<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-27024
METRO ONE TELECOMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OREGON 93-0995165
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8405 SW NIMBUS AVENUE, BEAVERTON, OREGON 97008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(503) 643-9500
(ISSUER'S TELEPHONE NUMBER)
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
-- --
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF AUGUST 14, 1998: 11,040,349
SHARES, NO PAR VALUE PER SHARE
<PAGE>
METRO ONE TELECOMMUNICATIONS, INC.
INDEX TO FORM 10 - QSB
<TABLE>
<CAPTION>
Part I Financial Information Page No.
- ------------------------------------ --------
<S> <C> <C>
Item 1. Financial Statements
Condensed Statements of Operations (Unaudited)
for the three and six months ended June 30, 1998 and 1997 1
Condensed Balance Sheets as of
June 30, 1998 (Unaudited) and December 31, 1997 2
Condensed Statements of Cash Flows (Unaudited)
for the six months ended June 30, 1998 and 1997 3
Notes to Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Part II Other Information
- --------------------------------
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
<PAGE>
METRO ONE TELECOMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- ----------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 10,922,278 $ 5,467,982 $ 19,967,268 $ 9,953,994
-------------- -------------- -------------- --------------
Costs and expenses:
Direct operating 5,525,064 2,696,664 10,317,679 5,130,402
General and administrative 4,475,454 2,702,649 8,476,598 5,206,420
-------------- -------------- -------------- --------------
10,000,518 5,399,313 18,794,277 10,336,822
-------------- -------------- -------------- --------------
Income (loss) from operations 921,760 68,669 1,172,991 (382,828)
Other income 81,315 34,463 146,556 193,657
Interest expense and loan fees (78,138) (86,694) (179,774) (184,919)
-------------- -------------- -------------- --------------
Income (loss) before income taxes 924,937 16,438 1,139,773 (374,090)
Income tax expense 24,000 - 29,500 -
-------------- -------------- -------------- --------------
Net income (loss) $ 900,937 $ 16,438 $ 1,110,273 $ (374,090)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Income (loss) per common share
Basic $ .08 $ .00 $ .10 $ (.03)
Diluted $ .08 $ .00 $ .10 $ (.03)
</TABLE>
The accompanying notes are an integral part of this statement.
1
<PAGE>
METRO ONE TELECOMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------- ----------------
1998 1997
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,922,456 $ 8,554,301
Accounts receivable 5,760,668 4,628,992
Prepaid costs and other current assets 697,822 694,025
---------------- ----------------
Total current assets 14,380,946 13,877,318
Furniture, fixtures and equipment, net 15,538,931 14,632,340
Other assets 575,394 615,737
---------------- ----------------
$ 30,495,271 $ 29,125,395
---------------- ----------------
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 998,077 $ 1,302,372
Accrued liabilities 490,364 991,743
Accrued payroll and related costs 1,330,874 1,022,708
Current portion of capital lease obligations 569,133 638,200
Current portion of long-term debt 199,746 78,161
---------------- ----------------
Total current liabilities 3,588,194 4,033,184
Capital lease obligations 307,511 548,620
Long-term debt 1,546,056 867,641
---------------- ----------------
5,441,761 5,449,445
---------------- ----------------
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, 11,040,349 and 10,925,676 shares,
respectively, issued and outstanding 37,781,783 37,514,496
Accumulated deficit (12,728,273) (13,838,546)
---------------- ----------------
Net shareholders' equity 25,053,510 23,675,950
---------------- ----------------
$ 30,495,271 $ 29,125,395
---------------- ----------------
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE>
METRO ONE TELECOMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,110,273 $ (374,090)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,735,421 976,101
Loss on disposal of fixed assets 21,781 84,692
Changes in certain assets and liabilities:
Accounts receivable (1,131,676) (447,848)
Prepaid expenses and other assets (17,989) (45,091)
Accounts payable and accrued expenses (497,508) (191,640)
--------------- ---------------
Net cash provided by operating activities 1,220,302 2,124
--------------- ---------------
Cash flows from investing activities:
Capital expenditures (2,609,258) (2,936,302)
--------------- ---------------
Net cash used in investing activities (2,609,258) (2,936,302)
--------------- ---------------
Cash flows from financing activities:
Repayment of capital lease obligations (310,176) (356,080)
Proceeds from issuance of debt 800,000 -
Proceeds from issuance of common stock upon exercise
of warrants and options 267,287 299,574
--------------- ---------------
Net cash provided by (used in) financing activities 757,111 (56,506)
--------------- ---------------
Net decrease in cash and cash equivalents (631,845) (2,990,684)
Cash and cash equivalents, beginning of period 8,554,301 14,136,574
--------------- ---------------
Cash and cash equivalents, end of period $ 7,922,456 $ 11,145,890
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying interim condensed financial statements have been prepared by
Metro One Telecommunications, Inc. (the "Company") without audit and in
conformity with generally accepted accounting principles for interim financial
information. Accordingly, certain financial information and footnotes have been
omitted or condensed. In the opinion of management, the condensed financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods. These condensed financial statements and notes thereto should be read
in conjunction with the Company's audited financial statements included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997.
The results of operations for the interim period shown in this report are not
necessarily indicative of results for any future interim period or the entire
fiscal year.
RECLASSIFICATION. Certain balances in the 1997 financial statements have been
reclassified to conform with 1998 presentation. Such reclassifications have no
effect on results of operations or shareholders' equity.
2. EARNINGS PER SHARE
Effective for the year ended December 31, 1997, the Company adopted SFAS No.
128, Earnings Per Share. SFAS No. 128 established new standards for computing
and presenting earnings per share. 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.
The calculation of weighted-average outstanding shares is as follows:
<TABLE>
<CAPTION>
AVERAGE SHARES
---------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic earnings per share 11,040,035 10,789,083 11,027,611 10,722,616
Common stock equivalents 489,906 136,186 393,770 -
------------ ------------ ------------ ------------
Diluted earnings per share 11,529,941 10,925,269 11,421,381 10,722,616
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
The Company is party to various legal actions and administrative proceedings
arising in the ordinary course of business. The Company believes that the
disposition of these matters will not have a material adverse effect on its
financial position, results of operations or net cash flows.
4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Cash paid for interest expense $ 171,679 $ 174,842
Cash paid for income taxes 16,457 1,300
Stock issued in settlement of litigation - 270,000
</TABLE>
4
<PAGE>
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
5. LONG-TERM DEBT
On June 24, 1998, the Company entered into an agreement with a commercial bank
for a $6.0 million secured operating line of credit. The line of credit expires
in 2000. Availability under the line of credit may be subject to borrowing base
requirements and requires compliance with loan covenants. Under the terms of
the agreement, outstanding borrowings bear interest at the prime rate (8.5
percent at June 30, 1998) and all assets of the Company, other than assets
previously pledged under existing lease agreements, are pledged to the bank as
collateral. The agreement contains minimum net worth, working capital and
profitability requirements as well as certain other restrictive covenants and
prohibits the payment of cash dividends by the Company without the bank's
consent. As of June 30, 1998, the Company had $800,000 in borrowings against
this line of credit. The Company also entered into a credit facility under
which the Company may borrow up to $2.0 million to finance purchases of capital
equipment. Borrowings bear interest at the prime rate plus 0.25 percent and are
secured by the purchased equipment. As of June 30, 1998, the Company had no
borrowings against this credit facility.
As of June 30, 1998, the Company had $946,000 in borrowings with a commercial
bank in order to finance equipment purchases. This borrowing bears interest at
the prime rate plus 0.5 percent and is secured by the purchased equipment. The
terms of the loan call for an "interest only" accumulation period through August
1998 followed by 42 monthly payments of principal plus interest.
6. INCOME TAXES
During the quarter, 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.
7. ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." 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. 131 will
have no material impact on current disclosures.
5
<PAGE>
ITEM 2. 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-QSB 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. 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, the expiration of Enhanced
Directory Assistance-Registered Trademark- ("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
other factors.
OVERVIEW
The Company is a leading provider of EDA for the telecommunications
industry and has eleven significant EDA contracts with five different
carriers to provide EDA in numerous U.S. metropolitan markets. Over the last
five quarters the Company's operations have been characterized by rapid call
volume and revenue growth as well as growth in profits. Call volume and
revenues increased 92.6% and 99.7%, respectively, from the second quarter of
1997 to the second quarter of 1998, and profits grew from $16,000 to
$901,000. Call volume and revenues increased 93.1% and 100.6%, respectively,
from the first six months of 1997 to the first six months of 1998, and
profits grew from a loss of $374,000 to a gain of $1.1 million.
The Company expects to continue to increase its share of the directory
assistance market by expanding service to existing customers, adding new
customers and expanding the call center network into new geographic markets.
The Company has had ongoing business discussions about new contracts with
other telecommunications companies, and the Company anticipates that it will
open several new call centers during the remainder of 1998 and in 1999,
serving PCS, cellular and landline customers. With its increasing size, the
Company expects that the costs of each new call center will have an
increasingly smaller effect on results of operations.
