -------------------------------------------------------------------------------- ------------- ----------------
<S> <C> <C>
1998............................................................................ $ 808,008 $ 1,640,355
1999............................................................................ 506,338 1,533,523
2000............................................................................ 97,489 1,460,057
2001............................................................................ 17,475 1,139,327
2002............................................................................ -- 671,730
Thereafter...................................................................... -- 322,416
------------- ----------------
Total minimum lease payments.................................................... 1,429,310 $ 6,767,408
----------------
----------------
Less interest portion at rates of 10.2% to 25.9%................................ (242,490)
-------------
Present value of net minimum lease payments, capital leases..................... 1,186,820
Less portion due within one year................................................ (638,200)
-------------
Long-term portion............................................................... $ 548,620
-------------
-------------
</TABLE>
5. Shareholders' Equity (Deficit)
Common Stock. In 1997, the Board of Directors and the shareholders approved
an amendment to the Restated Articles of Incorporation to decrease the number of
authorized shares of common stock from 490,000,000 to 50,000,000.
Common Stock Options and Warrants. The Company has a Stock Incentive Plan
(the "Plan"), approved by the shareholders, which 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. As of December 31, 1997, 1,900,000 shares of common
stock were 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 price of the option.
The Company has elected to continue to account for stock options
according to Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, no compensation cost has been
recognized for this plan in the financial statements. If compensation cost on
stock options granted in 1997, 1996 and 1995 under this plan had been
determined based on the fair value of the options granted as of the grant
date in a method consistent with that described in Statement of Financial
Accounting Standards No. 123, the Company's net income and earnings per share
would have been changed to the pro forma amounts indicated below for the
years ended December 31, 1997, 1996 and 1995:
F-8
<PAGE>
Metro One Telecommunications, Inc.
Notes to Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Net income (loss), as reported......................................... $ 1,432,242 $ 1,166,488 $ (1,724,067)
Diluted earnings (loss) per share, as reported......................... 0.13 0.12 (0.31)
Net income (loss), pro forma........................................... 1,047,715 944,333 (1,847,175)
Diluted earnings (loss) per share, pro forma........................... 0.10 0.10 (0.33)
</TABLE>
The pro forma amounts may not be indicative of the effects on reported net
income for future periods due to the effect of options vesting over a period of
years and the awarding of stock compensation in future years.
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 1997, 1996 and 1995, respectively: dividend yield of 0 for all years;
risk-free interest rates of 5.7, 6.3 and 6.2 percent; expected volatility of
55.3, 46.5 and 46.5 percent; and expected life of 4.0 for all years.
A summary of the status of the Company's stock option plan as of December
31, 1997 and 1996 and changes during the years ending on those dates is
presented below. The plan was initiated in 1995.
<TABLE>
<CAPTION>
1997 1996
--------------------------- ---------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year.......................... 1,291,476 $ 8.55 1,103,029 $ 8.05
Granted................................................... 262,407 8.57 189,138 11.48
Exercised................................................. (71,426) 8.05 0 0.00
Forfeited................................................. (28,266) 8.40 (691) 8.05
---------- ----- ---------- -----
Outstanding at end of year................................ 1,454,191 $ 8.58 1,291,476 $ 8.55
---------- ----- ---------- -----
---------- ----- ---------- -----
Options exercisable at year-end........................... 1,183,195 949,704
Weighted-average fair value of options granted during the
year.................................................... $ 3.15 $ 5.09
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable under the Company Plan at December 31, 1997:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------------ -----------------------------
Range of Number Weighted-Average Number
Exercise of Remaining Weighted-Average of Weighted-Average
Prices Options Contractual Life (yrs) Exercise Price Options Exercise Price
- -------------- ---------- ----------------------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
$8.05 - 8.05 1,092,429 7.62 $ 8.05 1,059,687 $ 8.05
$8.38 - 13.38 361,762 9.40 $ 10.19 123,508 $ 10.88
- ------------- ---------- --- ------ ---------- ------
$8.05 - 13.38 1,454,191 8.07 $ 8.58 1,183,195 $ 8.35
- ------------- ---------- --- ------ ---------- ------
- ------------- ---------- --- ------ ---------- ------
</TABLE>
F-9
<PAGE>
Metro One Telecommunications, Inc.
Notes to Financial Statements
- -------------------------------------------------------------------------------
At December 31, 1997 and 1996, there were outstanding warrants to purchase
114,271 and 352,800 shares of common stock, respectively. The warrants were
fully exercisable at prices ranging from $2.31 to $8.05 per share, and expire
on various dates through February 1998. At December 31, 1997 and 1996, there
were outstanding options to purchase 85,710 shares of common stock. These
options were issued prior to the adoption of the Plan, are fully exercisable
at a price of $2.31 per share, and expire on January 1, 2000.
6. Related Parties
During 1995 and 1996, the Company entered into various capital lease
arrangements for furniture, fixtures and equipment with a company owned by a
shareholder (non-officer/director) of the Company. Minimum capital lease
obligations to this related party totaled $740,332, $971,014 and $1,024,380
at December 31, 1997, 1996 and 1995, respectively.
7. Other Income (Expense)
Included in other income (expense) are certain items which do not relate
directly to current ongoing business activity. Included in this
classification for the year ended December 31, 1997 are expenses of $141,898
related to estimated litigation settlement costs and losses on asset
dispositions, and interest income of $569,456. For the year ended
December 31, 1996, other expense consisted primarily of estimated litigation
settlement expenses of $280,323; loss on asset dispositions of $151,094; and
interest income of $287,542. For the year ended December 31, 1995, other
income consisted primarily of interest income of $47,918; litigation
settlement expense of $24,000; and gain of approximately $98,904, resulting
from settlement of a dispute with a vendor.
