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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _____________________
Commission File Number 0-27024
METRO ONE TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0995165
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8405 SW Nimbus Avenue Beaverton, OR 97008
(Address of principal executive offices)
Registrant's telephone number, including area code: 503-643-9500
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
--------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days. $136,755,977.
The number of shares outstanding of the registrant's Common Stock, as
of March 15, 1999, was 11,371,312.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 1999 Annual Meeting
are incorporated by reference into Part III of this Report.
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METRO ONE TELECOMMUNICATIONS, INC.
1998 FORM 10-K/A ANNUAL REPORT
TABLE OF CONTENTS
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Page No.
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PART I
Item 1 Business 3
Item 2 Properties 8
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote 8
of Security Holders
PART II
Item 5 Market for Registrant's Common Equity and 9
Related Stockholder Matters
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis 10
of Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures 17
About Market Risk
Item 8 Financial Statements and Supplementary Data 17
Item 9 Changes In and Disagreements With Accountants 17
on Accounting and Financial Disclosure
PART III
Item 10 Directors and Executive Officers of the Registrant 18
Item 11 Executive Compensation 20
Item 12 Security Ownership of Certain Beneficial 24
Owners and Management
Item 13 Certain Relationships and Related Transactions 25
PART IV
Item 14 Exhibits, Financial Statement Schedules, 26
and Reports on Form 8-K
Signatures 28
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PART I
ITEM 1. BUSINESS.
Metro One Telecommunications, Inc. (the "Company" or "Metro One") is
a leading independent developer and provider of Enhanced Directory Assistance
- -Registered Trademark-("EDA") for the telecommunications industry. The
Company contracts with wireless and other carriers to provide enhanced
directory assistance to the carrier's subscribers. In 1989, the Company
opened its first call center and began testing and offering EDA services. In
1991, the Company entered into its first contract to provide EDA services to
a cellular carrier's subscribers on a charge-per-call basis. The Company
operates call centers in many large metropolitan areas. In 1998, the Company
handled over 71 million requests for directory assistance on behalf of
carriers.
The Company's EDA provides callers with personalized, easy-to-use
directory assistance. The Company's operators provide EDA with a high level of
efficient, personalized service. The Company's EDA includes several connectivity
and content features in addition to those provided by traditional directory
assistance, including call completion, StarBack-Registered Trademark-,
categorical search and local event information. Call completion allows a
caller to be directly connected with the number requested, thus completing
the call without the need for redialing. The Company's StarBack feature
enables a subscriber to return to an operator at any time during a call. The
Company is developing additional EDA features including a broader array of
connectivity features and increased information content. The Company believes
that its EDA offers wireless and landline consumers a feature-rich,
user-friendly alternative to traditional directory assistance.
In addition to addressing the needs of the subscribers, the Company
believes that its EDA offers telecommunications carriers the opportunity to
differentiate their service by providing a high quality, value-added product to
subscribers, thereby assisting carriers in meeting heightened competition in the
telecommunications industry. The Company's array of connectivity features and
content, offered to subscribers in various configurations, allow the carrier to
distinguish its services from competitors and establish a separate identity in
the marketplace. The Company believes that its EDA also increases carriers'
revenues through increased call volumes and, in the case of wireless carriers,
billable air time.
The Company was incorporated in 1989 under the laws of the State of
Oregon. The Company's principal executive office is located at 8405 SW Nimbus
Avenue, Beaverton, Oregon 97008.
INDUSTRY BACKGROUND
The telecommunications industry is marked by rapid growth and increased
competition as a result of new technologies, a more favorable regulatory
environment and, specifically for carriers, an increasingly sophisticated and
demanding customer. Telecommunications carriers continue to face increasing
competitive pressures arising from the changes in the industry. Because of this
increasingly competitive environment, telecommunications carriers are confronted
with pressure to differentiate their products and establish brand loyalty. These
pressures are particularly acute for wireless and newer landline carriers, such
as competitive local exchange carriers ("CLECs"), who seek to increase market
penetration of their services and increase revenues while addressing competition
from rival carriers and new technologies. As competition increases, these
providers often seek to differentiate themselves by incorporating value-added
features into their services. Directory assistance is one such feature that
allows these carriers to compete more effectively, while increasing usage and
subscriber satisfaction.
Wireless telecommunications has been among the fastest growing segments
of the telecommunications industry during the 1990s. This growth stems largely
from technological advances that provide customers with affordable, high quality
mobile services. According to the Cellular Telecommunications Industry
Association ("CTIA"), the number of wireless subscribers at year-end 1998
exceeded 60 million. While this figure represents primarily cellular
subscribers, other types of wireless communications technologies, such as
Personal Communications Services ("PCS") and specialized mobile radio ("SMR"),
compete with cellular and have also experienced rapid growth. Industry experts
believe that the wireless telecommunications industry will continue to see rapid
growth.
Wireless subscribers need convenient and practical directory assistance
in which they are not hampered by the limited functionality of automated
operators or required to write down or memorize phone numbers. Wireless
subscribers benefit from EDA in that it can deliver features beyond mere phone
listings. Such features include call completion and connectivity,
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categorical searches, local events and movie listings. In turn, carriers
benefit from increased subscriber loyalty and the revenues derived from more
frequent usage.
THE DOMESTIC DIRECTORY ASSISTANCE MARKET
The Company believes that over ten billion directory assistance calls
are made annually by consumers and businesses in the United States. The majority
of these directory assistance calls are handled by the Regional Bell Operating
Companies ("RBOCs") from their incumbent positions as the local telephone
carriers. The majority of these local and long distance directory assistance
calls are from landline telephone users. The Company has focused on the wireless
segment of the market because of its belief that wireless directory assistance
represents a significant and rapidly growing segment of the market. This is due
to the expected continued growth in the wireless market and the natural
attractiveness of delivering directory assistance for wireless users. In
addition, the significantly larger landline directory assistance market is
beginning to represent improved opportunities for the Company due to that
segment's increased competition and need to differentiate its services.
The wireless telecommunications market is dominated by the cellular and
PCS affiliates of the established carriers as well as a few large independents.
The Federal Communications Commission ("FCC") initially granted cellular
licenses to only two systems (one for non-wireline carriers and one for wireline
carriers) in every metropolitan statistical and rural service area. The largest
U.S. cellular carriers include AT&T Wireless Services, Inc., GTE Wireless, the
cellular affiliates of the RBOCs such as Ameritech Cellular, and several
independents including AirTouch Communications Inc. and ALLTEL Corporation. In
early 1997, the FCC completed the auction of six PCS licenses in each market
area to potential PCS providers. In terms of estimated subscribers, the largest
PCS providers include Sprint PCS, AT&T Wireless Services, PrimeCo Personal
Communications L.P., Pacific Bell Wireless and Omnipoint Communications. During
1997, the majority of PCS licensees either initiated service or continued the
rollout of PCS service started in late 1996. In addition, one specialized mobile
radio provider, Nextel Communications, provides wireless communication services
utilizing SMR frequencies to customers in major metropolitan areas throughout
the U.S.
Directory assistance services for the cellular carriers were initially
provided exclusively by local exchange carriers, many of which were RBOCs.
However, because of an increasingly competitive marketplace, carriers have
sought ways to differentiate and improve their service, including outsourcing
services like directory assistance, in order to focus on their core
competencies. Meanwhile, PCS and other new providers also desire to outsource
their non-core operations, like directory assistance, and focus on ways to
acquire and retain new subscribers. Metro One believes it is well positioned to
provide the type of feature rich, easy-to-use and personalized enhanced
directory assistance that carriers desire. The Company's operating competencies,
derived from the establishment and operation of its national call center
network, allow it to provide carriers with a reliable, high-quality directory
assistance product that enables carriers operating in multiple markets to offer
a consistent EDA product, promoting greater system-wide marketing and brand
identification.
The entire telecommunications industry is currently undergoing various
regulatory, competitive and technological changes which the Company believes may
create new customers and affect existing customers of the Company. The Company
continues to monitor the ongoing changes in the marketplace and consider which
developments provide the most favorable opportunities for the Company to pursue.
METRO ONE'S STRATEGY
Metro One's mission is to be the leading provider of operator-assisted
enhanced directory assistance and information services. The key elements of
Metro One's strategy for fulfilling that mission are:
CONTINUOUSLY OFFER VALUE-ADDED PRODUCTS AND FEATURES. Metro One
endeavors to define a new standard for directory assistance by delivering
solutions that meet the expanding needs of telecommunications consumers. Through
continuous expansion of its connectivity features, enrichment of its database
and enhancement of its search capabilities, Metro One believes it can attract
and retain carriers and set an ever-increasing expectation for value-added
enhanced directory assistance.
EXPAND CALL CENTER NETWORK. Metro One expects to continue to expand its
national network of call centers in order to serve existing and new carrier
customers, which increasingly demand consistent service across their national
networks. Metro One believes its operational competencies and extensive
experience developing and maintaining its existing call center
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network will help the Company to successfully achieve its domestic growth
plans. In addition, the Company continues to examine opportunities to
leverage its operational competencies and technology in international markets.
LEVERAGE INFRASTRUCTURE; ACHIEVE GREATER OPERATING EFFICIENCIES. Metro
One intends to exploit its national call center network by providing service to
additional wireless and landline carriers from existing call centers. By
leveraging its established call center network, Metro One expects to achieve
greater operating efficiencies. The Company is also developing and implementing
software enhancements and adding new hardware to its EDA systems that are
intended to increase the productivity of its operators. Coupled with advanced
personnel training programs and operator monitoring capabilities, these
enhancements are expected to permit the Company to deliver its EDA to carrier
subscribers more efficiently while increasing call center profitability.
PURSUE OPPORTUNITIES TO PROVIDE ADDITIONAL OPERATOR-ASSISTED
SERVICES AND OTHER ENHANCED TELECOM SERVICES. Metro One intends to add
service offerings which complement its enhanced directory assistance. Such
offerings include operator-assisted services, such as concierge services, and
additional information services such as point-to-point driving directions.
The development and implementation of these services are intended to generate
incremental revenue for the Company while raising consumer expectation for
operator-assisted information services. In addition, Metro One will continue
to explore opportunities to leverage its call center infrastructure by
handling complimentary operator-assisted services and to enhance its carrier
relationships by offering additional enhanced telecom services.
CUSTOMERS AND MARKETS
The Company provides its EDA to three of the nation's largest cellular
carriers in a portion of their service areas and to three of the largest PCS
carriers, in terms of estimated subscribers. The Company has located call
centers in eighteen of the top 25 wireless markets (market size based on
estimated subscribers). The Company services the top 40 wireless markets from
these eighteen call centers. The Company believes that these major metropolitan
areas represent its greatest opportunities for future growth. Wireless usage in
these markets has attained sufficient levels to provide profitable call volumes,
while competition among carriers for these subscribers increases carrier need
for features that can differentiate their services. The Company strives to
expand relationships with existing carrier customers and to establish
relationships with new carrier customers.
The Company provides substantially all of its EDA services under ten
separate contracts that have terms that originally ranged from one to five
years. Five of these contracts have terms ending in 1999, one in 2000, one in
2001 and the remainder in 2002 and beyond. Under the EDA contracts, the
carrier generally agrees to route all local directory assistance calls to the
Company. However, these contracts generally allow the Company to offer EDA
services to competing carriers. The Company contractually agrees to staff its
EDA operations centers 24 hours a day, seven days a week, 365 days a year,
with a sufficient number of operators to perform the contracted services
within specified performance requirements.
The Company offers its services on behalf of the carrier under a brand
name selected by that carrier. For example, the Company offers its EDA to AT&T
Wireless Services subscribers in various markets as "AT&T Connect." The carrier
is generally responsible for all aspects of marketing, including advertising and
related costs. Although each carrier establishes its own fee structure with its
subscribers, Metro One charges carriers for its service on a per call basis,
usually with a set price per call and certain discounts dependent upon call
volume levels. The carrier is obligated for the charges regardless of whether it
is paid by the subscriber. During 1998, the Company's per-call charges to its
carrier customers averaged approximately $0.62.
The Company typically enters into a contract with a carrier that covers
either a large geographic market or a group of geographic markets to be served.