In the second quarter of 1998, the Company announced that its contract
with BellSouth Cellular would not be renewed upon its conclusion in June
1998. This contract accounted for approximately 2.6% of the Company's
revenues for the six months ended June 30, 1998, and 3.5% of the Company's
revenues for the 1997 fiscal year. The Company also announced that a portion
of its contract with Ameritech Cellular related to the Chicago market would
not be replaced upon its expiration in July 1998. This portion of the
contract accounted for approximately 10.5% of the Company's revenues for the
six months ended June 30, 1998, and 15.1% of the Company's revenues for the
1997 fiscal year. In addition, the portion of the contract with Ameritech
Cellular related to the Detroit market is not expected to be replaced upon
its expiration in November 1998. This portion of the contract accounted for
approximately 6.3% of the Company's revenues for the six months ended June
30, 1998, and 8.6% of the Company's revenues for the 1997 fiscal year.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the items of the
Company's statements of operations as a percentage of revenues.
6
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- --------------------------
1998 1997 1998 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Direct operating costs 50.6 49.3 51.6 51.5
General and administrative costs 41.0 49.4 42.5 52.3
----- ----- ----- -----
Income (loss) from operations 8.4 1.3 5.9 (3.9)
Other income 0.7 0.6 0.7 1.9
Interest and loan fees (0.7) (1.6) (0.9) (1.8)
----- ----- ----- -----
Income (loss) before income taxes 8.4 0.3 5.7 (3.8)
Income tax expense 0.2 0.0 0.1 0.0
----- ----- ----- -----
Net income (loss) 8.2 0.3 5.6 (3.8)
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
COMPARISON OF SECOND QUARTER OF 1998 TO SECOND QUARTER OF 1997
Revenues increased 99.7% to $10.9 million from $5.5 million. Call volume
grew to over 17 million calls in the second quarter of 1998 from approximately 9
million calls during the second quarter of 1997. This increase was due
primarily to increased call volumes under existing contracts, particularly to
PCS customers. This increase was partially offset by a decrease in call volumes
resulting from the expiration of two contracts.
Direct operating costs increased 104.9% to $5.5 million from $2.7 million.
This increase was primarily due to increased call volumes and the cost of
operating additional call centers in 1998. As a percentage of revenues, direct
operating costs increased to 50.6% from 49.3%. This increase was due primarily
to increased personnel and data costs associated with the start-up of new call
centers.
General and administrative costs increased 65.6% to $4.5 million from $2.7
million. This increase resulted primarily from the investment in corporate
services necessary to support additional call centers and the increase in
depreciation expense associated with additional call centers. As a percentage
of revenues, general and administrative costs decreased to 41.0% from 49.4%.
This decrease resulted primarily from operating efficiencies associated with the
expansion of the Company's national call center network.
Depreciation and amortization increased by 67.8% to $871,000 from $519,000
due primarily to equipment purchased for new call centers and upgrades for
existing call centers and corporate operations.
Other income for the three months ended June 30, 1998 was $81,000 and
consisted primarily of interest income. Other income for the three months ended
June 30, 1997 was $34,000 and consisted primarily of interest income offset by
losses upon the disposition of assets.
Interest expense and loan fees decreased 9.9% to $78,000 from $87,000.
This decrease was attributable to the decrease in the average interest rate paid
on outstanding debt.
Income tax expense for the three months ended June 30, 1998 was $24,000,
for an effective tax rate of approximately 2.6%. This rate differs from the
combined federal and state statutory rate of approximately 39% due to the use of
net operating loss carryforwards. For the three months ended June 30, 1997, the
Company did not recognize income tax expense as the Company had experienced a
year-to-date net loss.
COMPARISON OF THE FIRST SIX MONTHS OF 1998 TO THE FIRST SIX MONTHS OF 1997
Revenues increased 100.6% to $20.0 million from $10.0 million. Call volume
grew to over 31 million calls in the first six months of 1998 from approximately
16 million calls during the first six months of 1997. This increase was due
primarily to increased call volumes under existing contracts, particularly to
PCS customers. This increase was partially offset by a decrease in call volumes
resulting from the expiration of two contracts.
7
<PAGE>
Direct operating costs increased 101.1% to $10.3 million from $5.1 million.
This increase was primarily due to increased call volumes and the cost of
operating additional call centers in 1998. As a percentage of revenues, direct
operating costs increased to 51.6% from 51.5%. This increase was due primarily
to increased personnel associated with the start-up of new call centers.
General and administrative costs increased 62.8% to $8.5 million from $5.2
million. This increase resulted primarily from the investment in corporate
services necessary to support additional call centers and the increase in
depreciation expense associated with additional call centers. As a percentage
of revenues, general and administrative costs decreased to 42.5% from 52.3%.
This decrease resulted primarily from operating efficiencies associated with the
expansion of the Company's national call center network.
Depreciation and amortization increased by 77.8% to $1.7 million from
$976,000 due primarily to equipment purchased for new call centers and upgrades
for existing call centers and corporate operations.
Other income for the six months ended June 30, 1998 was $147,000 and
consisted primarily of interest income offset by losses upon the disposition of
assets. Other income for the six months ended June 30, 1997 was $194,000 and
consisted primarily of interest income offset by losses upon the disposition of
assets.
Interest expense and loan fees decreased 2.8% to $180,000 from $185,000.
This decrease was attributable to the decrease in the average interest rate paid
on outstanding debt.
Income tax expense for the six months ended June 30, 1998 was $29,500, for
an effective tax rate of approximately 2.6%. This rate differs from the
combined federal and state statutory rate of approximately 39% due to the use of
net operating loss carryforwards. For the six months ended June 30, 1997, the
Company experienced a net loss and did not recognize income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents are recorded at cost which
approximates their fair market value. As of June 30, 1998, the Company had $7.9
million in cash and cash equivalents compared to $8.5 million at December 31,
1997, a decrease of $632,000 primarily from acquisition of capital equipment,
offset by cash provided by operations and proceeds from the issuance of debt.
Working capital was $10.8 million at June 30, 1998, compared to $9.8
million at December 31, 1997. The increase is primarily due to cash provided by
operations and the issuance of debt, offset by the use of cash for capital
expenditures.
The Company has a $6.0 million secured operating line of credit with a
commercial bank. The line of credit expires in 2000. Availability under the
line of credit may be subject to borrowing base requirements and requires
compliance with loan covenants. Under the terms of the agreement, outstanding
borrowings bear interest at the prime rate and all assets of the Company,
other than assets previously pledged under existing lease agreements, are
pledged to the bank as collateral. The agreement contains minimum net worth,
working capital and profitability requirements as well as certain other
restrictive covenants and prohibits the payment of cash dividends by the
Company without the bank's consent. As of June 30, 1998, the Company had
$800,000 in borrowings against this line of credit. The Company also has a
credit facility under which the Company may borrow up to $2.0 million to
finance purchases of capital equipment. Borrowings bear interest at the
prime rate (8.5 percent at June 30, 1998) plus 0.25 percent and are secured
by the purchased equipment. As of June 30, 1998, the Company had no
borrowings against this credit facility.
As of June 30, 1998, the Company had $946,000 in borrowings with a
commercial bank in order to finance equipment purchases. This borrowing bears
interest at the prime rate (8.5 percent at June 30, 1998) plus 0.5 percent and
is secured by the purchased equipment. The terms of the loan call for an
"interest only" accumulation period through August 1998 followed by 42 monthly
payments of principal plus interest. 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.
8
<PAGE>
CASH FLOW FROM OPERATIONS. Net cash from operations for the six months
ended June 30, 1998 was $1.2 million, resulting primarily from net income and
the effect of noncash depreciation and amortization, offset by an increase in
accounts receivable and a decrease in accounts payable and accrued expenses.
CASH FLOW FROM INVESTING ACTIVITIES. Cash used in investing activities was
$2.6 million for the six months ended June 30, 1998 and was related primarily
to capital expenditures for the upgrade and expansion of existing call centers.
CASH FLOW FROM FINANCING ACTIVITIES. Net cash provided by financing
activities was $757,000 for the six months ended June 30, 1998, resulting
primarily from the issuance of $800,000 of debt plus the exercise of warrants to
purchase 114,673 shares of Common Stock and the receipt of cash proceeds by the
Company of $267,000. Cash provided by financing activities was offset by the
repayment of capital lease obligations totaling $310,000.
FUTURE CAPITAL NEEDS AND RESOURCES. The primary uses of capital are
expected to be the build-out of new call centers, including initial operating
expenses, the payment of principal and interest on indebtedness and the
purchase of equipment and development of technology for the improvement of
existing call centers. The Company anticipates that its capital expenditures
will be approximately an additional $5.0 million to $7.0 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.
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 June 30, 1999. In addition, the Company is
communicating 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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 19, 1998, at the Annual Meeting of the Company's Shareholders, the
shareholders approved each of the proposals set forth in the Company's Proxy
Statement dated April 14, 1998, briefly described below:
(i) The shareholders were requested to elect the following individuals to
the Board of Directors:
<TABLE>
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
A. Jean de Grandpre 7,741,422 10,186
G. Raymond Doucet 7,741,922 9,686
William D. Rutherford 7,740,922 10,686
Timothy A. Timmins 7,741,922 9,686
James M. Usdan 7,740,922 10,686
</TABLE>
All nominees were elected to the Board of Directors.
