SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] 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.
(INCORPORATED UNDER THE LAWS OF THE STATE OF OREGON)
8405 S.W. NIMBUS AVENUE, BEAVERTON, OREGON 97008
I.R.S. EMPLOYER IDENTIFICATION NUMBER 93-0995165
TELEPHONE - AREA CODE (503) 643-9500
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE EXCHANGE ACT DURING THE
PAST 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED
TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS
FOR THE PAST 90 DAYS. YES X NO
--- ---
AT AUGUST 11, 1997, 10,823,469 COMMON SHARES WERE OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES NO X
--- ---
METRO ONE TELECOMMUNICATIONS, INC.
INDEX TO FORM 10 - QSB
Page No.
Part I Financial Information
Condensed Statements of Operations (Unaudited)
Three and six months ended June 30, 1997 and 1996 1
Condensed Balance Sheets
June 30, 1997 and December 31, 1996 2
Condensed Statements of Cash Flows (Unaudited)
Six months ended June 30, 1997 and 1996 3
Notes to Condensed Financial Statements 4-5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-8
Part II Other Information
Item 4 Submission of Matters to a Vote of Security Holders 9
Item 6 Exhibits and Reports on Form 8-K 9
METRO ONE TELECOMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Revenues $ 5,467,982 $ 4,516,123 $ 9,953,994 $ 8,744,436
------------ ------------ ------------ ------------
Costs and expenses:
Direct operating 2,696,664 1,976,569 5,130,402 3,970,739
General and administrative 2,702,649 1,815,574 5,206,420 3,555,371
------------ ------------ ------------ ------------
5,399,313 3,792,143 10,336,822 7,526,110
------------ ------------ ------------ ------------
Income (loss) from operations 68,669 723,980 (382,828) 1,218,326
Other income (expense) 34,463 (119,597) 193,657 (158,523)
Interest and loan fees (86,694) (147,394) (184,919) (309,685)
------------ ------------ ------------ ------------
Income (loss) before income taxes 16,438 456,989 (374,090) 750,118
Income tax expense - 14,800 - 22,750
------------ ------------ ------------ ------------
Net income (loss) $ 16,438 $ 442,189 $ (374,090) $ 727,368
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common and
common equivalent shares outstanding 10,925,269 8,948,730 10,772,616 8,751,097
Net income (loss) per common and
common equivalent share $ .00 $ .05 $ (.03) $ .08
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
The accompanying notes are an integral part of this statement.
1
METRO ONE TELECOMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
JUNE 30, DECEMBER 31,
------------- -------------
1997 1996
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 11,145,890 $ 14,136,574
Accounts receivable 3,170,392 2,722,544
Other current assets 524,297 537,077
------------- -------------
Total current assets 14,840,579 17,396,195
Furniture, fixtures and equipment, net 8,707,823 6,759,759
Other assets 633,086 373,391
------------- -------------
$ 24,181,488 $ 24,529,345
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 690,310 $ 736,941
Accounts payable and accrued expenses 793,616 1,062,440
Other current liabilities 662,671 581,108
------------- -------------
Total current liabilities 2,146,597 2,380,489
Capital lease obligations, less current portion 858,755 1,168,204
------------- -------------
3,005,352 3,548,693
------------- -------------
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares
authorized, no shares issued or outstanding - -
Common stock, no par value; 50,000,000 shares
authorized, 10,808,041 and 10,692,887 shares,
respectively, issued and outstanding 36,821,014 36,251,440
Accumulated deficit (15,644,878) (15,270,788)
------------- -------------
Net shareholders' equity 21,176,136 20,980,652
------------- -------------
$ 24,181,488 $ 24,529,345
------------- -------------
------------- -------------
The accompanying notes are an integral part of this statement.
