-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E/gdqoBDrfhYuMWwUk1EsXU0kThR43q7YiZydZXtnPTCdqvBkf7ljKMdxwrRquqN U/Vsl7pZvVMI1hImdUaHZA== 0000912057-00-014953.txt : 20000331 0000912057-00-014953.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-014953 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METRO ONE TELECOMMUNICATIONS INC CENTRAL INDEX KEY: 0000920990 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 930995165 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-27024 FILM NUMBER: 586831 BUSINESS ADDRESS: STREET 1: 11200 MURRAY SCHOLLS PLACE CITY: BEVERTON STATE: OR ZIP: 97007 BUSINESS PHONE: 5036439500 MAIL ADDRESS: STREET 1: 11200 MURRAY SCHOLLS PLACE CITY: BEAVERTON STATE: OR ZIP: 97007 FORMER COMPANY: FORMER CONFORMED NAME: METRO ONE DIRECT INFORMATION SERVICES INC DATE OF NAME CHANGE: 19950215 10-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 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 incorporation or organization) Identification No.) 11200 Murray Scholls Place Beaverton, OR 97007 (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. $134,677,868. The number of shares outstanding of the registrant's Common Stock, as of March 15, 2000, was 11,538,554. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Proxy Statement for its 2000 Annual Meeting are incorporated by reference into Part III of this Report. 1 METRO ONE TELECOMMUNICATIONS, INC. 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
Page No. PART I Item 1 Business 3 Item 2 Properties 9 Item 3 Legal Proceedings 9 Item 4 Submission of Matters to a Vote of Security Holders 9 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 10 Item 6 Selected Financial Data 10 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 7A Quantitative and Qualitative Disclosures About Market Risk 20 Item 8 Financial Statements and Supplementary Data 20 Item 9 Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 20 PART III Item 10 Directors and Executive Officers of the Registrant 21 Item 11 Executive Compensation 21 Item 12 Security Ownership of Certain Beneficial Owners and Management 21 Item 13 Certain Relationships and Related Transactions 21 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 22 Signatures 24
2 PART I ITEM 1. BUSINESS. Metro One is a leading independent developer and provider of enhanced directory assistance and information services for the telecommunications industry. We primarily contract with wireless carriers to provide our services to their subscribers. In 1989, we opened our first call center and began testing and offering our enhanced directory assistance and information services. In 1991, we entered into our first contract with a wireless carrier to provide our services to that carrier's subscribers on a charge per call basis. Our customers include many of the leading wireless telecommunications carriers such as Sprint PCS, AT&T Wireless Services, Nextel Communications, Pacific Bell Wireless, Vodafone AirTouch PLC and ALLTEL Communications. In addition, we have expanded into the landline telecommunications market and provide our services to GST Communications, a regional competitive local exchange carrier. TELECOMMUNICATIONS INDUSTRY The U.S. telecommunications industry is generally characterized by strong growth and increased competition due to new technologies, a more favorable regulatory environment and, for carriers, an increasingly sophisticated and demanding subscriber. Telecommunications carriers face increasing competitive pressures to differentiate their products and establish brand loyalty. With rising costs to acquire new subscribers, carriers are seeking ways to minimize subscriber turnover through the use of, among other things, value-added services and features. In addition, carriers are increasingly offering local, long distance, wireless, cable and Internet services bundled into one package in order to appeal to a wider market. Competitive pressures are particularly acute for wireless and newer landline carriers, such as competitive local exchange carriers. The industry has also experienced a considerable amount of consolidation and investment in new technologies and alternative methods of delivery, including cable and the Internet. WIRELESS TELECOMMUNICATIONS. The U.S. wireless telecommunications market has experienced dramatic growth during the 1990s. This growth was largely due to technological advances that give callers affordable, high-quality mobile services. According to industry analysts, the number of wireless subscribers in the United States approached 80 million at the end of 1999, and is estimated to reach 177 million by the end of 2005. A relatively small number of carriers dominate the wireless telecommunications market. In terms of estimated number of subscribers, the largest U.S. wireless carriers include AT&T Wireless Services, SBC Communications, Vodafone AirTouch PLC and GTE Wireless. Other nationwide carriers include Sprint PCS and Nextel Communications. In the each of the major U.S. markets, at least four carriers compete for wireless subscribers. As a result, carriers are seeking to differentiate themselves from their competitors. While price continues to be an important competitive factor, carriers increasingly focus on value-added services and features as a means of differentiating themselves. LANDLINE TELECOMMUNICATIONS. The U.S. landline telecommunications market is significantly larger than the U.S. wireless market. For example, in 1998, domestic landline services generated approximately $210 billion in revenues as compared to approximately $37 billion in revenues generated by wireless services, according to the Federal Communications Commission. Like the wireless market, the landline market is dominated by a relatively small number of major carriers. Carriers providing local service include the regional Bell operating companies, such as SBC Communications, independent telephone companies, such as ALLTEL Communications, and competitive local exchange carriers, such as GST Communications. Carriers providing long distance service include AT&T, MCI WorldCom and Sprint Corp. As local and long distance carriers begin competing in each other's markets as well as against newer and smaller independent carriers, the landline market is becoming extremely competitive. With deregulation, the entry of new landline competitors and the increasing affordability of wireless services, subscribers who were historically bound to local carriers as a matter of geography are now increasingly able to choose their carriers. Of note, the competitive local exchange carrier segment of the landline telecommunications industry is rapidly growing. These companies compete with incumbent local carriers to provide a variety of services, including local, long distance and Internet and other data services. The Yankee Group estimates that the competitive local exchange industry generated revenues of $6.6 billion in 1998 and will generate $26.1 billion in 2001. As a result, the landline telecommunications market is rapidly becoming subscriber-based and carriers must find ways to differentiate their services to attract and retain subscribers. In addition, to maintain operational focus, competitive local exchange carriers often outsource non-core operations, including directory assistance services. While many incumbent carriers provide directory assistance services on an outsourced basis, the competitive local exchange carriers may prefer to outsource their directory assistance needs to independent companies rather than use the services of their competitors. 3 INTERNATIONAL TELECOMMUNICATIONS. The international telecommunications market is characterized by increasing privatization, competition and, in the wireless market, rapid growth. As governments privatize their national telecommunications companies, these companies face increased competition from large international carriers who have access to and interest in the newly-opened markets. According to the International Telecommunications Union, an international telecommunications industry group, the worldwide wireless industry generated $154 billion in revenue in 1998 and is projected to grow to $315 billion in revenue by 2002. As a whole, the worldwide telecommunications services market generated over $744 billion in revenue in 1998 and is expected to grow to $925 billion in revenue by 2002, according to the International Telecommunication Union. DIRECTORY ASSISTANCE MARKET Revenues generated by the wireless directory assistance market in the United States are estimated to grow from $390 million in 1998 to $594 million in 2002, according to Frost & Sullivan, a market research firm. Wireless subscribers tend to be heavy users of directory assistance services. According to Frost & Sullivan, growth in the wireless directory assistance market is driven by a number of factors, including growth in the wireless subscriber base, rising wireless penetration, increasing subscriber mobility and the offering of enhanced directory assistance services by wireless carriers. The landline directory assistance market is significantly larger than the wireless directory assistance market. Revenue generated by the landline directory assistance market is estimated to grow from approximately $3 billion in 1998 to $4 billion in 2002, according to Frost & Sullivan. Growth in the landline directory services market is driven by a number of factors, including the growing information needs of subscribers and the offering by landline carriers of call completion services. OUR BUSINESS STRATEGY Metro One's business strategy includes the following key elements: - - BUILD ON OUR CURRENT CARRIER RELATIONSHIPS, WHILE SEEKING NEW DOMESTIC AND INTERNATIONAL CUSTOMERS, INCLUDING LANDLINE CARRIERS AND OTHER CORPORATE CUSTOMERS We are continuing to expand our relationships with our existing carrier customers. We believe that our services can increase carriers' revenues by minimizing subscriber turnover, increasing the number of calls made and, in the case of wireless and long distance carriers, billable airtime. Further, our national call center network and integrated search engines and database systems allow carriers operating in multiple markets to offer consistent enhanced directory assistance and other information services on a nationwide basis. This consistency permits greater system-wide marketing opportunities and brand identification for these carriers. We believe that our existing relationships and the quality of our services will allow us to expand our business with our existing customers, providing us an opportunity to deliver our services to them and their affiliates in additional markets, including international markets. We are also aggressively pursuing business opportunities with additional wireless and landline carriers with a view to leveraging our reputation for high quality service. We believe increasing competition among landline carriers is leading to an increasingly subscriber-based business, which will result in the need to differentiate their product offerings. Our services provide them an opportunity to do so and, accordingly, could help us expand into the significantly larger landline directory assistance market. The information content that resides in our database systems, along with our ability to store, maintain, manipulate and deliver it, provides an opportunity to pursue other business customers and provide them with our services over private networks or otherwise. - - DEVELOP AND OFFER ADDITIONAL VALUE-ADDED SERVICES AND FEATURES We believe we are well positioned to continue developing and providing the types of services and features that enhance the utility of the telephone and other communications devices. For example, our MetroDex-TM-service is designed to provide individual callers and corporate users with the ability to quickly and efficiently access their personal or corporate contacts databases, including otherwise unpublished numbers, and potentially take advantage of additional services such as having a personal assistant available over the telephone. Such innovative features should permit our customers to distinguish themselves further from their competitors and increase their subscriber satisfaction. 4 - - EXPAND OUR NATIONAL CALL CENTER NETWORK AND ITS CAPABILITIES, WHILE ADDING GREATER BANDWIDTH, STORAGE CAPACITY, SPEED AND EFFICIENCY TO OUR SYSTEMS We intend to continue to expand our network capacity and efficiency, including adding to our call routing flexibility, redundancy and signaling systems. We may also build additional call centers as required by demand and customer commitments. We also intend to add to our storage capacity both for purposes of database backup and for delivery of personal database, concierge and other personalized and fulfillment-oriented services. We may build or license specialty call centers to deliver special products such as customer service and fulfillment assistance, as well as international call centers, should attractive opportunities arise. - - ENHANCE THE QUANTITY AND QUALITY OF OUR CURRENT CONTENT DATABASES We intend to continue to improve the breadth and depth of the information content within our database systems. We intend to seek additional content to make our directory listings and other data more useful and to enhance our ability to provide other services. Additions to this content may be virtual, through the Internet or other links that allow us to license or barter content. Some of this information will be deliverable to subscribers through portals other than the voice telephony portal, such as those available on the Internet. - - LEVERAGE OUR VOICE TELEPHONY PORTAL BY DELIVERING GREATER VOLUMES OF EXISTING AND NEW SERVICES THROUGH OUR CALL CENTER NETWORK AS WELL AS THROUGH OTHER PORTALS Our strength has been to provide enhanced services through the voice telephony portal we have created. We are seeking opportunities to provide access to some of the content we acquire, develop and maintain, as well as our applications and related features, to other portals, including those available through the Internet. We believe that telephone carriers and perhaps other customers, could use our content, applications and features to provide high quality services that are consistent across various portals and geographic areas. In so doing, these customers, particularly the telephone carriers, could further bind their subscribers to them as competition in their markets becomes increasingly subscriber-based. CUSTOMERS Metro One provides enhanced directory assistance and information services to several of the nation's leading wireless carriers in all or a portion of their service areas. Our customers include Sprint PCS, AT&T Wireless Services, Nextel Communications, Pacific Bell Wireless, Vodafone AirTouch PLC and ALLTEL Communications. In addition, we have expanded into the landline telecommunications market and currently provide our services to GST Communications, a regional competitive local exchange carrier. Customers that accounted for more than 10% of our revenues during any of the periods indicated were as follows:
Customer 1997 1998 1999 -------- ---- ---- ---- Sprint PCS 17% 38% 40% AT&T Wireless Services 7 17 30 Vodafone AirTouch 25 18 11 Pacific Bell Wireless 6 12 11 Ameritech Cellular 24 11 - Bell Atlantic Mobile 16 1 -
We offer our services to a carrier's subscribers under a brand name selected by the carrier, such as "AT&T 00 Info," "AirTouch 411 Connect" or "Sprint PCS Directory Assistance." The carrier establishes its own fee structure with its subscribers. Subscribers typically pay the carriers fees ranging from $0.75 to $1.10 plus airtime charges for our services. Metro One charges carriers directly and bears no subscriber collection risk. We currently charge our carriers on a per call basis. To stimulate increased call volume and to attract and expand customer commitments, we offer volume-pricing discounts to some large carriers. Beginning in 1999, we have decreased the average price per call as increasing call volumes from existing and new contracts have triggered the volume-based pricing we put in place to attract business. During the year ended December 31, 1999, our per call charges averaged approximately $0.55. 5 We currently have contracts with 13 carriers. The terms of these contracts are generally similar, with variations in the geographic market to be served, the services and features we are to provide the carriers' subscribers and the term, which is generally up to five years. Several also require us to build out call centers in specified locations. None of these contracts preclude us from providing services to other carriers. The carriers agree to route some or all of their directory assistance and/or alphanumeric messaging calls to us. CALL CENTER NETWORK We operate 27 call centers located in strategic local markets throughout the United States, and expect to add at least one additional new call center by the end of 2000. Our call center network enables us to provide enhanced directory assistance and information services nationwide. We are situated in or near major metropolitan areas and therefore are located locally for more than one-half of the U.S. population. We believe that the local nature of our call centers and operators permits us to offer more accurate and valuable service than would be available through a single or a few call centers attempting to serve the entire U.S. market. We operate our call centers 24 hours a day, seven days a week, 365 days a year. We continually upgrade our network and systems to allow greater utility, speed and efficiency in processing calls. We are also expanding capacity to store, manipulate and manage the additional data that we acquire. In addition, our telephone switching systems allow scalability, including the ability to join multiple switches together or configure switches so that they can handle large volumes of calls in tandem. These systems are monitored from our network operations center located at our corporate headquarters, which provides 24 hour support for our call center network. Our systems are designed to permit redundancy and avoid downtime from natural disasters or other adverse events. For example, all of our call centers on the Eastern Seaboard continued to operate during Hurricane Floyd in September 1999. Because a carrier offers our services to its subscribers under its brand name, we believe quality and reliability are important considerations in a carrier's decision to use us. To ensure high quality and consistency, we emphasize training, monitoring and customer support. We maintain a national training force with training personnel in each call center. Our operators undergo extensive training and testing on search techniques, etiquette and local information, including landmarks, major thoroughfares and geography. Our training personnel continually monitor, test and evaluate call center performance. We also monitor our call centers for compliance with contract performance standards and report this information to the carriers on a regular basis. In addition to accessing our systems maintenance and support personnel, carriers can obtain extensive customer usage information. OUR SERVICES AND FEATURES Metro One uses a customized array of hardware and software, along with proprietary database search engines, to provide its enhanced directory assistance and information services. We receive incoming calls by means of assigned telephone numbers, which are "411," "555-1212" or "00" in almost all cases. Our operators answer incoming calls and identify the service using the carrier's brand name. Upon receiving information requests from callers, our operators search the applicable database using one or more of our search engines. The operator then connects the caller to a party or supplies the caller with the requested information. We offer a variety of information, including: - - Directory listings information, which may be retrieved by methods that include reverse and category searches; - - Time, weather and traffic information; - - Movie, restaurant and local event information; - - TeleConcierge-TM- services, which currently consists of restaurant reservations; and - - Geographic directions. Our enhanced directory assistance and information services also incorporate connectivity features that make the telephone more useful and easier to use. These connectivity features include: - - Call completion - allows a caller to be directly connected with the number requested without the need to redial; - - StarBack-R- - allows the caller to return to a live operator simply by pressing a key, such as the star [*]; key or otherwise issuing a command at any time during a call; - - AutoBack-R- - automatically