8. Income Taxes
The components of income tax expense for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1996 1995
------------ ------------- ---------
<S> <C> <C> <C>
Current:
Federal....................... $ 12,400 $ 33,000 $ -
State......................... 12,607 41,123 -
------------ ------------- --------
25,007 74,123 -
------------ ------------- --------
Deferred:
Federal....................... (12,400) (33,000) -
State......................... - - -
------------ ------------- --------
(12,400) (33,000) -
------------ ------------- --------
Total tax expense $ 12,607 $ 41,123 $ -
------------ ------------- --------
------------ ------------- --------
</TABLE>
During the year ended December 31, 1995, the Company experienced net operating
losses and did not recognize income tax expense.
F-10
<PAGE>
Metro One Telecommunications, Inc.
Notes to Financial Statements
- -------------------------------------------------------------------------------
At December 31, the significant components of deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax liability:
Tax depreciation in excess of book $ 1,041,930 $ 632,327
------------- -------------
Deferred tax asset:
Net operating loss carryforwards $ 5,986,505 $ 6,103,493
Expenses not currently deductible 179,081 223,759
Tax credit carryforwards 61,026 48,626
------------- -------------
Gross deferred tax assets 6,226,612 6,375,878
Less valuation allowance (5,139,282) (5,710,551)
------------- -------------
Deferred tax assets 1,087,330 665,327
------------- -------------
Net deferred tax asset $ 45,400 $ 33,000
------------- -------------
------------- -------------
</TABLE>
During 1997 and 1996, the Company reduced its deferred tax valuation
allowance to reflect deferred tax assets used to reduce current year income
taxes. The Company will continue to review the valuation allowance on a
quarterly basis and make adjustments as appropriate.
At December 31, 1997, the Company had approximately $15.4 million of net
operating loss carryforwards expiring during the years 2005 to 2010.
Ownership changes as defined by section 382 of the Internal Revenue Code
could limit the amount of net operating loss carryforwards used in any one
year or in the aggregate.
The difference between taxes calculated at the statutory federal and state
tax rates and the effective combined rates for the years ended December 31 is
as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Federal statutory rate.......... 35.0% 35.0% -
State income taxes,
net of federal benefit........ 2.6% 5.0% -
Valuation allowance............. (39.5)% (39.4)% -
Other........................... 2.8% 2.8% -
------------ ------------- ------------
Effective tax rate.............. 0.9% 3.4% -
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
9. Earnings Per Share
Effective for the year beginning January 1, 1997, the Company adopted SFAS
No. 128, Earnings Per Share. SFAS No. 128 established new standards for
computing and presenting earnings per share, and accordingly all periods have
been restated. The per share amounts are based on the weighted average
number of common and dilutive common equivalent shares assumed to be
outstanding during the period of computation. Net income for the calculation
of both basic and diluted earnings per share is the same for all periods.
F-11
<PAGE>
Metro One Telecommunications, Inc.
Notes to Financial Statements
- -------------------------------------------------------------------------------
The calculation of weighted-average outstanding shares is as follows:
<TABLE>
<CAPTION>
Average Shares
------------------------------------------
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Basic earnings per share......... 10,820,168 9,152,408 5,562,959
Common stock equivalents......... 140,752 243,454 -
------------ ------------- ------------
Diluted earnings per share....... 10,960,920 9,395,862 5,562,959
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
10. Potential Rescission Liability
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 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. Management is unaware of any potential rescission
claims and believes that there is no material liability to the Company from
rescission claims.
11. 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 at least 500 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 made contributions of approximately $25,396 and
$11,065 during 1997 and 1996, respectively. No contributions were made by the
Company in 1995.
12. Statement of Cash Flows
Supplemental disclosure of Cash Flow information:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Equipment acquired by
capital lease................... $ - $ 678,877 $ 1,066,249
Conversion of debt into
common stock.................... - 1,400,000 6,910,000
Cash paid for interest expense.... 318,418 571,699 1,477,860
Cash paid for income taxes........ 50,843 44,123 -
Stock issued in settlement
of litigation................... 270,000 - -
</TABLE>
F-12
<PAGE>
EXHIBIT 3.1
THIRD RESTATED ARTICLES OF INCORPORATION
OF
METRO ONE TELECOMMUNICATIONS, INC.
Pursuant to the Oregon Business Corporation Act, the undersigned
corporation adopts the following Third Restated Articles of Incorporation
which shall supersede the existing Articles of Incorporation and all
amendments thereto.
ARTICLE I.
NAME OF CORPORATION
The name of the Corporation is Metro One Telecommunications, Inc.
ARTICLE II.
DURATION
The period of its duration is perpetual.
ARTICLE III.
PURPOSES AND POWERS
The purposes and powers of the Corporation are:
A. To engage in any lawful activities for which corporations may be
organized.
B. To do anything which shall appear necessary or beneficial to the
Corporation in connection with (1) its operation; (2) accomplishment of its
purposes; or (3) exercise of its powers set forth in these Articles.
ARTICLES IV.
CAPITALIZATION
A. The authorized capital stock of the Corporation consists of
50,000,000 shares of common stock, no par value ("Common Stock") and
10,000,000 shares of preferred stock, no par value ("Preferred Stock").
1 - Third Restated Articles of Incorporation of
Metro One Telecommunications, Inc.
