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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, 2000
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. [ ]
The aggregate market value of registrant's common stock held by
non-affiliates, based on the closing price of the common stock as reported by
the Nasdaq stock market on March 16, 2001, was $428,061,094.
The number of shares outstanding of the registrant's Common Stock, as of
March 16, 2001, was 15,958,966.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2001 Annual Meeting,
to be filed with the Securities and Exchange Commission within 120 days of the
registrant's fiscal year end, are incorporated by reference into Part III of
this Report.
1
METRO ONE TELECOMMUNICATIONS, INC.
2000 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 11
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 20
Item 11 Executive Compensation 20
Item 12 Security Ownership of Certain Beneficial
Owners and Management 20
Item 13 Certain Relationships and Related Transactions 20
PART IV
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 21
Signatures 23
2
PART I
ITEM 1. BUSINESS.
Metro One is a leading 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, Verizon Wireless, Cingular Wireless
and ALLTEL Communications. In addition, we have expanded into the landline
telecommunications market and provide our services to regional competitive local
exchange carriers.
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 over the last decade. This growth has been 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 110 million at the end of 2000, and experts
estimate that by 2005 there will be over 1.26 billion wireless phone users
around the world. 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, Cingular
Wireless, and Verizon Wireless. Other nationwide carriers include Sprint PCS and
Nextel Communications.
In each of the major U.S. markets, at least five 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 1999,
domestic landline services generated approximately $221 billion in revenues as
compared to approximately $48 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 Time
Warner and Integra Telecom. Carriers providing long distance service include
AT&T, MCI WorldCom and Sprint Corp.
Local and long distance carriers competing in each other's markets as
well as against newer and smaller independent carriers have added to
competition in the landline market. 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 billion in 1999
and will generate $16 billion in 2002. 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 significantly through 2003, according to various
industry sources, and among which, individual estimates vary widely. 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. Revenues generated by the landline
directory assistance market are estimated to grow from approximately $3.2
billion in 1999 to $4.3 billion in 2003, 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, increasing billable
airtime. Further, our national call center network,
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 and our
nationwide call center network. 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
accessing a "personal assistant" over the telephone. Such
innovative features will 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, Cingular Wireless (formerly Pacific Bell
Wireless), and ALLTEL Communications. In addition, we have expanded into the
landline telecommunications market and provide our services to competitive
local exchange carriers. Customers that accounted for more than 10% of our
revenues during any of the periods indicated are as follows:
CUSTOMER 1998 1999 2000
-------- ---- ---- ----
Sprint PCS 38% 40% 31%
AT&T Wireless Services 17 30 29
Nextel Communications - 5 21
Cingular Wireless (formerly Pacific Bell) Wireless 12 11 7
Verizon Wireless 18 11 6
Ameritech Cellular 11 - -
We offer our services to a carrier's subscribers under a brand name selected by
the carrier, such as "AT&T 00 Info," 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 $1.40 plus airtime charges
for our services. Metro One charges carriers directly and bears no subscriber
collection risk. We 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 our customers. Our success with this program
resulted in significant call volume increases in 2000 and 1999 which, in turn,
caused volume-based pricing in our existing contracts to become a factor in
determining our average price per call.
5
We have service contracts with 15 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. 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 29 call centers located in strategic local markets throughout the
United States, and expect to add at least two additional new call centers by the
end of 2001. 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 continually 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.
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
We use a customized array of hardware and software, along with proprietary
database search engines, to provide our 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 appropriate carrier's
brand name. Upon receiving information requests from callers, our operators
search applicable databases using one or more of our search engines. The
operator then connects the caller to the called 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; and
- - Turn-by-turn driving instructions.
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 to 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 by 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
- - QuickSend(TM) - a short messaging service that allows our operators to
send customized alphanumeric messages on behalf of a caller.
We are developing, testing and improving 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 "PersonalProfiler", which allows subscribers to customize how
our services are delivered to them as well as allowing them to have access to
"personal assistant" types of services. Other features under development include
on-line research and verification utilities for use by businesses with a direct
private connection to us. Equipment at our corporate headquarters facilitates
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 it more
useful. Acquisitions are made from a variety of sources and are supplemented
with information relating to local events and amenities.
In February 2001, we acquired Enthusiasm Technologies, Inc. ("Enthusiasm"), a
Seattle-based developer of web-based data extraction and processing technology.
Enthusiasm builds application-specific databases for a variety of portals, be
they wired or wireless, voice or data. Enthusiasm's proprietary data extraction
and processing technology enables the creation and ongoing maintenance of high
quality databases from distributed and fragmented data on the web and elsewhere.
Enthusiasm will contribute to Metro One's expansion of its services and data
offerings to its wireless and other customers.
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. 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. 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.
7
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 and Dell servers and
Lucent 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
eight U.S. patents issued, including three relating to our StarBack technology
and another associated with our turn-by-turn directions service. We have
approximately 22 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," "TeleConcierge,"
"LocationPro," "AutoBack" and "NumberBack," and applications pending for U.S.
trademark registrations for, among others, "MetroDex" and "PersonalProfiler."
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. 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 may 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, 2000, Metro One had approximately 5,400 employees, including
approximately 29% who 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, management and corporate staff.