For example, the Company is a party to a single contract with Sprint Spectrum
L.P., doing business as Sprint PCS. Under the terms of this multi-year
agreement, the Company provides its local and nationwide EDA for each Sprint PCS
market and potentially for each Sprint PCS affiliate market. As of March 1999,
the Company was providing its EDA services from existing call centers for the
domestic markets in which Sprint PCS or its participating affiliates have
launched PCS service. The additional terms of the agreement do not differ
materially from the Company's general EDA contracts except that the Company is
required to open additional call centers in major metropolitan areas in 1999 and
2000. Because of the significant capital expenditures required of the Company by
the contract, Sprint PCS has agreed to pay, under certain circumstances, a
termination fee to the Company in the event that Sprint PCS elects to terminate
the agreement at any time after March 2000. The Company is also required, in
conjunction with the Sprint PCS contract, to develop and maintain an out-of-band
signaling system for each of its call centers.
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In 1998, eight customers accounted for the majority of the Company's
$45.1 million in revenues. For the year, the Company's five largest customers,
Sprint PCS, AirTouch, AT&T Wireless Services, Pacific Bell Wireless and
Ameritech Cellular, accounted for approximately 38, 18, 17, 12 and 11 percent of
revenues, respectively. In 1997, eight customers accounted for the majority of
the Company's $26.1 million in revenues. For the year, the Company's four
largest customers, US West NewVector (which now provides its wireless
communications services under the brand name of AirTouch), Ameritech Cellular,
Bell Atlantic Mobile and Sprint PCS, accounted for approximately 25, 24, 17 and
16 percent of revenues, respectively.
PRINCIPAL PRODUCT AND PRODUCT FEATURES
Metro One delivers its EDA using a customized array of hardware and
software and the Company's proprietary database search engines. The Company
receives incoming calls by means of contractually assigned directory assistance
numbers, typically 411 or 555-1212. Calls are answered by the Company's
operators, identifying the EDA service using the carrier's brand name. Upon
receiving information requests from subscribers, Company operators search the
Company's local database utilizing its search engine. The Company's EDA system
allows the operator to connect the caller to a party and/or supply the telephone
number, address, or other information, including movie listings, local events or
businesses of a certain type within a specific locality. The fee to a subscriber
for this service is fixed by the carrier and typically ranges from $0.75 to
$1.10 plus airtime charges.
The Company's EDA incorporates connectivity and content features
designed to make the telephone easier to use. It includes an automatic call
completion feature, as well as connectivity features such as StarBack
- -Registered Trademark-, NumberBack-Registered Trademark- and
AutoBack-Registered Trademark-. The patented StarBack feature allows a caller
to return immediately to an operator simply by pressing the star (*) key once
on the caller's telephone. The NumberBack feature provides the callers the
called number by simply pressing the number (#) key once. AutoBack
automatically returns the caller to a live operator upon a busy signal or a
"ring-no-answer" and other common situations without pressing a single key.
The Company also offers its carrier customers Short Messaging Service,
whereby its operators send customized alphanumeric messages on behalf of a
caller. In addition to these and other planned connectivity features, the
Company's EDA incorporates increased content to provide the consumer with a
broader, full-service alternative to traditional directory assistance. The
Company's database system, which is derived from a variety of sources, is
supplemented by localized information, such as information relating to local
events and amenities. This allows the Company to customize a local database
to include specialized information at the request of a carrier customer.
OPERATIONS
The Company maintains call centers in the Los Angeles, New York,
Chicago, Miami, Baltimore, San Francisco, Detroit, Philadelphia, Atlanta,
Dallas, Seattle, San Diego, Phoenix, Minneapolis, Denver, St. Louis, Sacramento
and Portland, Oregon metropolitan areas. Call center premises are leased by the
Company and range in size from approximately 4,000 to 15,000 square feet.
The Company develops a principal database for each call center,
obtaining data from a variety of sources including RBOCs, independent telephone
companies and other sources. The Company also utilizes national directory
assistance databases licensed by the Company from commercial sources. The
Company's call center network stations allow operators to efficiently query both
their local database and the national directory assistance database. The Company
has developed a database management system that it uses to maintain and update
directory listings in its database.
Metro One's EDA system incorporates programmable switching equipment,
host computers, voice response units and database servers. The Company contracts
with value-added resellers to assist in programming its switches and host
computer systems. This software enhances its call handling and billing
capabilities and provides the basis for the Company's connectivity features. The
Company has developed proprietary search engines to access information within
its databases and also licenses portions of its systems from various vendors.
The Company continues to upgrade its database management system and search
engines to increase the speed of information access and to broaden the
categorical search capabilities of its operators. The Company believes
enhancement of these tools will improve EDA search times, resulting in faster
call processing.
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Particularly because the Company's EDA is provided to subscribers on a
branded basis, the Company believes that the quality and reliability of its EDA
services are important considerations in a carrier's decision to offer the
Company's EDA. The Company maintains a national training force that incorporates
training personnel in each call center. Training personnel continually monitor,
test and evaluate all of the Company's call centers. The Company also monitors
call center performance for compliance with contract performance standards and
reports this information to carriers on a regular basis. Performance evaluations
are also solicited from customers on a regular basis. The Company's systems
maintenance and support personnel are accessible on a 24-hour basis through the
Company's Network Operations Center.
MARKETING
The Company markets directly to telecommunications carriers. Sales and
technical support personnel are based at the Company's corporate headquarters in
Beaverton, Oregon. In addition, the Company's call center managers are a key
element in the maintenance and development of carrier relationships.
The Company's major marketing programs focus on product awareness
principally through trade shows, marketing materials, including brochures and
videotape presentations and direct contacts with telecommunications carriers.
There are several major industry conferences that are important to the Company's
marketing program. The Company maintains communications with its existing
carrier customers through its quality assurance and customer service programs,
which afford the Company the opportunity to receive information regarding
evolving carrier needs. The Company also maintains an active program to identify
and meet with prospective wireless and landline carrier customers as well as new
carriers in emerging technologies.
COMPETITION
The directory assistance market is characterized by rapidly changing
market forces, technological advancements and increasing competition from large
carrier-affiliated companies and small, independent companies. The Company's
principal competitors include RBOC-owned or -affiliated carriers or non-RBOC
affiliated carriers, including GTE, that provide directory assistance both in
and outside their own operating regions. Although the Company believes that none
of these competitors offers a form of directory assistance that incorporates all
the connectivity and content features of the Company's EDA, these competitors
have substantially greater financial, technical and marketing resources than the
Company and may be able to do so in the future. The Company also faces
competition from independent companies seeking to offer forms of enhanced
directory assistance.
The Company believes that the principal competitive factors in the
directory assistance market are quality of product, available features,
technological innovation, experience, responsiveness to customers and price.
Historically, the Company has sought to distinguish itself from competitors
based on the quality of its product, the development of useful features and its
experience derived from successfully establishing a national network of call
centers. The Company is subject to competitive pressures with respect to the
pricing of its product and there can be no assurance that the Company will not
experience price or margin pressures in the future. The Company believes,
however, that its future growth will depend on its ability to maintain and
improve the quality of its product, to develop and successfully introduce new
connectivity features and content and to continue to provide superior service.
INTELLECTUAL PROPERTY
The Company regards certain aspects of its products and their features
and processes as proprietary and relies on a combination of trademark, patent
and trade secrets laws and confidentiality procedures to protect its proprietary
rights. The Company holds three United States patents, including one for its
StarBack technology and another for its "method of directions delivery"
associated with the Company's point-to-point directions service currently in
development. The Company has also obtained trademark registration in the United
States for its product names "Enhanced Directory Assistance," "StarBack,"
"AutoBack," "NumberBack" and "SureConnect" and service mark registration for
several of its other product feature names. The Company's policy has been to
enter into confidentiality agreements with all employees and limit access to
its documentation and other information related to its intellectual property.
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GOVERNMENT REGULATION
The Company's business depends upon relationships with companies that
are regulated by the FCC or state public utility commissions. Such regulation
applies to all communications common carriers, such as AT&T, RBOCs and other
long distance and local exchange carriers. Enhanced service companies such as
the Company may be subject to various levels of regulation or are completely
unregulated on a state-by-state basis.
EMPLOYEES
As of March 15, 1999, the Company had approximately 1,463 employees.
None of the Company's employees are subject to a collective bargaining
agreement. Management of the Company considers its relationship with its
employees to be good.
ITEM 2. PROPERTIES.
The Company leases its principal executive and administrative offices
at 8405 SW Nimbus Avenue, Beaverton, Oregon, comprising approximately 15,400
square feet, for a remaining term of four years with a renewal option. The
Company has entered into an agreement to relocate its principal executive and
administrative offices beginning in May 1999. The new facility comprises
approximately 35,000 square feet, with a lease term extending through 2009. The
Company intends to sublease its existing executive and administrative offices at
8405 SW Nimbus Avenue.
The Company also leases office facilities for its EDA operations. The
Company believes that expansion of its call center network will require the
Company to lease additional office facilities for its EDA operations. There are
approximately 22 facility leases in effect at March 15, 1999 with remaining
terms ranging from one month to five years.
The Company is not dependent upon any individually leased premises.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not aware of any pending legal proceedings other than
routine litigation that is incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the quarter ended December 31, 1998 to
a vote of security holders.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock trades on The Nasdaq National Market
- -Registered Trademark-under the symbol "MTON." The high and low sales prices
as reported on the Nasdaq National Market for each quarterly period within
the two most recent fiscal years were as follows:
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1998 HIGH LOW
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Quarter ended December 31, 1998 $13.63 $6.13
Quarter ended September 30, 1998 8.63 4.75
Quarter ended June 30, 1998 13.94 7.00
Quarter ended March 31, 1998 12.00 7.75
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1997 HIGH LOW
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Quarter ended December 31, 1997 $11.00 $7.00
Quarter ended September 30, 1997 9.50 6.50
Quarter ended June 30, 1997 8.25 5.25
Quarter ended March 31, 1997 9.75 5.63
</TABLE>
The approximate number of shareholders of record as of March 15, 1999
was 223. The Company believes it has approximately 4,656 shareholders including
an estimate of shareholders with shares held in street name.
The Company has never declared or paid cash dividends on its Common
Stock. The Company intends to retain earnings from operations for use in the
operation and expansion of its business and does not anticipate paying cash
dividends with respect to its Common Stock in the foreseeable future. The
Company's existing line of credit agreement prohibits the payment of cash
dividends.
ITEM 6. SELECTED FINANCIAL DATA
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YEARS ENDED DECEMBER 31,
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1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share data)
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Operations data:
Revenues $45,139 $26,090 $17,834 $13,074 $ 5,050
Direct operating costs 23,107 13,017 8,334 7,157 4,793
General and administrative costs 18,334 11,702 7,615 5,999 4,268
Income (loss) from operations 3,698 1,371 1,885 (82) (4,011)
Net income (loss) 3,603 1,432 1,166 (1,724) (5,035)
Basic earnings (loss) per share .33 .13 .13 (.31) (1.00)
Diluted earnings (loss) per share .32 .13 .12 (.31) (1.00)
Cash flow from operations 6,546 3,293 2,912 (2,252) (4,404)
Balance sheet data:
Cash and investments $ 7,570 $ 8,554 $14,137 $ 1,149 $ 310
Working capital 8,414 9,844 15,012 151 (351)
Total assets 36,311 29,125 24,529 8,716 6,299
Long-term obligations 719 1,416 1,168 1,466 6,432
Shareholders' equity 28,242 23,676 20,981 3,274 (14,713)
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ITEM 7. 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-K/A relative to the future constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements are subject to the business and
economic risks faced by the Company and the Company's actual results of
operations may differ materially from those contained in the forward looking
statements. For a discussion of such risks, see "Issues and Uncertainties."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Results of operations for the periods discussed below should not be
considered indicative of the results to be expected in any future period and
fluctuations in operating results may also result in fluctuations in the market
price of the Company's Common Stock. The Company's quarterly and annual
operating results have in the past and may in the future vary significantly
depending on factors such as changes in the telecommunications market, the
addition or expiration of Enhanced Directory Assistance-Registered Trademark-
contracts, increased competition, changes in pricing policies by the Company
or its competitors, lengthy sales cycles, lack of market acceptance or delays
in the introduction of new versions of the Company's product or features, the
timing of the initiation of wireless services or their acceptance in new
market areas by telecommunications customers, the timing and expense of the
Company's expansion of its national call center network, general economic
conditions and the other factors discussed under the heading "Issues and
Uncertainties" in this Item 7.
OVERVIEW
The Company is a leading independent provider of Enhanced Directory
Assistance-Registered Trademark- ("EDA") for the telecommunications industry.
