<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number:
September 30, 2000 0-31295
O2WIRELESS SOLUTIONS, INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-2467466
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
440 Interstate North Parkway, Atlanta, Georgia 30339
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(Address of principal executive offices) (Zip Code)
770-763-5620
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
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 [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.0001 par value per share 26,900,804 shares
---------------------------------------- -------------------------------
Class Outstanding at November 1, 2000
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O2WIRELESS SOLUTIONS, INC.
FORM 10-Q
SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
----
<S> <C>
Consolidated Balance Sheets as of December 31, 1999 and September 30, 2000
(unaudited) 3
Consolidated Statements of Operations for the Three and Nine Month
Periods Ended September 30, 1999 and 2000, (unaudited) 5
Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 30, 1999 and 2000, (unaudited) 7
Notes to Consolidated Financial Statements 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 18
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES
EXHIBIT INDEX
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
O2WIRELESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ ------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 893 $ 13,294
Restricted cash 1,616 --
Accounts receivable, net 19,879 31,770
Costs and estimated earnings in excess of billings 5,704 16,097
Inventories 1,081 2,237
Deferred income taxes 403 901
Other current assets 460 1,127
------------ ------------
Total Current Assets 30,036 65,426
Property and equipment, net 5,002 4,753
Intangible assets, net 22,530 24,066
Deferred income taxes 1,339 2,149
Other assets 566 543
------------ ------------
$ 59,473 $ 96,937
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and other current indebtedness $ 1,573 $ 2,483
Accrued earn-out 4,000 --
Accounts payable 9,677 9,867
Accrued expenses 1,857 10,070
Billing in excess of costs and estimated earnings 920 1,558
------------ ------------
Total Current Liabilities 18,027 23,978
Other long-term indebtedness, less current portion 24,459 2,066
Common stock put warrants 9,031 --
------------ ------------
Total Liabilities 51,517 26,044
------------ ------------
Redeemable preferred stock 10,960 --
Stockholders' equity (deficit)
Common stock, $.0001 par value 15,000,000 shares authorized and 7,189,230
shares issued and outstanding at December 31, 1999, 100,000,000 shares
authorized and 26,900,804 shares issued and outstanding at September 30,
2000 -- 3
Paid-in capital 3,261 95,653
Deferred stock compensation -- (1,482)
Accumulated deficit (6,265) (23,281)
------------ ------------
Total stockholders' (deficit) equity (3,004) 70,893
------------ ------------
$ 59,473 $ 96,937
============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
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O2WIRELESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 9,172 $ 37,404 $ 25,390 $ 94,647
Operating expenses:
Cost of revenues 6,806 26,324 19,684 66,761
Selling, general, and administrative expenses 1,542 7,412 5,163 18,186
Depreciation and amortization 452 1,051 1,316 3,043
----------- ----------- ----------- -----------
Operating Income (Loss) 372 2,617 (773) 6,657
Interest expense, net (623) (836) (1,672) (3,242)
Increase in fair value of put warrants -- -- -- (13,681)
Other 57 68 88 92
----------- ----------- ----------- -----------
(Loss) income before taxes, extraordinary items and
cumulative effect of change in accounting principle (194) 1,849 (2,357) (10,174)
Income tax (benefit) expense (1,567) (303) (1,567) 465
----------- ----------- ----------- -----------
Income (loss) before extraordinary items and
cumulative effect of change in accounting principle 1,373 2,152 (790) (10,639)
Extraordinary item -- loss on extinguishment of
indebtedness, net of income tax benefit of
approximately $130 -- 6,377 -- 6,377
----------- ----------- ----------- -----------
Loss before cumulative effect of change
in accounting principle 1,373 (4,225) (790) (17,016)
Cumulative effect of change in accounting
treatment of organization costs -- -- (121) --
----------- ----------- ----------- -----------
Net Income (Loss) 1,373 (4,225) (911) (17,016)
Preferred stock dividends and accretion (140) (5,209) (348) (6,148)
----------- ----------- ----------- -----------
Net Income (Loss) to common stockholders $ 1,233 $ (9,434) $ (1,259) $ (23,164)
=========== =========== =========== ===========
Earnings per share data:
Net income (loss) per common share:
Basic:
Income (loss) per share before extraordinary item
and accounting change $ 0.17 $ (0.18) $ (0.16) $ (1.59)
Effect of extraordinary item -- (0.38) -- (0.60)
Effect of accounting change -- -- (0.02) --
----------- ----------- ----------- -----------