9
<PAGE>
(ii) The shareholders were asked to approve the selection of Deloitte &
Touche LLP as the Company's independent auditors. The proposal was
approved by the shareholders, as 7,725,297 votes were cast for the
proposal, 8,286 votes were against the proposal and 18,025 votes
abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.5 Loan and Security Agreement between Silicon Valley Bank and the
Company dated June 24, 1998
27.1 Financial data schedule
(b) REPORTS FILED ON FORM 8-K
On June 30, 1998, the Company filed the following current report on
Form 8-K under Item 5, Other Events:
<TABLE>
<CAPTION>
Date of Report Topic
---------------------- ------------------------------------------------
<S> <C>
June 25, 1998 Metro One Telecommunications Comments
on Second Quarter Outlook, Contract Conclusions
</TABLE>
10
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Metro One Telecommunications, Inc.
----------------------------------
Registrant
Date: August 14, 1998
/s/ Stebbins B. Chandor, Jr.
---------------------------------------
Stebbins B. Chandor, Jr.
Senior Vice President
Chief Financial Officer
/s/ R. Tod Hutchinson
---------------------------------------
R. Tod Hutchinson
Vice President
Controller
11
<PAGE>
SILICON VALLEY BANK
LOAN AND SECURITY AGREEMENT
BORROWER: Metro One Telecommunications, Inc.
ADDRESS: 8405 S.W. Nimbus Avenue
Beaverton, OR 97008
DATE: June 24 1998
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date
between SILICON VALLEY BANK ("Silicon"), whose address is 3003 Tasman Drive,
Santa Clara, California 95054 and the borrower named above (the "Borrower"),
whose chief executive office is located at the above address ("Borrower's
Address").
1. LOANS.
1.1 LOANS. Silicon will make loans to the Borrower (the "Loans") in
amounts determined by Silicon up to the amounts (the "Credit Limits") shown on
the Schedule to this Agreement (the "Schedule") as the Credit Limit for the
Loans. The terms of the Schedule are incorporated into this Agreement. The
Borrower is responsible for monitoring the total amount of Loans and other
Obligations outstanding from time to time, and the Borrower shall not permit
that amount, at any time, to exceed the applicable Credit Limit. If at any time
the total of all outstanding Loans and all other Obligations exceeds the
applicable Credit Limit, the Borrower shall immediately pay the amount of the
excess to Silicon, without notice or demand.
1.2 INTEREST; DEBIT TO DEPOSIT ACCOUNTS. All Loans and all other
monetary Obligations shall bear interest at the applicable rates shown on the
Schedule hereto. Interest shall be payable monthly, on the due date shown on the
monthly billing from Silicon to the Borrower. The Borrower shall regularly
deposit all funds received from its business activities in accounts maintained
by the Borrower at Silicon. The Borrower hereby requests and authorizes Silicon
to debit any of the Borrower's accounts with Silicon, including without
limitation account no. 09003193-70, for payments of interest and principal due
on the Loans and all other obligations owing by the Borrower to Silicon. Silicon
shall promptly notify the Borrower of all debits which Silicon makes against the
Borrower's accounts. Any such debit against the Borrower's accounts shall in no
way be deemed a setoff by Silicon.
1.3 FEES. The Borrower shall pay to Silicon at closing a commitment
fee and other fees in the amounts shown on the Schedule (less any amounts
previously paid). These fees are in addition to all interest and other sums
payable to Silicon and are not refundable.
1.4 ADDITIONAL COSTS. In case any law, regulation, treaty or official
directive or the interpretation or application thereof by any court or any
governmental authority charged with the
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administration thereof or the compliance with any guideline or request of any
central bank or other govern mentalauthority (whether or not having the force
of law):
(a) subjects Silicon to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by the Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Silicon imposed by the United States of America or
any political subdivision thereof);
(b) imposes, modified or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Silicon; or
(c) imposes upon Silicon any other condition with respect to
its performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Silicon,
reduce the income receivable by Silicon or impose any expense upon Silicon with
respect to any loans, Silicon shall notify the Borrower thereof. Borrower agrees
to pay to Silicon the amount of such increase in cost, reduction in income or
additional expense as and when such cost, reduction or expense is incurred or
determined, upon presentation by Silicon of a statement of the amount and
setting forth Silicon's calculation thereof, all in reasonable detail, which
statement shall be deemed true and correct absent manifest error. The statement,
which shall be signed by an authorized officer of Silicon, will also state that,
to the best of such officer's knowledge, a majority of Silicon's borrowers with
legal obligations to Silicon similar to the Borrower's obligations and in a
similar fact situation as the Borrower (as it relates to this Section 1.4) has
also received statements requesting payments under this Section.
2. GRANT OF SECURITY INTEREST.
2.1 OBLIGATIONS. The term "Obligations" as used in this Agreement
means the following: the obligation to pay all Loans and all interest thereon
when due, and to pay and perform when due all other present and future
indebtedness, liabilities, obligations, guarantees, covenants, agreements,
warranties and representations of the Borrower to Silicon, whether joint or
several, monetary or non-monetary, and whether created pursuant to this
Agreement or any other present or future agreement (such as future agreements
relating to letters of credit issued by Silicon) or otherwise executed in
connection with this Agreement, including, without limitation, any and all
amendments, supplements, and modifications of the foregoing. Provided that
Silicon gives Borrower written notice, Silicon may, in its discretion, require
that the Borrower pay monetary Obligations in cash to Silicon, or charge them to
Borrowers' Loan account, in which event they shall bear interest at the rates
applicable to the Loans.
2.2 COLLATERAL. As security for all Obligations, the Borrower hereby
grants Silicon a continuing security interest in all of the Borrower's assets,
including but not limited to all of the Borrower's interest in the types of
property described below, whether now owned or hereafter acquired, and wherever
located (collectively, the "Collateral"): (a) All accounts, contract rights,
chattel paper, letters of credit, documents, securities, money, and instruments,
and all other obligations now or in the future owing to the Borrower; (b) All
inventory, goods, merchandise, materials, raw materials, work in process,
finished goods, farm products, advertising, packaging and shipping materials,
supplies, and all other tangible personal property
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which is held for sale or lease or furnished under contracts of service or
consumed in the Borrower's business, and all warehouse receipts and other
documents; (c) All equipment, including without limitation all machinery,
fixtures, trade fixtures, vehicles, furnishings, furniture, materials, tools,
machine tools, office equipment, computers and peripheral devices, appliances,
apparatus, parts, dies, and jigs; (d) All general intangibles including, but not
limited to, deposit accounts, goodwill, names, trade names, trademarks and the
goodwill of the business symbolized thereby, trademark applications, trade
secrets, drawings, blueprints, customer lists, patents, patent applications,
copyrights, copyright applications, security deposits, loan commitment fees,
federal, state and local tax refunds and claims, all rights in all litigation
presently or hereafter pending for any cause or claim (whether in contract, tort
or otherwise), and all judgments now or hereafter arising therefrom, all claims
of the Borrower against Silicon, all rights to purchase or sell real or personal
property, all rights as a licensor or licensee of any kind, all royalties,
licenses, processes, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation
credit, liability, property and other insurance), and all other rights,
privileges and franchises of every kind; (e) All books and records, whether
stored on computers or otherwise maintained; (f) All of the Borrower's cash; and
(g) All substitutions, additions and accessions to any of the foregoing, and all
products, proceeds and insurance proceeds of the foregoing, and all guaranties
of and security for the foregoing; and all books and records relating to any of
the foregoing. Silicon's security interest in any present or future technology
(including patents, trade secrets, and other technology) shall be subject to any
licenses or rights now or in the future granted by the Borrower to any third
parties in the ordinary course of the Borrower's business; provided that if the
Borrower proposes to sell, license or grant any other rights with respect to any
technology in a transaction that, in substance, conveys a major part of the
economic value of that technology, Silicon shall first be requested to release
its security interest in the same, and Silicon may withhold such release in its
discretion,
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
The Borrower represents and warrants to Silicon as follows, and the
Borrower covenants that the following representations shall continue to be true,
and that the Borrower shall comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. The Borrower is and shall
continue to be duly authorized, validly existing and in good standing under the
laws of the state of Oregon. The Borrower is and shall continue to be qualified
and licensed to do business in all jurisdictions in which any failure to do so
would have a material adverse effect on the Borrower. The execution, delivery
and performance by the Borrower of this Agreement, and all other documents
contemplated hereby have been duly and validly authorized, are enforceable
against the Borrower in accordance with their terms, and do not violate any law
or any provision of, and are not grounds for acceleration under, any agreement
or instrument which is binding upon the Borrower.
3.2 NAME, TRADE NAMES AND STYLES. The name of the Borrower set forth
in the heading to this Agreement is its correct name. Listed on the Schedule
hereto are all prior names of the Borrower and all of the Borrower's present and
prior trade names. The Borrower shall give Silicon 15 days' prior written notice
before changing its name or doing business under any other name. The Borrower
has complied, and shall in the future comply, with all laws relating to the
conduct of business under a fictitious business name.