The Company provides EDA under contracts with original terms ranging
from one to five years. Under the EDA contracts, carriers generally agree to
route all local directory assistance calls to the Company, bill their
subscribers for EDA calls and market the service. These contracts generally
permit the Company to offer its EDA services to competing carriers in the same
market. Metro One provides EDA to a carrier's subscribers under a brand name
designated by the carrier, such as "AT&T Connect." Although each carrier
establishes its own EDA fee structure for its subscribers, Metro One charges
carriers directly for its service on a per call basis, usually with a set price
per call and certain discounts dependent upon call volume levels. The carrier is
obligated for the charges regardless of whether it is paid by its subscriber.
To stimulate increased call volume and to attract and expand customer
commitments, the Company's strategy has included price discounts based upon call
volumes. Volume-based pricing discounts did not materially affect the Company's
average price per call in 1998; however, the Company expects that its average
price per call will decrease in 1999 as increasing call volumes trigger
volume-based pricing discounts and if the Company enters into additional or new
contracts. The Company believes that its reduced pricing better positions the
Company to retain and expand service with existing carrier customers, to
extend service to new wireless and landline carriers and to achieve greater
operating margins over time.
The Company has ten significant EDA contracts with six different
carriers to provide EDA in numerous metropolitan markets. The Company expects to
continue to expand its share of the telecommunications directory assistance
market by adding customer carriers to the existing national network of call
centers and by expanding this network into new geographic markets to serve new
and existing carrier customers. The Company anticipates that it will open
between six and ten new call centers by the end of 1999. Based on the Company's
historical experience and technical upgrade plans, establishing a call center
generally requires an investment of $750,000 to $1,250,000, exclusive of initial
operating losses. There can be no assurance, however, that costs associated with
establishment of new call centers will be consistent with costs experienced by
the Company on a historical basis.
In the first quarter of 1999, the Company extended its contract with
Sprint PCS to provide EDA services to Sprint PCS customers through December
2002. The contract was initially signed in the fourth quarter of 1996 and was
expanded in 1998 to include service to markets served by Sprint PCS under new
licenses. In conjunction with the introduction of services
10
<PAGE>
in new markets by Sprint PCS, the Company expects to open new call centers in
several major metropolitan areas in 1999 and 2000.
In the second quarter of 1997, the Company signed a multi-year contract
with AT&T Wireless Services under which regions of AT&T Wireless Services and
its affiliates may elect to offer the Company's EDA service to their
subscribers. To date, the Company is providing service to AT&T Wireless Services
in several metropolitan markets and expects to roll out service to other markets
during 1999.
In the fourth quarter of 1998, the Company extended its relationship
with Pacific Bell Wireless into the year 2000. In addition, in 1998 and early
1999, the Company announced several new contracts to provide its EDA service.
New customers include 360 Communications (since acquired by ALLTEL Corporation),
for which the Company provides service in selected markets. Other new customers
include TeleCorp Communications, US Unwired, Triton PCS, Iowa Wireless Services,
Central Wireless Partnership and Indus, Inc.
In the second quarter of 1998, the Company announced that portions
of its contract with Ameritech Cellular would not be replaced upon expiration
in 1998. The contract accounted for approximately 10.7% of the Company's
revenues for the year. In the second quarter of 1998, the Company announced
that its contract with BellSouth Cellular would not be replaced upon its
expiration in 1998. The contract accounted for approximately 1.2% of the
Company's revenues for the year.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected items
of the Company's statements of operations as a percentage of its revenues.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Direct operating costs 51.2 49.9 46.7
General and administrative costs 40.6 44.9 42.7
------ ------ ------
Income from operations 8.2 5.2 10.6
Other income (expense) 0.6 1.6 (0.6)
Interest and loan fees (0.6) (1.3) (3.2)
------ ------ ------
Income before income taxes 8.2 5.5 6.8
Income tax expense 0.2 0.0 0.3
------ ------ ------
Net income 8.0 5.5 6.5
------ ------ ------
------ ------ ------
New call centers opened 2 4 1
Call centers in operation 18 16 12
</TABLE>
1998 COMPARED TO 1997
Revenues increased 73.0% to $45.1 million from $26.1 million. Call
volume increased to approximately 71 million calls in 1998 from approximately 42
million calls in 1997. This increase was due primarily to increases in call
volumes under existing contracts and additional call volumes from new contracts,
offset by decreases in call volume due to the completion of contracts with
Ameritech, BellSouth and Bell Atlantic.
Direct operating costs consist of call center personnel and data costs.
These costs increased 77.5% to $23.1 million from $13.0 million. The increase in
direct operating costs was due primarily to increased call volumes and the cost
of operating several additional call centers in 1998. As a percentage of
revenues, direct operating costs increased to 51.2% from 49.9%, as personnel
costs increased due to the continuing build-out of the Company's national
network of call centers. The costs associated with the start-up of a new call
center increase personnel and data costs as a percentage of revenue for a period
of time, as the call center launches service and prior to optimal utilization of
personnel and data. This increase was partially offset by higher call volumes
and the associated operating efficiencies due to improved personnel utilization.
The Company anticipates that direct operating costs as a percentage of revenue
will increase in 1999 from 1998 levels, reflecting a lower
11
<PAGE>
average price per call and continued costs related to the build-out of its
national call center network. Additionally, the Company expects that data
costs as a percentage of revenue may increase from 1998 levels as the Company
continues to seek additional data for enhancement of its directory assistance
listings and information and for new markets that it serves.
General and administrative costs increased 56.7% to $18.3 million from
$11.7 million. This increase in costs was due primarily to the support of
increased operational activity overall and the costs associated with the opening
of several additional call centers in 1998. As a percentage of revenues, general
and administrative costs decreased to 40.6% from 44.9%. This decrease resulted
primarily from the decreasing investment in corporate services necessary to
support additional call centers. The Company anticipates that general and
administrative costs may decrease from 1998 levels as a percentage of revenue,
as less incremental investment in corporate services should be necessary to
support the continued build-out of the national network of call centers.
Depreciation and amortization increased by 66.8% to $3.8 million from $2.3
million due primarily to equipment purchased for new call centers and upgrades
for existing call centers and corporate research and development activities.
Other income for the year ended December 31, 1998 was $289,000, and
consisted of interest income of $365,000, offset primarily by asset valuation
losses of $73,000 related to equipment taken out of service during the year.
Other income for the year ended December 31, 1997 was $408,000 and consisted of
interest income of $569,000, offset primarily by expenses of $142,000 related to
estimated litigation settlement costs and asset valuation losses for assets
taken out of service during the year.
Interest expense and loan fees declined 7.5% to $309,000 from $334,000.
This decline was attributable solely to lower interest rates. Monthly average
debt outstanding increased to $1.7 million from $1.6 million.
Income tax expense for the year ended December 31, 1998 was $75,000,
for an effective tax rate of approximately 2.1%. This rate differs from the
combined federal and state statutory rate of approximately 39% due to the use of
net operating loss carryforwards. Income tax expense for the year ended December
31, 1997 was $13,000, for an effective tax rate of approximately 0.9%. This rate
differs from the combined federal and state statutory rate of approximately 39%
due to the use of net operating loss carryforwards.
1997 COMPARED TO 1996
Revenues increased 46.3% to $26.1 million from $17.8 million. Call
volume increased to approximately 42 million calls in 1997 from approximately 30
million calls in 1996. This increase was due primarily to increases in call
volumes under existing contracts and additional call volumes from new contracts.
Direct operating costs consist of call center personnel and data costs.
These costs increased 56.2% to $13.0 million from $8.3 million. The increase in
direct operating costs was due primarily to increased call volumes and the cost
of operating several additional call centers in 1997. As a percentage of
revenues, direct operating costs increased to 49.9% from 46.7%, as personnel
costs increased due to the continuing build-out of the Company's national
network of call centers. This increase was partially offset by higher call
volumes and the associated operating efficiencies due to improved personnel
utilization and the introduction of new technology designed to enhance
productivity.
General and administrative costs increased 53.8% to $11.7 million from
$7.6 million. This increase in costs was due primarily to the support of
increased operational activity overall and the costs associated with the opening
of several additional call centers in 1997. As a percentage of revenues, general
and administrative costs increased to 44.9% from 42.7%. This increase resulted
primarily from the investment in corporate services necessary to support
additional call centers. Depreciation and amortization increased by 71.2% to
$2.3 million from $1.3 million due primarily to equipment purchased for new call
centers, upgrades for existing call centers and corporate research and
development activities.
Other income for the year ended December 31, 1997 was $408,000, and
consisted of interest income of $569,000, offset primarily by expenses of
$142,000 related to estimated litigation settlement costs and asset valuation
losses for assets taken out of service during the year. Other expense for the
year ended December 31, 1996 was $109,000, and consisted primarily of estimated
litigation settlement expenses of $280,000 and asset valuation losses of
$151,000 related to equipment taken out of service during the year, offset by
interest income of approximately $288,000.
12
<PAGE>
Interest expense and loan fees declined 41.3% to $334,000 from
$568,000. This decline was attributable solely to the reduction in monthly
average debt outstanding to $1.6 million from $2.9 million.
Income tax expense for the year ended December 31, 1997 was $13,000,
for an effective tax rate of approximately 0.9%. This rate differed from the
combined federal and state statutory rate of approximately 39% due to the use of
net operating loss carryforwards. Income tax expense for the year ended December
31, 1996 was $41,000, for an effective tax rate of approximately 3.4%. This rate
also differed from the combined federal and state statutory rate of
approximately 39% due to the use of net operating loss carryforwards.
1996 COMPARED TO 1995
Revenues increased 36.4% to $17.8 million from $13.1 million. Call
volume increased to approximately 30 million calls in 1996 from approximately 22
million calls in 1995. This increase was due primarily to increases in call
volumes under existing contracts and additional call volumes from new contracts,
offset by a decrease in call volume due to the completion of a contract with
AirTouch in the first quarter of 1996.
Direct operating costs increased 16.4% to $8.3 million from $7.2
million. The increase in direct operating costs was due primarily to the cost of
operating an additional call center in 1996. As a percentage of revenues, direct
operating costs decreased to 46.7% from 54.7%. This decline primarily resulted
from higher call volumes and the associated operating efficiencies due to
improved personnel utilization and the introduction of new technology designed
to enhance productivity.
General and administrative costs increased 26.9% to $7.6 million from
$6.0 million. This increase in costs was due primarily to the support of
increased operational activity overall and costs associated with the operation
of an additional call center during 1996. As a percentage of revenues, general
and administrative costs declined to 42.7% from 45.6%. This decline resulted
primarily from the achievement of substantially higher revenues in 1996.
Depreciation and amortization increased by 32.7% to $1.3 million from $1.0
million due primarily to equipment upgrades for existing call centers.
Other expense for the year ended December 31, 1996 was $109,000, and
consisted primarily of estimated litigation settlement expenses of $280,000 and
asset valuation losses of $151,000 related to equipment taken out of service
during the year, offset by interest income of approximately $288,000. Other
income for the year ended December 31, 1995 was $114,000, and consisted
primarily of interest income of $48,000, approximately $99,000 of income
resulting from the settlement of a vendor claim, offset by estimated litigation
settlement expenses of approximately $24,000.
Interest expense and loan fees declined 58.5% to $568,000 from $1.4
million. This decline was attributable solely to the reduction in monthly
average debt outstanding to $2.9 million from $8.9 million.
Income tax expense for the year ended December 31, 1996 was $41,000,
for an effective tax rate of approximately 3.4%. This rate differed from the
combined federal and state statutory rate of approximately 39% due to the use of
net operating loss carryforwards. The Company did not provide for income taxes
in 1995 due to net operating losses for that year.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased to $8.4 million from $9.8 million at December
31, 1998 and 1997, respectively. The Company's current ratio decreased to 2.1:1
from 3.4:1 at December 31, 1998 and 1997, respectively. These decreases were due
primarily to costs associated with the continuing build-out of the Company's
national network of call centers.
The Company has a $6.0 million secured operating line of credit with a
commercial bank. The line of credit expires in 2000. Availability of funds is
subject to borrowing base requirements and compliance with loan covenants. Under
the terms of the agreement, outstanding borrowings bear interest at the prime
rate plus 0.25 percent and all assets of the Company are pledged to the bank as
collateral. The agreement contains minimum net worth and working capital
requirements as well as certain other restrictive covenants and prohibits the
payment of cash dividends by the Company. As of December 31, 1998, the Company
had $1.4 million 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. Borrowing bears interest at the prime
rate plus 0.50 percent and is secured by the purchased equipment. As of December
31, 1998, the Company had no borrowings
13
<PAGE>
against this line of credit. In addition, at December 31, 1998 the Company
had borrowings of $856,000 against a credit facility under which the Company
was able to borrow up to $1.0 million to finance purchases of capital
equipment. This borrowing bears interest at the prime rate plus 0.50 percent
and is secured by the purchased equipment. 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 1999.
