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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-27024
METRO ONE TELECOMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OREGON 93-0995165
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8405 SW NIMBUS AVENUE, BEAVERTON, OREGON 97008
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(503) 643-9500
(ISSUER'S TELEPHONE NUMBER)
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 3, 1999: 11,392,249
SHARES, NO PAR VALUE PER SHARE
METRO ONE TELECOMMUNICATIONS, INC.
INDEX TO FORM 10 - Q
PART I FINANCIAL INFORMATION PAGE NO.
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Item 1. Financial Statements
Condensed Statements of Operations (Unaudited) for
the three months ended March 31, 1999 and 1998 1
Condensed Balance Sheets as of
March 31, 1999 (Unaudited) and December 31, 1998 2
Condensed Statements of Cash Flows (Unaudited) for
the three months ended March 31, 1999 and 1998 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 9
PART II OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
METRO ONE TELECOMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
(In thousands, except per share data) 1999 1998
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Revenues $ 14,175 $ 9,045
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Costs and expenses:
Direct operating 7,836 4,793
General and administrative 5,653 4,001
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13,489 8,794
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Income from operations 686 251
Other income 74 65
Interest and loan fees (54) (101)
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Income before income taxes 706 215
Income tax expense 24 6
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Net income $ 682 $ 209
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Income per common share
Basic $ .06 $ .02
Diluted $ .06 $ .02
The accompanying notes are an integral part of this statement.
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METRO ONE TELECOMMUNICATIONS, INC.
BALANCE SHEETS
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MARCH 31, DECEMBER 31,
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(In thousands) 1999 1998
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(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 6,726 $ 6,063
Short-term investments 1,307 1,507
Accounts receivable 5,919 7,428
Prepaid costs and other current assets 1,140 766
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Total current assets 15,092 15,764
Furniture, fixtures and equipment, net 22,414 19,982
Other assets 602 565
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$ 38,108 $ 36,311
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,564 $ 1,501
Accrued liabilities 2,080 1,992
Accrued payroll and related costs 1,884 1,852
Line of credit payable - 1,400
Current portion of capital lease obligations 312 365
Current portion of long-term debt 240 240
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Total current liabilities 7,080 7,350
Capital lease obligations 77 103
Long-term debt 549 616
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7,706 8,069
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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, 11,371 and 11,188 shares,
respectively, issued and outstanding 39,955 38,477
Accumulated deficit (9,553) (10,235)
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Shareholders' equity 30,402 28,242
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$ 38,108 $ 36,311
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The accompanying notes are an integral part of this statement.
2
METRO ONE TELECOMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
(In thousands) 1999 1998
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Cash flows from operating activities:
Net income $ 682 $ 209
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,232 865
Loss on disposal of fixed assets 1 23
Changes in certain assets and liabilities:
Accounts receivable 1,509 112
Prepaid expenses and other assets (443) (46)
Accounts payable, accrued liabilities and payroll costs 1,183 125
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Net cash provided by operating activities 4,164 1,288
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Cash flows from investing activities:
Capital expenditures (3,633) (800)
Sale of short-term investments 200 -
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Net cash used in investing activities (3,433) (800)
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Cash flows from financing activities:
Net proceeds from line of credit (1,400) -
Repayment of debt (67) -
Repayment of capital lease obligations (79) (162)
Proceeds from issuance of common stock upon exercise
of warrants 1,478 264
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Net cash provided by (used in) financing activities (68) 102
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Net increase in cash and cash equivalents 663 590
Cash and cash equivalents, beginning of period 6,063 8,554
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Cash and cash equivalents, end of period $ 6,726 $ 9,144
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The accompanying notes are an integral part of this statement.
3
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (IN 000'S, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
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1. BASIS OF PRESENTATION
The accompanying interim condensed financial statements have been prepared by
Metro One Telecommunications, Inc. (the "Company") without audit and in
conformity with generally accepted accounting principles for interim financial
information. Accordingly, certain financial information and footnotes have been
omitted or condensed. In the opinion of management, the condensed financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods. These condensed financial statements and notes thereto should be read
in conjunction with the Company's audited financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. 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. EARNINGS PER SHARE
The per share amounts are based on the weighted average number of common and
dilutive common equivalent shares assumed to be outstanding during the period of
computation. Net income for the calculation of both basic and diluted earnings
per share is the same for all periods.
The calculation of weighted-average outstanding shares is as follows:
AVERAGE SHARES
THREE MONTHS ENDED MARCH 31,
1999 1998
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Basic earnings per share 11,350 11,013
Common stock equivalents 645 268
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Diluted earnings per share 11,995 11,281
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3. COMMITMENTS AND CONTINGENCIES
The Company is party to various legal actions and administrative proceedings
arising in the ordinary course of business. The Company believes that the
disposition of these matters will not have a material adverse effect on its
financial position, results of operations or net cash flows.
4. SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED MARCH 31,
1999 1998
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Cash paid for interest expense $ 53 $ 104
Cash paid for income taxes 5 8
4
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (IN 000'S, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
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5. INCOME TAXES
At December 31, 1998, the Company had approximately $13.1 million of net
operating loss carryforwards expiring during the years 2005 to 2010. Ownership
changes as defined by section 382 of the Internal Revenue Code could limit the
amount of net operating loss carryforwards used in any one year or in the
aggregate.
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 product or features, the timing of the initiation
of wireless services or their acceptance in new market areas by
telecommunications customers, the timing and expense of the Company's expansion
of its national call center network, general economic conditions and the other
factors. Given the variability in operating results, the Company will continue
to review the valuation allowance on a quarterly basis and make adjustments as
appropriate.
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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 product or features, the timing of the initiation of wireless
services or their acceptance in new market areas by telecommunications
customers, the timing and expense of the Company's expansion of its national
call center network, general economic conditions and other factors.
OVERVIEW
The Company is a leading provider of EDA for the telecommunications
industry and has ten significant EDA contracts with six different carriers to
provide EDA in numerous U.S. metropolitan markets. Over the last eight quarters,
the Company's operations have been characterized by rapid call volume and
revenue growth as well as growth in profits. Call volume and revenues increased
71.1% and 56.7%, respectively, from the first quarter of 1998 to the first
quarter of 1999, and profits grew from $209,000 to $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
several new call centers during 1999 and 2000 to serve PCS, cellular and
landline customers. With its increasing size, the Company expects that the costs
of each new call center will have an increasingly smaller effect on results of
operations.
To stimulate increased call volume and to attract and expand customer
commitments, the Company's strategy has included price discounts based upon call
volumes. Volume-based pricing discounts did not materially effect the Company's
average price per call in 1998; however, the Company expects that its average
price per call will decrease in 1999 as increasing call volumes trigger
volume-based pricing discounts and if the Company enters into additional or new
contracts. The Company believes that its reduced pricing better positions the
Company to retain and expand service with existing carrier customers, to extend
service to new wireless and landline carriers and to achieve greater operating
margins over time.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the items of
the Company's statements of operations as a percentage of revenues.
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THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
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Revenues 100.0% 100.0%
Direct operating costs 55.3 53.0
General and administrative costs 39.9 44.2
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Income from operations 4.8 2.8
Other income 0.5 0.7
Interest and loan fees (0.4) (1.1)
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Income before income taxes 4.9 2.4
Income tax expense 0.1 0.1
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Net income 4.8 2.3
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COMPARISON OF FIRST QUARTER 1999 TO FIRST QUARTER 1998
Revenues increased 56.7% to $14.2 million from $9.0 million. This
increase was due to significantly increased call volumes and was partially
offset by lower average per call pricing. Call volume grew to over 24 million
calls in the first quarter of 1999 from approximately 14 million calls during
the first quarter of 1998. This increase was due primarily to increased call
volumes under existing contracts and additional call volumes from new
contracts, and was partially offset by a decrease in call volumes resulting
from the expiration of contracts to provide EDA services to Ameritech and
BellSouth.
Direct operating costs increased 63.5% to $7.8 million from $4.8
million. This increase was primarily due to the costs associated with increased
call volumes and the cost of operating additional call centers in 1999. As a
percentage of revenues, direct operating costs increased to 55.3% from 53.0%.
This increase was due primarily to lower average per call pricing and increased
personnel and 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 41.3% to $5.7 million
from $4.0 million. This increase resulted primarily from the additional costs
necessary to support additional call centers. As a percentage of revenues,
general and administrative costs decreased to 39.9% from 44.2%. This
decreased resulted primarily from operating efficiencies associated with the
expansion of the Company's national network of call centers. Depreciation and
amortization increased by 42.5% to $1.2 million from $865,000 due primarily
to equipment purchased for new call centers, upgrades for existing call
centers and corporate research and development activities.
Other income for the three months ended March 31, 1999 was $74,000 and
consisted primarily of interest income. Other income for the three months ended
March 31, 1998 was $65,000 and consisted primarily of interest income offset by
losses on the disposition of assets.
Interest expense and loan fees decreased 46.6% to $54,000 from
$101,000. This decrease was attributable to lower interest rates and the
decrease in average debt outstanding to $1.2 million from $2.0 million.
Income tax expense for the three months ended March 31, 1999 was
$24,000, for an effective tax rate of approximately 3.5%. Income tax expense for
the three months ended March 31, 1998 was $6,000, for an effective tax rate of
approximately 2.6%. 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, 1999, the
Company had $8.0 million in cash and cash equivalents and investments
compared to $7.6 million at December 31, 1998, an increase of $463,000
primarily from cash provided by
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operations and proceeds from the exercise of options, offset by the
acquisition of capital equipment and payments applied to the Company's line
of credit.