Basic income (loss) per common share $ 0.17 $ (0.56) $ (0.18) $ (2.19)
=========== =========== =========== ===========
Diluted:
Income (loss) per share before extraordinary item
and accounting change $ 0.08 $ (0.18) $ (0.16) $ (1.59)
Effect of extraordinary item -- (0.38) -- (0.60)
Effect of accounting change -- -- (0.02) --
----------- ----------- ----------- -----------
Diluted income (loss) per common share $ 0.08 $ (0.56) $ (0.18) $ (2.19)
=========== =========== =========== ===========
Weighted-average common shares outstanding
Basic 7,189 16,840 7,189 10,591
Diluted 15,722 16,840 7,189 10,591
</TABLE>
See accompanying notes to unaudited consolidated financial statements
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O2WIRELESS SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months Nine months
ended ended
Sept. 30, Sept. 30,
1999 2000
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (911) $ (17,016)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,316 3,043
Accretion of loan discount -- 358
Amortization of deferred stock-based compensation -- 327
Increase in fair value of common stock put warrants -- 13,681
Deferred income tax (benefit) expense (1,424) 228
Extraordinary loss - Loss on extinguishment of indebtedness -- 6,377
Noncash interest expense relating to warrants issuances 277 --
Write off of organization costs 121 --
Changes in operating assets and liabilities:
Accounts receivable (1,993) (10,377)
Costs and estimated earnings in excess of billings (2,779) (10,393)
Inventories -- (1,098)
Other current assets (903) (667)
Other assets 13 23
Accounts payable 715 148
Accrued expenses 1,577 4,174
Billings in excess of cost and estimated earnings 427 638
----------- -----------
Net cash used in operating activities (3,564) (10,554)
----------- -----------
Cash flows used in investing activities:
Purchase of property and equipment (1,268) (751)
Cash paid for acquisitions, net (975) (2,707)
----------- -----------
Net cash used in investing activities (2,243) (3,458)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 62,700
Restricted cash held in escrow -- 1,616
Preferred stock dividends -- (331)
Exercise of stock options and warrants -- 926
Repayment of various notes payable (550) (2,338)
Proceeds from borrowing under credit facility 3,920 16,087
Repayment of borrowings under credit facility -- (31,329)
Repayment of preferred stock -- (7,918)
Issuance of Series C convertible preferred stock 2,961 --
Repayment of subordinated notes -- (13,000)
----------- -----------
Net cash provided by financing activities 6,331 26,413
----------- -----------
Net increase in cash and cash equivalents 524 12,401
Cash and cash equivalents at beginning of period 186 893
----------- -----------
Cash and cash equivalents at end of period $ 710 $ 13,294
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,148 $ 3,109
=========== ===========
Non cash investing and financing activities:
Conversion of Series B preferred stock to notes payable $ 1,550 --
=========== ===========
Conversion of warrants into common stock -- $ 22,712
=========== ===========
Conversion of preferred stock to common stock -- $ 8,859
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
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O2WIRELESS SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
A) ORGANIZATION AND BASIS OF PRESENTATION
o2wireless Solutions, Inc. and subsidiaries (formerly Clear Holdings,
Inc. and subsidiaries) - (the "Company") is headquartered in Atlanta, Georgia.
On November 12 ,1997, Clear Communications Group, Inc. was merged into American
Communications Construction, Inc. ("ACCI"), an affiliated company under common
control, and ACCI changed its name to Clear Communications Group, Inc. ("Clear
Group").
In November, 1997, Clear Group acquired all of the outstanding stock of
ISDC, Inc. and substantially all of the assets and liabilities of the
construction division of Minerich, Inc. During 1998, Clear Group acquired all of
the outstanding stock of Communications Development Systems, Inc. In January,
1999, the Company acquired all of the outstanding stock of Cellular Technology
International, Inc., in a purchase transaction. In November, 1999, the Company
acquired all of the outstanding stock of TWR Telecom, Inc., and its
subsidiaries, and Specialty Drilling, Inc., collectively ("TWR Group"), in a
purchase transaction. Also on this date, the Company purchased substantially all
of the assets and liabilities of McKenzie Telecommunications Group, Inc. In
June, 2000, the Company, through its subsidiary Clear Communications Group,
Inc., acquired all of the issued and outstanding common stock of Communication
Consulting Services, Inc. for a purchase price of $2,250,000 in cash, resulting
in goodwill of approximately $1,453,000. The pro forma effect of the acquisition
of Communication Consulting Services, Inc. is not material to the Company's
revenues or net loss for the nine months ended September 30, 2000 or 1999.