<PAGE>
B. The Board of Directors shall have the power to issue, from time to
time, one or more series of Preferred Shares or special stock in any manner
permitted by law and not inconsistent with these Articles or the Bylaws of
the Corporation. The Board of Directors shall have the authority to fix and
determine, subject to the provisions of these Articles, the rights and
preferences of the shares of such additional series, which shall be
established by a resolution or resolutions of the Board of Directors providing
for the issuance of such series.
C. Pursuant to the Second Restated Articles of Incorporation filed
December 12, 1995, each issued and outstanding share of Common Stock shall be
combined and reconstituted as 0.2857 shares. Any fractional shares resulting
from the reverse stock split (after aggregating all shares held by each
holder) shall be rounded up to the next whole share.
ARTICLE V.
CONSENT TO ACTION
Any action which may be taken at a meeting of the shareholders or
Directors may be taken without a meeting if all shareholders or Directors
entitled to vote on the action consent in writing to the action taken. The
written consent shall have the same force and effect as a unanimous vote of
the shareholders or Directors.
ARTICLE VI.
CUMULATIVE VOTING
No shareholder shall be entitled to cumulate his votes for election of
Directors.
ARTICLE VII.
PREEMPTIVE RIGHTS DENIED
Unless otherwise determined by the Board of Directors, no shareholder of
the Corporation shall be entitled, as a matter of right, to purchase or
subscribe for any stock of any class which the Corporation may issue or sell,
whether or not exchangeable for any stock of the Corporation of any class or
classes and whether out of unissued shares authorized by the Articles of
Incorporation of the Corporation as originally filed or by any amendment
thereof or out of shares acquired in the future. Nor, unless otherwise
determined by the Board of Directors, shall any holder of any shares of the
capital stock of the Corporation be entitled, as a matter of right, to
purchase or subscribe for any obligation which the Corporation may issue or
sell that shall be convertible into or exchangeable for any shares of the
stock of the Corporation of any class or classes, or to which shall be
attached to any warrant or warrants or any other instrument or instruments
that shall confer upon the holder or holders of such obligation the right to
subscribe for or purchase from the Corporation any shares or its capital
stock of any class or classes.
2 - Third Restated Articles of Incorporation of
Metro One Telecommunications, Inc.
<PAGE>
ARTICLE VIII.
DIRECTORS
A. The number of directors of the Corporation shall not be less than
three nor more than seven, and within such limits, the exact number shall be
fixed and increased or decreased from time to time by resolution of the
Board of Directors. At such time as the Board of Directors fixes the number
of directors at six or more, the directors shall be divided into three
classes designated Class I, Class II and Class III, each class to be as
nearly equal in number as possible. At the first annual meeting of
shareholders following the designation of six or more directors (the "First
Meeting"), directors of all three classes shall be elected. The term of
office of Class I directors shall expire at the annual meeting of
shareholders held in the first calendar year following the calendar year in
which the First Meeting is held. The term of office of Class II directors
shall expire at the annual meeting of shareholders held in the second
calendar year following the calendar year in which the First Meeting is held.
The term of office of Class III directors shall expire at the annual meeting
of shareholders held in the third calendar year following the calendar year
in which the First Meeting is held. At each annual meeting of shareholders
after the First Meeting, each class of directors elected to succeed those
directors whose terms expire shall be elected to serve for three-year terms
and until their successors are elected and qualified, so that the term of one
class of directors will expire each year. When the number of directors is
changed within the limits provided herein, any newly created directorships or
any decrease in directorships shall be apportioned as nearly as possible
among the classes as to make all classes as nearly equal as possible,
provided that no decrease in the number of directors constituting the Board
of Directors shall shorten the term of any incumbent director.
B. All or any number of the directors of the Corporation may be removed
only for cause and at a meeting of shareholders called expressly for that
purpose, by a vote of not less than 75 percent (75%) of the votes entitled to
be cast for the election of directors. At any meeting of shareholders at
which one or more directors are removed, a majority of votes then entitled to
be cast for the election of directors may fill a vacancy created by such
removal. If any vacancy created by removal of a director is not filled by
the shareholders at the meeting at which the removal is effected, such
vacancy may be filled by a majority vote of the remaining directors.
C. The provisions of this Article VIII may not be amended, altered,
changed or repealed in any respect unless such action is approved by the
affirmative vote of not less than 75 percent (75%) of the votes then entitled
to be cast for election of directors.
3 - Third Restated Articles of Incorporation of
Metro One Telecommunications, Inc.
<PAGE>
ARTICLE IX.
QUORUM OF SHAREHOLDERS
A quorum at a meeting of shareholders is constituted by the representation
in person or by proxy of fifty-one percent (51%) of the shares entitled to
vote. Shares shall not be counted to make up a quorum for a meeting if voting
of them at the meeting has been enjoined or for any reason they cannot be
lawfully voted at the meeting. The shareholders present at a duly held
meeting at which a quorum is present may continue to do business until
adjournment in spite of the withdrawal of enough shareholders to leave less
than a quorum.
ARTICLE X.
INDEMNIFICATION
A. The Corporation shall indemnify to the fullest extent not prohibited
by law any person who was or is a party or is threatened to be made a party
to any Proceeding against all expenses (including attorney fees),
judgments, fines, and amounts paid in settlement actually or reasonably
incurred by the person in connection with such Proceeding.
B. Expenses incurred by a director or officer of the Corporation in
defending a Proceeding shall in all cases be paid by the Corporation in
advance of the final disposition of such Proceeding at the written request of
such person, if the person:
1. Furnishes the Corporation a written affirmation of the person's
good faith belief that such person has met the standard of conduct described
in the Oregon Business Corporation Act or is entitled to be indemnified by
the Corporation under any other indemnification rights granted by the
Corporation to such person; and
2. Furnishes the Corporation a written undertaking to repay such
advance to the extent ultimately determined by a court that such person is
not entitled to be indemnified by the Corporation under this Article X or
under any other indemnification rights granted by the Corporation to such
person.