The Company's cash and cash equivalents and investments are recorded
at cost that approximates their fair market value. As of December 31, 1998,
the Company had $7.6 million in cash and cash equivalents and investments
compared to $8.5 million at December 31, 1997, a decrease of approximately
$0.9 million resulting primarily from the continuing build-out of the
Company's national network of call centers.
CASH FLOW FROM OPERATIONS. Net cash from operations for the twelve
months ended December 31, 1998 was $6.5 million, resulting primarily from net
income and non-cash expense items, such as depreciation and amortization. Net
cash from operations for the twelve months ended December 31, 1997 and 1996
was $3.3 million and $2.9 million, respectively, resulting primarily from net
income and non-cash expense items, such as depreciation and amortization,
for the respective periods.
CASH FLOW FROM INVESTING ACTIVITIES. Cash used in investing activities
was $9.1 million for 1998 and was related primarily to capital expenditures for
new call centers and the upgrade and expansion of existing call centers and
purchase of investments.
Cash used in investing activities was $10.1 million for 1997 and was
related primarily to capital expenditures for new call centers and the upgrade
and expansion of existing call centers. Cash used in investing activities was
$3.4 million for 1996 and was related primarily to capital expenditures for
system redundancy capabilities and equipment upgrades for certain locations.
In the twelve months ended December 31, 1996, additional capital equipment
for the same purposes was acquired through lease financing in the amount of
$679,000.
CASH FLOW FROM FINANCING ACTIVITIES. Net cash provided by financing
activities for the twelve months ended December 31, 1998 was $1.6 million
resulting primarily from $1.4 million in borrowings against the Company's
line of credit and the exercise of warrants and options to purchase 262,087
shares of Common Stock resulting in net cash proceeds to the Company of
$963,000.
Net cash provided by financing activities for the twelve months ended
December 31, 1997 was $1.2 million resulting primarily from the exercise of
warrants and options to purchase 182,789 shares of Common Stock resulting in net
cash proceeds to the Company of $993,000. Net cash provided by financing
activities for the twelve months ended December 31, 1996 was $13.5 million
resulting primarily from the proceeds of the Company's initial public offering
of $12.5 million and the exercise throughout the year of warrants to purchase
818,756 shares of Common Stock resulting in net cash proceeds to the Company of
$2.6 million.
FUTURE CAPITAL NEEDS AND RESOURCES. The primary uses of capital are
expected to be the expansion of existing call centers, the funding of start-up
operating losses for newly opened call centers, the purchase of equipment and
development of technology for the improvement of existing and new call centers
and the payment of principal and interest on indebtedness.
Under the terms of its contract with Sprint PCS, the Company will be
required to open additional call centers in major metropolitan areas in 1999 and
2000. The Company is also required, in conjunction with the Sprint PCS contract,
to develop and maintain an out-of-band signaling system for each of its call
centers. The Company anticipates that its capital expenditures, including those
expenditures related to Sprint PCS, will be approximately $10.0 million to $14.0
million through the end of 1999, resulting primarily from the projected
expansion and other 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 1999.
EFFECT OF INFLATION. The effect of inflation was not a material factor
affecting the Company's business during the twelve months ended December 31,
1998.
14
<PAGE>
ISSUES AND UNCERTAINTIES
Metro One does not provide forecasts of future financial performance.
While Metro One's management is optimistic about the Company's long-term
prospects, the following issues and uncertainties, among others, should be
considered in evaluating its outlook.
RAPIDLY CHANGING TELECOMMUNICATIONS MARKET. The telecommunications
environment is characterized by rapid change and uncertainty due to merger,
acquisition, alliances and introduction of new carrier licensees into the
wireless and landline markets. This may result in competitive situations which
could unfavorably impact the Company, such as the withdrawal of a customer from
a market that the Company serves or increased negotiation leverage for newly
affiliated carriers in contract discussions for EDA services.
EXPIRATION OF EDA AGREEMENTS. The Company has ten significant EDA
contracts with six different carriers. Of these contracts, five have terms
ending in 1999, one in 2000, one in 2001 and the remainder in 2002 and
beyond. Efforts to renew existing and enter into new contracts may face
lengthy sales cycles and increased competitive, pricing and service pressures.
COMPETITION. The Company intends to compete to attract and retain
customers principally on the basis of services and features of its EDA, its
emphasis on quality and customer care, and price. The Company's ability to
compete successfully will also depend, in part, on its ability to anticipate and
respond to various competitive factors affecting the industry, including new
services that may be introduced, changes in customer preferences, economic
conditions and discount pricing strategies by competitors, all of which could
adversely affect the Company's business, financial condition and results of
operation.
PRICES. Prices the Company can obtain for its services are subject to
the changing telecommunications market, the relative leverage of negotiating
parties and the overall competitive landscape. The Company expects that its
average price per call will decrease as increasing call volumes trigger
volume-based pricing discounts and if the Company enters into additional or new
contracts. The Company believes that its reduced pricing better positions the
Company to retain and expand service with existing carrier customers and to
extend service to new wireless and landline carriers. There can be no assurance
that as existing contracts are renewed, if they are renewed, or as new contracts
are entered into, that the contracts will not provide for lower prices than the
Company currently experiences. This could have an adverse impact on the
business, financial condition and results of operations of the Company.
NEED FOR EXPANSION. Although the Company has a number of contracts for
delivery of its EDA services, there is no assurance that the Company will be
successful in expanding its services to a sufficient number of new customers or
markets to achieve substantial and sustainable profitability or that it will be
able to sustain past growth rates.
CONCENTRATION OF BUSINESS; LIMITED CUSTOMER BASE. Although the Company
seeks to increase the number of its EDA contracts with telecommunications
carriers, a small number of companies dominate the telecommunications market,
which limit the Company's potential customers and expansion opportunities. Three
of the dominant wireless carriers represented approximately 73 percent, 66
percent and 76 percent of the Company's revenue in 1998, 1997 and 1996,
respectively. The failure of the Company to maintain a satisfactory relationship
with any significant customer could have a material adverse effect on the
Company's business, financial condition and results of operation.
CHANGES IN WIRELESS USAGE BY SUBSCRIBERS. The usage patterns of
wireless subscribers are impacted by a number of factors, including pricing,
safety concerns, government regulation and various other items. Any factor that
causes wireless subscribers to decrease their usage could have an adverse impact
on the results of operations of the Company.
TECHNOLOGY. Telecommunications and the related directory assistance
market are characterized by rapid technological change, frequent introductions
of new and enhanced products and service, and changing consumer demands. The
Company's success will be dependent, in part, upon its ability to anticipate
changes in technology and industry standards and to successfully develop and
introduce new and improved EDA and other telecommunications services, which may
require substantial expenditures. There is no assurance that the Company will be
able to do so, that it will have adequate financial resources to undertake such
development or that it will not encounter technical or other difficulties that
could delay the introduction of its services or enhancements thereof.
RELIANCE ON THIRD PARTY VENDORS. The Company relies on key vendors to
supply programming and engineering services and to license technology. Although
there are a limited number of such service providers, the Company believes that
15
<PAGE>
other providers could provide for the Company's needs on comparable terms.
Abrupt changes in the arrangements could, however, cause a disruption in
operations or a delay in development efforts, either of which could affect
adversely affect the Company's business, financial condition and results of
operation.
QUALITY, COST AND AVAILABILITY OF DATA. The Company's operations are
dependent upon its access to names, telephone numbers and other information
supplied to callers directly or used in providing call completion. Such data
vary widely across geographic regions as to availability, cost, quality and
usefulness for the Company's purposes. Ultimately, the satisfaction of the
Company's carrier customers is dependent upon the quality of service being
provided to the carrier's subscribers. Although the Company believes that it
obtains its data in a manner that allows it to provide quality service to its
customers, there is no assurance that the Company will have access to sufficient
and quality data or that the Company can obtain and update data in a manner and
at prices that allow the Company to successfully and economically maintain or
improve current service levels.
POTENTIAL FOR UNIONIZATION AND STAFFING. The telecommunications
industry, particularly with respect to larger telecommunications companies, is
characterized by widespread union membership among its operators and other
workers. Although the Company believes that its relations with its employees are
good, no assurance can be given that unionization will not occur in the future.
The occurrence of such an event could likely have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, the Company is dependent upon the available labor pool for its
operators and no assurances can be given that the Company will be able to
continue to attract qualified staff at competitive wages.
INTELLECTUAL PROPERTY. To a limited extent, the Company relies upon a
combination of trade secret, patent and other intellectual property law,
non-disclosure agreements and other protective measures to preserve its rights
pertaining to its EDA, but there is no assurance that the Company can
meaningfully protect its intellectual property. Further, the Company is not
aware of any pending or threatened claims that affect any of the Company's
intellectual property rights. If any infringement claim is asserted against the
Company, the Company may seek to obtain a license of the other party's
intellectual property rights. There is no assurance that a license would be
available on reasonable terms or at all. Litigation with respect to patents or
other intellectual property matters could result in substantial costs and
diversion of management and other resources and could have a material adverse
effect on the Company's business, financial condition and results of operations.
YEAR 2000 COMPLIANCE. Certain technology hardware and software systems
use two-digit fields to score and recognize years, assuming the first two digits
of the year are "19" (e.g., the number "98" is recognized as "1998"). This and
certain similar protocols give rise to possible problems related to the
recognition of dates in years after 1999--so-called "Year 2000" issues. The
Company has commenced a program to identify, remediate, test and develop
contingency plans for the Year 2000 issue (the "Y2K Program"). Significant
issues are expected to be identified by April 1999. All phases are expected to
be completed prior to July 1999. The Y2K Program includes a review of (1)
information and other technology systems used in the Company's internal
business; (2) the Company's hardware and software products delivered to
customers; and (3) third party vendors, manufacturers and suppliers. An
assessment has been made of the key internal systems, and the Company believes
that systems that are not already Year 2000 ready will be modified, upgraded or
replaced. The Company is currently assessing its products, and is working with
third party vendors, manufacturers and suppliers to identify and resolve Year
2000 issues. The Company does not believe that the historical or anticipated
costs of remediation have had, or will have, a material effect on the Company's
financial condition or results of operations. However, because of the existence
of numerous systems and related components within the Company and the
interdependency of these systems, it is possible that certain systems at the
Company, or systems at entities that provide services or goods for the Company,
may fail to operate in the Year 2000. The Company is continuing to evaluate the
risks to the Company of failure to be Year 2000 compliant and to develop a
contingency plan. Although it is not currently anticipated, the inability to
complete the Company's Y2K Program on a timely basis or the failure of a system
at the Company or at an entity that provides services or goods to the Company
may have a material impact on the Company's business, financial condition and
results of operations.
16
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Substantially all of the Company's liquid investments are invested in
money market instruments, and therefore the fair market value of these
investments is affected by changes in market interest rates. However,
substantially all of the Company's liquid investments mature within six months.
As a result, the Company believes that the market risk arising from its holdings
of financial instruments is minimal.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See pages F-1 through F-13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
The following table sets forth the names of the Company's directors. Also
set forth is certain other information with respect to each such person's age at
March 15, 1999, the periods during which he has served as a director of the
Company, the expiration of his term as a director, positions currently held with
the Company and his principal occupation or employment during the last five
years.