8
ITEM 2. PROPERTIES.
We lease our principal executive and administrative offices, consisting of two
adjacent locations totaling approximately 53,000 square feet of space, in
Beaverton, Oregon. The terms of the leases extend through 2009.
We also lease office facilities for our call center operations, which generally
range in size from 5,000 to 24,000 square feet. We have 33 leases for call
centers and other remote facilities, with remaining terms up to seven 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, among other things, that our patent is invalid and
unenforceable. In February 2000 the competitor and another plaintiff brought
suit against us in the United States District Court, Eastern District of Texas.
We moved for, and obtained, a stay of the Texas matter pending resolution of
the Delaware case. Fact discovery is proceeding on this matter.
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, 2000 to a vote
of security holders.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Metro One'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:
2000 HIGH LOW
---- ---- ---
Quarter ended December 31, 2000 $25.00 $ 12.44
Quarter ended September 30, 2000 14.88 9.75
Quarter ended June 30, 2000 12.88 9.00
Quarter ended March 31, 2000 16.38 11.06
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
The approximate number of shareholders of record as of March 16, 2001 was
124. We believe we have approximately 6,669 shareholders including an
estimate of shareholders with shares held in street name. On March 16, 2001,
the closing price of our common stock, as reported on the Nasdaq National
Market, was $29.63 per share.
We have never declared or paid cash dividends on our common stock. We intend
to retain earnings from operations for use in the operation and expansion of
our business and do not anticipate paying cash dividends with respect to our
common stock in the foreseeable future. Our existing line of credit agreement
prohibits the payment of cash dividends in excess of 10% of our tangible net
worth.
On February 2, 2001, we issued and sold 4,000,000 shares of our common stock
to Sonera Media Holding B.V., for an aggregate purchase price of $68 million,
pursuant to the terms of a Stock Purchase Agreement dated November 8, 2000.
These securities were issued in a private transaction in reliance on the
exemption to the registration requirements of the Securities Act of 1933, as
amended, provided by Rule 506 of Regulation D, as promulgated under the
Securities Act.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data presented below for, and as of the end of, each of
the years in the five-year period ended December 31, 2000 have been derived from
our audited financial statements. The financial data should be read in
conjunction with the Financial Statements and related Notes that appear
elsewhere in this Annual Report and Management's Discussion and Analysis of
Financial Conditions and Results of Operations set forth in Item 7.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands, except per share data)
Operations data:
Revenues $156,981 $77,831 $45,139 $26,090 $17,834
Direct operating costs 97,438 46,494 23,107 13,017 8,334
General and administrative costs 45,892 28,711 18,334 11,702 7,615
Income from operations 13,651 2,626 3,698 1,371 1,885
Net income 9,742 1,906 3,603 1,432 1,166
Basic earnings per share .83 .17 .33 .13 .13
Diluted earnings per share .80 .16 .32 .13 .12
Cash flow from operations 5,350 3,326 6,546 3,293 2,912
Balance sheet data:
Cash and investments $ 6,463 $ 9,964 $ 7,570 $ 8,554 $14,137
Working capital 12,723 11,750 8,414 9,844 15,012
Total assets 102,298 65,475 36,311 29,125 24,529
Long-term obligations 24,731 18,940 719 1,416 1,168
Shareholders' equity 45,404 31,979 28,242 23,676 20,981
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 customer 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.
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Under our contracts, the carriers agree to route some or all of their directory
assistance and/or alphanumeric messaging calls to us. We also 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," 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 $1.40
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 2001 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 2001, we expect to continue our call center and network expansion to prepare
for anticipated continued significant growth. This growth is expected to come
from existing customers in the form of new markets acquired, as well as from new
subscribers and increased usage by existing subscribers. We will also continue
to opportunistically pursue additional significant new business. Our call center
and network expansion efforts will 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 attempt to match the
operating readiness of our call centers to the timing of when our customers
transition call volume to us. At times, our customers have experienced delays,
and may experience some additional delays in the future, in the timing of
delivery of call volume to us. These delays can 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 run.
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,
-----------------------------------------
2000 1999 1998
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Direct operating costs 62.1 59.7 51.2
General and administrative costs 29.2 36.9 40.6
------- ------- ----------
Income from operations 8.7 3.4 8.2
Other (expense) income (0.0) 0.1 0.6
Interest and loan fees (2.1) (1.0) (0.6)
-------- ------- --------
Income before income taxes 6.6 2.5 8.2
Income tax expense 0.4 0.1 0.2
--------- -------- -----------
Net income 6.2 2.4 8.0
========= ======= ==========
New call centers opened during year 4 6 2
Call centers in operation at year-end 28 24 18
2000 COMPARED TO 1999
REVENUES. Revenues increased 101.6% to $156.9 million from $77.8 million. We
have offered volume discount pricing for the last several years in order to
encourage customers to send additional call volume to us. As an ongoing
result of this pricing policy, as well as numerous other factors including
the quality of our services, call volume has continued to increase each year.
Call volume grew to approximately 302 million calls in 2000 from approximately
142 million calls in 1999. This increase resulted from growth in call volume
under existing contracts and markets, as well as new call volume from new
contracts and new markets. Our average price per call was approximately $0.52
in 2000 versus $0.55 in 1999.