Such advances shall be made without regard to the person's ability to
repay such advances and without regard to the person's ultimate entitlement
to indemnification under this Article X or otherwise.
C. The term "Proceeding" shall include any threatened, pending, or
completed action, suit, or proceeding whether brought in the right of the
Corporation or otherwise and whether of a civil, criminal, administrative, or
investigative nature, in which a person may be or may have been involved as a
party or otherwise by reason of the fact that the person is or was a director
or officer of the Corporation or a fiduciary within the meaning of the
Employee Retirement Income Security Act of 1974 with respect to any employee
benefit plan of the
4 - Third Restated Articles of Incorporation of
Metro One Telecommunications, Inc.
<PAGE>
Corporation, or is or was serving the request of the Corporation as a
director, officer, or fiduciary of an employee benefit plan of another
corporation, partnership, joint venture, trust, or other enterprise, whether
or not serving in such capacity at the time any liability or expense is
incurred for which indemnification or advancement of expenses can be provided
under this Article X.
D. The indemnification and entitlement to advancement of expenses
provided by this Article X shall not be deemed exclusive of any other rights
to which those indemnified may be entitled under the Corporation's Articles
of Incorporation or any statute, agreement, general or specific action of the
Board of Directors, vote of the shareholders, or otherwise, shall continue as
to a person who has ceased to be a director or officer, shall inure to the
benefit of the heirs, executors and administrators of such person and shall
extend to all claims for indemnification or advancement of expenses made
after the adoption of this Article X.
E. Any repeal of this Article X shall only be prospective and no repeal
or modification hereof shall adversely affect the rights under this Article X
in effect at the time of the alleged occurrence of any action or omission to
act that is the cause of any Proceeding.
F. To the fullest extent permitted by law, no director of this
Corporation shall be personally liable to the Corporation or its shareholders
for monetary damages for conduct as a director. No amendment or repeal of
this Article X, nor the adoption of any provision of these Articles
inconsistent with this Article X, nor a change in the law, shall adversely
affect any right or protection of a director, which right or protection is
based on this Article X and arises from conduct that occurred prior to the
time of such amendment, repeal, adoption or change. No change in the law
shall reduce or eliminate the rights and protections applicable immediately
after this provision becomes effective unless the change in the law shall
specifically require such reduction or elimination. If the Oregon Business
Corporation Act or its successor is amended, after this Article X becomes
effective, to authorize corporate action further eliminating or limiting the
personal liability of directors of the Corporation, then the liability of
directors of this Corporation shall eliminated or limited to the fullest
extent permitted by the Oregon Business Corporation Act, as so amended.
EFFECTIVE DATE: These Third Restated Articles of Incorporation shall be
effective upon filing of the Articles in the Office of the Secretary of State
of Oregon.
METRO ONE TELECOMMUNICATIONS, INC.
By: /s/ Stebbins B. Chandor, Jr.
-----------------------------------
Stebbins B. Chandor, Jr., Secretary
Person to contact about this filing:
Byron W. Milstead
(503) 226-1191
5 - Third Restated Articles of Incorporation of
Metro One Telecommunications, Inc.
<PAGE>
CERTIFICATE ACCOMPANYING
THIRD RESTATED ARTICLES OF INCORPORATION
OF
METRO ONE TELECOMMUNICATIONS, INC.
Pursuant to ORS 60.451, the undersigned corporation submits for filing
this certificate, together with the corporation's Third Restated Articles of
Incorporation. The undersigned corporation hereby certifies that:
1. The name of the corporation, prior to the filing of the attached Third
Restated Articles of Incorporation, is Metro One Telecommunications,
Inc.
2. A copy of the Third Restated Articles of Incorporation is attached
hereto.
3. The Third Restated Articles of Incorporation contain an amendment that
requires shareholder approval. The shareholder vote on the following
amendment was as follows:
(a) Amendment to new Article IV to decrease the number of authorized
shares of Common Stock:
<TABLE>
<CAPTION>
Class or Series Number of Shares Number of Votes Number of Votes Number of Votes
of Shares Outstanding Entitled to be Cast Cast for Cast Against
----------------- ---------------- -------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Common Stock..... 10,783,303 10,783,303 7,171,323 18,577
</TABLE>
4. The date of adoption of the Third Restated Articles of Incorporation
was May 8, 1997.
Metro One Telecommunications, Inc.
By: /s/ Stebbins B. Chandor, Jr.
-----------------------------
Stebbins B. Chandor, Jr.
Secretary
Person to contact about this filing:
Byron W. Milstead
(503) 226-1191
Certificate Accompanying Third Restated Articles of Incorporation
<PAGE>
LOAN MODIFICATION AGREEMENT
BETWEEN: Metro One Telecommunications, Inc., an Oregon corporation ("Borrower"),
whose address is 8405 S.W. Nimbus Avenue, Beaverton, OR 97008
AND: Silicon Valley Bank ("Silicon"), whose address is 3003 Tasman Drive,
Santa Clara, California 95054;
DATE: March 14 , 1997.
This Loan Modification Agreement is entered into on the above date by
Borrower and Silicon.
1. Background. Borrower entered into a Loan and Security Agreement with
Silicon in March, 1996 (as amended from time to time, the "Loan Agreement").
Capitalized terms used in this Loan Modification Agreement shall, unless
otherwise defined in this Agreement, have the meaning given to such terms in
the Loan Agreement.