The accompanying consolidated financial statements as of September 30,
2000, and for the three and nine month periods ended September 30, 1999 and 2000
are unaudited. In the opinion of management, these unaudited consolidated
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial condition and
results of operations for the interim periods presented. The consolidated
balance sheet data for December 31, 1999 was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. Interim operating results are not necessarily indicative
of operating results for the entire year. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the related notes included in the Company's Registration
Statement filed on Form S-1 (Reg. No. 333-36678) with the Securities and
Exchange Commission.
Certain reclassifications of prior year amounts have been made to
conform with the current year presentation.
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B) DESCRIPTION OF BUSINESS
The Company provides comprehensive integrated network solutions to all
sectors of the global wireless telecommunications industry. These solutions
enable its customers to plan, design, deploy and maintain their wireless
networks. The Company also offers business planning and consulting services to
wireless telecommunications industry participants.
C) INITIAL PUBLIC OFFERING AND CONVERSION OF PREFERRED STOCK AND WARRANTS
On August 21, 2000, the Company completed the initial public offering
of its common stock. In conjunction with the closing of that offering, the
Company issued and sold 5,798,623 shares and some of its shareholders sold
301,377 shares of common stock (excluding shares sold pursuant to the
underwriters' over-allotment option). The shares were sold by the Company at
$12.00 per share less an underwriting discount of $0.84 per share. The Company
received net proceeds (after underwriter discounts and offering expenses) of
approximately $62.7 million in cash which were used to repay approximately $31
million of indebtedness outstanding under our credit facility with Wachovia
Bank, N.A., to redeem $13 million of our senior subordinated notes held by
American Capital Strategies, Ltd., and to redeem approximately $7.9 million of
our Series D preferred stock, held by Stratford Capital Partners, L.P. and
Stratford Equity Partners, L.P. In connection with the public offering, each
share of our convertible preferred stock automatically converted into
approximately 96.7 shares of our common stock or an aggregate of 8,565,444
shares. With the exception of outstanding warrants to purchase 2,757,827 shares,
all of our warrants have converted to common stock. Upon the completion of our
initial public offering, the put feature on our common stock put warrants
expired. Approximately $2 million in expenses relating to the offering have been
recorded against the proceeds in equity as of September 30, 2000.
D) COMMON STOCK SPLIT
On June 29, 2000, the Company effected a 2.65-for-one stock split of
the Company's common stock. All share and per share data in the accompanying
Consolidated Financial Statements and Notes to the Consolidated Financial
Statements have been retroactively restated to reflect the stock split.
E) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities as of the balance sheet date and
revenues and expenses during the reporting period to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
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F) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income or loss and its components in a full set of financial
statements. Comprehensive income or loss consists of net income or loss and all
other gains and losses that are excluded from net income by current accounting
standards, and is presented in the statement of stockholders' equity. SFAS No.
130 requires only additional disclosures in the financial statements and does
not affect the Company's financial position or results of operations. The
Company has no "other" comprehensive income or loss to report for the three and
nine month periods ended September 30, 1999 and 2000.
G) PENDING ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, which (as
amended through issuance of Statement of Financial Accounting Standards No. 137,
"Deferral of the Effective Date of FASB Statement No. 133") is effective for
2001, requires all derivatives to be recorded on the balance sheet at fair value
and establishes accounting treatment for certain hedge transactions. The Company
is analyzing the implementation requirements and currently does not anticipate
there will be a material impact on the results of operations or financial
position after adoption of SFAS No. 133.