<TABLE>
<CAPTION>
DIRECTOR EXPIRATION
NAME AGE SINCE OF TERM POSITION WITH THE COMPANY
- ---- --- ----- ------- -------------------------
<S> <C> <C> <C> <C>
A. Jean de Grandpre 77 1995 1999 Chairman of the Board of Directors
G. Raymond Doucet 56 1995 1999 Director
William D. Rutherford 60 1995 1999 Director
Timothy A. Timmins 42 1994 1999 President, Chief Executive Officer
and Director
James M. Usdan 49 1997 1999 Director
</TABLE>
A. JEAN DE GRANDPRE is Chairman of the Board of Directors of the Company
and has served as a director since 1995. Mr. de Grandpre is the founding
Director and Chairman Emeritus of Bell Canada Enterprises from which he
retired in 1989. He has served on the Canadian Advisory Board of BJB
International Management since 1993 and the Board of Thera Technologies since
1993. He is a former Director of Bell Canada, Northern Telecom Limited,
Chrysler Corporation, Chrysler Canada Ltd., and the International Advisory
Board of The Chemical Bank, New York. Mr. de Grandpre is a Life Member of
the Canadian Bar Association, Emeritus Member of the Canadian Association of
Canadian General Counsel, Member of the Bar of the Province of Quebec and
former Chancellor of McGill University. Mr. de Grandpre is a lawyer,
appointed Queen's Counsel and a Companion of the Order of Canada, the highest
honour granted a private citizen. Mr. de Grandpre is the recipient of the
Honourary Associate Award of the Conference Board of Canada and is an
inductee into the Canadian Business Hall of Fame.
G. RAYMOND DOUCET has served as a director of the Company since 1995 and
has served as a consultant to the Company since 1994. Mr. Doucet is the
President and Chief Executive Officer of TeleZone Corporation, a
Toronto-based telecommunications company. He is past President and Chief
Executive Officer of Douserv Management Inc., a Montreal-based holding
company. From 1984 to 1991, he was the Chairman and Chief Executive Officer
of Radcel Communications Inc. which was purchased by Rogers Communications,
Inc. Prior to that, he was President of Douserv Group Inc., a company
offering consulting, marketing and operational services to the
telecommunications industry. From 1965 to 1974, Mr. Doucet was the Director
of Technical Services with Bell Canada where he was responsible for the
planning and development of transmission and distribution networks. Mr.
Doucet serves on the Boards of Directors of Doucet & Associates Consultants
Inc., Servco Quebec Inc., TeleZone Inc. and Optel Corporation.
WILLIAM D. RUTHERFORD has served as a director of the Company since
1995. He is the Principal of Rutherford Investment Management, an investment
advisory service. During 1997, Mr. Rutherford was Chief Executive Officer of
Fiberboard Asbestos Compensation Trust. From 1995 to 1996, Mr. Rutherford
was a principal with Macadam Partners, a Portland-based investment firm. He
was formerly the Treasurer of the State of Oregon, where he was responsible
for the State's then $14 billion investment program and the state's then $7.5
billion in indebtedness and during which service he was elected Chairman of
the Oregon Investment Council. He also served for seven years as a Member of
the Oregon House of Representatives. From 1994 to 1995, Mr. Rutherford
served as Director of Special Projects for Metallgesellschaft Corp., a
multi-billion dollar international trading company. From 1990 through 1993,
Mr. Rutherford was President and a director of Societe Generale Touche
Remnant Corporation (U.S.), an international asset management company. From
1987 to 1990, Mr. Rutherford was President and Chief Executive Officer of ABD
International Management Corporation, an international asset
18
<PAGE>
management company. Mr. Rutherford formerly practiced law and served as the
Chief Executive Officer of a regional investment firm. A U.S. Army veteran,
Mr. Rutherford received a Bachelor of Science in History from the University
of Oregon and an LL.B. from Harvard University Law School.
TIMOTHY A. TIMMINS has served as President and Chief Executive Officer
of the Company since 1995 and a director of the Company since 1994. He
served as the Company's Executive Vice President and Chief Financial Officer
from 1993 to 1995. From 1985 to 1993, Mr. Timmins served in various
capacities with the Investment Banking Division of Kemper Securities, Inc.
and predecessor firms, ultimately as Senior Vice President. Mr. Timmins is a
certified public accountant and holds a Bachelor of Science degree in
Business Administration from Portland State University and a Masters degree
in Business Administration from the University of Southern California.
JAMES M. USDAN has served as a director of the Company since 1997. He
is the Chief Executive Officer of NextCare Hospitals, Inc., a provider of
long-term acute care hospital services. From 1990 to 1998, Mr. Usdan was the
President, Chief Executive Officer and a director of RehabCare Group Inc.
(NYSE: RHB), a provider of physical therapy, rehabilitation staffing and
outsourcing services. Prior to joining RehabCare, Mr. Usdan founded and was
President and Chief Executive Officer of American Transitional Care, Inc.
from 1987 to 1990, and, from 1986 to 1987, he was Executive Vice President
and Chief Operating Officer of Rehab Hospital Services Corporation, the
rehabilitation subsidiary of National Medical Enterprises. Mr. Usdan serves
on the Board of D & K Healthcare Services, Inc. (Nasdaq: DKWD) a
pharmaceutical distribution company, and is an Advisory Board member of
Mercantile Bank, the MedStat Group and Maryville College. Mr. Usdan holds a
Bachelor of Arts degree from Harvard College.
EXECUTIVE OFFICERS
The following table sets forth certain information at March 15, 1999
with respect to the executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Timothy A. Timmins 42 President, Chief Executive Officer and Director
Stebbins B. Chandor, Jr. 39 Senior Vice President, Chief Financial Officer and
Secretary
Gary E. Henry 42 Senior Vice President - Operations
Karen L. Johnson 49 Senior Vice President - Corporate Development
Hugh Knox 59 Vice President - Sales and Marketing
R. Tod Hutchinson 35 Vice President - Controller
</TABLE>
Information concerning the principal occupation of Mr. Timmins is set
forth under "Directors." Information concerning the principal occupation
during the last five years of the executive officers of the Company who are
not also directors of the Company is set forth below.
STEBBINS B. CHANDOR, JR. joined the Company in 1995 and serves as Senior
Vice President and Chief Financial Officer. He has served as Secretary of
the Company since 1996. From 1985 to 1995, Mr. Chandor served in various
corporate finance capacities with BA Securities, Inc., a wholly-owned
subsidiary of BankAmerica Corporation, and affiliated or predecessor firms
including Bank of America and Continental Bank N.A. Mr. Chandor holds a
Bachelor of Science degree in Chemical Engineering from Tufts University and
a Masters degree in Business Administration from the University of Southern
California.
GARY E. HENRY joined the Company in 1992 and serves as Senior Vice
President - Operations. From 1992 to 1999, he served the Company in a variety
of positions, most recently as Senior Vice President - Call Center Operations.
Prior to 1992, he was Senior Vice President, Corporate Services Director for
Imperial Corporation of America, Inc., a financial institution, with whom he
was employed since 1985. Mr. Henry holds a Bachelor of Arts degree in Public
Administration from San Diego State University.
KAREN L. JOHNSON joined the Company in 1993 and since 1998 has served as
Vice President - Corporate Development. From 1993 to 1998, she served as
Vice President - Controller. From 1989 to 1993, she was Financial Operations
Manager for Care Medical Equipment, Inc. and Care Ambulance, Inc. Ms.
Johnson is a certified public accountant with a Bachelor of Arts degree from
St. Olaf College and she performed post-graduate work in accounting and
business administration at Portland State University.
19
<PAGE>
HUGH KNOX joined the Company in 1998 and serves as Vice President -
Sales and Marketing. From 1989 to 1998, Mr. Knox worked as Vice President -
Sales and Marketing with ACS Wireless, a developer, manufacturer and
distributor of telephone headset equipment to various telecommunications
concerns, including the Regional Bell Operating Companies and major long
distance telephone companies. Prior to joining ACS Wireless, Mr. Knox served
in senior sales and marketing positions with Pacific Bell, Centex
Telemanagement and PacTel Connection. Mr. Knox attended San Diego State
University.
R. TOD HUTCHINSON joined the Company in January 1998 and serves as Vice
President - Controller. From 1995 to 1998, he was the Chief Financial
Officer for various start-up and early stage companies. From 1990 to 1995,
he was the Controller and Chief Financial Officer for InterVen Partners,
Inc., a regional venture capital firm. From 1987 to 1990, he was an
associate with Price Waterhouse, LLP. Mr. Hutchinson is a certified public
accountant and holds a Bachelors degree in Finance from the University of
Texas at Austin and a Masters degree in Business Administration from the
University of Oregon.
Section 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10%
of a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission reports of ownership and changes in
ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than 10% shareholders are required by
Securities and Exchange Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file. To the Company's knowledge,
based solely on review of the copies of such reports furnished to the
Company, the Company believes that during fiscal 1998 its officers, directors
and greater than 10% shareholders complied with all applicable Section 16(a)
filing requirements.
ITEM 11. EXECUTIVE COMPENSATION.
Summary of Cash and Certain Other Compensation
The following table sets forth, for the fiscal year ended December 31,
1998, certain summary information concerning compensation of the person
serving as the Company's Chief Executive Officer and the four other most
highly paid executive officers of the Company whose total annual salary and
bonus exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS COMPENSATION
- --------------------------- ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Timothy A. Timmins .................. 1998 $150,026 $150,000 --- ---
President, Chief Executive ..... 1997 150,026 3,000 --- ---
Officer and Director ........... 1996 127,385 --- --- ---
Patrick M. Cox (1) ................. 1998 $ 70,451 $ 62,877 --- $ 72,123 (2)
Vice President, Technology ..... 1997 135,017 2,700 --- ---
1996 116,154 --- --- ---
Gary E. Henry ....................... 1998 $138,220 --- 30,000 ---
Senior Vice President, ......... 1997 98,752 --- 28,570 ---
Operations ..................... 1996 68,997 --- 22,856 ---
Stebbins B. Chandor, Jr ............. 1998 $119,954 --- 20,000 ---
Senior Vice President, Chief ... 1997 110,417 --- --- ---
Financial Officer and Secretary 1996 96,000 --- --- ---
Karen L. Johnson .................... 1998 $100,154 --- 20,000 ---
Senior Vice President, Corporate 1997 88,044 --- 45,712 ---
Development .................... 1996 69,923 --- 14,285 ---
</TABLE>
20
<PAGE>
(1) Mr. Cox resigned effective on June 19, 1998.
(2) These amounts were paid to Mr. Cox pursuant to an agreement with the
Company which provides for the payment to Mr. Cox of twelve months
compensation through June 19, 1999.
OPTION GRANTS
During the year ended December 31, 1998, the following Named Executive
Officers were granted options to purchase Common Stock pursuant to the Company's
1994 Stock Incentive Plan (the "Plan").
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZED VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
-----------------
% OF TOTAL
NUMBER OF OPTIONS/
SECURITIES SARS
UNDERLYING GRANTED TO
OPTIONS/ EMPLOYEES EXERCISE OR
SARS IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED YEAR ($/SH) DATE 5% 10%
- ---- ------- ---- ------ ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Timothy A. Timmins --- --- --- --- --- ---
Patrick M. Cox (1) --- --- --- --- --- ---
Gary E. Henry 30,000 7.38% $11.44 12/9/08 $215,837 $546,972
Stebbins B. Chandor, Jr. 20,000 4.92% $11.44 12/9/08 $143,891 $364,648
Karen L. Johnson 20,000 4.92% $11.44 12/9/08 $143,891 $364,648
</TABLE>
(1) Mr. Cox resigned effective on June 19, 1998.
YEAR-END OPTION TABLE
The following table provides information regarding exercises of options
during 1998 and unexercised options held, as of December 31, 1998, by the
Named Executive Officers.
<TABLE>
<CAPTION>
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT YEAR-END YEAR-END
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C> <C> <C>
Timothy A. Timmins --- --- 399,981 / 0 $2,079,901 / $0
Patrick M. Cox (1) 25,000 $120,625 174,991 / 0 $909,953 / $0
Gary E. Henry --- --- 41,427 / 62,855 $152,780 / $156,078
Stebbins B. Chandor, Jr. --- --- 58,033 / 33,393 $301,772 / $105,844
Karen L. Johnson --- --- 31,631 / 62,651 $122,751 / $204,863
</TABLE>
(1) Mr. Cox resigned effective on June 19, 1998.
21
<PAGE>
DIRECTORS' COMPENSATION AND OTHER ARRANGEMENTS
Generally, directors who are not employees of the Company receive $500
plus expenses for each Board meeting attended locally or via telephone and
$2,500 plus expenses for each meeting attended in person for which
substantial travel is required. Beginning in June 1999, each non-employee
director will also be compensated by an annual fee of $7,500. Additionally,
after such date, non-employee directors will be compensated at the rate of
$250 for each committee meeting attended. Messrs. de Grandpre and Doucet, in
1995, and Mr. Rutherford, in 1996, were granted non-qualified options to
purchase 57,140 shares of Common Stock of the Company at a price of $8.05 per
share. Such options vest over a four-year period, which vesting has
accelerated due to the occurrence of certain events as outlined in the option
agreements. Beginning in 1996, Directors who are not employees of the
Company are granted non-qualified options to purchase 10,000 shares of Common
Stock at the time of recruitment ("Recruitment Grant') and 10,000 shares of
Common Stock in October of each year ("Annual Grant"). The non-employee
Chairman of the Board on July 31 of each year will also be granted a
non-qualified option to purchase 14,285 shares of Common Stock (also, an
"Annual Grant"). Annual Grants and Recruitment Grants are vested and
exercisable at the time of the grant and have exercise prices equal to the
market price on the date of grant. Mr. de Grandpre also receives $2,000 a
month for his service as Chairman of the Board.