Silicon and Borrower are entering into this Agreement to state the terms
and conditions of certain modifications to the Loan Agreement and the
Schedule, as amended prior to the date of this Agreement.
2. Modifications to Loan Agreement and Schedule.
2.1 The Schedule to the Loan Agreement is hereby deleted and replaced
by the Amended and Restated Schedule to Loan and Security Agreement attached
to this Agreement.
2.2 Section 4.5 of the Loan Agreement is deleted and replaced with
the following:
"4.5 Access to Collateral, Books and Records. At all reasonable
times, and upon five business days' written notice, Silicon, or its
agents, shall have the right to inspect the Collateral, and the
right to audit and copy the Borrower's accounting books, records,
ledgers, journals, or registers and the Borrower's books and
records relating to the Collateral, provided that on and after an
Event of Default the five business day period referred to above
shall be reduced to no notice. Silicon shall take reasonable steps
to keep confidential all information obtained in any such
inspection or audit in accordance with Silicon's standard business
practices regarding such information, but Silicon shall have the
right to disclose any such information to its auditors, regulatory
agencies and attorneys, and pursuant to any subpoena or other legal
process. In the event that Silicon is requested or required by oral
questions, interrogatories, requests for information or documents,
subpoenas or other lawful, civil investigative demand or similar
process, to disclose any such confidential information, Silicon
agrees to notify Borrower of any such event or circumstances in a
timely manner. The foregoing audits shall be at Silicon's expense,
except that the
Page 1 - LOAN MODIFICATION AGREEMENT
<PAGE>
Borrower shall reimburse Silicon for its reasonable out of pocket
costs for such accounts receivable audits in an amount not to
exceed $1,250 per year. Silicon may debit the Borrower's deposit
accounts with Silicon for the cost of such audits, in which event
Silicon shall send notification thereof to the Borrower."
2.3 The Secured Equipment Term Loan referred to in the Schedule
dated March 15, 1996 is terminated. Borrower shall not have any right to draw
on such Loan.
2.4 Borrower acknowledges and agrees that all Obligations, including
without limitation Borrower's obligation to repay amounts advanced by Silicon
to Borrower on the terms of the Loan Agreement and Schedule as modified by
this Loan Modification Agreement, are secured by all liens and security
interests granted by Borrower to Silicon in the Loan Agreement.
2.5 The amount stated in the third sentence of Section 4.3 of the
Loan Agreement (with respect to insurance proceeds) is hereby increased to
$1,000,000.
3. Conditions Precedent. This Loan Modification Agreement shall not take
effect until Borrower delivers to Silicon a Certified Resolution of Borrower
and such other documents as Silicon shall reasonably require to give effect
to the terms of this Loan Modification Agreement.
4. No Other Modifications. Except as expressly modified by this Loan
Modification Agreement, the terms of the Loan Agreement, as amended prior to
the date of this Loan Modification Agreement, shall remain unchanged and in
full force and effect. Silicon's agreement to modify the Loan Agreement
pursuant to this Loan Modification Agreement shall not obligate Silicon to
make any future modifications to the Loan Agreement or any other loan
document. Nothing in this Loan Modification Agreement shall constitute a
satisfaction of any indebtedness of any Borrower to Silicon. It is the
intention of Silicon and Borrower to retain as liable parties all makers and
endorsers of the Loan Agreement or any other loan document. No maker,
endorser, or guarantor shall be released by virtue of this Loan Modification
Agreement. The terms of this paragraph shall apply not only to this Loan
Modification Agreement, but also to all subsequent loan modification
agreements.
5. Representations and Warranties.
5.1 The Borrower represents and warrants to Silicon that the
execution, delivery and performance of this Agreement are within the
Borrower's corporate powers, and have been duly authorized and are not in
contravention of law or the terms of the Borrower's articles of
incorporation, bylaws or of any undertaking to which the Borrower is a party
or by which it is bound.
5.2 The Borrower understands and agrees that in entering into this
Agreement, Silicon is relying upon the Borrower's representations, warranties
and agreements as set forth in
Page 2 - LOAN MODIFICATION AGREEMENT
<PAGE>
the Loan Agreement and other loan documents. Borrower hereby reaffirms all
representations and warranties in the Loan Agreement, all of which are true
as of the date of this Agreement.
Borrower:
METRO ONE TELECOMMUNICATIONS, INC.
By: /s/Timothy A. Timmins
-------------------------------
Title: President & CEO
/s/Stebbins B. Chandor, Jr.
-------------------------------
SVP & CFO
Silicon:
SILICON VALLEY BANK
By: /s/ Eric Siow
------------------------------
Title: VP
Page 3 - LOAN MODIFICATION AGREEMENT
<PAGE>
AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
Borrower: Metro One Telecommunications, Inc.
Address: 8405 S.W. Nimbus Avenue Beaverton, OR 97008
Date: March 14, 1997
Secured Accounts Receivable Line of Credit
Credit Limit:
(Section 1.1) An amount not to exceed the lesser of: (i) $3,000,000 at any one
time outstanding; or (ii) the amount of the "Borrowing Base", as
defined below. For purposes of this Schedule, the "Borrowing
Base" shall mean the sum of 80% of the Net Amount of Borrower's
eligible accounts receivable. With respect to Borrower's
accounts, "Net Amount" means the gross amount of the account,
minus all applicable sales, use, excise and other similar taxes
and minus all discounts, credits and allowances of any nature
granted or claimed. During such time as Borrower maintains a
Quick Ratio (defined below) of at least 3.00:1.00, the Secured
Accounts Receivable Line of Credit will not be subject to the
Borrowing Base limitation stated above, but the aggregate
outstanding amount of such Line of Credit shall not exceed
$3,000,000 at any time.