DIRECT OPERATING COSTS. Direct operating costs consist of call center personnel
and data and content acquisition costs. These costs increased 109.6%, to $97.4
million from $46.5 million. This increase was primarily due to the costs of
servicing increased call volumes. As a percentage of revenues, direct operating
costs increased to 62.1% from 59.7%, due primarily to the reduction in the
average price per call.
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GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs increased
59.8%, to $45.9 million from $28.7 million. This increase resulted primarily
from costs associated with the start-up of new call centers and the
investment in infrastructure necessary to support additional call volume and
the increase in depreciation expense associated with additional call centers.
As a percentage of revenues, general and administrative costs decreased to
29.2% from 36.9%. This decrease resulted primarily from efficiencies
associated with the expansion of our operations.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
68.1%, to $10.5 million from $6.2 million, due primarily to equipment
purchased for new call centers, for upgrades and expansions of existing call
centers and corporate operations.
OTHER (EXPENSE) INCOME. Other expense for the year ended December 31, 2000
consisted primarily of losses upon the disposition of assets of $220,000 and
other miscellaneous non-operating expenses of $106,000 offset by interest income
of $301,000. 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.
INTEREST EXPENSE AND LOAN FEES. Interest expense and loan fees increased 314.7%,
to $3.2 million from $773,000. This increase was attributable to an increase in
average debt outstanding during 2000.
INCOME TAX EXPENSE. Income tax expense for the year ended December 31, 2000 was
$678,000 for an effective tax rate of approximately 6.5%. December 31, 1999 was
$75,000, for an effective tax rate of approximately 3.8%. These rates differ
from the combined federal and state statutory rate of approximately 38% due
primarily to the use of net operating loss carryforwards.
1999 COMPARED TO 1998
REVENUES. Revenues increased 72.4%, to $77.8 million from $45.1 million. Call
volume grew to approximately 142 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 and expansions of 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.
13
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and investments are recorded at cost which
approximates their fair market value. As of December 31, 2000, we had
approximately $6.5 million in cash and cash equivalents and investments compared
to approximately $10.0 million at December 31, 1999. This decrease of
approximately $3.5 million was primarily from cash used to fund capital
expenditures incurred as part of the expansion of our call center network and
infrastructure capacity, offset by borrowings under credit facilities, cash
provided by operations and proceeds from the exercise of stock options. Total
capital expenditures for the year ended December 31, 2000 were approximately
$27.2 million. Net borrowings under credit facilities were approximately $14.8
million for the same period.
Working capital was $12.7 million at December 31, 2000, as compared with $11.8
million at December 31, 1999. Our current ratio was 1.4:1 at December 31, 2000,
as compared with 1.8:1 at December 31, 1999.
In December 1999, we entered into a secured term loan agreement with an
equipment financing lender. The loan agreement provided us with $20 million to
repay outstanding indebtedness, fund the expansion of our call center network
and for other equipment needs. During the year ended December 31, 2000, we
negotiated additional agreements with this lender to allow for total borrowing
capacity of approximately $54 million. Borrowings under these agreements were
repayable over 48 months at fixed interest rates between 8.10% and 10.09%. With
certain restrictions, repayment of outstanding borrowings was allowable at any
time for a 1% fee. Substantially all of our fixed assets were pledged as
collateral. At December 31, 2000, there was approximately $34.2 million
outstanding under these agreements. During February and March 2001, all of the
outstanding indebtedness on these facilities was paid in full using a portion
of the proceeds from the sale of common stock to Sonera described below.
We also have a $10 million secured line of credit agreement with a commercial
bank. The agreement expires in December 2001. Outstanding borrowings bear
interest at the prime rate plus up to 0.5% (10.0% at December 31, 2000) based on
the ratio of debt to cash flow, and all receivables are pledged to the bank as
collateral. In addition, the line has an unused facility fee of up to 0.75%,
also based on the ratio of debt to cash flow. 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, 2000, we had $4.8 million of outstanding borrowings
under this agreement. As of the date of this filing, there were no outstanding
borrowings under this agreement.
CASH FLOW FROM OPERATIONS. Net cash provided by operating activities was $5.4
million, $3.3 million and $6.5 million for the years ended December 31, 2000,
1999 and 1998, respectively, resulting primarily from net income, the effect of
non-cash depreciation and amortization and increases in accounts payable, offset
by increases accounts receivable.
CASH FLOW FROM INVESTING ACTIVITIES. Cash used in investing activities was $26.8
million, $23.3 million and $10.6 million for the years ended December 31, 2000,
1999 and 1998, respectively 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 other facilities
and equipment costs.
CASH FLOW FROM FINANCING ACTIVITIES. Net cash provided by financing activities
was $18.3 million, $23.5 million and $1.6 million for the years ended December
31, 2000, 1999 and 1998, respectively, resulting primarily from borrowings under
credit facilities and the receipt of cash proceeds from the exercise of stock
options, offset by the repayment of debt obligations
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 new customers and for
general corporate purposes, including possible acquisitions and other corporate
development activities and working capital. We anticipate that our capital
expenditures will be approximately $25 million in 2001, resulting primarily from
projected call center expansions, increased network capacity and corporate
development activities.