returns the caller to a live operator or other options upon a busy signal, "ring-no-answer" or other common situations without pressing a single key; 6 - - MessageBack-TM- - delivers a caller's message to a desired party and, when configured with AutoBack, provides a convenient tool for ensuring communication; - - NumberBack-R- - sends the caller the called number simply by pressing the number [#] key; and - - Short Messaging Service - allows our operators to send customized alphanumeric messages on behalf of a caller. We are developing and testing new services that add new content and connectivity features, such as MetroDex, which allows callers to use their telephone or the Internet to access their personal or corporate contact databases, and LocationPro, which provides location-based services, including turn-by-turn driving instructions. Other features under development include on-line research and verification utilities for use by businesses with a direct private connection to us, and fulfillment-oriented services, such as reservations and procurement capabilities for use by our carriers' subscribers. Equipment at our corporate headquarters facilitate this development and testing by simulating normal call center operations. DATABASE SYSTEMS AND CONTENT We believe the quality of our services is in large measure related to the scope, quality and quantity of the information content that resides in our database systems. The majority of the information or data that we acquire, develop and maintain is telephone listings data. We obtain this listings data from multiple sources, including the regional Bell operating companies, independent telephone companies and other commercial sources, to ensure that our data is of high quality and accuracy. This data is enhanced by our data collection efforts and a principal database of local information is developed for each call center or region. Our proprietary operator interface software allows operators to efficiently search and reverse search both their local databases and other national databases. We use proprietary database management systems to maintain and update our directory listings. We continually acquire additional content or access to content that will, in many cases, build on this listings data to make them more useful. Acquisitions are made from a variety of sources and are supplemented with information relating to local events and amenities. On December 23, 1999, we announced that we signed a multi-year agreement with Network Solutions, Inc., the leading Registrar of Web addresses ending in .com, .net and .org, for the use of its Registrar domain name database. Under the terms of the agreement, Metro One will also license its Business Category Thesaurus to Network Solutions for use in the dot com directory-TM-, the Internet's definitive place to find an online business. During the year 2000, Metro One intends to make Network Solutions' domain name registration data available through its Enhanced Directory Assistance services. By dialing 411, callers will be able to request domain names of online businesses throughout the United States and the world, registered in .com, .net and .org. On February 3, 2000, we announced that we signed an agreement with MapQuest.com. Under the terms of the agreement, Metro One will license MapQuest.com's technology for mapping and detailed turn-by-turn directions for subscribers of Metro One's carrier customers. By providing a street address or city and state information, callers can obtain the most direct route from the point of origin to a destination using a variety of options and formats. MARKETING Our marketing is conducted directly with the telecommunications carriers. The marketing process involves a considerable amount of time and attention by our senior management. Our senior management and all of our sales and technical support personnel are based at our corporate headquarters in Beaverton, Oregon. Call center managers also play a key role in maintaining and developing carrier relationships. Some of our contracts provide for customer promotion of the services we provide to their subscribers. In addition, we occasionally assist our carrier customers in the promotion of these services. We communicate on a regular basis with our existing carrier customers through our quality assurance and customer service programs. We have developed proprietary programs that allow us and our customers to monitor the quality of our performance and the volume and duration of directory assistance and information requests on a real-time basis. These programs also give us an opportunity to learn more about our carriers' evolving needs. TECHNOLOGY Our ability to provide enhanced directory assistance and information services is dependent to a great extent on our proprietary technology. Our proprietary software applications enhance our call handling and delivery capabilities and provide the basis for our connectivity features. 7 We have developed search engines to access information from our databases. We continue to upgrade our operator interface software, database management systems and search engines to increase the access speed and the efficiency and search capability of our operators. Our call processing systems incorporate programmable switching equipment, host computers, voice response units and database servers. Our advanced technology is based on customized software running Sun Microsystems servers and Excel switching equipment. One of the characteristics of our call processing systems is the ability to take all calls from a carrier's switch and have them run through our switch for the entire length of the call so that we are able to provide a full range of our services to the caller. We are also monitoring technological advances in the methods of delivery of information and data and are working to insure that our systems are compatible with, and we can take advantage of, these developments. As an example, wireless application protocol (or WAP) allows telephone users with a certain type of telephone to access the Internet. Opportunities that this may present include using the content we have available to us in this new format. We believe that by expanding reliance on the telephone as a source of information, the application of this technology will also benefit our enhanced directory and information services business. INTELLECTUAL PROPERTY We rely on a combination of trademark, patent and trade secrets laws and confidentiality procedures to protect our intellectual property rights. We have seven U.S. patents issued, including one relating to our StarBack technology and another associated with our turn-by-turn directions service currently in development. We have approximately 18 applications pending for additional U.S. patents. We also have U.S. registered trademarks for, among others, "Metro One Telecommunications," "Metro One," "Enhanced Directory Assistance," "StarBack," "AutoBack" and "NumberBack," and applications pending for U.S. trademark registrations for, among others, "MetroDex," "TeleConcierge," "LocationPro" and "MessageBack." COMPETITION The directory assistance and information services markets are characterized by rapidly changing market forces, technological advancements and increasing competition from large carrier-affiliated companies and small, independent companies. Our principal competitors include regional Bell operating companies and other local providers, including GTE Corporation. These carriers provide directory assistance or information services both in and outside their own operating regions. Although we believe that none of these competitors offers a form of directory assistance that incorporates all of our features, they have substantially greater financial, technical and marketing resources than we do and may be able to offer features similar to ours in the future. We also face competition from independent companies seeking to offer forms of enhanced directory assistance and, in some cases, other information services. We believe the principal competitive factors in the directory assistance market are quality and range of features, technological innovation, experience, responsiveness to customers and price. Historically, we have sought to distinguish ourselves from our competitors based on the quality of our services, the development of useful features, the breadth of the content provided and our extensive national network of call centers. GOVERNMENT REGULATION While our business is not directly regulated, it is dependent upon relationships with companies that are regulated by the Federal Communications Commission and state public utility commissions. This regulation applies to all communications common carriers, such as AT&T, the regional Bell operating companies and other long distance and local exchange carriers. EMPLOYEES As of December 31, 1999, Metro One had approximately 2,900 employees, approximately 15% of whom were employed on a part-time basis. Most of our employees are operators, and the number of full-time and part-time operators varies from time to time reflecting fluctuations in the volume of calls. None of our employees are subject to a collective bargaining agreement. Our management considers relations with our employees to be good. We invest significant resources in the recruitment, training and retention of qualified operators. Our organizational structure provides opportunities and encourages talented individuals to take on roles of increasing responsibility. We also invest considerable resources in personnel motivation, including providing incentive plans for our operators and management and corporate staff. 8 ITEM 2. PROPERTIES. In July 1999, we relocated our principal executive and administrative offices in Beaverton, Oregon. We lease our new headquarters facilities, with approximately 35,000 square feet of space. The lease term extends through 2009. We have subleased our former executive and administrative offices, which have approximately 15,400 square feet of space and a remaining lease term of three years. We also lease office facilities for our call center operations, which range in size from 3,600 to 15,500 square feet. Currently, we have 29 leases for call center and other remote facilities, with remaining terms up to five years. We believe that expansion of our call center network may require us to lease additional office facilities within the next year. From time to time, we are required to move our call centers or lease additional space to meet expanding volume from existing or new customers. ITEM 3. LEGAL PROCEEDINGS. In August 1999, we commenced an action against a competitor in the United States District Court in Delaware claiming infringement of one of our patents relating to our StarBack feature. The defendant has denied that it is infringing the patent and has asserted that our patent is invalid. The Company is not aware of any other 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, 1999 to a vote of security holders. 9 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(R) 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:
1999 High Low ---- ------ ------ Quarter ended December 31, 1999 $19.25 $ 8.00 Quarter ended September 30, 1999 20.00 12.00 Quarter ended June 30, 1999 17.63 12.13 Quarter ended March 31, 1999 19.44 11.50 1998 High Low ---- ------ ------ 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
The approximate number of shareholders of record as of March 15, 2000 was 165. The Company believes it has approximately 4,220 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 in excess of 10% of the Company's tangible net worth. ITEM 6. SELECTED FINANCIAL DATA.
Years Ended December 31, ----------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- (In thousands, except per share data) Operations data: Revenues $77,831 $45,139 $26,090 $17,834 $13,074 Direct operating costs 46,494 23,107 13,017 8,334 7,157 General and administrative costs 28,711 18,334 11,702 7,615 5,999 Income (loss) from operations 2,626 3,698 1,371 1,885 (82) Net income (loss) 1,906 3,603 1,432 1,166 (1,724) Basic earnings (loss) per share .17 .33 .13 .13 (.31) Diluted earnings (loss) per share .16 .32 .13 .12 (.31) Cash flow from operations 3,326 6,546 3,293 2,912 (2,252) Balance sheet data: Cash and investments $ 9,964 $ 7,570 $ 8,554 $14,137 $ 1,149 Working capital 11,750 8,414 9,844 15,012 151 Total assets 65,475 36,311 29,125 24,529 8,716 Long-term obligations 18,940 719 1,416 1,168 1,466 Shareholders' equity 31,979 28,242 23,676 20,981 3,274
10 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 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 us and our 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. We undertake 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 our Common Stock. Our 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(R) contracts, increased competition, changes in pricing policies by us or our competitors, lengthy sales cycles, lack of market acceptance or delays in the introduction of new versions of our products 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 expansion of our national call center network, the general employment environment, general economic conditions and the other factors discussed under the heading "Issues and Uncertainties" in this Item 7. OVERVIEW We are a leading independent developer and provider of enhanced directory assistance and information services for the telecommunications industry. We primarily contract with wireless carriers to provide enhanced directory assistance and information services to their subscribers. Under our contracts, the carriers agree to route some or all of their directory assistance and/or alphanumeric messaging calls to us. We are also able to offer our services to multiple carriers within the same market. When a carrier's subscribers dial a typical directory assistance number, such as "411," "555-1212" or "00," the calls are answered by our operators identifying the service by that carrier's brand name, such as "AT&T 00 Info," "AirTouch 411 Connect" or "Sprint PCS Directory Assistance." Each carrier establishes its own directory assistance fee structure for its subscribers. Wireless subscribers typically pay fees ranging from $0.75 to $1.10 plus airtime charges for our services. We bear no subscriber collection risk. We charge our carriers directly on a per call basis, with prices varying in some cases based on call volume. Our long-term strategy is based in part on reducing the price we charge our customers. We expect that our average price per call will decrease in 2000 as call volume increases. We believe this reduced pricing better positions us to retain and expand service with existing carrier customers, to attract new wireless and landline carriers, and to achieve greater operating margins over time. In 2000, we will continue our call center and network build out to prepare for significant new call volume from Nextel Communications, AT&T Wireless Services, ALLTEL Communications and other carriers. We will also continue to opportunistically pursue additional significant new business. This build out will substantially increase our local service coverage and our capacity to process additional call volume. Our rapid growth plan involves both capital expenditures and operating expenses, as we build infrastructure and recruit and train qualified personnel. To better serve our customers and strengthen our relationships, we maintain the operating readiness of our call centers even when our carrier customers experience unexpected delays in transitioning call volume to us. Some of our carrier customers have recently experienced these types of delays and may experience some additional delays in the future. These delays increase our ongoing operating expenses with no corresponding increase in revenues. The result under these conditions has been, and will likely continue to be, near-term reported earnings that vary widely. However, we intend to continue to pursue and prepare for significant additional call volume in order to seek to achieve greater earnings over the long-term. 11 RESULTS OF OPERATIONS The following table shows selected items of our statements of operations data expressed as a percentage of revenues:
Years Ended December 31, ---------------------------------------- 1999 1998 1997 ----- ----- ----- Revenues 100.0% 100.0% 100.0% Direct operating costs 59.7 51.2 49.9 General and administrative costs 36.9 40.6 44.9 ----- ----- ----- Income from operations 3.4 8.2 5.2 Other income 0.1 0.6 1.6 Interest and loan fees (1.0) (0.6) (1.3) ----- ----- ----- Income before income taxes 2.5 8.2 5.5 Income tax expense 0.1 0.2 0.0 ----- ----- ----- Net income 2.4 8.0 5.5 ===== ===== ===== New call centers opened during year 6 2 4 Call centers in operation at year-end 24 18 16
1999 COMPARED TO 1998 REVENUES. Revenues increased 72.4%, to $77.8 million from $45.1 million. Call volume grew to approximately 141 million calls in 1999 from approximately 71 million calls in 1998. This increase was due primarily to increased call volume under existing contracts and call volume from new contracts that commenced service during the second half of 1998 and the third quarter of 1999. DIRECT OPERATING COSTS. Direct operating costs consist of call center personnel and data costs. These costs increased 101.2%, to $46.5 million from $23.1 million. This increase was primarily due to servicing increased call volumes and the cost of operating additional call centers in 1999. In addition, during 1999 we elected to take on an increased amount of staffing and infrastructure expenditures in preparation for additional scheduled call volume, some of which did not arrive as anticipated. As a percentage of revenues, direct operating costs increased to 59.7% from 51.2%, due primarily to increased personnel and data costs associated with the start-up of new call centers, the increase in staffing in anticipation of additional call volume from existing customers and a reduction in average price per call. GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs increased 56.6%, to $28.7 million from $18.3 million. This increase resulted primarily from the costs associated with the start-up of new call centers and the investment in infrastructure necessary to support, and the increase in depreciation expense associated with, additional call centers. As a percentage of revenues, general and administrative costs decreased to 36.9% from 40.6%. This decrease resulted primarily from efficiencies associated with the expansion of our operations. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by 64.9%, to $6.2 million from $3.8 million, due primarily to equipment purchased for new call centers, for upgrades to existing call centers and corporate operations. OTHER INCOME. Other income for the year ended December 31, 1999 was $128,000 and consisted primarily of interest income of $192,000, offset by losses upon the disposition of assets of $67,000. Other income for the year ended December 31, 1998 was $289,000 and consisted primarily of interest income of $365,000, offset by losses upon the disposition of assets of $73,000. INTEREST EXPENSE AND LOAN FEES. Interest expense and loan fees increased 150.2%, to $773,000 from $309,000. This increase was attributable to an increase in average debt outstanding during 1999. INCOME TAX EXPENSE. Income tax expense for the year ended December 31, 1999 was $75,000, for an effective tax rate of approximately 3.8%. Income tax expense for the year ended December 31, 1998 was $75,000, for an effective tax rate of approximately 2.1%. These rates differ from the combined federal and state statutory rate of approximately 38% due primarily to the use of net operating loss carryforwards. 12 1998 COMPARED TO 1997 REVENUES. Revenues increased 73.0%, to $45.1 million from $26.1 million. Call volume increased to approximately 71 million calls from approximately 42 million calls. This increase was due primarily to increases in call volume under existing contracts and additional call volume from new contracts, offset by decreases in call volume due to the completion of contracts with Ameritech Cellular, BellSouth and Bell Atlantic Mobile. DIRECT OPERATING COSTS. Direct operating 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 our national network of call centers. This increase was partially offset by higher call volumes and the associated operating efficiencies due to improved personnel utilization. GENERAL AND ADMINISTRATIVE COSTS. 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. DEPRECIATION AND AMORTIZATION. 