Without limiting the fact that the determination of which
accounts are eligible for borrowing is a matter of Silicon's
discretion, the following shall not be deemed eligible for
borrowing: accounts outstanding for more than 90 days
from the invoice date, accounts subject to any contingencies,
accounts owing from an account debtor outside the United States
(except for approved in writing by Silicon), accounts owing from
governmental agencies, accounts owing from one
account debtor to the extent they exceed 40% of the total
eligible accounts outstanding, accounts owing from an affiliate
of the Borrower, and accounts owing from an account debtor to
whom the Borrower is or may be liable for goods purchased from
such account debtor or otherwise (provided, however, that such
contra accounts involving account debtors in the
telecommunications industry may be allowed if approved in
writing from time to time by Silicon, and provided further that
U.S. West and its subsidiaries are hereby approved as exceptions
to the foregoing exclusion for contra accounts). In addition, if
more than 50% of the accounts owing from an account debtor
are outstanding more than 90 days from the invoice date or are
otherwise not eligible accounts, then all accounts owing from
that account debtor shall be deemed ineligible for borrowing.
Page 1 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE>
Interest Rate:
(Section 1.2) The interest rate applicable to the Secured Accounts
Receivable Line of Credit shall be a rate equal to the "Prime
Rate" in effect from time to time, plus 0.25% per annum.
Interest calculations shall be made on the basis of a 360-day
year and the actual number of days elapsed. "Prime Rate" means
the rate announced from time to time by Silicon as its "prime
rate"; it is a base rate upon which other rates charged by
Silicon are based, and it is not necessarily the best rate
available at Silicon. The interest rate applicable to the
Obligations shall change on each date there is a change in the
Prime Rate (and such changes will be noted on each invoice or
otherwise communicated to the Borrower).
Commitment Fee:
(Section1.3) .25% per annum of the maximum commitment amount of $3,000,000,
or $7,500, which is fully earned and payable at closing. (Any
Commitment Fee previously paid by the Borrower in connection
with this loan shall be credited against this Fee.)
Unused Line
Fee: .25% per annum of the excess of the maximum commitment amount
of $3,000,000 over the average daily balance of such Line of
Credit. This fee is payable quarterly in arrears.
Maturity Date:
(Section1.3) March 14, 1999, at which time all unpaid principal and accrued
but unpaid interest shall be due and payable.
SECURED EQUIPMENT TERM LOAN
Credit Limit: An amount not to exceed (i) $1,000,000 at any one time
outstanding; or (ii) the amount of the "Equipment Borrowing
Base", as defined below. For purposes of this Schedule, the
"Equipment Borrowing Base" shall mean 50% of the net book
value of equipment purchased by Borrower prior to December 31,
1996, plus 90% of new equipment purchased by Borrower after
December 31, 1996. Silicon shall have no obligation to advance
against taxes, freight charges, installation charges or other
similar amounts relating to Borrower's equipment, whether or
not such amounts are identified on the invoices submitted to
Silicon. Equipment to be included in the Equipment Borrowing
Base must be new equipment, at the time of purchase by
Borrower, owned by Borrower, in good working order, must not
be subject to any liens in favor of any person or entity other
than Silicon, and must be subject to a first priority,
perfected security interest in favor of Silicon. Silicon shall
make advances under this Secured Equipment Term Loan from time
to time, based on invoices and other documentation as shall be
requested by Silicon to support such advances. The Borrower's
indebtedness to Silicon with respect to this Secured Equipment
Term Loan shall be evidenced by this Schedule and the Loan
Agreement, not by a separate promissory note unless required
by Silicon.
Page 2 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE>
Borrower shall submit to Silicon such invoices, advance
requests and other information, in form acceptable to Silicon,
as Silicon shall reasonably require from time to time.
Silicon shall not have any obligation to make advances on this
Secured Equipment Term Loan after August _____, 1998. Once the
maximum amount of the principal has been advanced under this
Secured Equipment Term Loan, Borrower is no longer entitled to
further advances on this Loan. Borrower shall not be entitled
to reborrow any amount repaid on this Secured Equipment Term
Loan. Advances may be requested in writing by Borrower or an
authorized person. Silicon may, but need not, require that all
oral requests be confirmed in writing. The unpaid principal
balance owing on this Secured Equipment Term Loan at any time
may be evidenced by Silicon's internal records, including
daily computer print-outs (which Silicon shall provide to
Borrower periodically).
Purpose: Borrowers shall use the proceeds of this Secured Equipment Term
Loan to finance the purchase of new equipment.
Interest Rate: The interest rate applicable to the Secured Equipment Term
Loan shall be a rate equal to the "Prime Rate" (as defined
above) in effect from time to time, plus 0.50% per annum.
Interest calculations shall be made on the basis of a 360-day
year and the actual number of days elapsed. The interest rate
applicable to the Obligations shall change on each date there
is a change in the Prime Rate.
Amortization: Borrower shall pay Silicon monthly payments of interest on the
last day of each month commencing March 1997. Commencing on
the last day of September, 1998, Borrower shall pay Silicon 42
equal monthly payments of principal, in the amount necessary
to repay fully the outstanding principal of this Secured
Equipment Term Loan in 42 payments, plus interest calculated
as provided in this Schedule.
Maturity Date: February ____, 2002, at which time all unpaid principal and
accrued but unpaid interest, fees and other charges shall be due
and payable.