In November 2000, we entered into a definitive agreement with Sonera Media
Holding B. V. ("Sonera"), a wholly owned subsidiary of Sonera Corporation of
Helsinki, Finland, whereby Sonera agreed to purchase four million
newly-issued shares of our common stock at a price of $17 per share, for an
aggregate price of $68 million and an approximate 25.5% ownership position.
This transaction was completed in February 2001. Sonera is a world leader in
developing and providing mobile value-added services. After paying costs of
the transaction and retiring approximately $34.2 million of debt, we intend
to utilize the approximately $31 million remaining from the transaction for
infrastructure and capacity expansion as well as for other corporate
purposes. We believe our existing cash and cash equivalents, proceeds from
the Sonera investment, credit facilities and cash from operations will be
sufficient to fund our operations for the next twelve months.
14
SUBSEQUENT EVENT. In February 2001, we acquired Enthusiasm Technologies, Inc., a
Seattle-based developer of web-based data extraction and processing technology,
for a combination of cash and stock. Enthusiasm builds application-specific
databases for a variety of portals, be they wired or wireless, voice or data.
Enthusiasm's proprietary data extraction and processing technology enables the
creation and ongoing maintenance of high quality databases from distributed and
fragmented data on the web and elsewhere. Enthusiasm will contribute to Metro
One's expansion of its services and data offerings to its wireless and other
customers. The purchase price is not material to our financial position.
RECENT ACCOUNTING PRONOUNCEMENTS. In December 1999, the Securities and
Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements." The effective date of the bulletin was
delayed by the issuance of SAB No. 101A and SAB 101B and was effective for
our fourth quarter of 2000. The adoption of this bulletin did not have a
material effect on our financial statements.
EFFECT OF INFLATION
Inflation did not materially affect our business during the last several years.
ISSUES AND UNCERTAINTIES
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 MAY 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 depends in part on the
customers' ability to adapt their networks and billing systems to
allow them to transfer calls to us;
- - 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 would 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;
15
- - 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 CONTRACTS WITH A LIMITED NUMBER OF CARRIER CUSTOMERS. IF WE FAIL TO
EXTEND OR RENEW 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 94% of our revenues
in 2000. Our two largest customers, Sprint PCS and AT&T Wireless Services
accounted for approximately 31% and 29% of our revenues, respectively, in 2000.
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, one expires in 2001 and the
remainder, including Sprint PCS and AT&T Wireless Services, expire in 2002 and
beyond. Some contracts contain performance and other standards and may be
terminated prior to their scheduled expiration dates under specified
circumstances.
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 large customers. The selling process involves demonstrating
the value-added benefits of outsourcing 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. This
could increase 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 also may have the advantage
of being the local telephone carrier in their area of operation. Some of these
companies 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 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 can significantly impact contract pricing
negotiations. 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. If we were to substantially reduce our prices without correspondingly
increasing volume, there could be an adverse impact on our ability to operate
profitably.
16
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 revenues come 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 subscribers appears to be affected by a number of
factors, many of which are beyond our control, 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. We intend to increase call volume by seeking
additional customers, including landline carrier customers, as well as seeking
additional business from our existing customers. We have limited experience in
the landline market, which is dominated by the regional Bell operating
companies. 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 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 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 significant 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 significant
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.
17
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.
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 the 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 and, therefore, may be subject to
increasing pressure to offer higher wages and other benefits during such
periods. 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.
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.
OUR STOCK PRICE IS VOLATILE.
The market price of our stock has experienced volatility and is likely to
continue 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, 2000 through December 31, 2000, our stock price fluctuated
from $9.00 per share to $25.00 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 and arbitrarily. 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
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.
19
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
investments at December 31, 2000 were invested in overnight money market
instruments and were redeemable on a daily basis. Substantially all of the
underlying investments in the money market fund had maturities of three months
or less. 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.
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 2001 Annual Meeting, to be filed with the Securities and
Exchange Commission within 120 days of our fiscal year end, under the captions
of "Management" and "Information as to the Board's Nominees."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated by reference to the Proxy
Statement for our 2001 Annual Meeting, to be filed with the Securities and
Exchange Commission within 120 days of our fiscal year end, 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 2001 Annual Meeting, to be filed with the Securities and
Exchange Commission within 120 days of our fiscal year end, 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 2001 Annual Meeting, to be filed with the Securities and
Exchange Commission within 120 days of our fiscal year end, under the caption of
"Certain Transactions."