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. Other income for 1998 was $289,000, and consisted of interest income of $365,000, offset primarily by losses on the disposition of assets of $73,000 related to equipment taken out of service during the year. Other income for 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 losses on the disposition of assets taken out of service during the year. INTEREST EXPENSE AND LOAN FEES. Interest expense and loan fees declined 7.5%, to $309,000 from $334,000. This decline was attributable to lower interest rates. Monthly average debt outstanding increased to $1.7 million from $1.6 million. INCOME TAX EXPENSE. Income tax expense for 1998 was $75,000, for an effective tax rate of approximately 2.1%. Income tax expense for 1997 was $13,000, for an effective tax rate of approximately 0.9%. These rates differ from the combined federal and state statutory rate of approximately 39% due primarily to the use of net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalents and investments are recorded at cost that approximates their fair market value. As of December 31, 1999, we had $10.0 million in cash and cash equivalents and investments compared to $7.6 million at December 31, 1998, an increase of $2.4 million primarily from borrowings under credit facilities, less cash used to fund capital expenditures incurred as part of the expansion of our national call center network and capacity. Net borrowings under credit facilities were $21.9 million for the year ended December 31, 1999, and total capital expenditures were $24.4 million for the same period. In addition to borrowings under credit facilities, we have funded the expansion of our call center network with cash on hand, cash provided by operating activities and proceeds from the exercise of options. Working capital was $11.8 million at December 31, 1999, as compared with $8.4 million at December 31, 1998. Our current ratio was 1.8:1 at December 31, 1999, as compared with 2.1:1 at December 31, 1998. In December 1999, we entered into a new secured term loan agreement with an equipment financing lender. The loan agreement provided us with $20 million of debt to repay outstanding indebtedness, fund the expansion of our call center network and for other equipment needs. Borrowings under the agreement are repayable over 48 months at a fixed interest rate of 9.29%. Prepayment of outstanding borrowings is allowable at any time for a 1% fee. Substantially all of our fixed assets have been pledged as collateral. Subsequent to December 31, 1999, we increased the availability under this term loan agreement to provide for an additional $15 million of borrowing capacity. Also during December 1999, we entered into a new line of credit agreement with a commercial bank that replaced prior agreements. The agreement consists of a $10 million revolving line of credit that expires in December 2001. Outstanding borrowings bear interest at the prime rate (8.5% at December 31, 1999) plus a fee of no greater than .75% based on the ratio of debt to cash flow, and all receivables are 13 pledged to the bank as collateral. The agreement contains minimum quick ratio, debt to equity and profitability requirements, as well as other restrictive covenants, and prohibits the payment of any dividends and other distributions and redemptions of our stock exceeding 10% of our tangible net worth. As of December 31, 1999, we did not have any outstanding borrowings under this agreement. During the third quarter of 1999, we entered into an equipment financing loan agreement with an equipment financing lender. The loan agreement provides us with borrowing capacity to fund the expansion of our call center network and for other equipment needs. The agreement provides for fixed or floating rate borrowings and all assets purchased pursuant to the agreement are pledged as collateral. Borrowings under the agreement have a term of 48 months, and prepayment of outstanding borrowings is allowable after 12 months from the funding date. As of December 31, 1999, we had $4.2 million outstanding at fixed rates ranging from 8.77% to 9.5%. CASH FLOW FROM OPERATIONS. Net cash provided by operating activities was $3.3 million for the year ended December 31, 1999, resulting primarily from net income, the effect of non-cash depreciation and amortization and increases in accounts receivable and accounts payable. Net cash from operations for 1998 was $6.5 million, resulting primarily from net income and non-cash expense items, such as depreciation and amortization. Net cash from operations was $3.3 million for 1997, resulting primarily from net income and non-cash expense items, such as depreciation and amortization. CASH FLOW FROM INVESTING ACTIVITIES. Cash used in investing activities was $23.3 million for the year ended December 31, 1999 and was related primarily to capital expenditures for the purchase of equipment for new call centers, the upgrade and expansion of existing call centers, investment in corporate operations and our relocation to expanded corporate headquarters. Cash used in investing activities was offset by proceeds from the sale of short-term investments. Cash used in investing activities was $10.6 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 FLOW FROM FINANCING ACTIVITIES. Net cash provided by financing activities was $23.5 million for the year ended December 31, 1999, resulting from the borrowing of $31.8 million under credit facilities and the repayment of $10.2 million of debt obligations, and the receipt of cash proceeds of $1.8 million from the exercise of options. Net cash provided by financing activities for 1998 was $1.6 million resulting primarily from $1.4 million in borrowings against our line of credit and the receipt of cash proceeds of $963,000 from the exercise of warrants and options to purchase common stock. Net cash provided by financing activities for 1997 was $1.2 million resulting primarily from the receipt of net cash proceeds of $993,000 from the exercise of warrants and options to purchase common stock. FUTURE CAPITAL NEEDS AND RESOURCES. The primary uses of our capital in the near future are expected to be the development or acquisition of technologies, features and content complementary to our business and to expand our call center and network capacity to serve existing and potential customers; the reduction of outstanding indebtedness; and for general corporate purposes, including possible acquisitions and other corporate development activities and working capital. Under the terms of certain contracts, we are required to open additional call centers in major metropolitan areas. We anticipate that our capital expenditures will be approximately $14 million to $16 million in 2000, resulting primarily from the projected expansion and planned improvements. We believe our existing cash and cash equivalents, credit facilities and cash from operations will be sufficient to fund our operations through the end of the year 2000. 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 "99" is recognized as "1999"). 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 concluded a program to identify, remediate, test and develop contingency plans for the Year 2000 issue (the "Y2K Program"). Significant issues were identified by April 1999. All phases were completed prior to December 31, 1999. The Y2K Program included 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 was made of the key internal systems, and the systems that were not already Year 2000 ready were modified, upgraded or replaced. The Company assessed its products, and worked 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 future. 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 failure of a system at the Company or at an 14 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. EFFECT OF INFLATION Inflation did not materially affect our business during the last several years. ISSUES AND UNCERTAINTIES We do not provide forecasts of future financial performance. While management is optimistic about our long-term prospects, the following issues and uncertainties, among others, should be considered in evaluating our outlook. OUR QUARTERLY AND ANNUAL OPERATING RESULTS FREQUENTLY VARY SIGNIFICANTLY IN PART DUE TO FACTORS OUTSIDE OUR CONTROL. In the future, as in the past, our quarterly and annual operating results may vary significantly as a result of a number of factors. We cannot control many of these factors, which include, among others: - - Changes in the telecommunications market, including the addition or withdrawal of carriers from the market, changes in technology and increased competition from existing and new competitors; - - The timing of the commencement of our services under new or existing contracts with our carrier customers, which depend in part on the customers' ability to adapt their networks to allow them to transfer calls to us and bill for call completion; - - The timing and expense of our call center network expansion, including increased staffing and infrastructure expenses related to anticipated new call volume; - - The addition or expiration of contracts with carrier customers; - - Changes in our or our competitors', customers' or suppliers' pricing policies; - - Lengthy sales cycles for new and extended contracts; - - Lack of market acceptance or delays or increased development costs related to the introduction of our services or features; and - - General economic conditions. For these reasons, you should not rely on period-to-period comparisons of our financial results as an indication of any future results. Our future operating results could fall below the expectations of securities industry analysts or investors. Any such shortfall could result in a decline in the market price of our common stock. Fluctuations in our operating results will likely increase the volatility of our common stock price. THE RAPIDLY CHANGING TELECOMMUNICATIONS MARKET COULD UNFAVORABLY AFFECT US. The telecommunications market is subject to rapid change and uncertainty that may result in competitive situations which could unfavorably affect us. These changes and uncertainties are due to, among other factors: - - Mergers, acquisitions and alliances among carriers and among our competitors, which can result in fewer carriers in the marketplace, lost carrier customers, increased negotiating leverage for newly affiliated carriers and more effective competitors; - - Changes in the regulatory environment, which may affect us directly, by affecting our ability to access and update listings data at a reasonable cost, or indirectly, by restricting our carrier customers' ability to operate or provide a competitive service; - - Increasing availability of alternative methods for delivery of directory assistance and other information services, including the Internet; and - - Evolving industry standards, including frequent technological changes and new product introductions. WE HAVE A LIMITED NUMBER OF CONTRACTS WITH A SMALL NUMBER OF CARRIER CUSTOMERS. IF WE FAIL TO EXTEND OR REPLACE THESE CONTRACTS, OR IF THESE CONTRACTS ARE TERMINATED PRIOR TO THEIR EXPIRATION, OUR BUSINESS COULD BE ADVERSELY AFFECTED. A limited number of customers account for substantially all our revenues. For example, our top five customers accounted for approximately 97% of our revenues in 1998 and 1999. Of our two largest customers, Sprint PCS accounted for approximately 38% of our revenues in 1998 and approximately 40% of our revenues in 1999, and AT&T Wireless Services accounted for approximately 17% of our revenues in 15 1998 and approximately 30% of our revenues in 1999. The parent of Sprint PCS has entered into an agreement to be merged into MCI WorldCom, Inc. Our business would be adversely affected by the loss of either Sprint PCS or AT&T Wireless Services and could be adversely affected by the loss of any other significant customer. Of our contracts with significant customers, two expire in 2000, one expires in 2001 and the remainder, including Sprint PCS and AT&T Wireless Services, expire in 2002 and beyond. Our contracts contain performance and other standards and may be terminated prior to their scheduled expiration dates in specified circumstances. In addition, Sprint PCS may, on payment of a termination fee, accelerate the termination date of its contract to as early as March 31, 2000, for any or no reason, by notifying us before March 31, 2000. If we fail to extend or replace our contracts, or our contracts are terminated prior to their expiration, our business could be adversely affected. Although we seek to increase the number of our customers, and maintain good relationships with our existing customers, a small number of companies dominate the telecommunications market. This limits the potential customer base and our expansion opportunities. WE HAVE A LONG SALES CYCLE WHICH MAY CAUSE DELAYS THAT ADVERSELY AFFECT OUR REVENUE GROWTH AND OPERATING RESULTS. A customer's decision to contract for our directory assistance and information services involves a significant commitment of technical and other resources. As a result, we have a long sales cycle for both new and extended contracts, particularly with larger customers. The selling process involves demonstrating to the customer the value-added benefits of outsourcing their directory assistance and using our services rather than those of our competitors. Any delays due to lengthy sales cycles could significantly affect our revenue growth and operating results. OUR OPERATING RESULTS ARE SIGNIFICANTLY AFFECTED BY OUR ABILITY TO ACCURATELY ESTIMATE THE AMOUNT AND TIMING OF CALL VOLUME. THE ACTUAL AMOUNT AND TIMING OF CALL VOLUME IS OFTEN SUBJECT TO FACTORS OUTSIDE OF OUR CONTROL. Our operating results are significantly affected by costs incurred for staffing and expanding infrastructure. We incur significant staffing and general and administrative costs in anticipation of call volume under our customer contracts. If such call volume does not arrive as scheduled, in the amount anticipated, or at all, our operating results can be adversely affected. For example, during 1999 we expanded our call center operations in anticipation of rolling out service in new markets for several customers. However, due to several factors beyond our control, in some instances the carriers were unable to deliver the anticipated volume of calls as scheduled. This contributed to an increase in our operating expenses without a corresponding increase in revenues from the anticipated call volume. WE FACE SUBSTANTIAL COMPETITION FROM A NUMBER OF OTHER COMPANIES. Many of our competitors in the directory assistance market, including the regional Bell operating companies, have far greater resources and better name recognition. The regional Bell operating companies and GTE Corporation also have the advantageous position of being the local telephone carrier in their area of operation. Some of these companies, including a former enhanced directory assistance customer, Ameritech Cellular, are or may be developing their own versions of expanded directory assistance services. We also face competition from a number of other independent directory assistance providers. If we are unable to compete successfully, it could have an adverse effect on our business, financial condition and results of operations. Our ability to compete successfully depends, in part, on our ability to anticipate and appropriately respond to many factors, including the introduction of new services and products by our competitors, changes in subscriber preferences, changes in economic conditions and discount pricing strategies by our competitors. OUR INABILITY TO ACHIEVE DESIRED PRICING LEVELS COULD ADVERSELY AFFECT OUR PROFITABILITY AND OPERATIONS. We are subject to competitive pressures with respect to pricing, which could adversely affect our profitability and operations. The prices that we can charge our carrier customers are subject to the terms of our contracts, the changing telecommunications market, the relative leverage of the negotiating parties and the overall competitive landscape. We charge our carriers on a per call basis, with prices varying in some cases based on call volume. Our long-term strategy is based in part on reducing the price we charge our customers. Generally, our pricing levels have declined and, in the future, will likely continue to decline as call volumes increase. Substantially reduced pricing without a corresponding increase in volume could adversely affect our ability to operate profitably. WE ARE DEPENDENT ON THE WIRELESS TELECOMMUNICATIONS INDUSTRY, AND A DECREASE IN WIRELESS USAGE BY SUBSCRIBERS COULD HAVE AN ADVERSE IMPACT ON OUR RESULTS OF OPERATIONS. Almost all of our business comes from providing enhanced directory assistance and information services to our wireless customers' subscribers. A decrease in wireless usage by subscribers could have an adverse effect on our results of operations. Wireless usage by 16 subscribers appears to be affected by a number of factors, including pricing, safety concerns, reliability and availability of the wireless network, government regulation and reliability and availability of alternative technologies. WE NEED TO EXPAND CALL VOLUME AND INCREASE EFFICIENCIES IN ORDER TO BE SUCCESSFUL. In order to successfully execute our business strategies, we need to increase the volume of calls made to our call center network, while realizing the benefits of operating leverage (that is, revenues growing at a faster rate than operating expenses). We intend to increase call volume by seeking additional customers, including landline carrier customers, as well as seeking additional business from our existing customers, in the areas served by our call center network. We have limited experience in the landline market, which is dominated by the regional Bell operating companies and GTE Corporation. If we are unable to expand our wireless business or attract significant landline business, on a cost effective basis or at all, we may be unable to increase profitability or sustain past growth rates. IF WE ARE UNABLE TO ANTICIPATE CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS AND TO DEVELOP NEW SERVICES AND FEATURES, WE MAY NOT SUCCEED. Our success depends, in part, on our ability to anticipate changes in technology and industry standards and to develop and introduce new services and features that are accepted by the marketplace and cost effective for us to provide as a part of our overall service offerings. The development of new services and features can be very expensive. Further, given the rapid technological changes, frequent introduction of new products, services and features, and changing consumer demands that characterize our industry, it can be difficult to correctly anticipate future changes in technology and industry standards. If we fail to develop new services and features, encounter difficulties that delay the introduction of such services and features, or incorrectly anticipate future changes and develop services and features that are not accepted by the marketplace or are not cost effective for us to provide as a part of our overall service offerings, we may not succeed at our business. ALTERNATIVE METHODS FOR DELIVERY OF DIRECTORY ASSISTANCE AND INFORMATION SERVICES COULD REDUCE THE DEMAND FOR OUR SERVICES. Our business comes primarily from providing enhanced directory assistance and information services to telephone users. However, information can be transmitted in other ways, including more intelligent communications devices and other technologies and protocols, and over the Internet. For example, as the Internet continues to develop and becomes easier to use and access, technologies may be developed that decrease or eliminate the demand for telephone-based or voice-based directory or information services. Widespread acceptance of existing and developing technologies and protocols, such as voice recognition and wireless application protocol, could adversely affect our business. Our call volume could decline dramatically if telephone users change their usage habits and rely on the Internet or other alternatives as their primary source for information. SYSTEMS FAILURES, DELAYS AND OTHER PROBLEMS COULD HARM OUR REPUTATION AND BUSINESS, CAUSE US TO LOSE CUSTOMERS AND EXPOSE US TO CUSTOMER LIABILITY. Our success also depends on our ability to provide reliable services. Our operations could be interrupted by any damage to or failure of our network, our connections to third parties, our computer hardware or software or our customers' or suppliers' computer hardware or software. Any such damage or failure could disrupt the operations of our network and the provision of our services and result in the loss of current and potential customers. In addition, as call volume increases, we will need to expand and upgrade our technology and network hardware and software in order to provide services. Capacity limits on our technology and network hardware and software may make it difficult for us to expand and upgrade our systems in a timely and economical manner. IF WE ARE UNABLE TO OBTAIN OR ADEQUATELY UPDATE DIRECTORY OR INFORMATION CONTENT AT AN ECONOMICAL COST, WE MAY BE UNABLE TO PROVIDE CURRENT LEVELS OF SERVICE OR IMPROVE OUR SERVICE. Our operations depend on our access to the names, telephone numbers and other information that we supply directly to callers or we use in providing our services. The availability, cost, quality and usefulness of such data varies widely across geographic regions. If we are unable to obtain or update directory or information content at an economical cost, we may be unable to provide current levels of service, improve our enhanced directory assistance service or provide new services and features. Ultimately, the satisfaction of our carrier customers, and our ability to renew and extend our current customer contracts and enter into new customer contracts, depends on the quality of services we provide to the carrier's subscribers. The quality of our services is directly related to the quality of our listings data and other information content. AS WE RELY ON A LIMITED NUMBER OF SUPPLIERS, AN ABRUPT LOSS OF ANY KEY SUPPLIER COULD ADVERSELY AFFECT OUR BUSINESS OPERATIONS OR DELAY OUR DEVELOPMENT EFFORTS. 