Commitment
Fee: $2,500, payable at closing. This fee is fully earned at
closing and is non-refundable. (Any Commitment Fee previously
paid by the Borrower in connection with this loan shall be
credited against this Fee.)
Prior Names of
Borrower: See attached Exhibit B
(Section 3.2)
Page 3 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE>
Trade Names of
Borrower: See attached Exhibit B
(Section 3.2)
Trademarks of
Borrower: See attached Exhibit B
Other Locations
and Addresses: See attached Exhibit B
(Section 3.3)
Material Adverse
Litigation: See attached Exhibit B
(Section 3.10)
Financial
Covenants:
(Section 4.1) The Borrower shall at all times comply with all of the
following covenants, all of which shall be determined and
measured quarterly in accordance with generally accepted
accounting principles, on a consolidated basis, except as
otherwise stated below:
Tangible Net
Worth: Borrower shall maintain a Tangible Net Worth of not less than
$19,000,000.
Debt to Tangible
Net Worth
Ratio: Borrower shall at all times maintain a ratio of total
liabilities to Tangible Net Worth of not more than 0.75:1.00.
For purposes of this calculation, total liabilities shall
exclude deferred revenues and debt, if any, that has been
subordinated to the Loans in a written subordination agreement
on terms satisfactory to Silicon.
Profitability: Borrower shall not incur any Loss (as defined below) in excess
of $750,000 per quarter. For purposes of this paragraph,
"loss" means net income after taxes, as reported on Borrower's
financial statements.
Quick Ratio: Borrower shall maintain a ratio of Quick Assets (defined
below) to current liabilities less deferred revenue of not
less than 1.50:1.00.
Term Liquidity
Coverage: Borrower shall at all times maintain a minimum term liquidity
coverage of at least 2.0:1.0. "Term liquidity coverage" is
defined as (a) cash + cash equivalents (readily marketable
securities issued by the United States, readily marketable
commercial paper rated "A-I" by Standard & Poors Corporation
or a similar rating by a similar rating organization,
certificates of deposit and banker's acceptances) +
availability under the Secured Accounts Receivable Line of
Credit divided by (b) the outstanding Secured Equipment Term
Loan balance.
Page 4 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE>
Definitions: "Tangible Net Worth" means stockholders' equity plus debt, if
any, that has been subordinated to the Loans in a written
subordination agreement on terms satisfactory to Silicon, and
accrued interest thereon, less goodwill, patents, capitalized
software costs, deferred organizational costs, tradenames,
trademarks, and all other assets which would be classified as
intangible assets under generally accepted accounting
principles.
"Quick Assets" means cash on hand or on deposit in banks,
readily marketable securities issued by the United States,
readily marketable commercial paper rated "A-I" by Standard &
Poor's Corporation (or a similar rating by a similar rating
organization), certificates of deposit and banker's
acceptances, and accounts receivable (net of allowance for
doubtful accounts).
Other Covenants:
(Section 4.1) Borrower shall at all times comply with all of the following
additional covenants:
Banking Relationship. Borrower and its subsidiaries shall at
all times maintain their primary banking relationship with
Silicon. Neither Borrower nor its subsidiaries shall establish
any deposit accounts of any type with any bank or other
financial institution other than Silicon without Silicon's
prior written consent.
Financial Statements and Reports. The Borrower shall provide
Silicon: (a) within 50 days after the end of each quarter, a
quarterly financial statement (consisting of a income
statement and a balance sheet) prepared by the Borrower in
accordance with generally accepted accounting principles; (b)
within 20 days after the end of each month, an accounts
receivable aging report and an accounts payable aging report,
in such form as Silicon shall reasonably specify; (c) within
20 days after the end of each month, a Borrowing Base
Certificate in the form attached to this Agreement as Exhibit
A, as Silicon may reasonably modify such Certificate from time
to time, signed by the Chief Financial Officer of the
Borrower; (d) within 50 days after the end of each quarter, a
Compliance Certificate in such form as Silicon shall
reasonably specify, signed by the Chief Financial Officer of
the Borrower, setting forth calculations showing compliance
(at the end of each such calendar quarter) with the financial
covenants set forth on the Schedule, and certifying that
throughout such quarter the Borrower was in full compliance
with all other terms and conditions of this Agreement and the
Schedule, and providing such other information as Silicon
shall reasonably request; and (e) within 90 days following the
end of the Borrower's fiscal year, complete annual CPA-audited
financial statements, such audit being conducted by
independent certified public accountants reasonably acceptable
to Silicon, together with an unqualified opinion of such
accountants. If Borrower has maintained a Quick Ratio of at
least 3.00:1.00 throughout any month, the submission of an
accounts payable aging report and a Borrowing Base Certificate
will not be required for that month.
Page 5 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE>
Conditions to
Closing: Without in any way limiting the discretionary nature of advances
under this Agreement, before requesting any such advance, the
Borrower shall satisfy each of the following conditions:
1. Loan Documents:
Silicon shall have received this Amended and Restated Schedule,
executed by the Borrower, and such other loan documents as
Silicon shall require, each duly executed and delivered by the
parties thereto.
2. Documents Relating
to Authority, Etc.:
Silicon shall have received each of the following in form and
substance satisfactory to it:
(a) Certified Copies of the Articles of Incorporation and
Bylaws of the Borrower;
(b) A Certificate of Good Standing issued by the Secretary of
State of the Borrower's state of incorporation and such other
states as Silicon may reasonably request with respect to the
Borrower;
(c) A certified copy of a Resolution adopted by the Board of
Directors of the Borrower authorizing the execution, delivery
and performance of this Agreement, and any other documents or
certificates to be executed by the Borrower in connection with
this transaction; and
(d) Incumbency Certificates describing the office and
identifying the specimen signatures of the individuals signing
all such loan documents on behalf of the Borrower.