20
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 (8)
10.2 1994 Stock Incentive Plan (3)*
10.5 1995 Employment Agreement with Timothy A. Timmins (7)*
10.6 Lease Agreement between and among Petula Associates, Ltd., Koll
Creekside Associates and the Company (2)
10.7 Enhanced Directory Assistance Agreement between Sprint Spectrum L.P.
and the Company dated October 23, 1996 (5)(10)
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)(10)
10.14 Agreement for Enhanced Directory Assistance Services between Metro One
and AT&T Wireless Services, Inc. dated May 2, 1997 (8)(10)
10.16 Loan and Security Agreement between Silicon Valley Bank and the Company
dated December 15, 1999 (9)
10.18 Amendment to 1995 Employment Agreement with Timothy A. Timmins (9)*
10.19 Stock Purchase Agreement between the Company and Sonera Media Holding
B.V. dated as of November 8, 2000 (11)
10.20 Investment Agreement between the Company and Sonera Media Holding B.V.
dated as of February 2, 2001 (12)
10.21 Registration Rights Agreement between the Company and Sonera Media
Holding B.V. dated as of February 2, 2001 (12)
10.22 Commercial Lease agreement between Murray Scholls, LLC and the Company
10.23 Deferred Compensation Plan Document*
10.24 Agreement for Enhanced Directory Assistance Services between Metro One
and AT&T Wireless Services, Inc. dated December 1, 2000 (10)
10.25 1999 Employee Stock Purchase Plan*
10.26 Amendment to 1994 Stock Incentive Plan*
23.1 Consent of Deloitte & Touche LLP, independent certified public
accountants
* Management contract or compensatory plan
21
(1) Incorporated herein by reference to the Company's Registration
Statement on Form S-1 dated August 22, 1996, File No. 333-05183.
(2) Incorporated herein by reference to the Company's Registration
Statement on Form SB-2, File No. 33-88926-LA.
(3) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 dated January 24, 1997, File No. 333-20387.
(4) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 dated February 5, 1998, File No. 333-45643.
(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 August 20, 1996, Commission No. 0-27024.
(8) Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q dated October 22, 1999, Commission No. 0-27024.
(9) Incorporated herein by reference to the Company's Annual Report on Form
10-K dated March 30, 2000, Commission No. 0-27024
(10) Certain portions of Exhibits 10.7, 10.12, 10.14 and 10.24 are the
subject of a request for confidential treatment and have been omitted
from the Exhibit and have been filed separately with the Commission.
(11) Incorporated herein by reference to the Company's Current Report on
Form 8-K dated November 20, 2000, Commission No. 0-27024.
(12) Incorporated herein by reference to the Company's Current Report on
Form 8-K dated February 15, 2001, Commission No. 0-27024.
(b) REPORTS FILED ON FORM 8-K
During the quarter ended December 31, 2000, the Company filed the following
current reports on Form 8-K under Item 5, Other Events:
DATE OF REPORT TOPICS
----------------------- --------------------------------------------------
November 20, 2000 Sonera Agrees to Invest $68 Million For 25.5%
Equity Interest in Metro One Telecommunications
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
METRO ONE TELECOMMUNICATIONS, INC.
By: /s/ TIMOTHY A. TIMMINS
Timothy A. Timmins
President and Chief Executive Officer
Date: April 2, 2001
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 April 2, 2001
- ------------------------- Officer and Director
Timothy A. Timmins (Principal Executive Officer)
/s/ Dale N. Wahl Senior Vice President, Chief Financial April 2, 2001
- ------------------------- Officer
Dale N. Wahl (Principal Financial Officer)
/s/ William D. Rutherford Chairman of the Board of Directors April 2, 2001
- -------------------------
William D. Rutherford
/s/ A. Jean De Grandpre Director April 2, 2001
- -------------------------
A. Jean de Grandpre
/s/ Heikki Jamsanen Director April 2, 2001
- -------------------------
Heikki Jamsanen
/s/ Aimo Olkkonen Director April 2, 2001
- -------------------------
Aimo Olkkonen
/s/ James M. Usdan Director April 2, 2001
- -------------------------
James M. Usdan
/s/ David A. Williams Director April 2, 2001
- -------------------------
David A. Williams
23
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, 2000 and 1999 and the related statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. 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, 2000
and 1999 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Portland, Oregon
February 5, 2001 (March 30, 2001 as to Note 11)
The accompanying notes are an integral part of these statements.
F-1
METRO ONE TELECOMMUNICATIONS, INC.
STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2000 1999 1998
------------------ ------------------ -----------------
Revenues $ 156,981 $ 77,831 $ 45,139
------------------ ------------------ -----------------
Costs and expenses:
Direct operating 97,438 46,494 23,107
General and administrative 45,892 28,711 18,334
------------------ ------------------ -----------------
143,330 75,205 41,441
------------------ ------------------ -----------------
Income from operations 13,651 2,626 3,698
Other (expense) income (25) 128 289
Interest and loan fees (3,206) (773) (309)
------------------ ------------------- ------------------
Income before income taxes 10,420 1,981 3,678
Income tax expense 678 75 75
------------------ ------------------ -----------------
Net income $ 9,742 $ 1,906 $ 3,603
================== ================== =================
Income per common share
Basic $ .83 $ .17 $ .33
Diluted $ .80 $ .16 $ .32
The accompanying notes are an integral part of these statements.
F-2
METRO ONE TELECOMMUNICATIONS, INC.