2) SEGMENT INFORMATION
The Company operates and manages its business as a single segment. The
Company provides comprehensive integrated network solutions to service providers
in the wireless telecommunications industry. The following is a summary of
revenues by geographic area (in thousands):
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 2000 1999 2000
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
U.S. $ 9,041 $ 35,929 $ 25,024 $ 92,257
Foreign $ 131 $ 1,475 $ 366 $ 2,390
</TABLE>
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements regarding our expected financial position
and operating results, our business strategy and our financing plans are
forward-looking statements. These statements can sometimes be identified by our
use of forward-looking words such as "may," "will," "anticipate," "estimate,"
"expect," or "intend." Known and unknown risks, uncertainties and other factors
could cause our actual results to differ materially from those contemplated by
these statements. Such risks and uncertainties include, but are not limited to,
general economic conditions, competition in the wireless services industry, the
Company's ability to manage its growth effectively, the Company's ability to
implement its acquisition strategy, fluctuations in quarterly operating results
and other uncertainties detailed from time to time in the Company's Securities
and Exchange Commission filings. The Company's Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission (No. 333-36678),
discusses some additional important factors that could cause the Company's
actual results to differ materially from those in such forward-looking
statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. We are under no obligation to
update any of the forward-looking statements after the filing of this Form 10-Q
to conform such statements to actual results or to changes in our expectations.
The following discussion should be read in conjunction with our
financial statements and the related notes and other financial information
appearing elsewhere in this Form 10-Q.
OVERVIEW
o2wireless Solutions ("o2wireless" or the "Company") provides a full
range of network services to all sectors of the global wireless
telecommunications industry. Our services range from business planning and
design through deployment and maintenance services for telecommunications
networks.
We have built our business through both internal growth and
acquisitions. During 1999 and 2000, we acquired certain strategically positioned
companies in order to create an integrated telecommunications services company
with depth and expertise in wireless and wireline technologies and a broad
geographical presence. All of our acquisitions have been accounted for under the
purchase method of accounting. Aggregate goodwill for all of our acquisitions
since 1997 is approximately $24.1 million which is generally being amortized on
a straight-line basis over 10 years, the expected period of benefit.
We generally offer our network planning, design and deployment services
on either a fixed-price or a time-and-material basis, with scheduled deadlines
for completion times, that is,
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on a time-certain basis. We recognize revenues for our fixed-price contracts
using the percentage-of-completion method. Under the percentage-of-completion
method, in each period we recognize expenses as they are incurred, and we
recognize revenue based on a comparison of the current costs incurred for the
project to the then estimated total costs of the project. Accordingly, the
revenue we recognize in a given quarter depends on the costs we have incurred
for individual projects and our then current estimate of the total remaining
costs to complete individual projects. If in any period we significantly
increase our estimate of the total costs to complete a project, we may recognize
very little or no additional revenue with respect to that project. As a result,
our gross margin in such period and in future periods may be significantly
reduced, and in some cases we may recognize a loss on individual projects prior
to their completion. In the nine-month period ended September 30, 2000, revenues
from our fixed-price contracts accounted for approximately 79% of our total
revenues. Our contracts are typically structured with milestone events that
dictate the timing of payments to us from our customers. Accordingly, there may
be a significant delay between the date we record revenue and the date we
receive payment from our customers. During our planning process, we divide
projects into deliverables. This enables us to better understand the costs
associated with each of the components and minimizes the risks of exceeding our
initial estimates.
During the second quarter of 2000, we granted options to certain of our
employees at exercise prices below the initial public offering price of $12.00
per share, which will result in a total future compensation expense of
approximately $1.9 million which will be recognized over the vesting periods of
the options. A majority of the aggregate expense amount will be recognized over
a two-year period. Of this aggregate amount, approximately $198,000 was expensed
in the third quarter of 2000.
During the third quarter of 2000, we recorded an extraordinary loss of
approximately $6.4 million related to the early extinguishment of indebtedness.
This loss was comprised of (i) approximately $3.8 million which represents the
amount of the then unaccreted discount on our senior subordinated notes held by
American Capital Strategies, Ltd. that was expensed upon the early repayment of
the notes with proceeds from the initial public offering, and (ii) a $2.6
million write-off of the then remaining capitalized loan costs relating to loans
repaid. Also, income available to common shareholders was reduced by
approximately $5 million which represents the amount of the then unaccreted
discount on some of our preferred stock, upon redemption of the related
preferred stock. This amount was accreted against additional paid-in capital.
On August 21, 2000, we completed the initial public offering of our
common stock. In connection with the completion of that offering, we issued
5,798,623 shares of our common stock for net proceeds (after underwriter
discounts and offering expenses) of approximately $62.7 million in cash, which
was used to pay off approximately $31 million under our credit facility, $13
million in subordinated indebtedness and $7.9 million in redeemable preferred
stock. In connection with the public offering, each share of our convertible
preferred stock automatically converted into approximately 96.7 shares of our
common stock, or an aggregate of 8,565,444 shares.