The Company entered into a two-year consulting agreement with G. Raymond
Doucet, a director, in December 1994. In addition to receiving a consulting
fee of $5,000 per month, the Company in 1994 granted Mr. Doucet an option to
purchase up to 85,710 shares of its Common Stock at an exercise price of
$2.31 per share. The Company entered into a new, two-year consulting
agreement with Mr. Doucet in December 1996. In connection with the new
agreement, in addition to receiving a consulting fee of $5,000 per month, Mr.
Doucet was granted a non-qualified option to purchase 30,000 shares of Common
Stock of the Company at a price of $13.38 per share. The option vests upon
the occurrence of certain performance milestones relating to the Company
entering into long-term EDA Service Contracts with certain entities. As of
March 15, 1999, the option had vested to the extent of 10,000 shares. The
consulting agreement was renewed for an additional an one-year term in
November 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During the fiscal year ended December 31, 1998, the members of the
Compensation Committee were Messrs. de Grandpre, Doucet, Rutherford, and
Usdan. There were no employee directors on the Compensation Committee and no
Interlocks.
COMPENSATION COMMITTEE REPORT
Under rules established by the Securities and Exchange Commission (the
"SEC"), the Company is required to provide certain data and information in
regard to the compensation and benefits provided to the Company's Chief
Executive Officer and the four other most highly compensated executive
officers. In fulfillment of this requirement, the Compensation Committee has
prepared the following report for inclusion in the Proxy Statement.
COMPENSATION PHILOSOPHY. The Compensation Committee of the Board of
Directors, which is responsible for reviewing and evaluating the compensation
of the Company's executive officers, approves and recommends to the Board of
Directors compensation and award levels for executive officers of the
Company. With regard to compensation actions affecting Mr. Timmins, all of
the members of the Board of Directors except for Mr. Timmins act as the
approving body.
The executive compensation program of the Company has been designed to:
- Support a pay for performance policy that is tied to corporate and
individual performance;
- Motivate executive officers to achieve strategic business initiatives
and reward them for their achievement;
- Provide compensation opportunities which are comparable to those
offered by similarly-sized telecommunications and technology-based
companies; and
- Align the interest of executives with the long-term interest of
shareholders through award opportunities that can result in ownership
of Common Stock.
Currently, the executive compensation program is comprised of a base salary
and long-term incentive opportunities in the form of stock options, along
with benefits offered to all employees of the Company.
22
<PAGE>
BASE SALARIES. The base salaries of the Company's executive officers
for 1998 were established effective December, 1998. In establishing those
salaries, the Compensation Committee considered information about salaries
paid by companies of comparable size in the telecommunications outsourcing
industry, individual performance, position, and internal comparability
considerations. While all of these factors were considered, the Compensation
Committee did not assign specific weights to any of these factors.
STOCK PLANS. The long-term, performance-based compensation of
executive officers takes the form of option awards under the Company's 1994
Stock Incentive Plan (the "1994 Plan"), which is designed to align a
significant portion of the executive compensation program with long-term
shareholder interests. The 1994 Plan permits the granting of several
different types of stock-based awards. The Compensation Committee believes
that equity-based compensation ensures that the Company's executive officers
have a continuing stake in the long-term success of the Company. All options
granted by the Company have been granted with an exercise price equal to the
market price of the Company's Common Stock on the date of grant and,
accordingly, will only have value if the Company's stock price increases. In
granting options under the 1994 Plan, the Compensation Committee generally
takes into account each executive's responsibilities, relative position in
the Company and past grants.
CHIEF EXECUTIVE OFFICER COMPENSATION. In 1995, the Company entered
into an employment contract with Mr. Timmins that allows for a base annual
compensation and increases based upon achievement of certain corporate goals
and upon a formula tied to the profitability of the Company and for
employment for a five-year period ending in 2000. The agreement provides for
an adjusted base salary for Mr. Timmins of $150,000. The employment
agreement provides for annual bonuses up to 100 percent of adjusted base
salary for annual earnings per share growth from 8 percent to 30 percent. In
developing its recommendations regarding Mr. Timmins' compensation, the
Committee considered a number of factors, including analyses of compensation
in similarly-sized companies in the telecommunications outsourcing industry,
analyses of compensation levels in similar companies in the Company's local
geographic area and the Company's improved performance in revenue and net
income as compared to the prior year. Mr. Timmins earned bonus payments for
1998 of $150,000.
The employment agreement also provides for payment to Mr. Timmins of one
additional year of adjusted base salary and a pro rata portion of annual
bonuses in the event of termination of employment upon death or for reasons
other than cause, six months additional adjusted base salary and a pro rata
portion of annual bonuses due to disability, or six months additional
adjusted base salary and no bonuses if for cause. Under the employment
agreement, Mr. Timmins has been granted certain indemnification rights. In
addition, the employment agreement prevents Mr. Timmins from competing with
the Company or soliciting the employment of other individuals employed by the
Company during Mr. Timmins' employment and for a period of one year
thereafter. Under the employment agreement, Mr. Timmins may not disclose the
Company's confidential information to outsiders during employment and for a
period of two years thereafter.
COMPENSATION COMMITTEE
A. Jean de Grandpre
G. Raymond Doucet
William D Rutherford
James M. Usdan
23
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total shareowner return on
the Company's Common Stock for the period beginning August 23, 1996, the date
the Company's Common Stock began trading on the Nasdaq National Market, and
ending December 31, 1998, as compared with the cumulative total return of the
Russell 2000 Index and a Peer Group Index. The Peer Group consists of:
Billing Concepts Corp., Boston Communications Group, International
Telecommunication Data Systems, Inc., Lightbridge, Inc., Premiere
Technologies, Inc., Saville Systems PLC, SCC Communications Corp. and West
Teleservices Corp. The total shareowner return for each company in the Peer
Group has been weighted according to the company's stock market
capitalization. This graph assumes an investment of $100 on August 23, 1996
in each of the company's common stock, the Russell 2000 Index and the Peer
Group Index, and assumes reinvestment of dividends, if any. The stock price
performance shown on the graph below is not necessarily indicative of future
stock price performance.
PERFORMANCE GRAPH
<TABLE>
<CAPTION>
MTON RUSSELL PEER GROUP
---- ------- ----------
<S> <C> <C> <C>
23-Aug-96 100 100 100
31-Dec-96 76.8 109.3 110.6
31-Dec-97 81.7 131.7 138.2
31-Dec-98 129.3 127.2 102.9
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
ownership of the Company's Common Stock as of March 15, 1999 with respect to:
(i) each person known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each Named Executive Officer and (iv) all directors and executive officers as
a group. Except as otherwise indicated, the Company believes the that persons
listed below have sole investment and voting power with respect to the shares
of Common Stock owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
---------------- -----------------
NAMED EXECUTIVE OFFICERS, DIRECTORS AND 5% SHAREHOLDERS (1) NUMBER (2) PERCENT (2)
- ----------------------------------------------------------- ---------- -----------
<S> <C> <C>
A. Jean de Grandpre 194,928 1.7
G. Raymond Doucet 290,496 2.5
William D. Rutherford 118,759 1.0
Timothy A. Timmins 408,910 3.5
James M. Usdan 30,300 *
Gary E. Henry 50,730 *
Stebbins B. Chandor, Jr. 68,147 *
Karen L. Johnson 40,168 *
All directors and officers as a group (10 persons) 1,213,374 10.5
</TABLE>
- --------------------------
* Less than one percent
(1) The address of each beneficial owner identified is 8405 SW Nimbus Avenue,
Beaverton, Oregon 97008.
24
<PAGE>
(2) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes voting power and
investment power with respect to shares. Shares issuable upon the exercise
of outstanding stock options that are currently exercisable or become
exercisable within 60 days from March 15, 1999 are considered outstanding
for the purpose of calculating the percentage of Common Stock owned by such
person, but not for the purpose of calculating the percentage of Common
Stock owned by any other person. The number of shares that are issuable
upon the exercise of options that are currently exercisable or exercisable
within 60 days of March 15, 1999 is as follows: A. Jean de Grandpre -
129,996 shares; G. Raymond Doucet - 97,140 shares; William D. Rutherford -
87,140 shares; Timothy A. Timmins - 399,981 shares; James M. Usdan - 30,000
shares; Gary E. Henry - 49,730 shares; Stebbins B. Chandor, Jr. - 63,747
shares; Karen L. Johnson - 39,768 shares; and all directors and officers as
a group - 908,438 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1994, G. Raymond Doucet and A. Jean de Grandpre, both of whom are
now directors of the Company, purchased 8% Convertible Secured Notes ("8%
Notes") of the Company in the principal amounts of $275,000 and $150,000,
respectively, through investment companies controlled by them, as part of a
convertible secured note financing of the Company (the "Secured Note
Financing"). The 8% Notes beneficially held by Messrs. Doucet and de
Grandpre were converted into 119,042 and 64,932 shares of the Common Stock of
the Company, respectively, during the fourth quarter of 1995.
In 1996, the lenders in the Secured Note Financing, including Mr. Doucet
and Mr. de Grandpre (the "Lenders"), and the Company entered into a
Shareholder Rights Agreement (the "Agreement"), pursuant to which the Company
granted to the Lenders certain registration rights with respect to shares of
Common Stock of the Company held by the Lenders and a right of first refusal
with respect to future sales of Common Stock, preferred stock or other
securities issued by the Company. Mr. Doucet exercised this right of first
refusal and purchased 16,712 shares in the August 1996 initial public
offering of the Company's Common Stock at the initial public offering price
of $8.50. The Agreement provides for the termination of this right of first
refusal upon the consummation of an underwritten public offering of the
Common Stock of the Company in which the Company receives cash proceeds of
not less than $10 million based on a per share price of at least $10.50.
The Company entered into a two-year consulting agreement with Mr. Doucet
in 1994 and granted him a five-year option to purchase up to 85,710 shares of
its Common Stock at an exercise price of $2.31 per share. The Company
entered into a new, two-year consulting agreement with Mr. Doucet in 1996 and
in connection with that agreement, the Company granted Mr. Doucet an
additional option to purchase up to 30,000 shares of its Common Stock at an
exercise price of $13.38. See "Directors' Compensation and Other
Arrangements" in Item 11.
The Company believes that the foregoing transactions were fair to the
Company and in its best interests. As a matter of policy, all future
transactions between the Company and any of its officers, directors or
principal stockholders or their affiliates will continue to be approved by a
majority of the Board of Directors and will continue to be on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties, and will continue to be for bona fide business purposes of the
Company.
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) EXHIBITS
<TABLE>
<C> <S>
3.1 Third Restated Articles of Incorporation of Metro One
Telecommunications, Inc. (5)
3.2 Amended and Restated Bylaws of Metro One Telecommunications, Inc. (1)
10.1 Form of Enhanced Directory Assistance Agreement (2)
10.2 1994 Stock Incentive Plan (3)
10.3 Consulting Agreement with G. Raymond Doucet, dated December 1, 1996 (6)
10.4 Loan and Security Agreement between Silicon Valley Bank and the Company
dated March 15, 1996 (7)
10.5 1995 Employment Agreement with Timothy A. Timmins (7)
10.6 Lease Agreement between and among Petula Associates, Ltd., Koll
Creekside Associates and the Company (2)
10.7 Enhanced Directory Assistance Agreement between Sprint Spectrum L.P.
and the Company dated October 23, 1996 (9)(10)
10.8 Amendment to 1994 Stock Incentive Plan (4)
10.9 Loan Modification Agreement between Silicon Valley Bank and the Company
dated March 14, 1997 (5)
10.10 Loan and Security Agreement between Silicon Valley Bank and the Company
dated June 24, 1998 (8)
10.11 Lease Agreement between and among Murray Scholls, LLC, Gramor
Development Northwest, Inc. and the Company (10)
10.12 Amendment #1 to Specific Agreement between Sprint Spectrum L.P. and the
Company dated December 9, 1998 (9)(10)
23.1 Consent of Deloitte & Touche LLP, independent certified public
accountants
27.1 Financial Data Schedule (10)
</TABLE>
- --------------------
(1) Incorporated herein by reference to the Company's Registration
Statement on Form S-1 dated August 22, 1996, File No. 333-05183.