BALANCE SHEETS (IN THOUSANDS)
- --------------------------------------------------------------------------------
DECEMBER 31,
2000 1999
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,463 $ 9,564
Short-term investments - 400
Accounts receivable 36,559 15,357
Prepaid costs and other current assets 1,864 985
------------------ -----------------
Total current assets 44,886 26,306
Furniture, fixtures and equipment, net 54,749 38,225
Other assets 2,663 944
------------------ -----------------
$ 102,298 $ 65,475
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,633 $ 2,909
Accrued liabilities 6,088 2,390
Accrued payroll and related costs 9,181 3,839
Line of credit payable 4,750 -
Current portion of capital lease obligations - 159
Current portion of long-term debt 9,511 5,259
------------------ -----------------
Total current liabilities 32,163 14,556
Capital lease obligations - 17
Long-term debt 24,731 18,923
------------------ -----------------
56,894 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, 11,832 and 11,414 shares issued and outstanding
at December 31, 2000 and 1999, respectively 43,991 40,308
Retained earnings (accumulated deficit) 1,413 (8,329)
------------------ -----------------
Shareholders' equity 45,404 31,979
------------------ -----------------
$ 102,298 $ 65,475
================== =================
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 RETAINED EARNINGS
------------------------------------ (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT) EQUITY
----------------- ------------------ ------------------ ---------------
Balances at December 31, 1997 10,926 $ 37,514 $ (13,838) $ 23,676
Employee stock options exercised, net 262 963 - 963
Net income - - 3,603 3,603
----------------- --------------- ---------------- ---------------
Balances at December 31, 1998 11,188 38,477 (10,235) 28,242
Employee stock options 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
Employee stock options exercised, net 392 3,426 - 3,426
Employee stock purchase plan 26 257 - 257
Net income - - 9,742 9,742
----------------- --------------- ---------------- ---------------
Balances at December 31, 2000 11,832 $ 43,991 $ 1,413 $ 45,404
================= =============== ================ ===============
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,
---------------------------------------------------------
2000 1999 1998
------------------ ------------------ -----------------
Cash flows from operating activities:
Net income $ 9,742 $ 1,906 $ 3,603
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,465 6,225 3,774
Loss on disposal of fixed assets 220 67 73
Deferred income taxes (96) (8) (42)
Changes in certain assets and liabilities:
Accounts receivable (21,202) (7,929) (2,799)
Prepaid expenses and other assets (2,543) (728) (91)
Accounts payable, accrued liabilities and payroll costs 8,764 3,793 2,028
------- ------- ---------
Net cash provided by operating activities 5,350 3,326 6,546
------------------ ------------------ -----------------
Cash flows from investing activities:
Capital expenditures (27,168) (24,397) (9,085)
Purchase of short-term investments - (400) (1,507)
Maturity of short-term investments 400 1,507 -
------------------ ------------------ -----------------
Net cash used in investing activities (26,768) (23,290) (10,592)
------------------ ------------------ -----------------
Cash flows from financing activities:
Net proceeds from (repayment of) line of credit 4,750 (1,400) 1,400
Proceeds from issuance of debt 16,637 31,800 -
Repayment of debt (6,577) (8,474) (90)
Repayment of capital lease obligations (176) (292) (718)
Proceeds from exercise of stock options
and employee stock purchases 3,683 1,831 963
------------------ ------------------ -----------------
Net cash provided by financing activities 18,317 23,465 1,555
------------------ ------------------ -----------------
Net (decrease) increase in cash and cash equivalents (3,101) 3,501 (2,491)
Cash and cash equivalents, beginning of year 9,564 6,063 8,554
------------------ ------------------ -----------------
Cash and cash equivalents, end of year $ 6,463 $ 9,564 $ 6,063
================== ================== =================
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. All investments are classified as "held-to-maturity" and accordingly
are recorded at cost, which approximates fair value.
MAJOR CUSTOMERS. In each of the years ended December 31, 2000, 1999 and 1998,
twelve customers accounted for substantially all revenue and accounts receivable
reported. Our three largest customers accounted for approximately 31%, 29% and
21% of revenue in 2000. Our four largest customers accounted for approximately
40%, 30%, 11% and 11% of revenue in 1999. Our five largest customers accounted
for approximately 38%, 18%, 17%, 12% and 11% of revenue in 1998. We have not
historically incurred significant losses related to our accounts receivable.
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 $0 and
$1,184,000 at December 31, 2000 and 1999, 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.
OTHER ASSETS. Other assets include patents, patents pending and trademarks.
These assets are carried at cost less accumulated amortization. Other assets are
amortized over the estimated useful lives of the related assets of five to ten
years. The related accumulated amortization was $92,885 and $81,745 for the
years ended December 31, 2000 and 1999, respectively. In the event that facts
and circumstances indicate that the recorded value 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.
REVENUE RECOGNITION. Under existing contracts with telecommunications carriers,
we record revenue for the number of calls processed at the agreed upon price per
call, calculated on a monthly basis. Prices per call vary based on monthly
volumes achieved. Revenue is recognized as services are provided.
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
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that effect reported amounts of
assets and liabilities and disclosure of contingent 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 1999 and 1998 financial statements
have been reclassified to conform to 2000 presentations. Such reclassifications
had no effect on reported net income.
2. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment by major classification are summarized as
follows:
DECEMBER 31,
-------------------------------------
(In thousands) 2000 1999
------------------ -----------------
Equipment $ 63,232 $ 41,578
Furniture and fixtures 9,794 6,610
Leasehold improvements 5,037 3,729
------------------ -----------------
78,063 51,917
Accumulated depreciation and amortization (23,314) (13,692)
------------------ -----------------
$ 54,749 $ 38,225
================== =================
3. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
-------------------------------------
(In thousands) 2000 1999
------------------ -----------------
Secured Equipment Financing Loans $ 34,242 $ 24,182
Current portion of long-term debt (9,511) (5,259)
------------------ -----------------
$ 24,731 $ 18,923
================== =================
LOAN AGREEMENTS. At various times during 2000 and 1999, we entered into
equipment financing loan agreements with an equipment financing lender. The
agreements provide us with borrowing capacity to fund the expansion of our call
center network and for other equipment needs. The agreements provide for fixed
or floating rate options and all assets purchased pursuant to the agreements are
pledged as collateral. Individual borrowings under the agreements have terms of
48 months each, and prepayment of outstanding borrowings is allowable 12 months
after the funding dates, or, with certain restrictions, at any time prior, for a
1% fee. The equipment financing lender committed to a total lending capacity of
$54 million. As of December 31, 2000, we had $34.2 million in borrowings under
this facility (see Note 11), with individual borrowings bearing interest at
fixed rates ranging from 8.10% to 10.09%. The interest rates approximate current
market rates; thus, the recorded value of these loans is considered to be at
fair value.
F-7
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 plus up to 0.5% (10.0% at December
31, 2000) based on the ratio of debt to cash flow, and all receivables are
pledged to the bank as collateral. In addition, the line has an unused facility
fee of up to 0.75%, also based on the ratio of debt to cash flow. 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, 2000, we had approximately $4.8 million
in borrowings outstanding under this agreement.
4. LEASE OBLIGATIONS
We lease operating facilities and equipment under operating leases with
unexpired terms of one to nine years. Rental expense for operating leases was
approximately $5,418,000, $3,497,000 and $2,091,000 for 2000, 1999 and 1998,
respectively.
Minimum annual rentals for the five years subsequent to 2000 and in the
aggregate thereafter are as follows:
(In thousands)
YEAR ENDING
DECEMBER 31, OPERATING LEASES
------------------ ------------------
2001 6,481
2002 6,339
2003 6,047
2004 5,080
2005 3,577
Thereafter 5,061
------------------
Total minimum lease payments $ 32,585
==================
5. SHAREHOLDERS' EQUITY
PREFERRED STOCK. We have authorized 10,000,000 shares of preferred stock for
issuance. Our board of directors has the authority 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, 2000.
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, 2000, 2,300,000 shares of common stock were
reserved for issuance under the Plan. In January 2001, the shareholders approved
an amendment to the Plan increasing the number of shares reserved for issuance
to 2,880,000 (See Note 11). 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.
F-8
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. The ESPP allows
qualified employees to purchase shares of the Company's common stock on a
semi-annual basis, up to 10% of pre-tax compensation. The purchase price is set
at 85% of the lower of the stock price at the beginning or ending of each
purchase period. As of December 31, 2000, 150,000 shares of common stock were
reserved for issuance under the ESSP and 25,783 shares have been issued under
the plan.
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 in the financial
statements related to stock options issued under the Plan. If compensation cost
on stock options granted in 2000, 1999 and 1998 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, "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, 2000, 1999 and 1998:
(In thousands, except
per share amounts) 2000 1999 1998
---- ---- ----
Net income, as reported $9,742 $1,906 $3,603
Diluted earnings per share, as reported 0.80 0.16 0.32
Net income, pro forma 8,747 1,014 3,311
Diluted earnings per share, pro forma 0.72 0.08 0.29
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 2000, 1999 and 1998, respectively: dividend yield of 0 for all years;
risk-free interest rates of 5.0, 5.9 and 4.5 percent; expected volatility of
75.4, 73.6 and 66.6 percent; and expected life of 4.0 for all years.
A summary of the status of our stock option plan as of December 31, 2000, 1999
and 1998 and changes during the years ending on those dates is presented below.
2000 1999 1998
(In thousands, except -------------------------- --------------------------- --------------------------
per share amounts) Weighted- Weighted- Weighted-
Average Average Average
Shares Exer. Price Shares Exer. Price Shares Exer. Price
------------- ----------- -------------- ----------- ------------- -----------
Outstanding at
beginning of year 1,543 $ 9.17 1,765 $ 8.88 1,454 $ 8.58
Granted 340 13.00 55 15.76 407 10.07
Exercised (392) 8.75 (227) 8.08 (62) 8.07
Forfeited (121) 10.48 (50) 11.17 (34) 11.82
------------- ----------- -------------- ----------- ------------- -----------
Outstanding at
end of year 1,370 $ 10.13 1,543 $ 9.17 1,765 $ 8.88
============= =========== ============== =========== ============= ===========
Options exercisable at year-end 1,006 1,212 1,244
Weighted-average fair value of
options granted during the year $ 5.93 $ 8.11 $ 4.37
F-9
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding and
exercisable under the Plan at December 31, 2000:
(in thousands, except Outstanding Exercisable
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
- ------------------ ------------------------------------------------------- -------------------------------------
EXERCISE PRICE
$ 8.05 - 8.05 576 4.64 $ 8.05 576 $ 8.05
$ 8.50 - 12.00 512 7.80 $ 10.15 270 $ 9.54
$ 12.63 - 18.00 282 8.60 $ 14.32 160 $ 14.15
- ------------------ --------------- ---- ---------------- --------------- -------------
$ 8.05 - 18.00 1,370 6.64 $ 10.13 1,006 $ 9.42
================== =============== ==== ================ =============== =============
6. OTHER INCOME AND EXPENSE
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, 2000 are losses on asset dispositions of $220,000 and other
miscellaneous non-operating expenses of $106,000 offset by interest income of
$301,000. For the year ended December 31, 1999, other income consisted primarily
of losses on asset dispositions of $67,000 offset by interest income of
$192,000. For the year ended December 31, 1998, other income consisted primarily
of losses on asset dispositions of $73,000 offset by interest income of
$365,000.