2
METRO ONE TELECOMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
----------- ----------
Cash flows from operating activities:
Net income (loss) $ (374,090) $ 727,368
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 976,101 553,475
Loss on disposal of fixed assets 84,692 319
Changes in certain assets and liabilities:
Accounts receivable (447,848) 186,896
Prepaid expenses and other assets (45,091) (230,248)
Accounts payable and accrued expenses (193,262) 213,044
----------- ----------
Net cash provided by operating activities 502 1,450,854
----------- ----------
Cash flows from investing activities:
Capital expenditures (2,936,302) (305,533)
Collections on notes receivable 1,622 1,660
----------- ----------
Net cash used in investing activities (2,934,680) (303,873)
----------- ----------
Cash flows from financing activities:
Repayment of capital lease obligations (356,080) (474,980)
Proceeds from issuance of bank debt - 550,000
Repayment of debt - (745,897)
Proceeds from issuance of long-term debt - 67,200
Proceeds from issuance of common stock and exercise
of warrants and stock options 299,574 497,395
----------- ----------
Net cash used in financing activities (56,506) (106,282)
----------- ----------
Net increase (decrease) in cash and cash equivalents (2,990,684) 1,040,699
Cash and cash equivalents, beginning of period 14,136,574 1,148,822
----------- ----------
Cash and cash equivalents, end of period $11,145,890 $2,189,521
----------- ----------
----------- ----------
The accompanying notes are an integral part of this statement.
3
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The interim financial data are unaudited, however, in the opinion of
management, the interim data include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results
for the interim periods. The financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures included herein are adequate to ensure that the information
presented is not misleading.
The organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the Company's
audited financial statements contained in and filed as part of the Form
10-KSB, filed with the Securities and Exchange Commission. This quarterly
report should be read in conjunction with the audited financial statements.
RECLASSIFICATION. Certain balances in the 1996 financial statements have
been reclassified to conform with 1997 presentation. Such reclassifications
have no effect on results of operations or shareholders' equity.
2. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Net income (loss) per common and common equivalent share is computed using
the weighted average number of common and dilutive common equivalent shares
assumed to be outstanding during the period. Common equivalent shares
consist primarily of options and warrants to purchase common stock.
3. COMMITMENTS AND CONTINGENCIES
The Company is party to various legal actions and administrative proceedings
arising in the ordinary course of business. The Company believes that the
disposition of these matters will not have a material adverse effect on its
financial position, results of operations or net cash flows.
4. BANK LINE OF CREDIT
The Company has a $3,000,000 Secured Operating Line of Credit with a
commercial bank. Under the terms of the agreement, outstanding borrowings
bear interest at prime rate plus 0.25 percent and all assets of the Company
are pledged as collateral. The agreement contains minimum net worth and
working capital requirements as well as certain other restrictive covenants,
as defined by the agreement, and prohibits the payment of cash dividends.
Availability of the unused portion of the line of credit is subject to
borrowing base requirements and compliance with loan covenants. At June 30,
1997, the Company had no borrowings against this line of credit.
5. SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
---------- ----------
Cash paid for interest expense $ 174,842 $ 326,706
Conversion of debt into common stock - 1,300,000
Cash paid for equipment acquired by capital lease - 678,877
Income taxes paid 1,300 -
Common stock issued in settlement of litigation 270,000 -
4
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
6. ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share," which establishes new standards for
computing and presenting earnings per share ("EPS"). SFAS No. 128 replaces
the presentation of a primary EPS with a basic EPS on the face of the income
statement for entities with complex capital structures, and additional
disclosures regarding the computation of EPS.
SFAS No. 128 will require changes in the computation and presentation of the
Company's EPS commencing with the financial statements for the year ending
December 31, 1997. Earlier application of this Statement is not permitted.