(2) Incorporated herein by reference to the Company's Registration
Statement on Form SB-2, File No. 33-88926-LA.
(3) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 dated January 24, 1997, File No. 333-20387.
(4) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 dated February 5, 1998, File No. 333-45643.
26
<PAGE>
(5) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB dated March 31, 1998, Commission No. 0-27024.
(6) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB dated March 31, 1997, Commission No. 0-27024.
(7) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB dated August 20, 1996, Commission No. 0-27024.
(8) Incorporated herein by reference to the Company's Quarterly Report on
Form 10-QSB dated August 14, 1998, Commission No. 0-27024.
(9) Certain portions of Exhibits 10.7 and 10.12 are the subject of a
request for confidential treatment and have been omitted from the
Exhibit and have been filed separately with the Commission.
(10) Incorporated herein by reference to the Company's Annual Report on
Form 10-K dated March 31, 1999, Commission No. 0-27024.
(b) REPORTS FILED ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
METRO ONE TELECOMMUNICATIONS, INC.
By: /s/ Timothy A. Timmins
----------------------
Timothy A. Timmins
President and Chief Executive Officer
Date: April 29, 1999
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Timothy A. Timmins President, Chief Executive April 29, 1999
- ---------------------- Officer and Director
Timothy A. Timmins
/s/ Stebbins B. Chandor, Jr. Senior Vice President and April 29, 1999
- ---------------------------- Chief Financial Officer
Stebbins B. Chandor, Jr.
/s/ R. Tod Hutchinson Vice President April 29, 1999
- --------------------- Controller
R. Tod Hutchinson
/s/ A. Jean de Grandpre Chairman of the Board of Directors April 29, 1999
- -----------------------
A. Jean de Grandpre
/s/ G. Raymond Doucet Director April 29, 1999
- ---------------------
G. Raymond Doucet
/s/ William D. Rutherford Director April 29, 1999
- -------------------------
William D. Rutherford
/s/ James M. Usdan Director April 29, 1999
- ------------------
James M. Usdan
</TABLE>
28
<PAGE>
Metro One Telecommunications, Inc.
INDEPENDENT AUDITORS REPORT
- --------------------------------------------------------------------------------
To The Board of Directors and Shareholders of
Metro One Telecommunications, Inc.
Beaverton, Oregon
We have audited the accompanying balance sheets of Metro One Telecommunications,
Inc. as of December 31, 1998 and 1997 and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all respects, the
financial position of Metro One Telecommunications, Inc. as of December 31, 1998
and 1997 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
February 15, 1999
The accompanying notes are an integral part of these statements.
F-1
<PAGE>
METRO ONE TELECOMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands, except per share data) YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Revenues $ 45,139 $ 26,090 $ 17,834
------------------ ------------------ -----------------
Costs and expenses:
Direct operating 23,107 13,017 8,334
General and administrative 18,334 11,702 7,615
------------------ ------------------ -----------------
41,441 24,719 15,949
------------------ ------------------ -----------------
Income from operations 3,698 1,371 1,885
Other income (expense) 289 408 (109)
Interest and loan fees (309) (334) (569)
------------------ ------------------ -----------------
Income before income taxes 3,678 1,445 1,207
Income tax expense 75 13 41
------------------ ------------------ -----------------
Net income $ 3,603 $ 1,432 $ 1,166
------------------ ------------------ -----------------
------------------ ------------------ -----------------
Income per common share
Basic $ .33 $ .13 $ .13
Diluted $ .32 $ .13 $ .12
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
METRO ONE TELECOMMUNICATIONS, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands) DECEMBER 31,
-------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,063 $ 8,554
Short-term investments 1,507 -
Accounts receivable 7,428 4,629
Prepaid costs and other current assets 766 694
------------------ -----------------
Total current assets 15,764 13,877
Furniture, fixtures and equipment, net 19,982 14,632
Other assets 565 616
------------------ -----------------
$ 36,311 $ 29,125
------------------ -----------------
------------------ -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,501 $ 1,302
Accrued liabilities 1,992 992
Accrued payroll and related costs 1,852 1,023
Line of credit payable 1,400 -
Current portion of capital lease obligations 365 638
Current portion of long-term debt 240 78
------------------ -----------------
Total current liabilities 7,350 4,033
Capital lease obligations 103 548
Long-term debt 616 868
------------------ -----------------
8,069 5,449
------------------ -----------------
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, no par value; 10,000 shares
authorized, no shares issued or outstanding - -
Common stock, no par value; 50,000 shares
authorized, 11,188 and 10,926 shares,
respectively, issued and outstanding 38,477 37,514
Accumulated deficit (10,235) (13,838)
------------------ ------------------
Shareholders' equity 28,242 23,676
------------------ -----------------
$ 36,311 $ 29,125
------------------ -----------------
------------------ -----------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
METRO ONE TELECOMMUNICATIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands) SHAREHOLDERS' EQUITY
----------------------------------------------------------------------------
COMMON STOCK
------------------------------------- (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT) EQUITY
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Balances at December 31, 1995 7,937 $ 19,711 $ (16,436) $ 3,275
Common stock issued in public offering 1,675 12,515 - 12,515
Stock options/warrants exercised, net 819 2,625 - 2,625
Conversion of long-term debt to common stock 262 1,400 - 1,400
Net income - - 1,166 1,166
----------------- ------------------ ------------------ -----------------
Balances at December 31, 1996 10,693 36,251 (15,270) 20,981
Stock options/warrants exercised, net 183 993 - 993
Stock issued for legal settlement 50 270 - 270
Net income - - 1,432 1,432
----------------- ------------------ ------------------ -----------------
Balances at December 31, 1997 10,926 37,514 (13,838) 23,676
Stock options/warrants exercised, net 262 963 - 963
Net income - - 3,603 3,603
----------------- ------------------ ------------------ ----------------
Balances at December 31, 1998 11,188 $ 38,477 $ (10,235) $ 28,242
----------------- ------------------ ------------------ -----------------
----------------- ------------------ ------------------ -----------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
METRO ONE TELECOMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands) YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,603 $ 1,432 $ 1,166
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,774 2,263 1,322
Loss on disposal of fixed assets 73 81 151
Deferred income taxes (42) (12) (33)
Changes in certain assets and liabilities:
Accounts receivable (2,799) (1,906) (105)
Prepaid expenses and other assets (91) (238) (73)
Accounts payable, accrued liabilities and payroll costs 2,028 1,673 484
------------------ ------------------ -----------------
Net cash provided by operating activities 6,546 3,293 2,912
------------------ ------------------ -----------------
Cash flows from investing activities:
Capital expenditures (9,085) (10,096) (3,408)
Purchase of short-term investments (1,507) - -
------------------ ------------------ -----------------
Net cash used in investing activities (10,592) (10,096) (3,408)
------------------ ------------------ -----------------
Cash flows from financing activities:
Net proceeds from line of credit 1,400 - -
Proceeds from issuance of debt - 946 1,121
Repayment of debt (90) - (1,867)
Repayment of capital lease obligations (718) (719) (910)
Proceeds from issuance of common stock and exercise
of warrants and stock options 963 993 2,625
Proceeds from initial public offering of common
stock, net of expenses - - 12,515
------------------ ------------------ -----------------
Net cash provided by financing activities 1,555 1,220 13,484
------------------ ------------------ -----------------
Net increase (decrease) in cash and cash equivalents (2,491) (5,583) 12,988
Cash and cash equivalents, beginning of year 8,554 14,137 1,149
------------------ ------------------ -----------------
Cash and cash equivalents, end of year $ 6,063 $ 8,554 $ 14,137
------------------ ------------------ -----------------
------------------ ------------------ -----------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (IN 000'S, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. The Company provides enhanced directory assistance
services to telecommunications carriers and their customers. Revenues are
derived principally through fees charged to telecommunications carriers. The
Company operates call centers located in many metropolitan areas throughout the
United States.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash deposits in
banks and highly liquid investments with original maturity dates of three months
or less.
SHORT-TERM INVESTMENTS. Short-term investments include highly liquid investments
such as money market instruments with original maturity dates of three months to
one year. The Company classifies its investments as "held-to-maturity" and
accordingly recorded these investments at cost, which approximates fair value.
REVENUE RECOGNITION. Under existing contracts with telecommunications carriers,
the Company records revenue for the number of calls processed. Revenue is
recognized as services are provided.
MAJOR CUSTOMERS. In each of the three years ended in 1998, 1997 and 1996, twelve
customers accounted for substantially all revenue reported and the accounts
receivable balance at December 31. The Company's five largest customers
accounted for approximately 38%, 18%, 17%, 12% and 11%, respectively, of revenue
in 1998. The Company's four largest customers accounted for approximately 25%,
24%, 17% and 16%, respectively, of revenue in 1997. The Company's three largest
customers accounted for approximately 28%, 26% and 22%, respectively, of revenue
in 1996. Historically, the Company has not incurred significant losses related
to its accounts receivable and accordingly, no allowance for uncollectible
accounts has been provided.
FURNITURE, FIXTURES AND EQUIPMENT. Furniture, fixtures and equipment are stated
at cost and are depreciated over their estimated useful lives of three to seven
years using the straight-line method. Leasehold improvements are amortized over
the lesser of the remaining lease term or the useful life. Expenses for repairs
and maintenance are expensed as incurred. Capital lease assets were $1,323 and
$2,792 at December 31, 1998 and 1997, respectively. Accumulated amortization for
capital leases is included in accumulated depreciation. In the event that facts
and circumstances indicate that the cost of furniture, fixtures and equipment
may be impaired, an evaluation of recoverability would be performed and the
asset's carrying amount would be reduced to market value or discounted cash flow
value.
PATENTS AND TRADEMARKS. Patents, patents pending and trademarks are included
in other assets and are carried at cost less accumulated amortization. Costs
are amortized over the estimated useful lives of the related assets of five
to ten years. In the event that facts and circumstances indicate that the
cost of patents or trademarks may be impaired, an evaluation of
recoverability would be performed and the asset's carrying amount would be
reduced to market value or discounted cash flow value.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable,
accrued liabilities and line of credit payable approximate fair value due to the
short-term maturities of these assets and liabilities.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the fiscal year. Actual results could differ from those
estimates.
COMMITMENTS AND CONTINGENCIES. The Company is party to various legal actions and
administrative proceedings arising in the ordinary course of business. The
Company believes that the disposition of these matters will not have a material
adverse effect on its financial position, results of operations, or cash flows.
RECLASSIFICATION. Certain balances in the 1996 and 1997 financial statements
have been reclassified to conform with 1998 presentations. Such
reclassifications had no effect on results of operations or accumulated deficit.
F-6
<PAGE>
2. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment by major classification are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
Equipment $ 22,824 $ 16,409
Furniture and fixtures 3,536 2,403
Leasehold improvements 1,634 912
------------------ -----------------
27,994 19,724
Accumulated depreciation and amortization (8,012) (5,092)
------------------ -----------------
$ 19,982 $ 14,632
------------------ -----------------
------------------ -----------------
</TABLE>
3. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
Secured Term Loan $ 856 $ 946
Current portion (240) (78)
------------------ -----------------
Long-term debt $ 616 $ 868
------------------ -----------------
------------------ -----------------
</TABLE>
SECURED TERM LOAN. In 1997, the Company entered into a $1,000 Secured Term Loan
agreement with a commercial bank. Under the terms of the agreement, outstanding
borrowings bear interest at prime rate (7.75 percent at December 31, 1998) plus
0.5 percent and all assets of the Company are pledged as collateral. The terms
of the loan call for an 18-month interest only accumulation period through
August 1998 followed by 42 monthly payments of approximately $27 for principal
and interest. The agreement contains minimum net worth and working capital
requirements as well as certain other restrictive covenants, as defined by the
agreement, and prohibits the payment of cash dividends. This loan bears an
interest rate that approximates current market rates; thus, the recorded value
of this loan is considered to be at fair value.
