UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-27024
METRO ONE TELECOMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OREGON 93-0995165
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11200 MURRAY SCHOLLS PLACE, BEAVERTON, OREGON 97007
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(503) 643-9500
(ISSUER'S TELEPHONE NUMBER)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS (1) 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 __
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MAY 1, 2000: 11,557,446
SHARES, NO PAR VALUE PER SHARE
METRO ONE TELECOMMUNICATIONS, INC.
INDEX TO FORM 10 - Q
PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Income (Unaudited) for
the three months ended March 31, 2000 and 1999 1
Condensed Balance Sheets as of
March 31, 2000 (Unaudited) and December 31, 1999 2
Condensed Statements of Cash Flows (Unaudited) for
the three months ended March 31, 2000 and 1999 3
Notes to Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
METRO ONE TELECOMMUNICATIONS, INC.
STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
-------------------------------------
(In thousands, except per share data) 2000 1999
------------------ -----------------
Revenues $ 29,711 $ 14,175
------------------ -----------------
Costs and expenses:
Direct operating 18,523 7,836
General and administrative 9,319 5,653
------------------ -----------------
27,842 13,489
------------------ -----------------
Income from operations 1,869 686
Other (expense) income, net (98) 74
Interest and loan fees (609) (54)
------------------ -----------------
Income before income taxes 1,162 706
Income tax expense 41 24
------------------ -----------------
Net income $ 1,121 $ 682
================== =================
Income per common share
Basic $ .10 $ .06
Diluted $ .09 $ .06
The accompanying notes are an integral part of these statements.
1
METRO ONE TELECOMMUNICATIONS, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
(In thousands) 2000 1999
------------------ -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 6,574 $ 9,564
Short-term investments - 400
Accounts receivable 21,576 15,357
Prepaid costs and other current assets 981 985
------------------ -----------------
Total current assets 29,131 26,306
Furniture, fixtures and equipment, net 41,404 38,225
Other assets 1,077 944
------------------ -----------------
$ 71,612 $ 65,475
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,771 $ 2,909
Accrued liabilities 2,628 2,390
Accrued payroll and related costs 3,441 3,839
Operating line of credit 3,000 -
Current portion of capital lease obligations 127 159
Current portion of long-term debt 6,140 5,259
------------------ -----------------
Total current liabilities 17,107 14,556
Capital lease obligations - 17
Long-term debt 20,228 18,923
------------------ -----------------
37,335 33,496
------------------ -----------------
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, 11,545 and 11,414 shares,
respectively, issued and outstanding 41,485 40,308
Accumulated deficit (7,208) (8,329)
------------------ -----------------
Shareholders' equity 34,277 31,979
------------------ -----------------
$ 71,612 $ 65,475
================== =================
The accompanying notes are an integral part of these balance sheets.
2
METRO ONE TELECOMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------
(In thousands) 2000 1999
----------- -----------
Cash flows from operating activities:
Net income $ 1,121 $ 682
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 2,183 1,232
Loss on disposal of fixed assets 152 1
Changes in certain assets and liabilities:
Accounts receivable (6,219) 1,509
Prepaid expenses and other assets (147) (443)
Accounts payable, accrued liabilities and
payroll and related costs (1,297) 1,183
------------ -----------
Net cash (used in) provided by operating activities (4,207) 4,164
------------ -----------
Cash flows from investing activities:
Capital expenditures (5,497) (3,633)
Maturities of short-term investments 400 200
----------- -----------
Net cash used in investing activities (5,097) (3,433)
----------- -----------
Cash flows from financing activities:
Payments on operating line of credit - (1,400)
Repayment of long term debt (1,262) (67)
Repayment of capital lease obligations (49) (79)
Proceeds from operating line of credit 3,000 -
Proceeds from issuance of long-term debt 3,448 -
Proceeds from exercise of common stock options 1,177 1,478
----------- -----------
Net cash provided by (used in) financing activities 6,314 (68)
----------- ------------
Net (decrease) increase in cash and cash equivalents (2,990) 663
Cash and cash equivalents, beginning of period 9,564 6,063
----------- -----------
Cash and cash equivalents, end of period $ 6,574 $ 6,726
=========== ===========
The accompanying notes are an integral part of these statements.
3
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (IN 000S, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
- ----------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying interim condensed financial statements have been prepared by
management of Metro One Telecommunications, Inc. (the "Company") without audit
and in conformity with generally accepted accounting principles for interim
financial information. Accordingly, certain financial information and
footnotes have been omitted or condensed. In the opinion of management, the
condensed financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results
for the interim periods. These condensed financial statements and notes
thereto should be read in conjunction with the Company's audited financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999. The results of operations for the interim period
shown in this report are not necessarily indicative of results for any future
interim period or the entire fiscal year.
2. INCOME PER SHARE
Basic income per share is based on the weighted average of common shares
outstanding. Diluted income per share reflects the dilutive effect of stock
options outstanding. Net income for the calculation of both basic and diluted
income per share is the same for all periods.