17 We rely on some key suppliers to provide us with programming and engineering services and to license us their technology. An abrupt loss of any current key supplier could cause a disruption in our operations or a delay in our development efforts, including our planned expansion of our call center network, and could adversely affect our business operations. IF WE ARE UNABLE TO CONTINUE TO ATTRACT AND RETAIN QUALIFIED SENIOR MANAGEMENT, TECHNICAL PERSONNEL AND CALL CENTER OPERATORS, OR OUR CALL CENTER STAFF IS UNIONIZED, OUR OPERATIONS COULD BE ADVERSELY AFFECTED. Our success depends to a significant extent on the efforts and abilities of our senior management, technical personnel and call center operators. The loss of the services of our senior management and technical personnel could have a material adverse effect on our business and our ability to meet our strategic objectives. We also depend on the continued service of our call center operators, who we hire from the available labor pool. As we continue to expand our call center network, the ability to attract and retain qualified senior management, technical personnel, operators and other skilled employees is extremely important to the operation of our business. If we are unable to attract and retain qualified individuals, or we are required to pay significantly higher wages and other benefits to such individuals, or if our call center staff is unionized, it could adversely affect our business operations. We find it more difficult to recruit and retain qualified individuals during periods of low unemployment. We may be subject to increasing pressure to offer higher wages and other benefits. In our call center hiring, we may also feel the effects of the telecommunications industry in general, which has widespread union membership among its operators and other workers. IF WE ARE UNABLE TO USE AND PROTECT OUR INTELLECTUAL PROPERTY, WE MAY BE UNABLE TO PROVIDE SOME OF OUR ENHANCED DIRECTORY ASSISTANCE AND INFORMATION SERVICES OR PROFITABLY OPERATE OUR BUSINESS. We regard aspects of our enhanced directory assistance and information services and their features and processes to be proprietary. If we are unable to use and protect our intellectual property, we may be unable to provide some of our enhanced directory assistance and information services or profitably operate our business. To a limited extent, we rely on a combination of trade secret, patent and other intellectual property law, nondisclosure agreements and other protective measures to protect our intellectual property. However, these measures may be difficult and costly to meaningfully enforce. In addition, attempts to enforce our intellectual property rights may bring into question the validity of these rights. Litigation with respect to patents or other intellectual property rights can result in substantial costs and diversion of management and other resources. FUTURE ACQUISITIONS MAY STRAIN OUR OPERATIONS. We intend to evaluate, and in the future may pursue, acquisition opportunities that are consistent with our business strategy. If we fail to adequately address the financial and operational risks associated with such acquisitions, future acquisitions may adversely harm our business. These risks can include, among other things: - - Difficulties in assimilating the operations, technology, information systems and personnel of the acquired company, including the inability to maintain uniform standards, controls and policies, and the loss of key employees of the acquired company; - - Diversion of management's attention from other business concerns; - - Impairment of relationships with licensors, customers and suppliers; - - Difficulties in entering into markets in which we have no direct prior experience; - - Use of cash resources, potentially dilutive issuances of equity securities and incurrence of additional debt and contingent liabilities; and - - Significant write-offs and amortization expenses related to goodwill and other intangible assets. IF WE EXPAND OUR BUSINESS INTO INTERNATIONAL MARKETS, WE WILL ENCOUNTER RISKS WHICH COULD ADVERSELY AFFECT US. We currently operate only in the United States; however, an element of our business strategy is to continue to explore international business opportunities. If we expand into one or more international markets, we will encounter significant risks and uncertainties. These risks and uncertainties include increased operational difficulties arising from, among other things: - - Our ability to attract sufficient business or locate a suitable partner or joint venture candidate to enable us to overcome logistical and economic barriers to entry; 18 - - Our ability and cost to gather sufficient information content and listings data, properly modify our features and services to meet applicable standards, and hire and train personnel; - - Fluctuations in foreign currency exchange rates; and - - Political, regulatory and economic developments and cultural differences. REGULATIONS AFFECTING OUR CUSTOMERS AND SUPPLIERS AND FUTURE REGULATIONS TO WHICH WE MAY BE SUBJECT MAY ADVERSELY AFFECT OUR BUSINESS. Although we are not directly subject to telecommunications industry regulation, the business of our customers and certain suppliers is subject to regulation that indirectly affects our business. We cannot predict when, or upon what terms and conditions, further regulation or deregulation might occur or the effect of regulation or deregulation on our business. RESTRICTIONS AND COVENANTS IN OUR LOAN AGREEMENTS LIMIT OUR ABILITY TO CONDUCT OUR BUSINESS AND COULD PREVENT US FROM OBTAINING FUNDS WHEN WE NEED THEM IN THE FUTURE. Our loan agreements contain a number of significant limitations that will restrict our ability to, among other things, conduct our business and borrow additional money, pay dividends or make other distributions to our shareholders, make investments, create liens on or sell our assets, enter into transaction with affiliates, and engage in mergers or consolidations. These restrictions may limit our ability to obtain future financing, fund needed capital expenditures or withstand a future downturn in our business or the economy. If we violate the restrictions of our loan agreements, our lenders may require us to repay our outstanding indebtedness immediately, which may significantly impair our business. WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE, AND IT MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS. We may require more capital in the future to fund our operations, finance investments in equipment and infrastructure needed to maintain and expand our call center and network capabilities, enhance and expand the range of services and features we offer, and respond to competitive pressures and potential opportunities, such as investments, acquisitions and international expansion. We cannot be certain that additional financing will be available on terms favorable to us or at all. The terms of available financing may place limits on our financial and operating flexibility. If adequate funds are not available on acceptable terms, we may be forced to reduce our operations or abandon expansion opportunities. Moreover, even if we are able to continue our operations, the failure to obtain additional financing could reduce our competitiveness as our competitors may provide better maintained networks or offer an expanded range of services. OUR STOCK PRICE IS VOLATILE. The market price of our stock has experienced and is likely to experience significant fluctuations in response to a number of factors. These factors include, among others: - - Announcements of extensions, expirations or changes in our contracts and the opening of new call centers to support such activity; - - Announcements relating to material events concerning our customers; - - Actual or anticipated variations in our results of operations; - - Changes in financial estimates by securities analysts; - - Obsolescence of technologies that we or our customers use; - - Introductions of new technologies; and - - General market conditions. From January 1, 1999 through December 31, 1999, our stock price fluctuated from $8.00 per share to $20.00 per share and has on several days fluctuated more than 10%. Similar market fluctuations have affected the market prices of equity securities of many telecommunications companies and other public companies generally. These trading prices and valuations may change significantly. In addition, broad market factors affecting telecommunications or technology stocks may adversely affect the market price of our common stock. Our stock price may also be adversely affected by general economic, political and market conditions, including interest rate changes and recession. OUR RESULTS OF OPERATIONS COULD BE IMPACTED BY A SIGNIFICANT INCREASE IN THE RATE OF INFLATION 19 Inflation has not historically had a material affect on our business. Operating expenses such as salaries, employee benefits and occupancy costs are, however, subject to normal inflationary pressures which could adversely affect our operating results. OREGON LAW AND PROVISIONS OF OUR CHARTER COULD MAKE THE ACQUISITION OF OUR COMPANY MORE DIFFICULT. We are authorized to issue up to 10,000,000 shares of preferred stock, and the board of directors has the authority to fix the preferences, limitations and relative rights of those shares without any vote or action by the shareholders. The potential issuance of preferred stock may delay or prevent a change in control of our company, may discourage bids for the common stock at a premium over the market price and may adversely affect the market price of, and the voting and other rights of the holders of, our common stock. In addition, provisions under Oregon law limit the ability of parties who acquire a significant amount of voting stock to exercise control over our company. These provisions may have the effect of lengthening the time required for a person to acquire control of our company through a proxy contest or the election of a majority of the board of directors and may deter efforts to obtain control of our company. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Substantially all of our 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 our liquid investments mature within six months. As a result, we believe the market risk arising from our holdings of financial instruments is minimal. In addition, we are exposed to interest rate risk primarily through our use of short-term and long-term borrowings to finance operations. A hypothetical 1% fluctuation in interest rates would not have a material adverse effect on our financial position, results of operations or cash flows. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See pages F-1 through F-14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by Item 10 is incorporated by reference to the Proxy Statement for our 2000 Annual Meeting under the caption of "Management." ITEM 11. EXECUTIVE COMPENSATION. The information required by Item 11 is incorporated by reference to the Proxy Statement for our 2000 Annual Meeting under the caption of "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by Item 12 is incorporated by reference to the Proxy Statement for our 2000 Annual Meeting under the caption of "Principal Shareholders." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by Item 13 is incorporated by reference to the Proxy Statement for our 2000 Annual Meeting under the caption of "Certain Transactions." 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) EXHIBITS -------- 3.1 Third Restated Articles of Incorporation of Metro One Telecommunications, Inc. (6) 3.2 Amended and Restated Bylaws of Metro One Telecommunications, Inc. (1) 10.1 Form of Enhanced Directory Assistance Agreement (9) 10.2 1994 Stock Incentive Plan (3) 10.5 1995 Employment Agreement with Timothy A. Timmins (8) 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 (5)(12) 10.8 Amendment to 1994 Stock Incentive Plan (4) 10.11 Lease Agreement between and among Murray Scholls, LLC, Gramor Development Northwest, Inc. and the Company (5) 10.12 Amendment #1 to Specific Agreement between Sprint Spectrum L.P. and the Company dated December 9, 1998 (5)(12) 10.14 Agreement for Enhanced Directory Assistance Services between Metro One and AT&T Wireless Services, Inc. dated May 2, 1997 (9) 10.15 Loan Agreement with General Electric Capital Corporation dated September 10, 1999 (9) 10.16 Loan and Security Agreement between Silicon Valley Bank and the Company dated December 15, 1999 10.17 Loan Agreement with General Electric Capital Corporation dated December 29, 1999 10.18 Amendment to 1995 Employment Agreement with Timothy A. Timmins 23.1 Consent of Deloitte & Touche LLP, independent certified public accountants 27.1 Financial Data Schedule - ---------------------- (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. 22 (4) Incorporated herein by reference to the Company's Registration Statement on Form S-8 dated February 5, 1998, File No. 333-45643. (5) Incorporated herein by reference to the Company's Annual Report on Form 10-K dated March 31, 1999, Commission No. 0-27024. (6) Incorporated herein by reference to the Company's Annual Report on Form 10-KSB dated March 31, 1998, Commission No. 0-27024. (7) Incorporated herein by reference to the Company's Annual Report on Form 10-KSB dated March 31, 1997, Commission No. 0-27024. (8) Incorporated herein by reference to the Company's Annual Report on Form 10-KSB dated August 20, 1996, Commission No. 0-27024. (9) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q dated October 22, 1999, Commission No. 0-27024. (10) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q dated May 14, 1999, Commission No. 0-27024. (11) Incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB dated August 14, 1998, Commission No. 0-27024. (12) Certain portions of Exhibits 10.7, 10.12 and 10.14 are the subject of a request for confidential treatment and have been omitted from the Exhibit and have been filed separately with the Commission. (b) REPORTS FILED ON FORM 8-K During the quarter ended December 31, 1999, the Company filed the following current reports on Form 8-K under Item 5, Other Events: Date of Report Topics -------------- ------ November 15, 1999 Metro One Telecommunications Comments on Earnings Estimates November 17, 1999 Metro One Telecommunications Postpones Public Offering of Common Stock 23 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: March 30, 2000 Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated:
Signature Title Date - --------- ----- ---- /s/ Timothy A. Timmins President, Chief Executive March 30, 2000 - ------------------------- Officer and Director Timothy A. Timmins /s/ William D. Rutherford Chairman of the Board of Directors March 30, 2000 - ------------------------- William D. Rutherford /s/ A. Jean de Grandpre Director March 30, 2000 - ------------------------- A. Jean de Grandpre /s/ James M. Usdan Director March 30, 2000 - ------------------------- James M. Usdan
24 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, 1999 and 1998 and the related statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States of America. 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, 1999 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Portland, Oregon February 4, 2000 The accompanying notes are an integral part of these statements. F-1 METRO ONE TELECOMMUNICATIONS, INC. STATEMENTS OF OPERATIONS (In thousands, except per share amounts) - ------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 -------- --------- --------- Revenues $ 77,831 $ 45,139 $ 26,090 -------- --------- --------- Costs and expenses: Direct operating 46,494 23,107 13,017 General and administrative 28,711 18,334 11,702 -------- --------- --------- 75,205 41,441 24,719 -------- --------- --------- Income from operations 2,626 3,698 1,371 Other income 128 289 408 Interest and loan fees (773) (309) (334) -------- --------- --------- Income before income taxes 1,981 3,678 1,445 Income tax expense 75 75 13 -------- --------- --------- Net income $ 1,906 $ 3,603 $ 1,432 ======== ========= ========= Income per common share Basic $ .17 $ .33 $ .13 Diluted $ .16 $ .32 $ .13
The accompanying notes are an integral part of these statements. F-2 METRO ONE TELECOMMUNICATIONS, INC. BALANCE SHEETS (In thousands)
- --------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, ------------------------------------- 1999 1998 ------------------ ----------------- ASSETS Current assets: Cash and cash equivalents $ 9,564 $ 6,063 Short-term investments 400 1,507 Accounts receivable, net of allowance 15,357 7,428 Prepaid costs and other current assets 985 766 ------------------ ----------------- Total current assets 26,306 15,764 Furniture, fixtures and equipment, net 38,225 19,982 Other assets 944 565 ------------------ ----------------- $ 65,475 $ 36,311 ================== ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,909 $ 1,501 Accrued liabilities 2,390 1,992 Accrued payroll and related costs 3,839 1,852 Line of credit payable - 1,400 Current portion of capital lease obligations 159 365 Current portion of long-term debt 5,259 240 ------------------ ----------------- Total current liabilities 14,556 7,350 Capital lease obligations 17 103 Long-term debt 18,923 616 ------------------ ----------------- 33,496 8,069 ------------------ ----------------- 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, 11,414 and 11,188 shares, respectively, issued and outstanding 40,308 38,477 Accumulated deficit (8,329) (10,235) ------------------ ------------------ Shareholders' equity 31,979 28,242 ------------------ ----------------- $ 65,475 $ 36,311 ================== =================
The accompanying notes are an integral part of these statements. F-3 METRO ONE TELECOMMUNICATIONS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands)
- --------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY ---------------------------------------------------------------------------- COMMON STOCK ------------------------------------- (ACCUMULATED SHAREHOLDERS' SHARES AMOUNT DEFICIT) EQUITY ----------------- ------------------ ------------------ ----------------- 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 Stock options/warrants exercised, net 226 1,831 - 1,831 Net income - - 1,906 1,906 ----------------- ------------------ ------------------ ----------------- Balances at December 31, 1999 11,414 $ 40,308 $ (8,329) $ 31,979 ================= ================== ================== =================
The accompanying notes are an integral part of these statements. F-4 METRO ONE TELECOMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS (In thousands)