7. INCOME TAXES
The components of income tax expense for the years ended December 31 are as
follows:
(In thousands) 2000 1999 1998
------------------ ------------------ -----------------
Current:
Federal $ 96 $ 8 $ 42
State 678 75 75
------------------ ------------------ -----------------
774 83 117
------------------ ------------------ -----------------
Deferred:
Federal (96) (8) (42)
State - - -
------------------ ------------------ -----------------
(96) (8) (42)
------------------ ------------------ -----------------
Total tax expense $ 678 $ 75 $ 75
================== ================== =================
F-10
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) 2000 1999
------------------ -----------------
Deferred tax liability:
Tax depreciation in excess of book $ 4,343 $ 2,707
------------------- ------------------
Deferred tax asset:
Net operating loss carryforwards $ 4,441 $ 5,983
Expenses not currently deductible 800 396
Tax credit carryforwards 223 127
------------------ -----------------
Gross deferred tax assets 5,464 6,506
Valuation allowance (930) (3,704)
------------------ -----------------
Deferred tax assets 4,534 2,802
------------------ -----------------
Net deferred tax asset $ 191 $ 95
================== ==================
During 2000 and 1999, 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 review the valuation allowance on a
quarterly basis and make adjustments as appropriate.
At December 31, 2000, we had approximately $11.4 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,
---------------------------------------------------------
2000 1999 1998
------------------ ------------------ -----------------
Federal statutory rate 34.0% 34.0% 35.0%
State income taxes, net of federal benefit 6.6 3.9 3.9
Valuation allowance (34.8) (36.8) (36.7)
Other .7 2.7 (0.1)
----------------- ---------------- -----------------
Effective tax rate 6.5% 3.8% 2.1%
================== ================= =================
F-11
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. EARNINGS PER SHARE
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) 2000 1999 1998
-------------------- ------------------- -------------------
Weighted average common shares
outstanding (used in computing Basic EPS) 11,680 11,391 11,063
Common stock equivalents 443 597 211
-------------------- ------------------- -------------------
Weighted average common shares
outstanding (used in computing Diluted EPS) 12,123 11,988 11,274
==================== =================== ===================
9. 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). 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 $83,000, $55,000 and
$35,000 during 2000, 1999 and 1998, respectively.
10. STATEMENT OF CASH FLOWS
Supplemental disclosure of Cash Flow information:
YEAR ENDED DECEMBER 31,
(In thousands) 2000 1999 1998
------------------ ------------------ -----------------
Cash paid for interest expense $ 3,130 $ 718 $ 297
Cash paid for income taxes 366 78 95
11. SUBSEQUENT EVENTS
On January 31, 2001, the Company's shareholders approved the proposed issuance
and sale to Sonera Media Holding B.V. of 4,000,000 shares of Common Stock at a
price of $17 per share, or a total of $68 million, which represents
approximately 25.5% of our outstanding Common Stock after the issuance. Sonera
Media Holding B.V. is a wholly-owned subsidiary of Sonera Corporation, a
publicly traded telecommunications company organized in Finland. This
transaction was completed in February 2001. During February and March 2001, we
paid all outstanding debt with a portion of the proceeds from this transaction.
F-12
METRO ONE TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In addition, in conjunction with the Sonera transaction, on January 31, 2001,
the shareholders approved an amendment of our 1994 Stock Incentive Plan to
increase the number of shares available for issuance by 580,000 shares, from
2,300,000 to 2,880,000 shares of Common Stock.
In February 2001, the Company acquired Enthusiasm Technologies, Inc.,
("Enthusiasm") a Seattle-based developer of web-based data extraction and
processing technology, for a combination of cash and stock. Enthusiasm builds
application-specific databases for a variety of portals, be they wired or
wireless, voice or data. Enthusiasm Technologies' proprietary data extraction
and processing technology enables the creation and ongoing maintenance of high
quality databases from distributed and fragmented data on the web and elsewhere.
The purchase price is not material to the financial position of the Company.
QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
QUARTER ENDED
(In thousands except --------------------------------------------------------------------
per share amounts) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------------- --------------- --------------- ---------------
2000
Revenues $ 29,711 $ 36,589 $ 42,953 $ 47,728
Direct operating expense 18,523 24,036 26,879 27,999
General and administrative expense 9,319 10,668 12,219 13,686
Income from operations 1,869 1,885 3,855 6,043
Net income 1,121 1,156 2,764 4,702
Basic earnings per share .10 .10 .24 .40
Diluted earnings per share .09 .10 .23 .38
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
F-13