LINES OF CREDIT. At December 31, 1998, the Company had in place a $6,000 Secured
Operating Line of Credit with a commercial bank. Under the terms of the
agreement, outstanding borrowings bear interest at prime rate plus 0.25 percent
and all assets of the Company are pledged as collateral. The agreement contains
minimum net worth and working capital requirements as well as certain other
restrictive covenants, as defined by the agreement, and prohibits the payment of
cash dividends. At December 31, 1998, the Company had $1,400 in borrowings
against this line of credit. In addition, the Company has a credit facility
under which the Company may borrow up to $2,000 to finance purchases of capital
equipment. Borrowings bear interest at the prime rate plus 0.50 percent and are
secured by the purchased equipment. . At December 31, 1998, the Company had no
borrowings against this credit facility.
F-7
<PAGE>
4. LEASE OBLIGATIONS
The Company leases operating facilities and equipment under operating leases
with unexpired terms of one to ten years. Rental expense for operating leases
was approximately $2,091, $1,388 and $942 for 1998, 1997 and 1996, respectively.
Minimum annual rentals for the five years subsequent to 1998 and in the
aggregate thereafter are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, CAPITAL LEASES OPERATING LEASES
------------------ ------------------ ------------------
<S> <C> <C>
1999 422 2,609
2000 98 2,534
2001 17 2,194
2002 - 1,647
2003 - 988
Thereafter - 3,254
------------------ ------------------
Total minimum lease payments 537 $ 13,226
------------------
------------------
Less interest portion at rates
of 16.7% to 20.7% (69)
------------------
Present value of net minimum
lease payments, capital leases 468
Portion due within one year (365)
------------------
Long-term portion $ 103
------------------
------------------
</TABLE>
5. SHAREHOLDERS' EQUITY
PREFERRED STOCK. The Company has authorized 10,000,000 shares of preferred stock
for issuance. The Company's Board of Directors has the power to issue one or
more series of preferred shares and the authority to fix and determine the
rights and preferences of such shares. No preferred shares are issued or
outstanding as of December 31, 1998.
COMMON STOCK OPTIONS AND WARRANTS. The Company has a Stock Incentive Plan (the
"Plan"), approved by the shareholders, which provides for the award of incentive
stock options to key employees and the award of non-qualified stock options,
stock sales and grants to employees, outside directors, independent contractors
and consultants. As of December 31, 1998, 1,900,000 shares of common stock were
reserved for issuance under the Plan. It is intended that the Plan will be used
principally to attract and retain key employees of the Company.
The option price per share of an incentive stock option may not be less than the
fair market value of a share of common stock as of the date such option is
granted. The option price per share of a non-qualified stock option may be at
any price established by the Board of Directors or a committee thereof
established for purposes of administering the plan. Options become exercisable
at the times and subject to the conditions prescribed by the Board of Directors.
Generally, options vest over a period of four years and the term of each option
may not exceed ten years. Payment for shares purchased pursuant to options may
be made in cash or by delivery of shares of common stock having a market value
equal to the exercise price of the options.
The Company has elected to continue to account for stock options according to
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation cost has been recognized for this plan
in the financial statements. If compensation cost on stock options granted in
1998, 1997 and 1996 under this plan had been determined based on the fair value
of the options granted as of the grant date in a method consistent with that
described in Statement of Financial Accounting
F-8
<PAGE>
Standards No. 123, the Company's net income and earnings per share would have
been changed to the pro forma amounts indicated below for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income, as reported $3,603 $1,432 $1,166
Diluted earnings per share, as reported 0.32 0.13 0.12
Net income, pro forma 3,311 1,048 944
Diluted earnings per share, pro forma 0.29 0.10 0.10
</TABLE>
The pro forma amounts may not be indicative of the effects on reported net
income for future periods due to the effect of options vesting over a period of
years and the awarding of stock compensation in future years.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1998, 1997 and 1996, respectively: dividend yield of 0 for all years;
risk-free interest rates of 4.5, 5.7 and 6.3 percent; expected volatility of
66.6, 55.3 and 46.5 percent; and expected life of 4.0 for all years.
A summary of the status of the Company's stock option plan as of December 31,
1998 and 1997 and changes during the years ending on those dates is presented
below.
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- --------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXER. PRICE SHARES EXER. PRICE SHARES EXER. PRICE
------------- ----------- -------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,454,000 $ 8.58 1,291,000 $ 8.55 1,103,000 $ 8.05
Granted 407,000 10.07 262,000 8.57 189,000 11.48
Exercised (62,000) 8.07 (71,000) 8.05 0 0.00
Forfeited (34,000) 11.82 (28,000) 8.40 (1,000) 8.05
------------- ----------- -------------- ----------- ------------- -----------
Outstanding at
end of year 1,765,000 $ 8.88 1,454,000 $ 8.58 1,291,000 $ 8.55
------------- ----------- -------------- ----------- ------------- -----------
------------- ----------- -------------- ----------- ------------- -----------
Options exercisable at year-end 1,244,000 1,183,000 950,000
Weighted-average fair value of
options granted during the year $ 4.37 $ 3.15 $ 5.09
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable under the Company Plan at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------------------- ----------------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OF REMAINING WEIGHTED-AVERAGE OF WEIGHTED-AVERAGE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE (YRS) EXERCISE PRICE OPTIONS EXERCISE PRICE
- ------------------ ------------------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
$ 8.05 - 8.05 1,033,000 6.63 $ 8.05 1,019,000 $ 8.05
$ 8.50 - 13.38 732,000 9.20 $ 10.06 225,000 $ 9.89
- ------------------ --------------- ---- ------------- --------------- -------------
$ 8.05 - 13.38 1,765,000 7.69 $ 8.88 1,244,000 $ 8.38
- ------------------ --------------- ---- ------------- --------------- -------------
- ------------------ --------------- ---- ------------- --------------- -------------
</TABLE>
F-9
<PAGE>
At December 31, 1997, there were outstanding warrants to purchase 114,271 shares
of common stock. The warrants were fully exercisable at a price of $2.31 per
share, and were exercised on various dates through February 1998. At December
31, 1997, there was an outstanding option to purchase 85,710 shares of common
stock. This option was granted prior to the adoption of the Plan, was fully
exercisable at a price of $2.31 per share, and was exercised in September
1998.
6. RELATED PARTIES
The Company has entered into various capital lease arrangements for furniture,
fixtures and equipment with a company owned by a shareholder
(non-officer/director) of the Company. These leases bear interest at rates
ranging from 16.7% to 20.7% and expire in 2001. Minimum capital lease
obligations to this related party totaled $533, $740 and $971 at December 31,
1998, 1997 and 1996, respectively.
7. OTHER INCOME (EXPENSE)
Included in other income (expense) are certain items that do not relate directly
to current ongoing business activity. Included in this classification for the
year ended December 31, 1998 are loss on asset dispositions of $73; and interest
income of $365. For the year ended December 31, 1997, other income consisted
primarily of estimated litigation settlement expenses of $61; loss on asset
dispositions of $81; and interest income of $569. For the year ended December
31, 1996, other expense consisted primarily of estimated litigation settlement
expenses of $280; loss on asset dispositions of $151; and interest income of
$288.
8. INCOME TAXES
The components of income tax expense for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Current:
Federal $ 42 $ 12 $ 33
State 75 13 41
------------------ ------------------ -----------------
117 25 74
------------------ ------------------ -----------------
Deferred:
Federal (42) (12) (33)
State - - -
------------------ ------------------ -----------------
(42) (12) (33)
------------------ ------------------ -----------------
Total tax expense $ 75 $ 13 $ 41
------------------ ------------------ -----------------
------------------ ------------------ -----------------
</TABLE>
At December 31, the significant components of deferred tax assets and
liabilities are as follows:
F-10
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
Deferred tax liability:
Tax depreciation in excess of book $ 1,487 $ 1,042
------------------ -----------------
Deferred tax asset:
Net operating loss carryforwards $ 5,102 $ 5,986
Expenses not currently deductible 176 179
Tax credit carryforwards 113 61
------------------ -----------------
Gross deferred tax assets 5,391 6,226
Valuation allowance (3,817) (5,139)
------------------ -----------------
Deferred tax assets 1,574 1,087
------------------ -----------------
Net deferred tax asset $ 87 $ 45
------------------ -----------------
------------------ -----------------
</TABLE>
During 1998 and 1997, the Company reduced its deferred tax valuation allowance
to reflect deferred tax assets used to reduce current year income taxes. The
Company's quarterly and annual operating results have in the past and may in the
future vary significantly depending on factors such as changes in the
telecommunications market, the addition or expiration of contracts, increased
competition, changes in pricing policies by the Company or its competitors,
lengthy sales cycles, lack of market acceptance or delays in the introduction of
new versions of the Company's product or features, the timing of the initiation
of wireless services or their acceptance in new market areas by
telecommunications customers, the timing and expense of the Company's expansion
of its national call center network, general economic conditions and the other
factors. Given the variability in operating results, the Company will continue
to review the valuation allowance on a quarterly basis and make adjustments as
appropriate.
At December 31, 1998, the Company had approximately $13.1 million of net
operating loss carryforwards expiring during the years 2005 to 2010. Ownership
changes as defined by section 382 of the Internal Revenue Code could limit the
amount of net operating loss carryforwards used in any one year or in the
aggregate.
The difference between taxes calculated at the statutory federal and state tax
rates and the effective combined rates for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 3.9% 2.6% 5.0%
Valuation allowance (36.7)% (39.5)% (39.4)%
Other (0.1)% 2.8% 2.8%
------------------ ------------------ -----------------
Effective tax rate 2.1% 0.9% 3.4%
------------------ ------------------ -----------------
------------------ ------------------ -----------------
</TABLE>
9. EARNINGS PER SHARE
The Company has adopted SFAS No. 128, Earnings Per Share. SFAS No. 128
established new standards for computing and presenting earnings per share, and
accordingly all periods have been restated. The per share amounts are based on
the weighted average number of common and dilutive common equivalent shares
assumed to be outstanding during the period of computation. Net income for the
calculation of both basic and diluted earnings per share is the same for all
periods.
F-11
<PAGE>
The calculation of weighted-average outstanding shares is as follows:
<TABLE>
<CAPTION>
AVERAGE SHARES
---------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
<S> <C> <C> <C>
Basic earnings per share 11,063 10,820 9,152
Common stock equivalents 211 141 244
-------------------- ------------------- -------------------
Diluted earnings per share 11,274 10,961 9,396
-------------------- ------------------- -------------------
-------------------- ------------------- -------------------
</TABLE>
10. BENEFIT PLANS
The Company has a deferred compensation savings plan for the benefit of its
eligible employees. The plan permits certain voluntary employee contributions to
be excluded from the employees' current taxable income under the provisions of
Internal Revenue Code Section 401(k). Upon reaching the age of twenty-one, each
employee becomes eligible to participate in the savings plan six months
following the initial date of employment. The employee must also complete at
least 500 hours of service in any twelve-month period. Under the plan, the
Company can make discretionary contributions to the plan as approved by the
Board of Directors.
Participants' interest in Company contributions to the plan vest over a
four-year period. The Company made contributions of approximately $35, $25 and
$11 during 1998, 1997 and 1996, respectively.
11. STATEMENT OF CASH FLOWS
Supplemental disclosure of Cash Flow information:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Cash paid for interest expense $ 297 $ 318 $ 572
Cash paid for income taxes 95 51 44
Equipment acquired by capital lease - - 679
Conversion of debt into common stock - - 1,400
Stock issued in settlement of litigation - 270 -
</TABLE>
12. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
1998
Revenues $ 9,045 $ 10,922 $ 11,313 $ 13,859
Direct operating 4,793 5,525 5,786 7,003
General and administrative 4,001 4,476 4,622 5,235
Income from operations 251 922 904 1,621
Net income 209 901 916 1,577
Basic earnings per share .02 .08 .08 .14
Diluted earnings per share .02 .08 .08 .14
</TABLE>
F-12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
1997
Revenues $ 4,486 $ 5,468 $ 7,055 $ 9,081
Direct operating 2,434 2,697 3,419 4,467
General and administrative 2,504 2,702 2,953 3,543
Income (loss) from operations (452) 69 683 1,071
Net income (loss) (390) 16 744 1,062
Basic earnings per share (.04) .00 .07 .10
Diluted earnings per share (.04) .00 .07 .10
</TABLE>
F-13
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-20387 and 333-45643 both on Form S-8 of our report dated February 15,
1999, appearing in this Annual Report on Form 10-K/A of Metro One
Telecommunications, Inc. for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Portland, Oregon
April 29, 1999