- --------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, --------------------------------------------------------- 1999 1998 1997 ------------------ ------------------ ----------------- Cash flows from operating activities: Net income $ 1,906 $ 3,603 $ 1,432 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,225 3,774 2,263 Loss on disposal of fixed assets 67 73 81 Deferred income taxes (8) (42) (12) Changes in certain assets and liabilities: Accounts receivable (7,929) (2,799) (1,906) Prepaid expenses and other assets (728) (91) (238) Accounts payable, accrued liabilities and payroll costs 3,793 2,028 1,673 ------------------ ------------------ ----------------- Net cash provided by operating activities 3,326 6,546 3,293 ------------------ ------------------ ----------------- Cash flows from investing activities: Capital expenditures (24,397) (9,085) (10,096) Purchase of short-term investments (400) (1,507) - Maturity of short-term investments 1,507 - - ------------------ ------------------ ----------------- Net cash used in investing activities (23,290) (10,592) (10,096) ------------------ ------------------ ----------------- Cash flows from financing activities: Net proceeds from (repayment of) line of credit (1,400) 1,400 - Proceeds from issuance of debt 31,800 - 946 Repayment of debt (8,474) (90) - Repayment of capital lease obligations (292) (718) (719) Proceeds from issuance of common stock and exercise of warrants and stock options 1,831 963 993 ------------------ ------------------ ----------------- Net cash provided by financing activities 23,465 1,555 1,220 ------------------ ------------------ ----------------- Net increase (decrease) in cash and cash equivalents 3,501 (2,491) (5,583) Cash and cash equivalents, beginning of year 6,063 8,554 14,137 ------------------ ------------------ ----------------- Cash and cash equivalents, end of year $ 9,564 $ 6,063 $ 8,554 ================== ================== =================
The accompanying notes are an integral part of these statements. F-5 METRO ONE TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS. We provide enhanced directory assistance services to telecommunications carriers and their customers. Revenues are derived principally through fees charged to telecommunications carriers. We operate 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 maturity dates of three months or less at the date of acquisition. 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. We classify our investments as "held-to-maturity" and accordingly record these investments at cost, which approximates fair value. REVENUE RECOGNITION. Under existing contracts with telecommunications carriers, we record revenue for the number of calls processed. Revenue is recognized as services are provided. MAJOR CUSTOMERS. In each of the years ended December 31, 1999, 1998 and 1997, twelve customers accounted for substantially all revenue reported and the accounts receivable. Our four largest customers accounted for approximately 40%, 30%, 11% and 11%, respectively, of revenue in 1999. Our five largest customers accounted for approximately 38%, 18%, 17%, 12% and 11%, respectively, of revenue in 1998. Our four largest customers accounted for approximately 25%, 24%, 17% and 16%, respectively, of revenue in 1997. We have not historically incurred significant losses related to our accounts receivable. However, a $10,000 allowance for uncollectible accounts has been provided as of December 31, 1999. 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 $1,184,000 and $1,323,000 at December 31, 1999 and 1998, 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. EARNINGS PER SHARE. Basic earnings per share was calculated based on the weighted average number of common shares outstanding during each period. Diluted earnings per share was calculated based on these same shares plus dilutive potential shares issuable upon assumed exercise of outstanding stock options based on the treasury stock method. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that effect reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the fiscal year. Actual results could differ from those estimates. F-6 METRO ONE TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES. We are party to various legal actions and administrative proceedings arising in the ordinary course of business. We believe the disposition of these matters will not have a material adverse effect on our financial position, results of operations, or cash flows. RECLASSIFICATION. Certain balances in the 1997 and 1998 financial statements have been reclassified to conform with 1999 presentations. Such reclassifications had no effect on results of operations or accumulated deficit. 2. FURNITURE, FIXTURES AND EQUIPMENT Furniture, fixtures and equipment by major classification are summarized as follows:
DECEMBER 31, ------------------------------------- (In thousands) 1999 1998 ------------------ ----------------- Equipment $ 41,578 $ 22,824 Furniture and fixtures 6,610 3,536 Leasehold improvements 3,729 1,634 ------------------ ----------------- 51,917 27,994 Accumulated depreciation and amortization (13,692) (8,012) ------------------ ----------------- $ 38,225 $ 19,982 ================== =================
3. LONG-TERM DEBT Long-term debt consisted of the following:
DECEMBER 31, ------------------------------------- (In thousands) 1999 1998 ------------------ ----------------- Secured Term Loan $ 20,000 $ - Secured Equipment Financing Loans 4,182 - Secured Term Loan - 856 Current portion (5,259) (240) ------------------ ----------------- Long-term debt $ 18,923 $ 616 ================== =================
LOAN AGREEMENTS. In December 1999, we entered into a new secured term loan agreement with an equipment financing lender. The loan agreement provided us with $20 million of debt to repay outstanding indebtedness, fund the expansion of our call center network and for other equipment needs. Borrowings under the agreement are repayable over 48 months at a fixed interest rate of 9.29%. Prepayment of outstanding borrowings is allowable at any time for a 1% fee. Substantially all of our fixed assets have been pledged as collateral. The interest rate on this loan approximates current market rates; thus, the recorded value of this loan is considered to be at fair value. Also during December 1999, we entered into a new line of credit agreement with a commercial bank that replaced prior agreements. The agreement consists of a $10 million revolving line of credit that expires in December 2001. Outstanding borrowings bear interest at the prime rate (8.5% at December 31, 1999) plus a fee of no greater than .75% based on the ratio of debt to cash flow, and all receivables are F-7 METRO ONE TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- pledged to the bank as collateral. The agreement contains minimum quick ratio, debt to equity and profitability requirements, as well as other restrictive covenants, and prohibits the payment of any dividends and other distributions and redemptions of our stock exceeding 10% of our tangible net worth. As of December 31, 1999, we did not have any outstanding borrowings under this agreement. In September 1999, we entered into a new equipment financing loan agreement with an equipment financing lender. The loan agreement provides us with borrowing capacity to fund the expansion of our call center network and for other equipment needs. The agreement provides for fixed or floating rate options and all assets purchased pursuant to the agreement are pledged as collateral. Borrowings under the agreement have a term of 48 months, and prepayment of outstanding borrowings is allowable 12 months after the funding date. As of December 31, 1999, we had $4.2 million in borrowings against this facility, bearing interest at fixed rates ranging from 8.77% to 9.50%. These interest rates approximate current market rates; thus, the recorded value of this loan is considered to be at fair value. At December 31, 1998, we had in place a $6 million Secured Operating Line of Credit with a commercial bank. Under the terms of the agreement, outstanding borrowings bore interest at prime rate plus 0.25 percent and all of our assets were pledged as collateral. The agreement contained minimum net worth and working capital requirements as well as certain other restrictive covenants, as defined by the agreement, and prohibited the payment of cash dividends. At December 31, 1998, we had $1.4 million in borrowings against this line of credit. In addition, we had a credit facility under which we could borrow up to $2 million to finance purchases of capital equipment. Borrowings bore interest at the prime rate plus 0.50 percent and were secured by the purchased equipment. At December 31, 1998, we had no borrowings against this credit facility. In 1997, we entered into a $1 million Secured Term Loan agreement with a commercial bank. Under the terms of the agreement, outstanding borrowings bore interest at prime rate plus 0.5 percent. The terms of the loan called for an 18-month interest only accumulation period through August 1998 followed by 42 monthly payments of approximately $27,000 for principal and interest. The agreement contained minimum net worth and working capital requirements as well as certain other restrictive covenants and prohibited the payment of cash dividends. We had $856,000 in borrowings against this credit facility at December 31, 1998. This loan bore an interest rate that approximated current market rates; thus, the recorded value of this loan was considered to be at fair value. Aggregate long-term debt payments will be $5.3 million in 2000, $5.8 million in 2001, $6.3 million in 2002, and $6.8 million in 2003. 4. LEASE OBLIGATIONS We lease operating facilities and equipment under operating leases with unexpired terms of one to ten years. Rental expense for operating leases was approximately $3,497,000, $2,091,000 and $1,388,000 for 1999, 1998 and 1997, respectively. F-8 METRO ONE TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Minimum annual rentals for the five years subsequent to 1999 and in the aggregate thereafter are as follows:
(In thousands) YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES ------------------ ------------------ ------------------ 2000 176 4,338 2001 17 3,921 2002 - 3,579 2003 - 3,103 2004 - 1,994 Thereafter - 3,108 ------------------ ------------------ Total minimum lease payments 193 $ 20,043 ================== Less interest portion at rates of 16.7% to 20.7% (17) ------------------ Present value of net minimum lease payments, capital leases Portion due within one year (159) ------------------ Long-term portion $ 17 ==================
5. SHAREHOLDERS' EQUITY PREFERRED STOCK. We have authorized 10,000,000 shares of preferred stock for issuance. Our 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 were issued or outstanding as of December 31, 1999. COMMON STOCK OPTIONS AND WARRANTS. We have 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, 1999, 2,300,000 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. 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, subject to approval by the board of directors, by delivery of shares of common stock having a market value equal to the exercise price of the options. In 1999, our stockholders approved the Metro One Telecommunications, Inc. 1999 Employee Stock Purchase Plan (the "ESPP"). The purpose of the ESPP is to attract and retain qualified employees essential to our success, and to provide such persons with an incentive to perform in our best interests. As of December 31, 1999, 150,000 shares of common stock were reserved for issuance under the ESSP. We have 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 the Plan in the financial statements. If compensation cost on stock options granted in 1999, 1998 and 1997 under this plan had been determined based on the fair value of the options granted as of the grant date in a method consistent with that described in Statement of Financial Accounting Standards ("SFAS") No. 123, F-3 METRO ONE TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- "Accounting for Stock-Based Compensation," our net income and earnings per share would have been changed to the pro forma amounts indicated below for the years ended December 31, 1999, 1998 and 1997:
(In thousands, except per share amounts) 1999 1998 1997 ---- ---- ---- Net income, as reported $1,906 $3,603 $1,432 Diluted earnings per share, as reported 0.16 0.32 0.13 Net income, pro forma 1,014 3,311 1,048 Diluted earnings per share, pro forma 0.08 0.29 0.10
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 1999, 1998 and 1997, respectively: dividend yield of 0 for all years; risk-free interest rates of 5.9, 4.5 and 5.7 percent; expected volatility of 73.6, 66.6 and 55.3 percent; and expected life of 4.0 for all years. A summary of the status of our stock option plan as of December 31, 1999, 1998 and 1997 and changes during the years ending on those dates is presented below.
(In thousands, except 1999 1998 1997 -------------------------- --------------------------- -------------------------- per share amounts) Weighted- Weighted- Weighted Average Average Average Shares Exer. Price Shares Exer. Price Shares Exer. Price ------------- ----------- -------------- ----------- ------------- ----------- Outstanding at beginning of year 1,765 $ 8.88 1,454 $ 8.58 1,291 $ 8.55 Granted 55 15.76 407 10.07 262 8.57 Exercised (227) 8.08 (62) 8.07 (71) 8.05 Forfeited (50) 11.17 (34) 11.82 (28) 8.40 ------------- ----------- -------------- ----------- ------------- ----------- Outstanding at end of year 1,543 $ 9.17 1,765 $ 8.88 1,454 $ 8.58 ============= =========== ============== =========== ============= =========== Options exercisable at year-end 1,212 1,244 1,183 Weighted-average fair value of options granted during the year $ 8.11 $ 4.37 $ 3.15
The following table summarizes information about stock options outstanding and exercisable under the Plan at December 31, 1999:
Outstanding Exercisable (In thousands, except -------------------------------------------------------- ------------------------------------- per share amounts) Number Weighted-Average Number Range of of Remaining Weighted-Average of Weighted-Average Exercise Prices Options Contractual Life (yrs) Exercise Price Options Exercise Price - ------------------ -------------------------------------------------------- ------------------------------------- $ 8.05 - 8.05 814 5.64 $ 8.05 814 $ 8.05 $ 8.50 - 18.00 729 8.35 $ 10.42 398 $ 10.71 - ------------------ --------------- ---- ------------- --------------- ------------- $ 8.05 - 18.00 1,543 6.92 $ 9.17 1,212 $ 8.93 ================== =============== ==== ============= =============== =============
F-10 METRO ONE TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- At December 31, 1997, there were outstanding warrants to purchase 114,000 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 86,000 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 We have 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 $193,000, $533,000 and $740,000 at December 31, 1999, 1998 and 1997, respectively. 7. OTHER INCOME Included in other income are certain items that do not relate directly to current ongoing business activity. Included in this classification for the year ended December 31, 1999 are loss on asset dispositions of $67,000; and interest income of $192,000. For the year ended December 31, 1998, other income consisted primarily of loss on asset dispositions of $73,000; and interest income of $365,000. For the year ended December 31, 1997, other income consisted primarily of estimated litigation settlement expenses of $61,000; loss on asset dispositions of $81,000; and interest income of $569,000. 8. INCOME TAXES The components of income tax expense for the years ended December 31 are as follows:
(In thousands) 1999 1998 1997 ------------------ ------------------ ----------------- Current: Federal $ 8 $ 42 $ 12 State 75 75 13 ------------------ ------------------ ----------------- 83 117 25 ------------------ ------------------ ----------------- Deferred: Federal (8) (42) (12) State - - - ------------------ ------------------ ----------------- (8) (42) (12) ------------------ ------------------ ----------------- Total tax expense $ 75 $ 75 $ 13 ================== ================== =================
F-11 METRO ONE TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- At December 31, the significant components of deferred tax assets and liabilities are as follows:
DECEMBER 31, ------------------------------------- (In thousands) 1999 1998 ------------------ ----------------- Deferred tax liability: Tax depreciation in excess of book $ 2,707 $ 1,487 ------------------ ----------------- Deferred tax asset: Net operating loss carryforwards $ 5,983 $ 5,102 Expenses not currently deductible 396 176 Tax credit carryforwards 127 113 ------------------ ----------------- Gross deferred tax assets 6,506 5,391 Valuation allowance (3,894) (3,817) ------------------ ----------------- Deferred tax assets 2,612 1,574 ------------------ ----------------- Net deferred tax asset $ 95 $ 87 ================== =================
During 1999 and 1998, we reduced our deferred tax valuation allowance to reflect deferred tax assets used to reduce current year income taxes. Our 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 us or our competitors, lengthy sales cycles, lack of market acceptance or delays in the introduction of new versions of our 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 expansion of our national call center network, the general employment environment, general economic conditions and the other factors. Given the variability in operating results, we will continue to review the valuation allowance on a quarterly basis and make adjustments as appropriate. At December 31, 1999, we had approximately $15.4 million of net operating loss carryforwards expiring during the years 2005 to 2010. Ownership changes as defined by section 382 of the Internal Revenue Code could limit the amount of net operating loss carryforwards used in any one year or in the aggregate. The difference between taxes calculated at the statutory federal and state tax rates and the effective combined rates for the years ended December 31 is as follows:
DECEMBER 31, --------------------------------------------------------- 1999 1998 1997 ------------------ ------------------ ----------------- Federal statutory rate 34.0% 35.0% 35.0% State income taxes, net of federal benefit 3.9% 3.9% 2.6% Valuation allowance (36.8)% (36.7)% (39.5)% Other 2.8% (0.1)% 2.8% ------------------ ------------------ ----------------- Effective tax rate 3.9% 2.1% 0.9% ================== ================== =================
F-12 METRO ONE TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 9. EARNINGS PER SHARE Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," requires dual presentation of basic and diluted earnings per share ("EPS"). Basic EPS is based on the weighted average number of common shares outstanding. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. There were no adjustments to net income for the calculation of both basic and diluted earnings per shares for all periods. The calculation of weighted-average outstanding shares is as follows:
AVERAGE SHARES --------------------------------------------------------------- (In thousands) 1999 1998 1997 -------------------- ------------------- ------------------- Weighted average common shares outstanding (used in computing Basic EPS) 11,391 11,063 10,820 Common stock equivalents 597 211 141 -------------------- ------------------- ------------------- Weighted average common shares outstanding (used in computing Diluted EPS) 11,988 11,274 10,961 ==================== =================== ===================
10. BENEFIT PLANS We have a deferred compensation savings plan for the benefit of our 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, we 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. We made contributions of approximately $55,000, $35,000 and $25,000 during 1999, 1998 and 1997, respectively. 11. STATEMENT OF CASH FLOWS Supplemental disclosure of Cash Flow information:
YEAR ENDED DECEMBER 31, --------------------------------------------------------- (In thousands) 1999 1998 1997 ------------------ ------------------ ----------------- Cash paid for interest expense $ 718 $ 297 $ 318 Cash paid for income taxes 78 95 51 Stock issued in settlement of litigation - - 270
F-13 METRO ONE TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
(In thousands except QUARTER ENDED -------------------------------------------------------------------- per share amounts) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ---------------- --------------- --------------- --------------- 1999 Revenues $ 14,175 $ 17,469 $ 20,469 $ 25,718 Direct operating expense 7,836 10,509 12,136 16,013 General and administrative expense 5,653 6,768 7,374 8,916 Income from operations 686 192 959 789 Net income 682 105 677 442 Basic earnings per share .06 .01 .06 .04 Diluted earnings per share .06 .01 .06 .04 1998 Revenues $ 9,045 $ 10,922 $ 11,313 $ 13,859 Direct operating expense 4,793 5,525 5,786 7,003 General and administrative expense 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
F-14 EX-10.16 2 EX-10.16 SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT METRO ONE TELECOMMUNICATIONS, INC.