However, if the Company computed its EPS for the three months ended June 30,
1997 and 1996 in a manner consistent with SFAS No. 128, the pro forma amounts
would have been as follows:
For the Three Months Ended June 30, For the Six Months Ended June 30,
1997 1996 1997 1996
----------------------- ---------------------- ----------------------- -------------------
Per Share Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount Shares Amount
---------- --------- --------- --------- ---------- --------- --------- ---------
Basic Earnings (Loss) Per Share 10,789,083 $0.00 8,513,373 $0.05 10,772,616 ($0.03) 8,315,740 $0.09
Diluted Earnings (Loss) Per Share 10,925,269 $0.00 8,948,730 $0.05 10,772,616 ($0.03) 8,751,097 $0.08
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 establishes requirements for disclosure of
comprehensive income and becomes effective for the Company's fiscal year
ending December 31, 1998. SFAS No. 131 establishes standards for disclosure
about operating segments in annual financial statements and selected
standards for related disclosures about products and services, geographic
areas and major customers. The Company believes the adoption of SFAS No. 130
and No. 131 will have no material impact on current disclosures.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
All statements and trend analyses contained in this item and elsewhere in
this report on Form 10-QSB relative to the future constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are subject to the business
and economic risks faced by the Company and the Company's actual results of
operations may differ materially from those contained in the forward looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Results of operations for the periods discussed below should not be
considered indicative of the results to be expected in any future period and
fluctuations in operating results may also result in fluctuations in the
market price of the Company's Common Stock. The Company's quarterly and
annual operating results have in the past and may in the future vary
significantly depending on factors such as increased competition and
expiration of Enhanced Directory Assistance ("EDA") contracts, the rapidly
changing telecommunications market, changes in pricing policies by the
Company or its competitors, lengthy sales cycles, lack of market acceptance
or delays in the introduction of new versions of the Company's product or
features, the timing of the initiation of wireless services in new market
areas by telecommunications customers, and general economic conditions.
RESULTS OF OPERATION
The Company continues to expand its presence into new geographic markets
through existing call centers and the opening of new call centers. A call
center serving the New York area opened in the second quarter of 1997. A call
center located in the Sacramento area is in start-up phase and is projected
to open in the fourth quarter of 1997. The Company expects to open
additional new call centers during the remainder of 1997.
During the second quarter, the Company completed the acquisition of
certain software and other assets of Microlytics, Inc. a developer of
proprietary database technology. The Company acquired the database search
engine capabilities that were in use in its call centers pursuant to a
previous license agreement with Microlytics, Inc. The Company was also able
to hire certain engineering and support staff from Microlytics, Inc., who
will continue to provide technical and development services to the Company.
The Company does not believe the asset acquisition had a material impact on
its results of operations or financial condition taken as a whole.
The following table sets forth for the periods indicated selected items
of the Company's statements of operations as a percentage of its revenues.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
1997 1996 1997 1996
------ ------ ------ -------
Revenues 100.0% 100.0% 100.0% 100.0%
Direct operating costs 49.3 43.8 51.5 45.4
General and administrative costs 49.4 40.2 52.3 40.7
Operating profit (loss) 1.3 16.0 (3.8) 13.9
Interest and loan fees 1.6 3.3 1.9 3.5
COMPARISON OF SECOND QUARTER OF 1997 TO SECOND QUARTER OF 1996
Due exclusively to increased call volume, revenues increased 21.1% to
$5.5 million from $4.5 million. Revenues from existing call centers,
excluding new and concluded contracts, grew 18.7% and accounted for $0.8
million of this increase while revenues from two new call centers accounted
for $0.1 million of revenues in the second quarter of 1996.
Direct operating costs increased 36.4% to $2.7 million from $2.0 million.
The increase in direct operating costs was due primarily to increased call
volumes and the cost of opening and operating two additional call centers in
1997. As a percentage of revenues, direct operating costs increased to 49.3%
from 43.8% primarily due to costs associated with three call centers serving
only PCS customers with recently initiated service and relatively small call
volumes. As these PCS carriers increase market penetration and generate
increased call volumes, the ratio of direct costs to revenue is expected to
decline. However, no assurance can be given that market penetration will
increase or that if it does, the
6
call volumes will be significant enough to impact the relationship of direct
operating costs to revenue. In addition, due to the continuing build-out of
the Company's national call center network and introduction of its Enhanced
Directory Assistance ("EDA") service into new markets, the Company
anticipates direct operating costs to increase from 1996 levels as a
percentage of revenue. The Company expects to open additional call
centers and enter into new markets during the remainder of 1997. The costs
associated with the start-up of a new call center increase overall direct
operating costs as a percentage of revenue as the call center prepares to
launch service and, once open, prior to efficient utilization of data and
personnel. In conjunction with the introduction of service in a new market,
regardless of whether a new call center is opened, the Company may acquire
additional data sources, often in advance of carrier customer service.