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3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth
in the heading to this Agreement is the chief executive office for the Borrower.
In addition, the Borrower has places of business only at, and Collateral of the
Borrower is located only at, the locations set forth on the Schedule to this
Agreement. The Borrower shall give Silicon at least 15 days prior written notice
before changing its chief executive office or moving Collateral to any location
other than a location listed on the Schedule.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. The Borrower is now, and
shall at all times in the future be, the sole owner of all the Collateral,
except for items of equipment which are leased by the Borrower. The Collateral
now is and shall remain free and clear of any and all liens, charges, security
interests, encumbrances and adverse claims, except for the following ("Permitted
Liens"): (i) any liens existing on the date hereof and disclosed on the attached
Exhibit B; (ii) purchase money security interests in specific items of
equipment, other than equipment financed by the Loans described in the Schedule;
(iii) leases of specific items of equipment; (iv) liens for taxes not yet
payable; (v) additional security interests and liens consented to in writing by
Silicon in its sole discretion; and (vi) security interests being terminated
substantially concurrently with this Agreement. Silicon shall have the right to
require, as a condition to its consent under subparagraph (v) above, that the
holder of the additional security interest or lien sign an intercreditor
agreement on terms satisfactory to Silicon in its sole discretion, acknowledge
that the holder's security interest is subordinate to the security interest in
favor of Silicon, and that the Borrower agrees that any uncured default in any
obligation secured by the subordinate security interest shall also constitute an
Event of Default under this Agreement. Silicon now has, and shall continue to
have, a first priority, perfected and enforceable security interest in all of
the Collateral. The Collateral shall not be subject to any other liens or
security interests of any type except for the Permitted Liens. The Borrower
shall at all times defend Silicon and the Collateral against all claims of
others. None of the Collateral now is or shall be affixed to any real property
in such a manner, or with such intent, as to become a fixture.
3.5 MAINTENANCE OF COLLATERAL. The Borrower shall maintain the
Collateral in good working condition. The Borrower shall not use the Collateral
for any unlawful purpose. The Borrower shall immediately advise Silicon in
writing of any material loss or damage to the Collateral.
3.6 BOOKS AND RECORDS. The Borrower has maintained and shall maintain
at the Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 FINANCIAL CONDITION AND STATEMENTS. All financial statements now
or in the future delivered to Silicon have been, and shall be, prepared in
conformity with generally accepted accounting principles and now and in the
future shall completely and accurately reflect the financial condition of the
Borrower, at the times and for the periods therein stated. Since the last date
covered by any such statement, there has been no material adverse change in the
financial condition or business of the Borrower. The Borrower is now and shall
continue to be solvent. The Borrower shall provide Silicon: (i) within 20 days
after the end of each month, except as provided below, an accounts receivable
report and an accounts payable report, in such form as Silicon shall reasonably
specify; (ii) within 20 days after the end of each month, except as provided
below, 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 or Controller of the Borrower; (iii)
within 45 days after the end of each quarter, a Compliance Certificate in such
form as Silicon shall reasonably specify, signed by the Chief Financial Officer
or Controller of the Borrower, setting forth calculations showing compliance (at
the end of each such calendar quarter) with the financial
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covenants set forth on the Schedule hereto, 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; (iv) 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; (v) within 45 days after
the end of each quarter, Borrower's Form 10-Q; and (vi) within 90 days after
fiscal year end, Borrower's Form 10-K. The financial information referenced
in subsections (i) and (ii) above shall only be required when Borrower
utilizes the Secured Accounts Receivable Line of Credit on a Formula
Borrowing basis, as defined in the Schedule
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. The Borrower has
timely filed, and shall timely file, all tax returns and reports required by
foreign, federal, state and local law. The Borrower has timely paid, and shall
timely pay, all foreign, federal, state and local taxes, assessments, deposits
and contributions now or in the future owed by the Borrower. The Borrower may,
however, defer payment of any contested taxes, provided that the Borrower (i) in
good faith contests the Borrower's obligation to pay the taxes by appropriate
proceedings promptly and diligently instituted and conducted, (ii) notifies
Silicon in writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or take any other steps required to keep the
contested taxes from becoming a lien upon any of the Collateral. The Borrower is
unaware of any claims or adjustments proposed for any of the Borrower's prior
tax years which could result in additional taxes becoming due and payable by the
Borrower. The Borrower has paid, and shall continue to pay all amounts necessary
to fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms. The Borrower has not and shall not
withdraw from participation in, permit partial or complete termination of, or
permit the occurrence of any other event with respect to, any such plan which
could result in any liability of the Borrower, including, without limitation,
any liability to the Pension Benefit Guaranty Corporation or its successors or
any other governmental agency.
3.9 COMPLIANCE WITH LAW. Except for actions described in the June 15,
1995 Rescission Offer filed on Form SB-2, the Borrower has complied, and shall
comply, in all material respects, with all provisions of all foreign, federal,
state and local laws and regulations relating to the Borrower, including, but
not limited to, those relating to ownership of real or personal property,
conduct and licensing of the Borrower's business, and environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule hereto, there is
no claim, suit, litigation, proceeding or investigation pending or (to best of
the Borrower's knowledge) threatened by or against or affecting the Borrower in
any court or before any governmental agency (or any basis therefor known to the
Borrower) which may result, either separately or in the aggregate, in any
material adverse change in the financial condition or business of the Borrower,
or in any material impairment in the ability of the Borrower to carry on its
business in substantially the same manner as it is now being conducted. The
Borrower shall promptly inform Silicon in writing of any claim, proceeding,
litigation or investigation in the future threatened or instituted by or against
the Borrower involving amounts in excess of $250,000.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely
for lawful business purposes.
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3.12 NO PATENTS OR TRADEMARKS. The Borrower does not own, and the
Borrower does not have pending any application for the registration of, any
patent or trademark with the U.S. Patent and Trademark Office or any similar
office or agency of any state, of the United States of America or of any foreign
jurisdiction except as disclosed in the Schedule.
3.13 HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used in this
Agreement, shall have the same meanings as set forth in the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended,
42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986, Pub L. No. 99-499 ("SARA"), the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 49 U.S.C. Section 6901, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant to
any of the foregoing. The Borrower represents and warrants that: None of
Borrower's or any Subsidiary's properties or assets has ever been used by
Borrower or any Subsidiary or, to the best of Borrower's knowledge, by
previous owners or operators, in the disposal of, or to produce, store,
handle, treat, release, or transport, any hazardous waste or hazardous
substance other than in accordance with applicable law; to the best of
Borrower's knowledge, none of Borrower's properties or assets has ever been
designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site,
or a candidate for closure pursuant to any environmental protection statute;
no lien arising under any environmental protection statute has attached to
any revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or
any other federal or state governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the releasing, or
otherwise disposing of hazardous waste or hazardous substances into the
environment.
4. ADDITIONAL DUTIES OF THE BORROWER.
4.1 FINANCIAL AND OTHER COVENANTS. The Borrower shall at all times
comply with the financial and other covenants set forth in the Schedule to this
Agreement.
4.2 OVERADVANCE; PROCEEDS OF ACCOUNTS. If for any reason the total
of all outstanding Loans and all other Obligations exceeds the total Credit
Limit, as stated in the Schedule, without limiting Silicon's other remedies,
and whether or not Silicon declares an Event of Default, the Borrower shall
remit to Silicon all checks and other proceeds of the Borrower's accounts and
general intangibles, in the same form as received by the Borrower, within one
day after the Borrower's receipt of the same, to be applied to the
Obligations in such order as Silicon shall determine in its discretion.
4.3 INSURANCE. The Borrower shall at all times insure all of the
tangible personal property Collateral and carry such other business
insurance, with insurers reasonably acceptable to Silicon, in such form and
amounts as Silicon may reasonably require. All such insurance policies shall
name Silicon as an additional loss payee, and shall contain a lenders loss
payee endorsement in form reasonably acceptable to Silicon. Upon receipt of
the proceeds of any such insurance, Silicon shall apply such proceeds in
reduction of the Obligations as Silicon shall determine in its sole and
absolute discretion, except that, provided no Event of Default has occurred,
Silicon shall release to the Borrower insurance proceeds with respect to
equipment totaling less than $1,000,000, which shall be utilized by the
Borrower for the replacement of the equipment with respect to which the
insurance proceeds were paid. Silicon may require reasonable
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assurance that the insurance proceeds so released shall be so used. If the
Borrower fails to provide or pay for any insurance, Silicon may, but is not
obligated to, obtain the same at the Borrower's expense. The Borrower shall
promptly deliver to Silicon copies of all reports made to insurance companies.
Statutory notice regarding insurance:
WARNING
Unless Borrower provides Silicon with evidence of the insurance
coverage as required by this Loan Agreement, Silicon may purchase insurance
at Borrower's expense to protect Silicon's interest. This insurance may, but
need not, also protect Borrower's interests. If the collateral becomes
damaged, the coverage Silicon purchases may not pay any claim Borrower makes
or any claim made against Borrower. Borrower may later cancel this coverage
by providing evidence that Borrower has obtained property coverage elsewhere.