A reconciliation of basic weighted average shares outstanding to diluted
weighted average shares outstanding is as follows:
AVERAGE SHARES
--------------------------------------
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2000 1999
---------------- ----------------
Weighted average shares
outstanding -- Basic 11,493 11,350
Dilutive effect of stock options 504 645
---------------- ----------------
Weighted average shares
outstanding -- Diluted 11,997 11,995
---------------- ----------------
The amount of dilution attributable to the stock options, determined by the
treasury stock method, is dependent on the average market price of the
Company's common stock for each period.
3. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is party to various legal actions and
administrative proceedings arising in the ordinary course of business. The
Company believes that the disposition of such matters will not have a material
adverse effect on its financial position, results of operations or net cash
flows.
4. SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2000 1999
---------------- ----------------
Cash paid for:
Interest $ 581 $ 53
Income taxes 10 5
4
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (IN 000S, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
- ----------------------------------------------------------------------------
5. INCOME TAXES
At December 31, 1999, the Company had approximately $15.4 million of net
operating loss carryforwards expiring during the years 2005 to 2010. Ownership
changes as defined by section 382 of the Internal Revenue Code could limit the
amount of net operating loss carryforwards used in any one year or in the
aggregate.
During the quarter, the Company reduced its deferred tax valuation allowance to
reflect deferred tax assets used to reduce current year income taxes. The
Company's quarterly and annual operating results have in the past and may in the
future vary significantly depending on factors such as changes in the
telecommunications market, the addition or expiration of contracts, increased
competition, changes in pricing policies by the Company or its competitors,
lengthy sales cycles, lack of market acceptance or delays in the introduction of
new versions of the Company's 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 Company's expansion
of its national call center network, general economic conditions and other
factors. Given the variability in operating results, the Company will continue
to review the valuation allowance on a quarterly basis and make adjustments as
appropriate.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
All statements and trend analyses contained in this item and elsewhere
in this report on Form 10-Q relative to the future constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements are subject to the business and
economic risks faced by the Company and the Company's actual results of
operations may differ materially from those contained in the forward looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Results of operations for the periods discussed below should not be
considered indicative of the results to be expected in any future period and
fluctuations in operating results may also result in fluctuations in the market
price of the Company's Common Stock. The Company's quarterly and annual
operating results have in the past and may in the future vary significantly
depending on factors such as changes in the telecommunications market, the
addition or expiration of Enhanced Directory Assistance-Registered Trademark-
("EDA") contracts, increased competition, changes in pricing policies by the
Company or its competitors, lengthy sales cycles, lack of market acceptance or
delays in the introduction of new versions of the Company's 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 Company's expansion of its national call center network, general economic
conditions and other factors.
OVERVIEW
The Company is a leading provider of enhanced telecommunications
services, including its EDA, and has ten significant contracts with six
different carriers to provide EDA and other services in numerous U.S.
metropolitan markets. The Company's recent operations have been characterized
by rapid call volume and revenue growth as well as growth in profits. Call
volume and revenues increased 128.2% and 109.6%, respectively, in the first
quarter of 2000 from the first quarter of 1999, and profits grew to $1,121,000
from $682,000.
The Company expects to continue to increase its share of the directory
assistance market by expanding service to existing customers, adding new
customers and expanding its call center network into new geographic markets. The
Company has had ongoing business discussions about new contracts with other
telecommunications companies, and the Company anticipates that it will open
additional call centers during 2000 to serve wireless and landline customers.
With its increasing size, the Company expects that costs associated with opening
each new call center will have a diminishing impact on results of operations.
To stimulate increased call volume and to attract and expand customer
commitments, the Company's strategy has included price discounts based on call
volumes. The Company expects that its average price per call will decrease in
2000 as increasing call volumes trigger volume-based pricing discounts. In
addition, as the Company enters into additional or new contracts, the average
price per call may decrease as the Company attempts to increase market share.
The Company believes that its reduced pricing better positions the Company to
retain and expand service with existing carrier customers, to extend service to
new wireless and landline carriers and to achieve greater operating margins over
time.
6
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the items of
the Company's statements of income as a percentage of revenues.
Three Months Ended
March 31,
-----------------------------
2000 1999
------------ ------------
Revenues 100.0% 100.0%
Direct operating costs 62.3 55.3
General and administrative costs 31.4 39.9
------ ------
Income from operations 6.3 4.8
Other (expense) income, net (0.3) 0.5
Interest and loan fees (2.1) (0.4)
------ -----
Income before income taxes 3.9 4.9
Income tax expense 0.1 0.1
------ -----
Net income 3.8 4.8
====== ====
COMPARISON OF FIRST QUARTER 2000 TO FIRST QUARTER 1999
Revenues increased 109.6% to $29.7 million in the first quarter of 2000
from $14.2 million in the first quarter of 1999. This increase was due to
significantly increased call volumes. Call volume grew to over 56 million
calls in the first quarter of 2000 from approximately 24 million calls during
the first quarter of 1999. This increase was due primarily to increased call
volumes under existing contracts and additional call volumes from new
contracts.