Accordingly, the Company may experience increased data costs without a
corresponding increase in revenue.
General and administrative costs increased 48.9% to $2.7 million from
$1.8 million. As a percentage of revenues, general and administrative costs
increased to 49.4% from 40.2% of revenues. These increases resulted
primarily from increased depreciation and amortization expense, expansion of
technical and support staff, the support of increased operational activity
overall and costs associated with opening and operation of two additional
call centers during 1997. Depreciation and amortization increased by 82.3% to
$518,871 from $284,661 due primarily to the acquisition of new equipment for
one of the two new call centers and additional equipment for existing call
centers.
Net interest expense declined 41.2% to $86,694 from $147,394. This
decline was attributable solely to the reduction in average debt outstanding
to $1.6 million from $3.0 million.
Other income for the three months ended June 30, 1997 was $34,463 and
consisted primarily of interest income of $152,452 offset by $84,726 of
losses on disposal of fixed assets and $20,950 of expenses for the early
termination of a facility lease upon relocation of a call center. Other
expense for the three months ended June 30, 1996, was $119,597, and
consisted primarily of estimated litigation settlement expenses of $103,178
and a $33,195 of losses on disposal of fixed assets, offset by interest
income of approximately $16,487.
COMPARISON OF THE FIRST SIX MONTHS OF 1997 TO THE FIRST SIX MONTHS OF 1996
Revenues increased 13.8% to $10.0 million from $8.7 million.
Revenues from existing call centers, excluding new and concluded contracts,
grew 17.6% and accounted for $1.4 million of this increase while revenues
from two new call centers accounted for $0.1 million. The revenue growth at
existing call centers from ongoing business was due exclusively to increases
in call volumes at these centers.
Direct operating costs increased 29.2% to $5.1 million from $4.0 million.
As a percentage of revenues, direct operating costs increased to 51.5% from
45.4%. These increases are primarily due to increased personnel and data
costs required to serve PCS customers with recently initiated service and
relatively small call volumes. As these PCS carriers increase market
penetration and generate increased call volumes, the ratio of direct costs to
revenue is expected to decline. However, no assurance can be given that
market penetration will increase or that if it does, the call volumes will be
significant enough to impact the relationship of direct operating costs to
revenue. In addition, due to the continuing build-out of the Company's
national call center network and introduction of its EDA service into new
markets, the Company anticipates direct operating costs to increase from 1996
levels as a percentage of revenue. The Company expects to open additional
call centers and enter into new markets during the remainder of 1997. The
costs associated with the start-up of a new call center increase overall
direct operating costs as a percentage of revenue as the call center prepares
to launch service and, once open, prior to efficient utilization of data and
personnel. In conjunction with the introduction of service in a new market,
regardless of whether a new call center is opened, the Company may acquire
additional data sources, often in advance of carrier customer service.
Accordingly, the Company may experience increased data costs without a
corresponding increase in revenue.
General and administrative costs increased 46.4% to $5.2 million from
$3.6 million. As a percentage of revenues, general and administrative costs
increased to 52.3% from 40.7%. These increases resulted primarily from
increased depreciation and amortization expense, expansion of technical and
support staff, the support of increased operational activity overall and
costs associated with the opening and operation of two additional call
centers during 1997. Depreciation and amortization
7
increased by 76.4% to $976,101 from $553,475 due primarily to the acquisition
of new equipment for one of the two new call centers and additional equipment
for existing call centers.
Net interest expense declined 40.3% to $184,919 from $309,685. This
decline was attributable solely to the reduction in average debt outstanding to
$1.7 million from $3.4 million for the six months ended June 30, 1997 and 1996,
respectively.
Other income for the six months ended June 30, 1997 was $193,657 and
consisted primarily of interest income of $312,260, offset by $84,692 of
losses on disposal of fixed assets and $20,950 of expenses for the early
termination of a facility lease upon relocation of a call center. Other
expense for the six months ended June 30, 1996 was $158,523 and consisted
primarily of litigation settlement expenses of approximately $155,000 and a
$33,195 of losses on disposal of fixed assets, offset by interest income of
$29,710.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents are recorded at cost which
approximates their fair market value. As of June 30, 1997, the Company had
$11.1 million in cash and cash equivalents compared to $14.1 million at December
31, 1996, a decrease of $3.0 million primarily from acquisition of equipment.