Borrower is responsible for the cost of any insurance purchased by
Silicon. The cost of this insurance may be added to Borrower's loan balance. If
the cost is added to Borrower's loan balance, the interest rate on the
underlying loan will apply to this added amount The effective date of coverage
may be the date Borrower's prior coverage lapsed or the date Borrower failed to
provide proof of coverage.
This coverage Silicon purchases may be considerably more expensive than
insurance Borrower can obtain on Borrower's own and may not satisfy any need for
property damage coverage or any mandatory liability insurance requirements
imposed by applicable law.
4.4 REPORT. The Borrower shall provide Silicon with such written
reports with respect to the Borrower as Silicon shall from time to time
reasonably specify.
4.5 ACCESS TO COLLATERAL, BOOKS AND RECORDS. If Borrower utilizes
the Secured Accounts Receivable Line of Credit on a Formula Borrowing basis,
as defined in the Schedule, 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 Borrowers 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 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 audit. If Borrower is in compliance with all financial
covenants, Silicon shall not conduct more than one (1) such audit in each
calendar year. If Borrower is not in compliance with all financial covenants,
Silicon shall conduct no more than four (4) such audits in each calendar
year. (This shall not be construed as a waiver of any default created by a
failure to comply with the applicable financial covenants.) 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.
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4.6 NEGATIVE COVENANTS. Except as may be permitted in the Schedule
hereto, the Borrower shall not, without Silicon's prior written consent, do
any of the following: (i) merge or consolidate with another corporation,
except that the Borrower may merge or consolidate with another corporation if
the Borrower is the surviving corporation in the merger and the aggregate
value of the assets acquired in the merger do not exceed 25% of the
Borrower's Tangible Net Worth (as defined in the Schedule hereto) as of the
end of the month prior to the effective date of the merger, and the assets of
the corporation acquired in the merger are not subject to any liens or
encumbrances, except Permitted Liens; (ii) acquire any assets, including
stock of any other entity, outside the ordinary course of business for an
aggregate purchase price (whether paid in cash, in stock of the Borrower or
other consideration) exceeding 25% of the Borrower's Tangible Net Worth (as
defined in the Schedule hereto) as of the end of the month prior to the
effective date of the acquisition; (iii) enter into any other material
transaction outside the ordinary course of business (except as permitted by
the other provisions of this Section); (iv) sell or transfer any Collateral,
except for the sale of finished inventory in the ordinary course of the
Borrower's business, and except for the sale of obsolete or unneeded
equipment in the ordinary course of business; (v) make any additional loans
of any money or any other assets to shareholders, employees or any other
person except in the ordinary course of business; (vi) incur any additional
debts that are outside the ordinary course of business or that would have a
material, adverse effect on the Borrower or on the prospect of repayment of
the Obligations, or incur any debt to any shareholder of the Borrower unless
such indebtedness is subordinated to the Loans in a written agreement
satisfactory to Silicon, (vii) guarantee or otherwise become liable with
respect to the obligations of another party or entity; (viii) pay or declare
any dividends on the stock of the Borrower (except for dividends payable
solely in stock of the Borrower); (ix) redeem, retire, purchase or otherwise
acquire, directly or indirectly, any of the stock of the Borrower (except for
purchases of the stock of the Borrower, in an amount not to exceed $700,000
in the aggregate, resulting from a threatened claim or litigation against the
Borrower arising from the failure of the Borrower to comply with applicable
securities laws as it relates to the past sales of securities); (x) make any
change (other than changes specifically permitted under this Section) in the
Borrower's capital structure which has a material adverse effect on that
Borrower or on the prospect of repayment of the Obligations; or (xi) dissolve
or elect to dissolve. Transactions permitted by the foregoing provisions of
this Section are only permitted if no Event of Default and no event which
(with notice or passage of time or both) would constitute an Event of Default
would occur as a result of such transaction.
4.7 LITIGATION COOPERATION. Should any third-party suit or proceeding
be instituted by or against Silicon with respect to any Collateral or in any
manner relating to the Borrower, the Borrower shall, without expense to Silicon,
make available the Borrower and its officers, employees and agents and the
Borrower's books and records to the extent that Silicon may deem them reasonably
necessary in order to prosecute or defend any such suit or proceeding.
4.8 VERIFICATION. Silicon may, from time to time, following seven
days' prior notification to the Borrower and consent of the Borrower (which
consent shall not be unreasonably withheld), verify directly with the respective
account debtors the validity, amount and other matters relating to the
Borrower's accounts, by means of mail, telephone or otherwise, either in the
name of the Borrower or Silicon or such other name as Silicon may reasonably
choose, provided that only one day prior notification shall be required (and the
Borrower's consent shall not be required) following an Event of Default. Silicon
shall be required to obtain the Borrower's consent as provided above prior to
any such verification of accounts unless an Event of Default has occurred.
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4.9 EXECUTE ADDITIONAL DOCUMENTATION. The Borrower agrees, at its
expense, on request by Silicon, to execute from time to time all documents in
form satisfactory to Silicon, as Silicon may deem reasonably necessary or useful
in order to perfect and maintain Silicon's perfected security interest in the
Collateral, and in order to fully consummate all of the transactions
contemplated by this Agreement.
5. TERM.
5.1 MATURITY DATE. This Agreement shall continue in effect until
the payment in full of the Obligations, provided, however, that the Borrower
shall repay in full the Secured Accounts Receivable Line of Credit described
on the Schedule, with all accrued but unpaid interest on that loan, not later
than the "Maturity Date" for each such loan set forth on the Schedule.
5.2 EARLY TERMINATION. Subject to Section 5.3, this Agreement may be
terminated, without penalty, prior to the Maturity Date as follows: (i) by the
Borrower, effective three business days after written notice of termination is
given to Silicon; or (ii) by Silicon at any time after the occurrence of an
Event of Default, without notice, effective immediately.
5.3 PAYMENT OF OBLIGATION . On the due dates stated in the Schedule,
or on any earlier effective date of termination, the Borrower shall pay and
perform in full all Obligations, whether evidenced by installment notes or
otherwise, and whether or not all or any part of such Obligations are otherwise
then due and payable. Notwithstanding any termination of this Agreement, all of
Silicon's security interests in all of the Collateral and all of the terms and
provisions of this Agreement shall continue in full force and effect until all
Obligations have been paid and performed in full; provided that, without
limiting the fact that Loans are discretionary on the part of Silicon, Silicon
may, in its sole discretion, refuse to make any further Loans after termination.
No termination shall in any way affect or impair any right or remedy of Silicon,
nor shall any such termination relieve the Borrower of any Obligation to
Silicon, until all of the Obligations have been paid and performed in full. Upon
payment and performance in full of all the Obligations, Silicon shall promptly
deliver to the Borrower termination statements, requests for reconveyances and
such other documents as may be required to fully terminate any of Silicon's
security interests.
6. EVENTS OF DEFAULT AND REMEDIES.
6.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and the Borrower
shall give Silicon immediate written notice thereof (a) any warranty,
representation, statement, report or certificate made or delivered to Silicon by
the Borrower or any of the Borrower's officers or employees, now or in the
future, shall be untrue or misleading in any material respect; or (b) the
Borrower shall fail to pay when due any Loan or any interest thereon or any
other monetary Obligation; or (c) the total Loans and other Obligations
outstanding at any time exceed the applicable Credit Limit; or (d) the Borrower
shall fail to comply with any of the financial covenants set forth in the
Schedule to this Agreement or shall fail to perform any other non-monetary
Obligation which by its nature cannot be cured; or (e) the Borrower shall fail
to pay or perform any other non-monetary Obligation, under this Agreement or any
other agreement or document relating to the Loans; or (f) any levy, assessment
attachment, seizure, lien or encumbrance is made on all or any part of the
Collateral; or (g) dissolution, termination of existence, insolvency or business
failure of the Borrower, or appointment of a receiver, trustee or custodian, for
all or any part of the property of, assignment for the benefit of creditors by,
or the commencement of any proceeding by the Borrower under any reorganization,
bankruptcy,
Page 9 - LOAN AND SECURITY AGREEMENT
<PAGE>
insolvency, arrangement, readjustment of debt, dissolution or liquidation law
or statute of any jurisdiction, now or in the future in effect; or (h) the
commencement of any proceeding against the Borrower or any guarantor of any
of the Obligations under any reorganization, bankruptcy, insolvency,
arrangement, readjustment of debt, dissolution or liquidation law or statute
of any jurisdiction, now or in the future in effect, which is not cured by
the dismissal thereof within 30 days after the date commenced; or (i)
revocation or termination of, or limitation of liability upon, any guaranty
of the Obligations; or (j) commencement of proceedings by any guarantor of
any of the Obligations under any bankruptcy or insolvency law; or (k) the
Borrower makes any payment on account of any indebtedness or obligation which
has been subordinated to the Obligations, unless such payment is permitted in
the applicable subordination agreement, or if any person who has subordinated
such indebtedness or obligations terminates or in any way limits his
subordination agreement; or (l) the Borrower shall generally not pay its
debts as they become due; or the Borrower shall conceal, remove or transfer
any part of its property, with intent to hinder, delay or defraud its
creditors, or make or suffer any transfer of any of its property which may be
fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (m)
either the Borrower or any other party thereto shall breach any subordination
agreement executed in connection with the Loans; or (n) there shall be a
change in the record or beneficial ownership of voting stock of the Borrower,
such that more than 20% of such voting stock is owned or controlled by a
person or entity who is not a shareholder of the Borrower as of the date of
this Agreement without the prior written consent of Silicon, PROVIDED it is
understood and agreed that, with respect to this clause (n), no Event of
Default shall arise if there is a change in the controlling interest of the
Borrower resulting from the consummation of a public offering or private
placement of shares of Borrower. Notwithstanding clause (k) above, provided
that there is no pending Event of Default at the time and that such payments
will not cause an Event of Default under the financial covenants stated in
the Schedule, the Borrower shall be permitted to make scheduled or
unscheduled payments on the Borrower's subordinated indebtedness outstanding
as of the date of this Agreement. If any of the foregoing defaults, other
than a failure to pay money and breach of any financial covenant set forth in
the Schedule, is curable, it may be cured if Borrower, after discovery or
notice of such default cures the failure within fifteen days (or within
thirty days in the case of clause (h) of this Section 6.1). Silicon may cease
making any Loans hereunder during the above cure periods, and thereafter if
an Event of Default has occurred.