3. Perfection and
Priority of Security:
Silicon shall have received evidence satisfactory to it that
its security interest in the Collateral has been duly
perfected and that such security interest is prior to all
other liens, charges, security interests, encumbrances and
adverse claims in or to the Collateral other than Permitted
Liens, which evidence shall include, without limitation, a
certificate from the Oregon Secretary of State showing the due
filing and first priority of the UCC Financing Statements to
be signed by the Borrower covering the Collateral.
Page 6 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE>
4. Insurance:
Silicon shall have received evidence satisfactory to it that
all insurance required by this Agreement is in full force and
effect, with loss payee designations and additional insured
designations as required by this Agreement.
5. Other Information:
Silicon shall have received such other statements, opinions,
certificates, documents and information with respect to
matters contemplated by this Agreement as it may reasonably
request, all of which must be acceptable to Silicon.
Silicon shall have conducted an examination of the Borrower's
books, records, ledgers, journals, and registers, as Silicon
may deem necessary, and shall be satisfied with the results of
such examination in its sole discretion.
Silicon and the Borrower agree that the terms of this Schedule
supplement the Loan and Security Agreement between Silicon and the Borrower
and agree to be bound by the terms of this Schedule.
Borrower:
METRO ONE TELECOMMUNICATIONS, INC.
By: /s/ Timothy A. Timmins
----------------------------
Title: President & CEO
Silicon: /s/ Stebbins B. Chandor, Jr.
-----------------------------
SVP & CFO
SILICON VALLEY BANK
By: /s/ Eric Siow
----------------------------
Title: VP
Page 7 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-20387 and 333-45643 both on Form S-8 of our report dated February 20,
1998, appearing in this Annual Report on Form 10-KSB of Metro One
Telecommunications, Inc. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Portland, Oregon
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1997 AND THE RELATED STATEMENTS OF OPERATIONS,
SHAREHOLDERS' EQUITY AND CASH FLOWS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,554
<SECURITIES> 0
<RECEIVABLES> 4,629
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,877
<PP&E> 19,724
<DEPRECIATION> 5,092
<TOTAL-ASSETS> 29,125
<CURRENT-LIABILITIES> 4,033
<BONDS> 0
0
0
<COMMON> 37,514
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 29,125
<SALES> 0
<TOTAL-REVENUES> 26,090
<CGS> 0
<TOTAL-COSTS> 24,719
<OTHER-EXPENSES> (408)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 334
<INCOME-PRETAX> 1,445
<INCOME-TAX> 13
<INCOME-CONTINUING> 1,432
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,432
<EPS-PRIMARY> $0.13
<EPS-DILUTED> $0.13
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AS OF SEP-30-1996, JUN-30-1996, MAR-31-1996 AND DEC-31-1996 AND THE
RELATED STATEMENTS OF OPERATIONS, SHAREHOLDERS' EQUITY AND CASH FLOWS FOR THE
RESPECTIVE PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 APR-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1996
<CASH> 15,913 2,190 1,602 14,137
<SECURITIES> 0 0 0 0
<RECEIVABLES> 2,195 2,431 2,874 2,723
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 18,454 5,242 5,070 17,396
<PP&E> 9,388 7,163 6,620 9,692
<DEPRECIATION> 2,946 2,604 2,321 2,932
<TOTAL-ASSETS> 25,338 10,229 9,776 24,529
<CURRENT-LIABILITIES> 3,251 2,805 2,915 2,380
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 36,189 21,509 21,509 36,251
<OTHER-SE> 0 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 25,338 10,229 9,776 24,529
<SALES> 0 0 0 0
<TOTAL-REVENUES> 4,417 4,516 4,228 17,834
<CGS> 0 0 0 0
<TOTAL-COSTS> 3,967 3,792 3,734 15,949
<OTHER-EXPENSES> 56 134 47 109
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 147 147 162 568
<INCOME-PRETAX> 246 442 285 1,208
<INCOME-TAX> 4 0 0 41
<INCOME-CONTINUING> 242 442 285 1,166
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 242 442 285 1,166
<EPS-PRIMARY> $0.03 $0.05 $0.04 $0.13
<EPS-DILUTED> $0.03 $0.05 $0.03 $0.12
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AS OF SEP-30-1997, JUN-30-1997 AND MAR-31-1997 AND THE RELATED STATEMENTS
OF OPERATIONS, SHAREHOLDERS' EQUITY AND CASH FLOWS FOR THE RESPECTIVE PERIODS
THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 APR-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 11,373 11,146 12,748
<SECURITIES> 0 0 0
<RECEIVABLES> 3,660 3,170 2,554
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 15,561 14,841 15,960
<PP&E> 14,572 12,564 11,266
<DEPRECIATION> 4,412 3,856 3,374
<TOTAL-ASSETS> 26,461 24,181 24,525
<CURRENT-LIABILITIES> 3,488 2,146 2,446
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 37,202 36,821 36,734
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 26,461 24,181 24,525
<SALES> 0 0 0
<TOTAL-REVENUES> 7,055 5,468 4,486
<CGS> 0 0 0
<TOTAL-COSTS> 6,372 5,399 4,938
<OTHER-EXPENSES> (139) (34) (159)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 77 87 98
<INCOME-PRETAX> 744 16 (391)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 744 16 (391)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 744 16 (391)
<EPS-PRIMARY> $0.07 $0.00 ($0.04)
<EPS-DILUTED> $0.07 $0.00 ($0.04)
</TABLE>