Working capital was $12.7 million at June 30, 1997, compared to $15.0 at
December 31, 1996. The decline was primarily due to use of cash for capital
equipment acquisitions.
The Company has a $3.0 million secured operating line of credit with a
commercial bank. Availability of the unused portion of the line of credit is
subject to borrowing base requirements and compliance with loan covenants.
At June 30, 1997, the Company had no borrowing against the line of credit.
CASH FLOW FROM OPERATIONS. Net cash from operations for the six months
ended June 30, 1997 was $502, resulting primarily from the effect of the
noncash item, depreciation and amortization. One existing call center and
two new call centers primarily serve PCS customers that have recently
initiated service in some of their respective markets. Due to the relatively
small call volumes in these markets, the related call centers were net users
of cash, while most existing call centers contributed to cash flow from
operations during the six months ended June 30, 1997.
CASH FLOW FROM INVESTING ACTIVITIES. Cash used in investing activities was
$2.9 million and was primarily related to capital expenditures for system
redundancy capabilities, equipment upgrades for certain locations and
acquisitions for a new call center in the New York area and relocation of two
existing call centers.
CASH FLOW FROM FINANCING ACTIVITIES. Net cash used by financing activities
was $56,506 and was primarily from principal payments on existing capital
leases, offset by the exercise of outstanding warrants and stock options.
FUTURE CAPITAL NEEDS AND RESOURCES. The Company's future needs for
financial resources include amounts for the purchase of equipment for the
upgrading of existing call centers and for the establishment of new call centers
and the funding of start-up losses for newly opened call centers. The Company
believes its existing capital resources and cash generated from operations will
be sufficient to meet its working capital and capital expenditure requirements
for the next twelve months.
EFFECT OF INFLATION. Inflation was not a material factor affecting
the Company's business during the six months ended June 30, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 8, 1997, at the Annual Meeting of the Company's Shareholders, the
shareholders approved each of the proposals set forth in the Company's Proxy
Statement dated April 4, 1997, briefly described below:
8
(i) The shareholders were requested to elect the following individuals to
the Board of Directors:
NOMINEE FOR WITHHELD
------- --- --------
A. Jean de Grandpre 7,195,833 25,952
G. Raymond Doucet 7,195,833 25,952
William D. Rutherford 7,195,833 25,952
Timothy A. Timmins 7,195,833 25,952
James M. Usdan 7,195,833 25,952
All nominees were elected to the Board of Directors.
(ii) The shareholders were asked to approve an amendment of the Company's
1994 Stock Incentive Plan to increase the number of shares of Common
Stock available for issuance under the Plan from 1,428,500 to
1,900,000. The proposal was approved by the shareholders, as
6,675,497 votes were cast for the proposal, 500,106 votes were against
the proposal, 35,497 votes abstained and 10,685 votes were broker
non-votes.
(iii) The shareholders were asked to approve an amendment of the Second
Restated Articles of Incorporation to decrease the number of
authorized shares of Common Stock from 490,000,000 to 50,000,000. The
proposal was approved by the shareholders, as 7,171,323 votes were
cast for the proposal, 18,577 votes were against the proposal, 21,200
votes abstained and 10,685 votes were broker non-votes.
(iv) The shareholders were asked to approve the selection of Deloitte &
Touche LLP as the Company's independent auditors. The proposal was
approved by the shareholders, as 7,205,066 votes were cast for the
proposal, 6,757 votes were against the proposal, 9,962 votes abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
There are no exhibits to this report.
(b) REPORTS FILED ON FORM 8-K
There were no reports filed on Form 8-K in the second quarter
ended June 30, 1997.
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: August 11, 1997
Stebbins B. Chandor, Jr.
-------------------------------
Stebbins B. Chandor, Jr.
Senior Vice President
Chief Financial Officer
Karen L. Johnson
-------------------------------
Karen L. Johnson
Vice President
Controller
10