6.2 REMEDIES. Upon the occurrence of any Event of Default and the
expiration of any applicable cure period under Section 6.1, and at any time
thereafter, Silicon, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by the Borrower), may do any one or
more of the following: (a) Cease making Loans or otherwise extending credit to
the Borrower under this Agreement or any other document or agreement; (b)
Accelerate and declare all or any part of the Obligations to be immediately due,
payable, and performable, notwithstanding any deferred or installment payments
allowed by any instrument evidencing or relating to any Obligation; (c) Take
possession of any or all of the Collateral wherever it may be found, and for
that purpose the Borrower hereby authorizes Silicon without judicial process to
enter onto any of the Borrower's premises without interference to search for,
take possession of, keep, store, or remove any of the Collateral, and remain on
the premises or cause a custodian to remain on the premises in exclusive control
thereof without charge for so long as Silicon deems it reasonably necessary in
order to complete the enforcement of its rights under this Agreement or any
other agreement; provided, however, that should Silicon seek to take possession
of any or all of the Collateral by Court process, the Borrower hereby
irrevocably waives: (i) any bond and any surety or security relating thereto
required by any statute, court rule or otherwise as an incident to such
possession; (ii) any demand for possession prior to the commencement of any suit
or action to recover possession thereof; and (iii) any
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<PAGE>
requirement that Silicon retain possession of and not dispose of any such
Collateral until after trial or final judgment; (d) Require the Borrower to
assemble any or all of the Collateral and make it available to Silicon at
places designated by Silicon which are reasonably convenient to Silicon and
the Borrower, and to remove the Collateral to such locations as Silicon may
deem advisable; (e) Require the Borrower to deliver to Silicon, in kind, all
checks and other payments received with respect to all accounts and general
intangibles, together with any necessary indorsements, within one day after
the date received by the Borrower; (f) Complete the processing, manufacturing
or repair of any Collateral prior to a disposition thereof and, for such
purpose and for the purpose of removal, Silicon shall have the right to use
the Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all
other property without charge; (g) Sell, lease or otherwise dispose of any of
the Collateral in its condition at the time Silicon obtains possession of it
or after further manufacturing, processing or repair, at any one or more
public and/or private sales, in lots or in bulk, for cash, exchange or other
property, or on credit, and to adjourn any such sale from time to time
without notice other than oral announcement at the time scheduled for sale.
Silicon shall have the right to conduct such disposition on the Borrower's
premises without charge, for such time or times as Silicon deems reasonable,
or on Silicon's premises, or elsewhere and the Collateral need not be located
at the place of disposition. Silicon may directly or through any affiliated
company purchase or lease any Collateral at any such public disposition, and
if permissible under applicable law, at any private disposition. Any sale or
other disposition of Collateral shall not relieve the Borrower of any
liability the Borrower may have if any Collateral is defective as to title or
physical condition or otherwise at the time of sale; (h) Demand payment of,
and collect any accounts and general intangibles comprising Collateral and,
in connection therewith, the Borrower irrevocably authorizes Silicon to
endorse or sign the Borrowers name on all collections, receipts, instruments
and other documents, to take possession of and open mail addressed to the
Borrower and remove therefrom payments made with respect to any item of the
Collateral or proceeds thereof, and, in Silicon's sole discretion, to grant
extensions of time to pay, compromise claims and settle accounts and the like
for less than face value; (i) Offset against any sums in any general, special
or other deposit accounts maintained by the Borrower with Silicon; and (j)
Demand and receive possession of any of the Borrower's federal and state
income tax and the books and records utilized in the preparation thereof or
referring thereto. All reasonable fees of professionals (including attorneys'
fees), expenses, costs, liabilities and obligations incurred by Silicon with
respect to the foregoing shall be added to and become part of the
Obligations, shall be due on demand, and shall bear interest at a rate equal
to the highest interest rate applicable to any of the Obligations. Without
limiting any of Silicon's rights and remedies, from and after the occurrence
of any Event of Default, the interest rate applicable to the Obligations
shall be increased by an additional two percent per annum, above the rate
otherwise applicable.
6.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. The
Borrower and Silicon agree that a sale or other disposition (collectively,
"sale") of any Collateral which complies with the following standards shall
conclusively be deemed to be commercially reasonable: (i) Notice of the sale
is given to the Borrower at least seven days prior to the sale, and, in the
case of a public sale, notice of the sale is published at least seven days
before the sale in a newspaper of general circulation in the county where the
sale is to be conducted; (ii) Notice of the sale describes the Collateral in
general, non-specific terms; (iii) The sale is conducted at a place
designated by Silicon, with or without the Collateral being present; (iv) The
sale commences at any time between 8:00 a.m. and 6:00 p.m; (v) Payment of the
purchase price in cash or by cashier's check or wire transfer is required;
(vi) With respect to any sale of any of the Collateral, Silicon may (but is
not obligated to) direct any prospective purchaser to ascertain directly from
the Borrower any and all information concerning the same. Silicon may employ
other methods of noticing and selling the Collateral, in its discretion, if
they are commercially reasonable.
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<PAGE>
6.4 POWER OF ATTORNEY. Upon the occurrence of any Event of Default
without limiting Silicon's other rights and remedies, the Borrower grants to
Silicon an irrevocable power of attorney coupled with an interest, authorizing
and permitting Silicon (acting through any of its employees, attorneys or
agents) at any time, at its option, but without obligation, with or without
notice to the Borrower, and at the Borrower's expense, to do any or all of the
following, in the Borrower's name or otherwise: (a) Execute on behalf of the
Borrower any documents that Silicon may, in its sole and absolute discretion,
deem advisable in order to perfect and maintain Silicon's security interest in
the Collateral, or in order to exercise a right of the Borrower or Silicon, or
in order to fully consummate all the transactions contemplated under this
Agreement, and all other agreements executed in connection with this Agreement,
each as amended from time to time; (b) demand, collect, receive, receipt for,
sue and recover all sums of money or other property which may now or hereafter
become due, owing or payable from the Collateral; (c) execute, sign and endorse
any and all claims, instruments, receipts, checks, drafts or warrants issued in
payment of any or all of the Collateral; (d) settle or compromise any and all
claims arising under the Collateral, and, in the place and stead of Borrower, to
execute and deliver its release and settlement for the claim; and (e) to file
any claim or claims or to take any action or institute or take part in any
proceedings, either in its own name or in the name of Borrower, or otherwise,
which in the discretion of Silicon may seem to be necessary or advisable.
Silicon shall exercise the foregoing powers in a commercially reasonable manner.
Any and all reasonable sums paid and any and all reasonable costs, expenses,
liabilities, obligations and attorneys' fees incurred by Silicon with respect to
the foregoing shall be added to and become part of the Obligations, shall be
payable on demand, and shall bear interest at a rate equal to the highest
interest rate applicable to any of the Obligations. In no event shall Silicon's
rights under the foregoing power of attorney or any of Silicon's other rights
under this Agreement be deemed to indicate that Silicon is in control of the
business, management or properties of the Borrower.
6.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of
any sale of the Collateral shall be applied by Silicon first to the costs,
expenses, liabilities, obligations and attorneys' fees incurred by Silicon in
the exercise of its rights under this Agreement, second to the interest due upon
any of the Obligations, and third to the principal of the Obligations, in such
order as Silicon shall determine in its sole discretion. Any surplus shall be
paid to the Borrower or other persons legally entitled thereto; the Borrower
shall remain liable to Silicon for any deficiency. If Silicon, in its sole
discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale or other disposition of
Collateral, Silicon shall have the option, exercisable at any time, in its sole
discretion, of either reducing the Obligations by the principal amount of
purchase price or deferring the reduction of the Obligations until the actual
receipt by Silicon of the cash therefor.