Working capital was $8.0 million at March 31, 1999, compared to $8.4
million at December 31, 1998. This decrease is due primarily to the use of cash
for capital expenditures and payments applied to the Company's line of credit
and long-term debt, offset by working capital provided by operations and
proceeds from the exercise of options.
As of March 31, 1999, the Company had $789,000 in borrowings with a
commercial bank in order to finance equipment purchases. This borrowing bears
interest at the prime rate plus 0.5 percent and is secured by the purchased
equipment.
On April 23, 1999, the Company entered into a new loan agreement with a
commercial bank. The loan agreement consists of a $10 million Revolving Line of
Credit plus an Equipment Line under which the Company may borrow up to $7.5
million to finance purchases of capital equipment. Total borrowings under the
two lines cannot exceed $15 million in the aggregate. The Revolving Line of
Credit expires in April 2001 and advances under the Equipment Line are available
through April 2000. Availability under the loan agreement may be subject to
borrowing base requirements and requires compliance with loan covenants. Under
the terms of the loan agreement, outstanding borrowings bear interest at the
prime rate (7.75 percent at March 31, 1999) and all assets of the Company, other
than assets previously pledged under existing financing and lease agreements,
are pledged to the bank as collateral. The agreement contains minimum net worth,
working capital and profitability requirements as well as certain other
restrictive covenants and prohibits the payment of cash dividends exceeding 10%
of the Company's tangible net worth.
The Company believes that current cash and cash equivalents and
investments, cash flows from operations and available credit facilities are
sufficient to meet current and anticipated future capital requirements through
1999.
CASH FLOW FROM OPERATIONS. Net cash from operations for the three
months ended March 31, 1999 was $4.2 million, resulting primarily from net
income, the effect of non-cash depreciation and amortization, a decrease in
accounts receivable and an increase in accounts payable and accrued expenses.
CASH FLOW FROM INVESTING ACTIVITIES. Cash used in investing activities
was $3.4 million for the three months ended March 31, 1999 and was related
primarily 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 used in financing
activities was $68,000 for the three months ended March 31, 1999, resulting from
the net repayment of debt obligations totaling $1.55 million. Cash used in
financing activities was offset by the exercise of options to purchase 183,549
shares of Common Stock and the receipt of cash proceeds by the Company of $1.48
million.
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 $12.0 million to $16.0 million in 1999, resulting primarily from
the projected expansion and planned improvements. The Company believes its
existing cash and cash equivalents, credit facilities and cash from operations
will be sufficient to fund its operations through the end of fiscal 1999.
YEAR 2000 COMPLIANCE. Certain technology hardware and software
systems use two-digit fields to score and recognize years, assuming the first
two digits of the year are "19" (e.g., the number "98" is recognized as
"1998"). This and certain similar protocols give rise to possible problems
related to the recognition of dates in years after 1999 - so-called "Year
2000" issues. The Company has commenced a program to identify, remediate,
test and develop contingency plans for the Year 2000 issue (the "Y2K
Program"). Significant issues have been and will continue to be identified
during the second quarter of 1999 and all phases of the Y2K Program are
expected to be completed by the end of the third quarter of 1999. The Y2K
Program includes a review of (1) information and other technology systems
used in the Company's internal business; (2) the Company's hardware and
software products
8
delivered to customers; and (3) applications and products provided by third
party vendors, manufacturers and suppliers. An assessment has been made of
the key internal systems, and the Company believes that systems that are not
already Year 2000 compliant will be modified, upgraded or replaced. The
Company is currently assessing its products, and is working with third party
vendors, manufacturers and suppliers to identify and resolve Year 2000
issues. The Company does not separately track the internal costs incurred for
the Y2K Program, however the Company does not believe that the historical or
anticipated costs of remediation have had, or will have, a material effect on
the Company's financial condition or results of operations. However, because
of the existence of numerous systems and related components within the
Company and the interdependency of these systems, it is possible that certain
systems at the Company, or systems at entities that provide services or goods
for the Company, may fail to operate in the Year 2000. The Company is
continuing to evaluate the risks to the Company of failure to be Year 2000
compliant, and the Company is in the initial stages of developing contingency
plans in the event it does not complete all phases of its Y2K Program. The
Company plans to evaluate the status of completion of its Y2K Program in the
third quarter of 1999 and to begin implementing such contingency plans as it
deems necessary. Although it is not currently anticipated, the inability to
complete the Company's Y2K Program on a timely basis or the failure of a
system at the Company or at an entity that provides services or goods to the
Company may have a material impact on the Company's business, financial
condition and results of operations.
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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.13 Loan and Security Agreement between Silicon Valley Bank and
the Company dated April 23, 1999
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, 1999.
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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 10, 1999
/s/ Stebbins B. Chandor, Jr.
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Stebbins B. Chandor, Jr.
Senior Vice President
Chief Financial Officer
/s/ R. Tod Hutchinson
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R. Tod Hutchinson
Vice President
Controller
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