TABLE OF CONTENTS PAGE ---- 1 ACCOUNTING AND OTHER TERMS......................................................................4 2 LOAN AND TERMS OF PAYMENT.......................................................................4 2.1 Credit Extensions...............................................................................4 2.2 Overadvances....................................................................................4 2.3 Interest Rate, Payments.........................................................................5 2.4 Fees............................................................................................5 3 CONDITIONS OF LOANS.............................................................................5 3.1 Conditions Precedent to Initial Credit Extension................................................5 3.2 Conditions Precedent to all Credit Extensions...................................................5 4 CREATION OF SECURITY INTEREST...................................................................6 4.1 Grant of Security Interest......................................................................6 5 REPRESENTATIONS AND WARRANTIES..................................................................6 5.1 Due Organization and Authorization..............................................................6 5.2 Collateral......................................................................................6 5.3 Litigation......................................................................................6 5.4 No Material Adverse Change in Financial Statements..............................................6 5.5 Solvency........................................................................................6 5.6 Regulatory Compliance...........................................................................7 5.7 Subsidiaries....................................................................................7 5.8 Full Disclosure.................................................................................7 6 AFFIRMATIVE COVENANTS...........................................................................7 6.1 Government Compliance...........................................................................7 6.2 Financial Statements, Reports, Certificates.....................................................7 6.3 Taxes...........................................................................................8 6.4 Insurance.......................................................................................8 6.5 Primary Accounts................................................................................8 6.6 Financial Covenants.............................................................................8 6.7 Further Assurances..............................................................................9 7 NEGATIVE COVENANTS..............................................................................9 7.1 Dispositions....................................................................................9 7.2 Changes in Business, Ownership, Management or Business Locations................................9 7.3 Mergers or Acquisitions.........................................................................9 7.4 Indebtedness....................................................................................9 7.5 Encumbrance.....................................................................................9 7.6 Distributions; Investments......................................................................9 7.7 Transactions with Affiliates...................................................................10 7.8 Subordinated Debt..............................................................................10 7.9 Compliance.....................................................................................10 8 EVENTS OF DEFAULT..............................................................................10 8.1 Payment Default................................................................................10 8.2 Covenant Default...............................................................................10 8.3 Material Adverse Change........................................................................10 8.4 Attachment.....................................................................................10 8.5 Insolvency.....................................................................................11 8.6 Other Agreements...............................................................................11
2 8.7 Judgments......................................................................................11 8.8 Misrepresentations.............................................................................11 9 BANK'S RIGHTS AND REMEDIES.....................................................................11 9.1 Rights and Remedies............................................................................11 9.2 Power of Attorney..............................................................................12 9.3 Accounts Collection............................................................................12 9.4 Bank Expenses..................................................................................12 9.5 Bank's Liability for Collateral................................................................12 9.6 Remedies Cumulative............................................................................12 9.7 Demand Waiver..................................................................................12 10 NOTICES........................................................................................13 11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER....................................................13 12 GENERAL PROVISIONS.............................................................................13 12.1 Successors and Assigns.........................................................................13 12.2 Indemnification................................................................................13 12.3 Time of Essence................................................................................13 12.4 Severability of Provision......................................................................13 12.5 Amendments in Writing, Integration.............................................................13 12.6 Counterparts...................................................................................14 12.7 Survival.......................................................................................14 12.8 Confidentiality................................................................................14 12.9 Effect of Amendment and Restatement............................................................14 12.10Attorneys'Fees, Costs and Expenses.............................................................14 13 DEFINITIONS....................................................................................14 13.1 Definitions....................................................................................14
3 THIS SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT dated December 15, 1999, between SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara, California 95054 with a loan production office located at 11000 SW Stratus, Ste. 170, Beaverton, Oregon 97008-7113 and METRO ONE TELECOMMUNICATIONS, INC. ("Borrower"), whose address is 11200 Murray Scholls Place, Beaverton, Oregon 97007. RECITALS A. Bank and Borrower are parties to that certain Loan and Security Agreements dated April 23, 1999, as amended (collectively, the "Original Agreement"). B. Borrower and Bank desire in this Agreement to set forth their agreement with respect to a working capital and equipment line loan and to amend and restate in its entirety without novation the Original Agreement in accordance with the provisions herein. AGREEMENT The parties agree as follows: 1 ACCOUNTING AND OTHER TERMS Accounting terms not defined in this Agreement will be construed following GAAP. Calculations and determinations must be made following GAAP. The term "financial statements" includes the notes and schedules. The terms "including" and "includes" always mean "including (or includes) without limitation," in this or any Loan Document. This Agreement shall be construed to impart upon Bank a duty to act reasonably at all times. 2 LOAN AND TERMS OF PAYMENT 2.1 CREDIT EXTENSIONS. Borrower will pay Bank the unpaid principal amount of all Credit Extensions and interest on the unpaid principal amount of the Credit Extensions. 2.1.1 REVOLVING ADVANCES. (a) Bank will make Advances not exceeding the lesser of (A) the Committed Revolving Line or (B) the Borrowing Base. Amounts borrowed under this Section may be repaid and reborrowed during the term of this Agreement. (b) To obtain an Advance, Borrower must notify Bank by facsimile or telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be made. Borrower must promptly confirm the notification by delivering to Bank the Payment/Advance Form attached as Exhibit B. Bank will credit Advances to Borrower's deposit account. Bank may make Advances under this Agreement based on instructions from a Responsible Officer or his or her designee or without instructions if the Advances are necessary to meet Obligations which have become due. Bank may rely on any telephone notice given by a person whom Bank believes is a Responsible Officer or designee. Borrower will indemnify Bank for any loss Bank suffers due to reliance. (c) The Committed Revolving Line terminates on the Revolving Maturity Date, when all Advances and other amounts due under this Agreement are immediately payable. 2.2 OVERADVANCES. If Borrower's Obligations under (a) Section 2.1.1 exceed the lesser of either (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower must immediately pay Bank the excess. 4 2.3 INTEREST RATE, PAYMENTS. (a) Interest Rate. Advances accrue interest on the outstanding principal balance at a per annum rate above the Prime Rate as follows: DEBT/CASH FLOW RATE 2.00 and higher .50% 1.00 - 1.99 .25% under 1.00 Prime Rate
After an Event of Default, Obligations accrue interest at 5 percent above the rate effective immediately before the Event of Default. The interest rate increases or decreases when the Prime Rate changes. Interest is computed on a 360 day year for the actual number of days elapsed. (b) Payments. Interest due on the Committed Revolving Line is payable on the 15th of each month. Bank may debit any of Borrower's deposit accounts including Account Number [Account Number] for principal and interest payments or any amounts Borrower owes Bank. Bank will notify Borrower when it debits Borrower's accounts. These debits are not a set-off. Payments received after 12:00 noon Pacific time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest accrue. 2.4 FEES. Borrower will pay: (a) Facility Fee. A fully earned, non-refundable Facility Fee of $20,000 due on the Closing Date; (b) An unused Facility Fee based on Borrower's Debt to Cash Flow, paid quarterly in arrears on the unused portion of the Committed Revolving Line as follows: DEBT/CASH FLOW RATE 2.00 and higher .75% 1.00 - 1.99 .65% under 1.00 .50% (c) Bank Expenses. All Bank Expenses (including reasonable attorneys' fees and expenses) incurred through and after the date of this Agreement, are payable when due. 3 CONDITIONS OF LOANS 3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. Bank's obligation to make the initial Credit Extension is subject to the condition precedent that it receive the agreements, documents and fees it requires; and Borrower shall pay in full any outstanding principal and interest under the existing term loans. 3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. Bank's obligations to make each Credit Extension, including the initial Credit Extension, is subject to the following: (a) timely receipt of any Payment/Advance Form; and 5 (b) the representations and warranties in Section 5 must be materially true on the date of the Payment/Advance Form and on the effective date of each Advance and no Event of Default may have occurred and be continuing, or result from the Credit Extension. Each Credit Extension is Borrower's representation and warranty on that date that the representations and warranties of Section 5 remain true. 4 CREATION OF SECURITY INTEREST 4.1 GRANT OF SECURITY INTEREST. Borrower grants Bank a continuing security interest in all presently existing and later acquired Collateral to secure all Obligations and performance of each of Borrower's duties under the Loan Documents. Except for Permitted Liens, any security interest will be a first priority security interest in the Collateral. Bank may place a "hold" on any deposit account pledged as Collateral. If this Agreement is terminated, Bank's lien and security interest in the Collateral will continue until Borrower fully satisfies its Obligations. 5 REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 5.1 DUE ORGANIZATION AND AUTHORIZATION. Borrower and each Subsidiary is duly existing and in good standing in its state of formation and qualified and licensed to do business in, and in good standing in, any state in which the conduct of its business or its ownership of property requires that it be qualified. The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower's formation documents, nor constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which or by which it is bound in which the default could cause a Material Adverse Change. 5.2 COLLATERAL. Borrower has good title to the Collateral, free of Liens except Permitted Liens. The Accounts are bona fide, existing obligations, and the service or property has been performed or delivered to the account debtor or its agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has no notice of any actual or imminent Insolvency Proceeding of any account debtor whose accounts are an Eligible Account in any Borrowing Base Certificate. All Inventory is in all material respects of good and marketable quality, free from material defects. 5.3 LITIGATION. Except as may otherwise be disclosed to Bank, there are no actions or proceedings pending or, to Borrower's knowledge, threatened by or against Borrower or any Subsidiary in which an adverse decision could cause a Material Adverse Change. 5.4 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All consolidated financial statements for Borrower, and any Subsidiary, delivered to Bank fairly present in all material respects Borrower's consolidated financial condition and Borrower's consolidated results of operations. There has not been any material deterioration in Borrower's consolidated financial condition since the date of the most recent financial statements submitted to Bank. 6 5.5 SOLVENCY. The fair salable value of Borrower's assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; the Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature. 5.6 REGULATORY COMPLIANCE. Borrower is not an "investment company" or a company "controlled" by an "investment company" under the Investment Company Act. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has complied with the Federal Fair Labor Standards Act. Borrower has not violated any laws, ordinances or rules, the violation of which could cause a Material Adverse Change. None of Borrower's or any Subsidiary's properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each Subsidiary has timely filed all required tax returns and paid, or made adequate provision to pay, all taxes, except those being contested in good faith with adequate reserves under GAAP. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that are necessary to continue its business as currently conducted. 5.7 SUBSIDIARIES. Borrower does not own any stock, partnership interest or other equity securities except for Permitted Investments. 5.8 FULL DISCLOSURE. No representation, warranty or other statement of Borrower in any certificate or written statement given to Bank contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading. 6 AFFIRMATIVE COVENANTS Borrower will do all of the following: 6.1 GOVERNMENT COMPLIANCE. Borrower will maintain its and all Subsidiaries' legal existence and good standing in its jurisdiction of formation and maintain qualification in each jurisdiction in which the failure to so qualify could have a material adverse effect on Borrower's business or operations. Borrower will comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which it is subject, noncompliance with which could have a material adverse effect on Borrower's business or operations or cause a Material Adverse Change. 6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. (a) Borrower will deliver to Bank: (i) within 5 days of filing, copies of all statements, reports and notices made available to Borrower's security holders or to any holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission; (ii) a prompt report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of $250,000 or more; (iii) budgets, sales projections, operating plans or other financial information Bank requests. (b) At such time as Advances become subject to the Borrowing Base and within 30 days after the last day of each month, Borrower will deliver to Bank a Borrowing Base Certificate signed by a 7 Responsible Officer in the form of Exhibit C, with aged listings of accounts receivable and accounts payable. (c) Borrower will deliver to Bank a Compliance Certificate signed by a Responsible Officer in the form of Exhibit D, together with its 10Q and 10K reports. (d) Bank has the right to audit Borrower's Collateral at Borrower's expense, but the audits will be conducted no more often than every year and will be performed after Closing Date and the cost of such audit shall not exceed $1,500, unless an Event of Default has occurred and is continuing. 6.3 TAXES. Borrower will make, and cause each Subsidiary to make, timely payment of all material federal, state, and local taxes or assessments and will deliver to Bank, on demand, appropriate certificates attesting to the payment. 6.4 INSURANCE. Borrower will keep its business and the Collateral insured for risks and in amounts, as Bank requests. Insurance policies will be in a form, with companies, and in amounts that are satisfactory to Bank. All property policies will have a lender's loss payable endorsement showing Bank as an additional loss payee and all liability policies will show the Bank as an additional insured and provide that the insurer must give Bank at least 20 days notice before canceling its policy. At Bank's request, Borrower will deliver certified copies of policies and evidence of all premium payments. Proceeds payable under any policy will, at Bank's option, be payable to Bank on account of the Obligations. Statutory notice regarding insurance: WARNING Unless you provide us with evidence of the insurance coverage as required by our contract or loan agreement, we may purchase insurance at your expense to protect our interest. This insurance may, but need not, also protect your interest. If the collateral becomes damaged, the coverage we purchase may not pay any claim you make or any claim made against you. You may later cancel this coverage by providing evidence that you have obtained property coverage elsewhere. You are responsible for the cost of any insurance purchased by us. The cost of this insurance may be added to your contract or loan balance. If the cost is added to your contract or loan balance, the interest rate on the underlying contract or loan will apply to this added amount. The effective date of coverage may be the date your prior coverage lapsed or the date you failed to provide proof of coverage. This coverage we purchased may be considerably more expensive than insurance you can obtain on your own and may not satisfy any need for property damage coverage or any mandatory liability insurance requirements imposed by applicable law. 6.5 PRIMARY ACCOUNTS. Borrower will maintain its primary operating accounts with Bank. 6.6 FINANCIAL COVENANTS. Borrower will maintain as of the last day of each quarter: (i) QUICK RATIO. Quick Ratio. A ratio of Quick Assets to Current Liabilities minus Deferred Maintenance Revenue plus any outstanding Advances which may be considered long term debt under GAAP of at least 1.00 to 1.00. (ii) DEBT/TANGIBLE NET WORTH RATIO. A ratio of Total Liabilities less Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than 1.50 to 1.00. 8 (iii) PROFITABILITY. Borrower will have a minimum net profit of $1 for each quarter, except that Borrower may incur one quarterly loss for the quarter ending December 31, 1999 or March 31, 2000 (but not in both periods) provided such loss is due to extraordinary expenses associates with the postponement of Borrower's secondary equity offering. 6.7 FURTHER ASSURANCES. Borrower will execute any further instruments and take further action as Bank requests to perfect or continue Bank's security interest in the Collateral or to effect the purposes of this Agreement. 7 NEGATIVE COVENANTS Borrower will not do any of the following: 7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose of (collectively "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than Transfers (i) of Inventory and equipment in the ordinary course of business; (ii) of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; or (iii) of worn-out or obsolete Equipment. 7.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS. Engage in or permit any of its Subsidiaries to engage in any business other than businesses equivalent to or substantially similar to the business currently engaged in by Borrower or have a material change in its ownership of greater than 35%. Borrower will not, without at least 30 days prior written notice, relocate its chief executive office or add any new offices or business locations. 7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, except where (i) a Subsidiary is merged into another Subsidiary, (ii) a Subsidiary into Borrower or (ii) an merger related to a stock transaction, provided Borrower has (a) received prior written consent of Bank, which such consent may be granted or withheld by Bank's sole discretion and (b) Borrower has provided to Bank a Compliance Certificate with covenant analysis prior to such transaction indicating that an Event of Default has not occurred and is continuing and Borrower is in compliance with all financial covenants. 7.4 INDEBTEDNESS. Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness. 7.5 ENCUMBRANCE. Create, incur, or allow any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, or permit any Collateral not to be subject to the first priority security interest granted here. 7.6 DISTRIBUTIONS; INVESTMENTS. Directly or indirectly acquire or own any Person, or make any Investment in any Person, other than Permitted Investments, or permit any of its Subsidiaries to do so. Except as provided in Section 7.3, 9 pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock exceeding 10% of the Borrower's Tangible Net Worth. 