6.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set
forth in this Agreement, Silicon shall have all the other rights and remedies
accorded a secured party under the Oregon Uniform Commercial Code and under
all other applicable laws, and under any other instrument or agreement now or
in the future entered into between Silicon and the Borrower, and all of such
rights and remedies are cumulative and none is exclusive. Exercise or partial
exercise by Silicon of one or more of its rights or remedies shall not be
deemed an election, nor bar Silicon from subsequent exercise or partial
exercise of any other rights or remedies. The failure or delay of Silicon to
exercise any rights or remedies shall not operate as a waiver thereof, but
all rights and remedies shall continue in full force and effect until all of
the Obligations have been fully paid and performed.
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<PAGE>
7. GENERAL PROVISIONS.
7.1 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by regular first-class mail, or
certified mail return receipt requested, addressed to Silicon or the Borrower at
the addresses shown in the heading to this Agreement, or at any other address
designated in writing by one party to the other party. All notices shall be
deemed to have been given upon delivery in the case of notices personally
delivered to the Borrower or to Silicon, or at the expiration of two business
days following the deposit thereof in the United States mail, with postage
prepaid.
7.2 SEVERABILITY. Should any provision of this Agreement be held by
any court of competent jurisdiction to be void or unenforceable, such defect
shall not affect the remainder of this Agreement, which shall continue in full
force and effect.
7.3 INTEGRATION. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between the Borrower and Silicon and
supersede all prior and contemporaneous negotiations and oral representations
and agreements, all of which are merged and integrated in this Agreement.
WASHINGTON STATUTORY NOTICE: ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN
MONEY, EXTEND CREDIT, OR FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW. OREGON STATUTORY NOTICE: UNDER OREGON LAW,
MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY SILICON AFTER OCTOBER 3,
1989. CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR
PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S
RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY SILICON
TO BE ENFORCEABLE.
7.4 WAIVERS. The failure of Silicon at any time or times to require
the Borrower to strictly comply with any of the provisions of this Agreement or
any other present or future agreement between the Borrower and Silicon shall not
waive or diminish any right of Silicon later to demand and receive strict
compliance therewith. Any waiver of any default shall not waive or affect any
other default, whether prior or subsequent thereto. None of the provisions of
this Agreement or any other agreement now or in the future executed by the
Borrower and delivered to Silicon shall be deemed to have been waived by any act
or knowledge of Silicon or its agents or employees, but only by a specific
written waiver signed by an officer of Silicon and delivered to the Borrower.
The Borrower waives demand, protest, notice of protest and notice of default or
dishonor, notice of payment and nonpayment, release, compromise, settlement,
extension or renewal of any commercial paper, instrument, account, general
intangible, document or guaranty at any time held by Silicon on which the
Borrower is or may in any way be liable, and notice of any action taken by
Silicon, unless expressly required by this Agreement.
7.5 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of
its directors, officers, employees, agents, attorneys or any other person
affiliated with or representing Silicon shall be liable for any claims, demands,
losses or damages, of any kind whatsoever, made, claimed, incurred or suffered
by the Borrower or any other party through the ordinary negligence of Silicon,
or any of its directors, officers, employees, agents, attorneys or any other
person affiliated with or representing Silicon.
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<PAGE>
7.6 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by the Borrower and a duly
authorized officer of Silicon.
7.7 TIME OF ESSENCE. Time is of the essence in the performance by the
Borrower of each and every obligation under this Agreement.
7.8 ATTORNEYS' FEES AND COSTS. The Borrower shall reimburse Silicon
for all reasonable attorneys' fees and fees of other professionals, and all
filing, recording, search, title insurance, appraisal, audit, and other
reasonable costs incurred by Silicon, pursuant to, or in connection with, or
relating to this Agreement (whether or not a lawsuit is filed), including,
but not limited to, any reasonable attorneys' fees and costs Silicon incurs
in order to do the following: prepare and negotiate this Agreement and the
documents relating to this Agreement, obtain legal advice in connection with
this Agreement; enforce, or seek to enforce, any of its rights; prosecute
actions against, or defend actions by, account debtors; commence, intervene
in, or defend any action or proceeding (including any appeal or review);
initiate any complaint to be relieved of the automatic stay in bankruptcy;
file or prosecute any probate claim, bankruptcy claim, third-party claim, or
other claim; examine, audit, copy, and inspect any of the Collateral or any
of the Borrower's books and records; protect, obtain possession of, lease,
dispose of, or otherwise enforce Silicon's security interest in, the
Collateral and otherwise represent Silicon in any litigation relating to the
Borrower. If either Silicon or the Borrower file any lawsuit against the
other predicated on a breach of this Agreement, the prevailing party in such
action shall be entitled to recover its reasonable costs and professionals'
fees, including (but not limited to) reasonable attorneys' fees and costs
incurred in the enforcement of, execution upon or defense of any order,
decree, award or judgment and in any appeal or review by an appellate court.
All fees and costs to which Silicon may be entitled pursuant to this
Paragraph shall immediately become part of the Borrower's Obligations and
shall be due on demand.
7.9 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of the parties hereto; provided,
however, that the Borrower may not assign or transfer any of their rights under
this Agreement without the prior written consent of Silicon, and any prohibited
assignment shall be void. No consent by Silicon to any assignment shall release
the Borrower from its liability for the Obligations. The Borrower agrees and
consents to Silicon's sale or transfer, whether now or later, of one or more
participation interests in the Loans to one or more purchasers, whether related
or unrelated to Silicon, but the Borrower does not consent to the outright
assignment of the Loans to a third party. Silicon may provide, without any
limitation whatsoever, to any one or more purchasers of participation interests,
or potential purchasers of participation interests, any information or knowledge
Silicon may have about the Borrower or about any other matter relating to the
Loans and the Borrower hereby waives any rights to privacy it may have with
respect to such matters, provided, however, that all purchasers and potential
purchasers of participation interests in the Loans shall be bound by a written
confidentiality agreement in form acceptable to the Borrower. The Borrower
additionally waives any and all notices of sale of participation interests, as
well as a notices of any repurchase of such participation interests, provided,
however that Silicon shall give the Borrower written notice if as a result of a
sale of a participation interest in the Loans Silicon must obtain the consent of
the participant for approval of events other than extensions of the maturity of
the Loans, reduction of interest rate, forgiveness of principal or interest, or
sale of any material portion of the Collateral.
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<PAGE>
7.10 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used
in this Agreement for convenience. The Borrower acknowledges that the headings
may not describe completely the subject matter of the applicable paragraph, and
the headings shall not be used in any manner to construe, limit define or
interpret any term or provision of this Agreement. This Agreement has been fully
reviewed and negotiated between the parties and no uncertainty or ambiguity in
any term or provision of this Agreement shall be construed strictly against
Silicon or the Borrower under any rule of construction or otherwise.
7.11 MUTUAL WAIVER OF JURY TRIAL.
7.12 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts
and transactions hereunder and all rights and obligations of Silicon and the
Borrower shall be governed by, and construed in accordance with, the laws of
the State of Oregon. Any undefined term used in this Agreement that is
defined in the Oregon Uniform Commercial Code shall have the meaning assigned
to that term in the Oregon Uniform Commercial Code. As a material part of the
consideration to Silicon to enter into this Agreement, the Borrower (i)
agrees that all actions and proceedings relating directly or indirectly
hereto shall at Silicon's option, be litigated in courts located within
Oregon, and that the exclusive venue therefor shall be, at Silicon's option,
Multnomah County or Washington County; (ii) consents to the jurisdiction and
venue of any such court and consents to service of process in any such action
or proceeding by personal delivery or any other method permitted by law; and
(iii) waives any and all rights the Borrower may have to object to the
jurisdiction of any such court, or to transfer or change the venue of any
such action or proceeding.
BORROWER:
METRO ONE TELECOMMUNICATIONS, INC.
By: /s/ Timothy A. Timmins
------------------------------------
Title: President and CEO
--------------------------------
By: /s/ Stebbins B. Chandor, Jr.
------------------------------------
Title: SVP & CFO
--------------------------------
SILICON:
SILICON VALLEY BANK
By: /s/ Bruce Helberg
------------------------------------
Title: VP
--------------------------------
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<PAGE>
SCHEDULE TO LOAN AND SECURITY AGREEMENT
Borrower: Metro One Telecommunications, Inc.
Address: 8405 S.W. Nimbus Avenue
Beaverton, OR 97008
SECURED ACCOUNTS RECEIVABLE LINE OF CREDIT
CREDIT LIMIT: An amount not to exceed the lesser of: (i) $6,000,000 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 ("Formula
Borrowing"). 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 2.00: 1.00, the
Secured Accounts Receivable Line of Credit will not be
subject to the Borrowing Base limitation stated above
("Non-Formula Borrowing"), but the aggregate outstanding
amount of such Line of Credit shall not exceed $6,000,000 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, SBC Corporation and its subsidiaries,
Ameritech and its subsidiaries, AT&T and its subsidiaries
and Sprint 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.