Direct operating costs increased 136.4% to $18.5 million in the first
quarter of 2000 from $7.8 million in the first quarter of 1999. This increase
was primarily due to costs associated with increased call volumes and costs of
operating additional call centers in 2000. As a percentage of revenues, direct
operating costs increased to 62.3% in the first quarter of 2000 from 55.3% in
the first quarter of 1999. This increase was due primarily to lower average per
call pricing and increased personnel and listings data costs associated with the
start-up of new call centers and increased staffing at existing call centers.
This increase was partially offset by operating efficiencies associated with
higher call volumes.
General and administrative costs increased 64.9% to $9.3 million in the
first quarter of 2000 from $5.7 million in the first quarter of 1999. This
increase resulted primarily from additional costs necessary to support new call
centers. As a percentage of revenues, general and administrative costs decreased
to 31.4% in the first quarter of 2000 from 39.9% in the first quarter of 1999.
This decrease resulted primarily from operating efficiencies associated with
the expansion of the Company's national network of call centers. Depreciation
and amortization increased by 77.2% to $2.2 million in the first quarter of 2000
from $1.2 million in the first quarter of 1999 due primarily to equipment
purchased for new call centers, upgrades of existing call centers and corporate
research and development activities.
Other expense for the three months ended March 31, 2000 was
$98,000 and consisted primarily of loss on disposal of assets offset by
interest income. Other income for the three months ended March 31, 1999 was
$74,000 and consisted primarily of interest income.
Interest expense and loan fees increased 1,027.8% to $609,000 from
$54,000. This increase was attributable to an increase in average outstanding
debt to $25.6 million from $1.2 million. This increase was attributable to
borrowings under an equipment financing facility used to finance equipment
purchased for existing and new call centers.
7
Income tax expense for the three months ended March 31, 2000 was
$41,000, for an effective tax rate of approximately 3.5%. Income tax expense for
the three months ended March 31, 1999 was $24,000, for an effective tax rate of
approximately 3.4%. These rates differ from the combined federal and state
statutory rate of approximately 39% due to the use of net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and investments are recorded at
cost, which approximates fair market value. As of March 31, 2000, the Company
had $6.6 million in cash and cash equivalents and investments compared to $10.0
million at December 31, 1999, a decrease of $3.4 million primarily from cash
used in operating activities, the acquisition of capital equipment and the
repayment of debt, offset by proceeds from bank borrowings and from the exercise
of options.
Working capital was $12.0 million at March 31, 2000, compared to $11.8
million at December 31, 1999. This increase is due primarily to working capital
provided by the issuance of long-term debt, bank borrowings and proceeds from
the exercise of common stock options, offset by the use of cash for capital
expenditures and payments on long-term debt.
CASH FLOW FROM OPERATIONS. Net cash used in operations for the three
months ended March 31, 2000 was $4.2 million, resulting primarily from an
increase in accounts receivable and a decrease in accounts payable and accrued
expenses offset by net income and the effect of non-cash depreciation and
amortization. In the first week of April 2000, approximately $3.7 million of
additional cash was collected from customers, in accordance with normal payment
terms.
CASH FLOW FROM INVESTING ACTIVITIES. Cash used in investing activities
was $5.1 million for the three months ended March 31, 2000 and was primarily
related to capital expenditures for the purchase of equipment 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 $6.3 million for the three months ended March 31, 2000 resulting
from borrowings on the operating line of credit and the issuance of long-term
debt as well as the exercise of common stock options. Cash provided by
financing activities was offset by the repayment of debt and capital lease
obligations.
As of March 31, 2000, the Company had $26,368,000 in borrowings with an
equipment financing lender used to finance equipment purchases. This borrowing
bears interest at various fixed rates ranging from 8.77% to 10.09% and is
secured by the purchased equipment. During the quarter, the company increased
the availability under this agreement to provide for a total of $40 million of
borrowing capacity.
FUTURE CAPITAL NEEDS AND RESOURCES. The primary uses of capital are
expected to be the build-out of new call centers, including initial operating
expenses, the payment of principal and interest on indebtedness and the purchase
of equipment and development of technology for the improvement of existing call
centers. The Company anticipates that its capital expenditures will be
approximately $14 million to $16 million in 2000, resulting primarily from
projected expansion and planned improvements. The Company believes its existing
cash and cash equivalents, credit facilities and cash from operations will be
sufficient to fund its operations through the end of fiscal 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of the Company's liquid investments are invested in
money market instruments, and therefore the fair market value of these
investments is affected by changes in market interest rates. However,
substantially all of the Company's liquid investments mature within six months.
As a result, the Company believes that the market risk arising from its holdings
of financial instruments is minimal.
8
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial data schedule
(b) REPORTS FILED ON FORM 8-K
There were no reports filed on Form 8-K during the quarter ended March
31, 2000.
9
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Metro One Telecommunications, Inc.
----------------------------------
Registrant
Date: May 12, 2000
/s/ Timothy A. Timmins
----------------------------------
Timothy A. Timmins
President
Chief Executive Officer
10