7.7 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter or permit any material transaction with any Affiliate except transactions that are in the ordinary course of Borrower's business, on terms less favorable to Borrower than would be obtained in an arm's length transaction with a non-affiliated Person. 7.8 SUBORDINATED DEBT. Make or permit any payment on any Subordinated Debt, except under the terms of the Subordinated Debt, or amend any provision in any document relating to the Subordinated Debt without Bank's prior written consent. 7.9 COMPLIANCE. Become an "investment company" or a company controlled by an "investment company," under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock, or use the proceeds of any Credit Extension for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could have a material adverse effect on Borrower's business or operations or cause a Material Adverse Change, or permit any of its Subsidiaries to do so. 8 EVENTS OF DEFAULT Any one of the following is an Event of Default: 8.1 PAYMENT DEFAULT. If Borrower fails to pay any of the Obligations when due; 8.2 COVENANT DEFAULT. If Borrower does not perform any obligation in Section 6 or violates any covenant in Section 7 or does not perform or observe any other material term, condition or covenant in this Agreement, any Loan Documents, or in any agreement between Borrower and Bank and as to any default under a term, condition or covenant that can be cured, has not cured the default within 10 days after it occurs, or if the default cannot be cured within 10 days or cannot be cured after Borrower's attempts within 10 day period, and the default may be cured within a reasonable time, then Borrower has an additional period (of not more than 30 days) to attempt to cure the default. During the additional time, the failure to cure the default is not an Event of Default (but no Credit Extensions will be made during the cure period); 8.3 MATERIAL ADVERSE CHANGE. (i) If there occurs a material impairment in the perfection or priority of the Bank's security interest in the Collateral or in the value of such Collateral which is not covered by adequate insurance or (ii) if the Bank determines, based upon information available to it and in its reasonable judgment, that there is a reasonable likelihood that Borrower will fail to comply with one or more of the financial covenants in Section 6 during the next succeeding financial reporting period. 8.4 ATTACHMENT. If any material portion of Borrower's assets is attached, seized, levied on, or comes into possession of a trustee or receiver and the attachment, seizure or levy is not removed in 10 days, or if Borrower is enjoined, restrained, or prevented by court order from conducting a material part of its 10 business or if a judgment or other claim becomes a Lien on a material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed against any of Borrower's assets by any government agency and not paid within 10 days after Borrower receives notice. These are not Events of Default if stayed or if a bond is posted pending contest by Borrower (but no Credit Extensions will be made during the cure period); 8.5 INSOLVENCY. If Borrower becomes insolvent or if Borrower begins an Insolvency Proceeding or an Insolvency Proceeding is begun against Borrower and not dismissed or stayed within 30 days (but no Credit Extensions will be made before any Insolvency Proceeding is dismissed); 8.6 OTHER AGREEMENTS. If there is a default in any agreement between Borrower and a third party that gives the third party the right to accelerate any Indebtedness exceeding $250,000 or that could cause a Material Adverse Change; 8.7 JUDGMENTS. If a money judgment(s) in the aggregate of at least $250,000 is rendered against Borrower and is unsatisfied and unstayed for 10 days (but no Credit Extensions will be made before the judgment is stayed or satisfied); or 8.8 MISREPRESENTATIONS. If Borrower or any Person acting for Borrower makes any material misrepresentation or material misstatement now or later in any warranty or representation in this Agreement or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document. 9 BANK'S RIGHTS AND REMEDIES 9.1 RIGHTS AND REMEDIES. When an Event of Default occurs and continues Bank may, without notice or demand, do any or all of the following: (a) Declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Bank); (b) Stop advancing money or extending credit for Borrower's benefit under this Agreement or under any other agreement between Borrower and Bank; (c) Settle or adjust disputes and claims directly with account debtors for amounts, on terms and in any order that Bank considers advisable; (d) Make any payments and do any acts it considers necessary or reasonable to protect its security interest in the Collateral. Borrower will assemble the Collateral if Bank requires and make it available as Bank designates. Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without charge, to exercise any of Bank's rights or remedies; (e) Apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or the account of Borrower; 11 (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral; and (g) Dispose of the Collateral according to the Code. 9.2 POWER OF ATTORNEY. Effective only when an Event of Default occurs and continues, Borrower irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name on any checks or other forms of payment or security; (ii) sign Borrower's name on any invoice or bill of lading for any Account or drafts against account debtors, (iii) make, settle, and adjust all claims under Borrower's insurance policies; (iv) settle and adjust disputes and claims about the Accounts directly with account debtors, for amounts and on terms Bank determines reasonable; and (v) transfer the Collateral into the name of Bank or a third party as the Code permits. Bank may exercise the power of attorney to sign Borrower's name on any documents necessary to perfect or continue the perfection of any security interest regardless of whether an Event of Default has occurred. Bank's appointment as Borrower's attorney in fact, and all of Bank's rights and powers, coupled with an interest, are irrevocable until all Obligations have been fully repaid and performed and Bank's obligation to provide Credit Extensions terminates. 9.3 ACCOUNTS COLLECTION. When an Event of Default occurs and continues, Bank may notify any Person owing Borrower money of Bank's security interest in the funds and verify the amount of the Account. Borrower must collect all payments in trust for Bank and, if requested by Bank, immediately deliver the payments to Bank in the form received from the account debtor, with proper endorsements for deposit. 9.4 BANK EXPENSES. If Borrower fails to pay any amount or furnish any required proof of payment to third persons Bank may make all or part of the payment or obtain insurance policies required in Section 6.4, and take any action under the policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and immediately due and payable, bearing interest at the then applicable rate and secured by the Collateral. No payments by Bank are deemed an agreement to make similar payments in the future or Bank's waiver of any Event of Default. 9.5 BANK'S LIABILITY FOR COLLATERAL. If Bank complies with reasonable banking practices it is not liable for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other person. Borrower bears all risk of loss, damage or destruction of the Collateral. 9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity. Bank's exercise of one right or remedy is not an election, and Bank's waiver of any Event of Default is not a continuing waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is effective unless signed by Bank and then is only effective for the specific instance and purpose for which it was given. 9.7 DEMAND WAIVER. Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable. 12 10 NOTICES All notices or demands by any party about this Agreement or any other related agreement must be in writing and be personally delivered or sent by an overnight delivery service, by certified mail, postage prepaid, return receipt requested, or by telefacsimile to the addresses set forth at the beginning of this Agreement. A party may change its notice address by giving the other party written notice. 11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER Oregon law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Washington County, Oregon. BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL. 12 GENERAL PROVISIONS 12.1 SUCCESSORS AND ASSIGNS. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights under it without Bank's prior written consent which may be granted or withheld in Bank's discretion. Bank has the right, without the consent of or notice to Borrower, to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits under this Agreement. 12.2 INDEMNIFICATION. Borrower will indemnify, defend and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred, or paid by Bank from, following, or consequential to transactions between Bank and Borrower (including reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3 TIME OF ESSENCE. Time is of the essence for the performance of all obligations in this Agreement. 12.4 SEVERABILITY OF PROVISION. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision. 12.5 AMENDMENTS IN WRITING, INTEGRATION. All amendments to this Agreement must be in writing and signed by Borrower and Bank. This Agreement represents the entire agreement about this subject matter, and supersedes prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement merge into this Agreement and the Loan Documents. UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY THE BANK AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S 13 RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY US TO BE ENFORCEABLE. 12.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement. 12.7 SURVIVAL. All covenants, representations and warranties made in this Agreement continue in full force while any Obligations remain outstanding. The obligations of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of limitations for actions that may be brought against Bank have run. 12.8 CONFIDENTIALITY. In handling any confidential information, Bank will exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made (i) to Bank's subsidiaries or affiliates in connection with their business with Borrower, (ii) to prospective transferees or purchasers of any interest in the loans, (iii) as required by law, regulation, subpoena, or other order, (iv) as required in connection with Bank's examination or audit and (v) as Bank considers appropriate exercising remedies under this Agreement. Confidential information does not include information that either: (a) is in the public domain or in Bank's possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank; or (b) is disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information. 12.9 EFFECT OF AMENDMENT AND RESTATEMENT. This Agreement is intended to and does completely amend and restate, without novation, the Original Agreement. All advances or loans outstanding under the Original Agreement are and shall continue to be outstanding under this Agreement. All security interests granted under the Original Agreement are hereby confirmed and ratified and shall continue to secure all Obligations under this Agreement. 12.10 ATTORNEYS' FEES, COSTS AND EXPENSES. In any action or proceeding between Borrower and Bank arising out of the Loan Documents, the prevailing party will be entitled to recover its reasonable attorneys' fees and other costs and expenses incurred, in addition to any other relief to which it may be entitled. 13 DEFINITIONS 13.1 DEFINITIONS. In this Agreement: "ACCOUNTS" are all existing and later arising accounts, contract rights, and other obligations owed Borrower in connection with its sale or lease of goods (including licensing software and other technology) or provision of services, all credit insurance, guaranties, other security and all merchandise returned or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "ADVANCE" or "ADVANCES" is a loan advance (or advances) under the Committed Revolving Line. "AFFILIATE" of a Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that 14 Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person's managers and members. "BANK EXPENSES" are all audit fees and expenses and reasonable costs and expenses (including reasonable attorneys' fees and expenses) for preparing, negotiating, administering, defending and enforcing the Loan Documents (including appeals or Insolvency Proceedings). "BORROWER'S BOOKS" are all Borrower's books and records including ledgers, records regarding Borrower's assets or liabilities, the Collateral, business operations or financial condition and all computer programs or discs or any equipment containing the information. "BORROWING BASE" shall mean 80% of Eligible Accounts as determined by Bank from Borrower's most recent Borrowing Base Certificate at such times as the Quick Ratio exceeds 2.00 to 1.00. "BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on which the Bank is closed. "CAPITALIZED PRODUCT DEVELOPMENT COSTS" are all costs associated with the development of Borrower's product, including, but not limited to software, that are not recorded as an expense and have been classified as an asset account. "CLOSING DATE" is the date of this Agreement. "CODE" is the Oregon Uniform Commercial Code. "COLLATERAL" is the property described on EXHIBIT A. "COMMITTED REVOLVING LINE" is an Advance of up to $10,000,000. "CONTINGENT OBLIGATION" is, for any Person, any direct or indirect liability, contingent or not, of that Person for (i) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (ii) any obligations for undrawn letters of credit for the account of that Person; and (iii) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but "Contingent Obligation" does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under the guarantee or other support arrangement. "CREDIT EXTENSION" is each Advance or any other extension of credit by Bank for Borrower's benefit. "CURRENT LIABILITIES" are the aggregate amount of Borrower's Total Liabilities which mature within one (1) year. "DEBT TO CASH FLOW" is, all indebtedness under this Agreement and any other Permitted Indebtedness divided by net income plus interest expense and no - -cash items such as depreciation and amortization for the preceding 4-quarter period. "DEFERRED MAINTENANCE REVENUE" is all amounts received in advance of performance under maintenance contract and not yet recognized as revenue. "ELIGIBLE ACCOUNTS" are Accounts in the ordinary course of Borrower's business that meet all Borrower's representations and warranties in Section 5; BUT Bank may change eligibility standards by giving Borrower notice. Unless Bank agrees otherwise in writing, Eligible Accounts will not include: 15 (a) Accounts that the account debtor has not paid within 90 days of invoice date; (b) Accounts for an account debtor, 50% or more of whose Accounts have not been paid within 90 days of invoice date; (c) Credit balances over 90 days from invoice date; (d) Accounts for an account debtor, including Affiliates, whose total obligations to Borrower exceed 25% of all Accounts, for the amounts that exceed that percentage, unless the Bank approves in writing except for those certain Accounts from Wireless affiliates of AT& T, Nextel, Sprint and Airtouch, for which the percentage may be 40% ; (e) Accounts for which the account debtor does not have its principal place of business in the United States; (f) Accounts for which the account debtor is a federal, state or local government entity or any department, agency, or instrumentality except for Accounts of the United States if the payee has assigned its payment rights to Bank and the assignment has been acknowledged under the Assignment of Claims Act of 1940 (31 U.S.C. 3727); (g) Accounts for demonstration or promotional equipment, or in which goods are consigned, sales guaranteed, sale or return, sale on approval, bill and hold, or other terms if account debtor's payment may be conditional; (h) Accounts for which the account debtor is Borrower's Affiliate, officer, employee, or agent; (i) Accounts in which the account debtor disputes liability or makes any claim and Bank believes there may be a basis for dispute (but only up to the disputed or claimed amount), or if the Account Debtor is subject to an Insolvency Proceeding, or becomes insolvent, or goes out of business; (j) Accounts for which Bank reasonably determines collection to be doubtful. "EQUIPMENT" is all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "ERISA" is the Employment Retirement Income Security Act of 1974, and its regulations. "GAAP" is generally accepted accounting principles. "INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations and (d) Contingent Obligations. "INSOLVENCY PROCEEDING" are proceedings by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "INVENTORY" is present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or later owned by or in the custody or possession, actual or constructive, of Borrower, including inventory temporarily out of its custody or possession or in transit and including returns on any accounts or other proceeds (including insurance proceeds) from the sale or disposition of any of the foregoing and any documents of title. 16 "INVESTMENT" is any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "LIEN" is a mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes or guaranties executed by Borrower or Guarantor, and any other present or future agreement between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated. "MATERIAL ADVERSE CHANGE" is defined in Section 8.3. "OBLIGATIONS" are debts, principal, interest, Bank Expenses and other amounts Borrower owes Bank now or later, including letters of credit and Exchange Contracts and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to Bank. "ORIGINAL AGREEMENT" has the meaning set forth in recital paragraph A. "PERMITTED INDEBTEDNESS" is: (a) Borrower's indebtedness to Bank under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and shown on the Schedule; (c) Subordinated Debt; (d) Indebtedness to trade creditors incurred in the ordinary course of business; and (e) Indebtedness secured by Permitted Liens. "PERMITTED INVESTMENTS" are: (a) Investments shown on the Schedule and existing on the Closing Date; (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States or its agency or any State maturing within 1 year from its acquisition, (ii) commercial paper maturing no more than 1 year after its creation and having the highest rating from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of deposit issued maturing no more than 1 year after issue; and (c) Investments which do not exceed 10% of Tangible Net Worth. "PERMITTED LIENS" are: (a) Liens existing on the Closing Date and shown on the Schedule or arising under this Agreement or other Loan Documents; (b) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, IF they have no priority over any of Bank's security interests; (c) Purchase money Liens (i) on Equipment acquired or held by Borrower or its Subsidiaries incurred for financing the acquisition of the Equipment, or (ii) existing on equipment when acquired, IF the Lien is confined to the property and improvements and the proceeds of the equipment; 17 (d) Leases or subleases and licenses or sublicenses granted in the ordinary course of Borrower's business and any interest or title of a lessor, licensor or under any lease or license, IF the leases, subleases, licenses and sublicenses permit granting Bank a security interest; (e) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (c), BUT any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase. "PERSON" is any individual, sole proprietorship, partnership, limited liability company, joint venture, company association, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency. "PRIME RATE" is Bank's most recently announced "prime rate," even if it is not Bank's lowest rate. "QUICK ASSETS" is, on any date, the Borrower's consolidated, unrestricted cash, cash equivalents, net billed accounts receivable and investments with maturities of fewer than 12 months determined according to GAAP. "RESPONSIBLE OFFICER" is each of the Senior Vice President, Operations and Senior Vice President-Corporate Development, Chief Executive Officer, the President, the Chief Financial Officer and the Controller of Borrower. "REVOLVING MATURITY DATE" is December 15, 2001. "SCHEDULE" is any attached schedule of exceptions. "SUBORDINATED DEBT" is debt incurred by Borrower subordinated to Borrower's debt to Bank (and identified as subordinated by Borrower and Bank). "SUBSIDIARY" is for any Person, or any other business entity of which more than 50% of the voting stock or other equity interests is owned or controlled, directly or indirectly, by the Person or one or more Affiliates of the Person. "TANGIBLE NET WORTH" is, on any date, the consolidated total assets of Borrower and its Subsidiaries MINUS, (i) any amounts attributable to (a) goodwill, (b) intangible items such as unamortized debt discount and expense, Patents, trade and service marks and names, Copyrights and research and development expenses except prepaid expenses, and (c) reserves not already deducted from assets, AND (ii) Total Liabilities. "TOTAL LIABILITIES" is on any day, obligations that should, under GAAP, be classified as liabilities on Borrower's consolidated balance sheet, including all Indebtedness, and current portion Subordinated Debt allowed to be paid, but excluding all other Subordinated Debt. BORROWER: Metro One Telecommunications, Inc. By: Stebbins B. Chandor Jr. -------------------------- Title: SVP & CFO ----------------------- By: R. Tod Hutchinson -------------------------- Title: VP, Finance ----------------------- 18 BANK: SILICON VALLEY BANK By: /s/ Bruce E. Helberg -------------------------- Title: Vice President ----------------------- 19 EXHIBIT A The Collateral consists of all of Borrower's right, title and interest in and to the following: All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above; All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, servicemarks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower; All documents, cash, deposit accounts, securities, securities entitlements, securities accounts, investment property, financial assets, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrower's Books relating to the foregoing; All copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; all trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; all claims for damages by way of any past, present and future infringement of any of the foregoing; and All Borrower's Books relating to the foregoing and any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof.