INTEREST RATE: 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. Interest
Page 16 - LOAN AND SECURITY AGREEMENT
<PAGE>
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: $8,250, which is fully earned and payable at closing.
UNUSED LINE FEE: .20% per annum of the excess of the maximum commitment
amount of $6,000,000 over the average daily balance of such
Line of Credit. This fee is payable quarterly in arrears.
MATURITY DATE: June 24, 2000, 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) $2,000,000 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, 1997, plus 90% of new equipment purchased by Borrower
after December 31, 1997. 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.
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 December 24, 1999.
Once the maximum amount of the principal has been advanced
under this Secured Equipment Term Loan,
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<PAGE>
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 and used 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 0.25% 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 July, 1998. Commencing
on the last day of January, 2000, Borrower shall pay Silicon
42 equal monthly payments or 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: June 24, 2003, at which time all unpaid principal and
accrued but unpaid interest, fees and other charges shall be
due and payable.
COMMITMENT
FEE: $2,750, payable at closing. This fee is fully earned at
closing and is non-refundable.
PRIOR NAMES OF
BORROWER: See attached Exhibit B
TRADE NAMES OF
BORROWER: See attached Exhibit B
TRADEMARKS OF
BORROWER: See attached Exhibit B
OTHER LOCATIONS
AND ADDRESSES: See attached Exhibit B
MATERIAL ADVERSE
LITIGATION: See attached Exhibit B
Page 18 - LOAN AND SECURITY AGREEMENT
<PAGE>
FINANCIAL
COVENANTS: 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 $21,000,000.
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.
DEBT SERVICE
COVERAGE RATIO: Borrower shall maintain a Debt Service Coverage Ratio of not
less than 1.50:1.00, measured as of the end of each fiscal
quarter of Borrower.
DEFINITIONS: "Debt Service Coverage Ratio" means Earnings Before
Interest, Taxes, Depreciation and Amortization (EBITDA) for
the preceding four quarters, divided by interest expense and
principal payments on debt and capital leases for the
preceding four quarters.
"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: Borrower shall at all times comply with all of the following
additional covenants:
Page 19 - LOAN AND SECURITY AGREEMENT
<PAGE>
BANKING RELATIONSHIP. Borrower and its subsidiaries shall at
all times maintain their primary commercial 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.
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
Page 20 - LOAN AND SECURITY AGREEMENT
<PAGE>
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.
4. INSURANCE: Silicon shall have received wvidence 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
------------------------------
By: /s/ Stebbins B. Chandor, Jr.
------------------------------------
Title: SVP & CFO
--------------------------------
SILICON:
SILICON VALLEY BANK
By: /s/ Bruce Helberg
---------------------------------
Title: VP
------------------------------
Page 21 - LOAN AND SECURITY AGREEMENT
<PAGE>
EXHIBIT A
[INSERT BORROWING BASE CERTIFICATE]
Page 22 - LOAN AND SECURITY AGREEMENT
<PAGE>
BORROWING BASE CERTIFICATE
- --------------------------------------------------------------------------------
Borrower: Metro One Telecommunications, Inc. Lender: Silicon Valley Bank
8405 S.W. Nimbus Avenue 3003 Tasman Drive
Beaverton, OR 97008 Santa Clara, CA 95054
Commitment Amount: $6,000,000
- --------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of _________ $_________
2. Additions (please explain on reverse) $_________
3. TOTAL ACCOUNTS RECEIVABLE $_________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $_________
5. Balance of 50% over 90 day accounts $_________
6. Credit balances $_________
7. Concentration Accounts* $_________
8. Foreign Accounts $_________
9. Governmental Accounts $_________
10. Contra Accounts (See Schedule) $_________
11. Promotion or Demo Accounts $_________
12. Intercompany/Employee Accounts $_________
13. Other (please explain on reverse) $_________
14. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_________
15. Eligible Accounts (#3 minus #14) $_________
16. LOAN VALUE OF ACCOUNTS (80% of #15) $_________
* Accounts exceeding 40% of eligible accounts receivable
BALANCES
17. Maximum Loan Amount $_________
18. Total Funds Available [Lesser of #17 or #16) $_________
19. Present balance owing on Line of Credit $_________
20. RESERVE POSITION (#18 minus #19) $_________
THE UNDERSIGNED REPRESENTS AND WARRANTS THAT THIS IS TRUE, COMPLETE AND CORRECT,
AND THAT THE INFORMATION IN THIS BORROWING BASE CERTIFICATE COMPLIES WITH THE
REPRESENTATIONS AND WARRANTIES IN THE LOAN AND SECURITY AGREEMENT BETWEEN THE
UNDERSIGNED AND SILICON VALLEY BANK.
COMMENTS:
BANK USE ONLY
Rec'd By:________________
Auth. Signer
METRO ONE TELECOMMUNICATIONS, INC. Date:_________________
Verified: ______________
Auth. Signer
Date:____________________
_________________________
By:_________________________________
Name:_______________________________
Title:______________________________
<PAGE>
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
3003 Tasman Drive
Santa Clara, CA 95054
FROM: METRO ONE TELECOMMUNICATIONS, INC.
8405 S.W. Nimbus Avenue
Beaverton, OR 97008
The undersigned authorized officer of Metro One Telecommunications, Inc.
certifies that under the terms and conditions of the Loan and Security Agreement
between Borrower and Bank (the "Agreement"), (i) Borrower is in complete
compliance for the period ending _________ with all required covenants except as
noted below and (ii) all representations and warranties in the Agreement are
true and correct in all material respects on this date. Attached are the
required documents supporting the certification. The Officer certifies that
these are prepared in accordance with Generally Accepted Accounting Principles
(GAAP) consistently applied from one period to the next except as explained in
an accompanying letter or footnotes. The Officer acknowledges that no borrowings
may be requested at any time or date of determination that Borrower is not in
compliance with any of the terms of the Agreement, and that compliance is
determined not just at the date this certificate is delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C>
Compliance Certificate Quarterly within 45 days Yes No
Form 10-Q Quarterly within 45 days Yes No
Form 10-K FYE within 90 days
Annual (Audited) FYE within 90 days Yes No
A/R & A/P Agings* Monthly within 20 days Yes No
Borrowing Base Certificate* Monthly within 20 days Yes No
</TABLE>
* See Loan Agreement
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Quarterly Basis:
Minimum Quick Ratio 1.50:1.00 ____:1.00 Yes No
Debt to 0.75:1.00 _________ Yes No
Tangible Net
Worth Ratio:
Tangible Net $21,000,000 $_________ Yes No
Worth:
Debt Service 1.50:1.00 ____:1.00 Yes No
Coverage
Ratio:
Profitability: No loss in _________ Yes No
Excess of
$750,000 per
quarter
</TABLE>
<PAGE>
COMMENTS REGARDING EXCEPTIONS: See Attached. BANK USE ONLY
Sincerely, Received by:__________________
AUTHORIZED SIGNER
METRO ONE TELECOMMUNICATIONS, INC.
Date:_________________________
____________________________________
SIGNATURE Verified:_____________________
AUTHORIZED SIGNER
____________________________________
TITLE Date:_______________________
Compliance Status: Yes No
____________________________________
Date
2
<PAGE>
EXHIBIT B
TRADENAMES
Metro One Telecommunications
db.one
TRADEMARKS
Enhanced Directory Assistance-Registered Trademark-
StarBack-Registered Trademark-
AutoBack-Registered Trademark-
CallBack-SM-
NumberBack-SM-
Message Back-SM-
PERMITTED LIENS
1) Lease Agreement between Beaverton-Redmond Tech Properties and Metro One
dated 10/8/96.
2) Lease Agreement between Mutual Life Insurance Company of New York and Metro
One dated 4/1/97
3) Lease Agreement between Ambassador Associates Ltd. Partnership and Metro
One dated 8/15/94
4) Lease Agreement between Oakbrook Plaza, Ltd. and Metro One dated 10/2/97
5) Lease Agreement between WHMNY Real Estate LP and Metro One date 11/14/97
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUN-30-1998 AND THE RELATED STATEMENTS OF OPERATIONS FOR THE THREE
AND SIX MONTH PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 7,922 7,922
<SECURITIES> 0 0
<RECEIVABLES> 5,761 5,761
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 14,381 14,381
<PP&E> 22,255 22,255
<DEPRECIATION> 6,716 6,716
<TOTAL-ASSETS> 30,495 30,495
<CURRENT-LIABILITIES> 3,588 3,588
<BONDS> 1,854 1,854
0 0
0 0
<COMMON> 37,782 37,782
<OTHER-SE> (12,728) (12,728)
<TOTAL-LIABILITY-AND-EQUITY> 30,495 30,495
<SALES> 0 0
<TOTAL-REVENUES> 10,922 19,967
<CGS> 0 0
<TOTAL-COSTS> 10,001 18,794
<OTHER-EXPENSES> (81) (147)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 78 180
<INCOME-PRETAX> 925 1,140
<INCOME-TAX> 24 30
<INCOME-CONTINUING> 901 1,110
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 901 1,110
<EPS-PRIMARY> 0.08 0.10
<EPS-DILUTED> 0.08 0.10
</TABLE>