EXHIBIT B LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T. TO: CENTRAL CLIENT SERVICE DIVISION DATE: ------------- FAX#: (408) 496-2426 TIME: ------------- FROM: METRO ONE TELECOMMUNICATIONS, INC ----------------------------------------- CLIENT NAME (BORROWER) REQUESTED BY: --------------------------------- AUTHORIZED SIGNER'S NAME AUTHORIZED SIGNATURE: ------------------------- PHONE NUMBER: --------------------------------- FROM ACCOUNT # TO ACCOUNT # -------------------------------- ----------------- REQUESTED TRANSACTION TYPE REQUESTED DOLLAR AMOUNT PRINCIPAL INCREASE (ADVANCE) $ -------------------- PRINCIPAL PAYMENT (ONLY) $ -------------------- INTEREST PAYMENT (ONLY) $ -------------------- PRINCIPAL AND INTEREST (PAYMENT) $ -------------------- OTHER INSTRUCTIONS:
All Borrower's representations and warranties in the Second Amended and Restated Loan and Security Agreement are true, correct and complete in all material respects on the date of the telephone request for and Advance confirmed by this Borrowing Certificate; but those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of that date BANK USE ONLY TELEPHONE REQUEST: The following person is authorized to request the loan payment transfer/loan advance on the advance designated account and is known to me - ---------------------------- -------------------- Authorized Requester Phone # - ---------------------------- -------------------- Received By (Bank) Phone # ---------------------------------------------- Authorized Signature (Bank)
EXHIBIT C BORROWING BASE CERTIFICATE Borrower: Metro One Telecommunications, Inc. Bank: Silicon Valley Bank 3003 Tasman Drive Santa Clara, CA 95054 Commitment Amount: $10,000,000, subject to the Borrowing Base at such times as Borrower's Quick Ratio falls blow 2.00 to 1.00 ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of $ ----------------------- 2. Additions (please explain on reverse) $ ------------- 3. TOTAL ACCOUNTS RECEIVABLE $ ------------- ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4. Amounts over 90 days due $ ------------- 5. Balance of 50% over 90 day accounts $ ------------- 6. Credit balances over 90 days $ ------------- 7. Concentration Limits* $ ----------- 8. Foreign Accounts $ ------------- 9. Governmental Accounts $ ----------- 10. Promotion or Demo Accounts $ ------------- 11. Intercompany/Employee Accounts $ ------------- 12. Other (please explain on reverse) $ ------------- 13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $ ----------- 14. Eligible Accounts (#3 minus #13) $ ------------- 15. LOAN VALUE OF ACCOUNTS (80% of #14) $ ------------- ------------- * 40% for Wireless affiliates of AT& T, Nextel, Sprint and Airtouch BALANCES 16. Maximum Loan Amount $ ---------- 17. Total Funds Available [Lesser of #16 or #15] $ ------------ 18. Present balance owing on Line of Credit $ ------------- 19. Outstanding under Sublimits ( none ) $ ------------- 20. RESERVE POSITION (#177 minus #18 and #19) $ ------------
THE UNDERSIGNED REPRESENTS AND WARRANTS THAT THIS IS TRUE, COMPLETE AND CORRECT, AND THAT THE INFORMATION IN THIS BORROWING BASE CERTIFICATE COMPLIES WITH THE REPRESENTATIONS AND WARRANTIES IN THE SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT BETWEEN THE UNDERSIGNED AND SILICON VALLEY BANK. COMMENTS: Metro One Telecommunications, Inc. By: ---------------------------- Authorized Signer 2 EXHIBIT D COMPLIANCE CERTIFICATE TO: SILICON VALLEY BANK 3003 Tasman Drive Santa Clara, CA 95054 FROM: METRO ONE TELECOMMUNICATIONS, INC. The undersigned authorized officer of Metro One Telecommunications, Inc. ("Borrower") certifies that under the terms and conditions of the Second Amended and Restated Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below and (ii) all representations and warranties in the Agreement are true and correct in all material respects on this date. Attached are the required documents supporting the certification. The Officer certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The Officer acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES 10-Q, 10-K and 8-K Within 5 days after filing with SEC Yes No A/R & A/P Agings* Monthly w/in 30 days Yes No Borrowing Base Certificate* Monthly w/in 30 days Yes No Compliance Certificate Together with 10Q & 10K Yes No * At such time as Advances become subject to the Borrowing Base. FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES Maintain on a Quarterly Basis: Minimum Quick Ratio (Adjusted) 1.00:1.00 _____:1.00 Yes No Maximum Debt/Tangible Net Worth 1.50:1.00 _____:1.00 Yes No Profitability: $1/Quarterly $_________ Yes No one quarterly loss allowed in 12/31/99 or 3/31/99 (but not both quarters), provided loss is due to extra ordinary expenses associated with the postponement of Borrower's secondary equity offering
1 COMMENTS REGARDING EXCEPTIONS: See Attached. BANK USE ONLY Received by: ----------------------- Sincerely, AUTHORIZED SIGNER Date: ------------------------------ Metro One Telecommunications, Inc. Verified: -------------------------- AUTHORIZED SIGNER - ---------------------------------- SIGNATURE - ---------------------------------- Date: TITLE ------------------------------ - ---------------------------------- DATE Compliance Status: Yes No 2 EX-10.17 3 EX-10.17 PROMISSORY NOTE --------------- December 28, 1999 (Date) 11200 Murray Scholls Place, Beaverton, Washington Co., OR 97008 (Street Address of Maker) (Town) (County) (State) (Zip Code) FOR VALUE RECEIVED, Metro One Telecommunications, Inc. ("Maker") promises, jointly and severally if more than one, to pay to the order of General Electric Capital Corporation or any subsequent holder hereof (each, a "Payee") at its office located at 4 North Park Drive, Suite 500, Hunt Valley, Maryland 21030 or at such other place as Payee may designate, the principal sum of Twenty million dollars ($20,000,000.00), with interest thereon, from the date hereof through and including the dates of payment, at a fixed interest rate of Nine and 29/100 percent (9.29%) per annum, to be paid in lawful money of the United States, in forty-seven (47) consecutive monthly installments of principal and interest of Five hundred thousand and four hundred fifty-nine and 44/100 Dollars ($500,459.44) each (each, a "Periodic Installment") and a final installment in the amount of $500,459.44. The first Periodic Installment shall be due and payable on January 28, 2000, and the following Periodic Installments and the final installment shall be due and payable on the same day of each succeeding month (each, a "Payment Date"). Such installments have been calculated on the basis of 360 day year of twelve 30-day months. Each payment may, at the option of the Payee, be calculated and applied on an assumption that such payment would be made on its due date. Payments shall be paid by wire transfer of immediately available funds to Bankers Trust, New York, New York 10006, Account No. [Account Number], ABA No. 021-001-033, or to such other account as holder may request. The acceptance by Payee of any payment which is less than payment in full of all amounts due and owing at such time shall not constitute a waiver of Payee's right to receive payment in full at such time or at any prior subsequent time. The Maker hereby expressly authorizes the Payee to insert the date value is actually given in the blank space on the face hereof. This Note is secured by Collateral Schedule No. G-1 to Master Security Agreement dated September 10, 1999 ("Security Agreement") This is of the essence hereof. If any installment or any other sum due under this Note or any Security Agreement is not received within ten (10) days after its due date, the Maker agrees to pay, in addition to the amount of each such installment or other sum, a late payment charge of five percent (5%) of the amount of said installment or other sum, but not exceeding any lawful maximum. In the event that (i) Maker fails to make payment of any amount due hereunder within ten (10) days after the same becomes due and payable; or (ii) Maker is in default under, or fails to perform under any term or condition contained in any Security Agreement following any applicable notice and/or cure period, then the entire principal sum remaining unpaid, together with all accrued interest thereon and any other sum payable under this Note or any Security Agreement, at the election of Payee, shall immediately become due and payable, with interest thereon at the lesser of 500 basis points over the fixed interest rate payable hereunder or the highest rate not prohibited by applicable law from the date of such accelerated maturity until paid (both before and after any judgment). The Maker may prepay all or part of its indebtedness hereunder upon payment of an additional sum as a premium equal to the following percentages of the remaining related principal balance for the indicated period: Prior to the second annual anniversary date of this Note: one percent (1%) Prior to the third annual anniversary date of this Note: one percent (1%) Prior to the fourth annual anniversary date of this Note: one percent (1%) and zero percent (0%) thereafter, plus all other sums due hereunder or under any Security Agreement It is the intention of the parties hereto to comply with the applicable usury laws; accordingly, it is agreed that, notwithstanding any provision to the contrary in this Note or any Security Agreement, in no event shall this Note or any Security Agreement require the payment or permit the collection of interest in excess of the maximum amount permitted by applicable law. If any such excess interest is contracted for, charged or received under this Note or any Security Agreement, or if all of the principal balance shall be prepaid, so that under any of such circumstances the amount of interest, contracted for, charged or received under the Note or any Security Agreement on the principal balance shall exceed the maximum amount of interest permitted by applicable law, then in such event (a) the provisions of this paragraph shall govern and control, (b) neither Maker nor any other person or entity now or hereafter liable for the payment hereof shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount of interest permitted by applicable law, (c) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal balance or refunded to Maker, at the option of the Payee, and (d) the effective rate of interest shall be automatically reduced to the maximum lawful contract rate allowed under applicable law as now or hereafter construed by the courts having jurisdiction thereof. It is further agreed that without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received under this Note or any Security Agreement which are made for the purpose of determining whether such rate exceeds the maximum lawful contract rate, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the indebtedness evidenced hereby, all interest at any time contracted for, charged or received from Maker or otherwise by Payee in connection with such indebtedness; provided however, that if any applicable state law is amended or the law of the United States of America preempts any applicable state law, so that it becomes lawful for the Payee to receive a greater interest per annum rate than is presently allowed, the Maker agrees that, on the effective date of such amendment or preemption, as the case may be, the lawful maximum hereunder shall be increased to the maximum interest per annum rate allowed by the amended state law or the law of the United States of America. The Maker and all sureties, endorsers guarantors or any others (each such person, other than the Maker, an "Obligor") who may at any time become liable for the payment hereof jointly and severally consent hereby to any and all extensions of time, renewals, waivers or modifications of, and all substitutions or releases of, security or any party primarily or secondary liable on this Note or any Security Agreement or any term and provision of either, which may be made, granted or consented to by Payee, and agree that suit may be brought and maintained against any one or more of them, at the election of Payee without joinder of any other as a party thereto, and that Payee shall not be required first to foreclose, proceed against, or exhaust any security hereof in order to enforce payment of this Note. The Maker and each Obligor hereby waives presentment, demand for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, and all notices in connection herewith, as well as filing of suit (if permitted by law) and diligence in collecting this Note or enforcing any of the security hereof, and agrees to pay (if permitted by law) all reasonable expenses incurred in collection, including Payee's actual attorneys' fees. THE MAKER HEREBY UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS NOTE, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN MAKER AND PAYEE RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN MAKER AND PAYEE. The scope of this waiver is intended to be all encompassing of any and all disputes that may be filed in any court (including, without limitation, contract claims, tort claims, breach of duty claims and all other common law and statutory claims). THIS WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS NOTE, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. In the event of litigation, this Note may be filed as a written consent to a trial by the court. This Note and any Security Agreement constitute the entire agreement of the Maker and the Payee with respect to the subject matter hereof and supersedes all prior understandings, agreements and representations, express or implied. No variation or modification of this Note, or any waiver of any of its provisions or conditions, shall be valid unless in writing and signed by an authorized representative of Maker and Payee. Any such waiver, consent, modification or change shall be effective only in the specific instance and for the specific purpose given. Any provision in this Note or any Security Agreement which is in conflict with any statute, law or applicable rule shall be deemed omitted, modified or altered to conform thereto. METRO ONE TELECOMMUNICATIONS, INC By: /s/ R. Tod Hutchinson (L.S.) - ----------------------------------- ---------------------------- (Witness) Signature R. Tod Hutchinson VP, Finance - ----------------------------------- ------------------------------- (Print Name) Print name (and title, if applicable) - ----------------------------------- 93-0995165 (Address) Federal Tax ID Number
COLLATERAL SCHEDULE NO. G-1 THIS COLLATERAL SCHEDULE NO. G-1 incorporates that certain Master Security Agreement dated as of September 10, 1999 between General Electrical Capital Corporation as Secured Party and Metro One Telecommunications, Inc. as Debtor. Debtor hereby gives, grants and assigns to Secured Party a first priority security interest in and against property listed below, and in and against any and all additions, attachments, accessories and accessions thereto, any and all substitutions, replacements or exchanges therefor, and any and all insurance and/or other proceeds thereof (collectively, the "Collateral"). The foregoing security interest is given to secure the payment and performance of any and all debts, obligations and liabilities of any kind, nature or description whatsoever (whether primary, secondary, direct, contingent, sole, joint or several, or otherwise, and whether due or to become due) of Debtor to Secured Party, now existing or hereafter arising, including without limitation that certain Promissory Note dated December 28, 1999 in the original principal amount of $20,000,000.00 (the "Note") and any renewals, extensions and modifications of the Note and such other debts, obligations and liabilities.
- ------------------------------------------------------------------------------------------------- Description Year/Model Serial Location - ------------------------------------------------------------------------------------------------- All Equipment and Telecommunications Equipments; including but not limited to the equipment as more specifically described on the Attachment attached hereto and incorporated herein by reference, and in and against any and all additions, attachments, accessories and accessions thereto, any and all substitutions, replacements or exchanges therefor, and any and all insurance and/or other proceeds - -------------------------------------------------------------------------------------------------
Debtor agrees that its obligations under the Notes to make payments to Secured party in the amounts set forth in the Note are absolute and unconditional and it will not assert against Secured Party, any defense, claim, setoff, recoupment, abatement or other right, existing or future, which Debtor may have against Secured Party or any other person or entity. Debtor acknowledges that it has been advised that General Electric Capital Corporation is acting (a) under the Agreement to the extent relating to this Collateral Schedule and the Collateral, (b) hereunder and (c) with respect to the Collateral, for itself and as agent for certain third parties (each being herein referred to as a "PARTICIPANT" and, collectively, as the "PARTICIPANTS"); that the interest of Secured Party in this Collateral Schedule, related instruments and documents and/or the Collateral may be conveyed to, in whole or in part, and may be used as security for financing obtained from, one or more third parties without the consent of Debtor (the "SYNDICATION"). Debtor agrees reasonably to cooperate with Secured Party in connection with the Syndication, including the execution and delivery of such other documents, instruments, notices, opinions, certificates and acknowledgements as reasonably may be required by Secured Party or such Participant. SECURED PARTY: DEBTOR: General Electric Capital Corporation Metro One Telecommunications, Inc. /s/ R. Tod Hutchinson By: By : /s/ Stebbins B. Chandor Jr. --------------------------------- ------------------------------ Title: Title: VP, FINANCE SVP/CFO ------------------------------ ----------------------------- Date: December 28, 1999 Date: December 28, 1999 CERTIFICATE OF DELIVERY/INSTALLATION Undersigned hereby certify that all equipment and property covered by a Security Agreement or Chattel Mortgage dated September 10, 1999 and Note dated December 29, 1999 between General Electric Capital Corporation ("SECURED PARTY") and undersigned has been delivered to undersigned and found satisfactory, and that any and all installation has been satisfactorily completed. In order to induce Secured Party to advance the loan evidenced by such Note, undersigned hereby waive any defense, counterclaim or offset thereunder as against Secured Party. METRO ONE TELECOMMUNICATIONS, INC. /s/ R. Tod Hutchinson By : /s/ Stebbins B. Chandor Jr. --------------------------------- Title: VP, FINANCE SVP/CFO -------------------------------- Date: 12/23/99 12/25/99 -------------------------------- EX-10.18 4 EX-10.18 AMENDMENT TO EMPLOYMENT AGREEMENT DATED AUGUST 1, 1995 BETWEEN METRO ONE TELECOMMUNICATIONS, INC. AND TIMOTHY A. TIMMINS This amendment (the "Amendment") to the Employment Agreement dated August 1, 1995 between Metro One Telecommunications, Inc., an Oregon Corporation (the "Company"), and Timothy A. Timmins ("Timmins") (the "Agreement") is dated and entered into as of January 1, 2000. RECITALS A. The parties wish to extend and amend the employment contract between them (the "Agreement") for a period to run until December 2002. B. The other desired effects of the amendment are to (i) increase Timmins' Base Salary to $200,000 annually; (ii) limit the amount of the bonus to be paid to Timmins to 150% of Base Salary in any year following a year in which the total net income is less than that of the previous year; (iii) remove any bonus limit existing under the Agreement in all future years, leaving that outlined in the previous clause B(ii) as the only future bonus limitation; and (iv) grant Timmins an option to purchase 50,000 shares of common stock in the Company, as presently instituted, at $15.688 per share, effective as of the conclusion of the meeting of its Board of Directors on November 5, 1999. AMENDMENTS TO THE AGREEMENT NOW, THEREFORE, The parties agree to amend the Agreement as follows: SECTION 3 SHALL READ: 1 - AMENDMENT TO EMPLOYMENT AGREEMENT - TIMMINS 3. TERM. Unless otherwise terminated as provided in Section 5 of this Agreement, Timmins' term of employment under this agreement shall be for a period beginning August 1, 1995 and ending on December 31, 2002. SECTION 4 SHALL BE AMENDED TO INCLUDE PARAGRAPH 4.1d: 4.1d BASE SALARY. Effective January 1, 2000, Timmins' Base Salary shall be $200,000 annually before all customary withholding of income and employment taxes, with no additional adjustment for Paragraphs 4.1a, 4.1b or 4.1c. A SENTENCE SHALL BE ADDED TO THE END OF PARAGRAPH 4.2 AS FOLLOWS: Effective for the calendar year 2000 and each year thereafter, the Company shall instead pay to Timmins a bonus determined in accordance with the schedules attached as Exhibit 4.2 - Amended. EXHIBIT 4.2 SHALL BE AMENDED AS FOLLOWS: Exhibit 4.2 shall be amended by changing the title to "Exhibit 4.2 - Amended." The language in Section B of Exhibit 4.2 that reads "Up to total bonus of 100% of base salary" shall be modified to read "Up to total bonus of 150% of base salary in any year following a year in which the Company's total net income is less than that of the previous year. The shall be no cap (limit to the bonus) in any year in which the Company's total net income exceeds that of the previous year." SECTION 4 SHALL BE AMENDED TO INCLUDE A PARAGRAPH 4.3a: 4.3a STOCK OPTION RELATED TO THE 2000 AMENDMENT. The Company will cause Timmins to be granted a stock option to purchase 50,000 shares of common stock of the Company, as presently instituted, at $15.688 per share, effective as of the conclusion of the meeting of its Board of Directors on November 5, 1999. For purposes of the Agreement and acceleration, Termination 2 - AMENDMENT TO EMPLOYMENT AGREEMENT - TIMMINS etc., this stock option shall be treated identically to the Stock Option of Paragraphs 4.3. SECTION 10, "NOTICE," SHALL BE MODIFIED TO SUBSTITUTE MR. WILLIAM D. RUTHERFORD FOR MR. A. JEAN DE GRADPRE: If to the Company: Metro One Telecommunications, Inc. c/o Mr. William D. Rutherford Chairman of the Board of Directors 6978 SW Foxfield Court Portland, Oregon 97225
IN WITNESS WHEREOF, the parties have executed and entered into this Agreement, as hereby amended, on the date set forth above. METRO ONE TELECOMMUNICATIONS, INC. By: /s/ William B. Rutherford March 6, 2000 -------------------------- ------------- William B. Rutherford Date Chairman of the Board Of Directors /s/ Timothy A. Timmins March 6, 2000 ---------------------- ------------- Timothy A. Timmins Date
3 - AMENDMENT TO EMPLOYMENT AGREEMENT - TIMMINS EX-23.1 5 EXHIBIT 23.1 [Letterhead] 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 4, 2000, appearing in this Annual Report on Form 10-K of Metro One Telecommunications, Inc. for the year ended December 31, 1999. /s/ Deloitte & Touche LLP - ---------------------------- DELOITTE & TOUCHE LLP Portland, Oregon February 4, 2000 EX-27.1 6 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE RELATED STATEMENTS OF OPERATIONS, SHAREHOLDER'S EQUITY AND CASH FLOWS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 9,964 0 15,357 10 0 26,306 51,997 13,692 65,475 14,556 18,940 0 0 40,308 (8,329) 65,475 0 77,831 0 75,205 (128) 0 773 1,981 75 1,906 0 0 0 1,906 .17 .16
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