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On September 11, 2000, the underwriters exercised their over-allotment
option to purchase an additional 915,000 shares of our common stock from certain
of our selling shareholders. The Company did not receive any proceeds in
connection with the exercise of the underwriters' over-allotment option.
RESULTS OF OPERATIONS
REVENUES. Our revenues increased 308%, or $28.2 million, from $9.2
million for the three months ended September 30, 1999 to $37.4 million for the
three months ended September 30, 2000. Of this increase, $14.4 million was
attributable to internal growth from new contracts. The remaining $13.8 million
is attributable to our acquisitions of TWR Telecom, Inc. and McKenzie
Telecommunications Group, Inc., both of which were completed in November 1999,
and Communications Consulting Services, Inc., which was completed in June 2000.
Our revenues for the nine months ended September 30, 2000 increased to
$94.6 million, or 272%, from $25.4 million for the nine months ended September
30, 1999. The $69.2 million increase was primarily attributable to internal
growth from new contracts, which accounted for $37 million. The remaining $32.2
million is attributable to our acquisitions of TWR Telecom, Inc. and McKenzie
Telecommunications Group, Inc., both of which were completed in November 1999,
and Communications Consulting Services, Inc., which was completed in June 2000.
COST OF REVENUES. Our cost of revenues includes direct compensation and
benefits, living and travel expenses, payments to third-party sub-contractors
and other direct project-related expenses, in addition to allocations of
indirect overhead. As of September 30, 2000, we had 614 employees working on
contracted projects. Our cost of revenues increased 287% from $6.8 million for
the three months ended September 30, 1999 to $26.3 million for the three months
ended September 30, 2000, due to increased staffing and other costs to support
the growth in our existing business coupled with an increase in contracts due to
acquisitions. Gross margin was 29.6% of revenues for the three months ended
September 30, 2000, compared to 25.8% for the three months ended September 30,
1999. Gross margin for the three months ended September 30, 2000 increased due
to higher margin contracts and a shift in the mix of services to higher margin
services.
Our cost of revenues increased 239% from $19.7 million for the nine
months ended September 30, 1999 to $66.8 million for the nine months ended
September 30, 2000, due to increased staffing and other costs to support the
growth in our existing business coupled with an increase in contracts due to
acquisitions. Gross margin was 29.5% of revenues for the nine months ended
September 30, 2000 compared to 22.5% for the nine months ended September 30,
1999. Gross margin for the nine months ended September 30, 2000 increased due to
higher margin contracts and a shift in the mix of services to higher margin
services.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include compensation and benefits, facilities expenses
and other expenses not related directly to projects. Selling, general and
administrative expenses, increased 381% from $1.5 million for the three months
ended September 30, 1999 to $7.4 million for the three months ended September
30, 2000. The increase was attributable to increased staffing costs to support
significant growth in our existing business along with increased costs
associated with our acquisitions. As a percentage of revenues, selling, general
and administrative expenses increased from 16.8% for the three months ended
September 30, 1999 to 19.8% for the three months ended September 30, 2000,
reflecting increased marketing and other costs in the quarter ended September
30, 2000.
Selling, general and administrative expenses, increased 252% from $5.2
million for the nine months ended September 30, 1999 to $18.2 million for the
nine months ended September 30, 2000. The increase was primarily attributable to
increased staffing costs to support significant growth in our existing business
along with increased costs associated with our acquisitions. As a percentage of
revenues, selling, general and administrative expenses decreased from 20.3% for
the nine months ended September 30, 1999 to 19.2% for the nine months ended
September 30, 2000, reflecting the lower costs associated with businesses
acquired in addition to savings in connection with the consolidation of our
existing business.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
include depreciation on our furniture, fixtures and equipment and amortization
of goodwill and other intangibles related to our acquisitions. Depreciation and
amortization expenses increased 133% from $452,000 for the three months ended
September 30, 1999 to $1.1 million for the three months ended September 30,
2000. The significant increase reflects the amortization of goodwill associated
with the acquisitions of TWR Telecom, Inc., McKenzie Telecommunications Group,
Inc., and Communication Consulting Services, Inc., along with the increase in
capitalized assets to support the growth of our business.
Depreciation and amortization expenses increased 131% from $1.3 million
for the nine months ended September 30, 1999 to $3.0 million for the nine months
ended September 30, 2000. The significant increase reflects the amortization of
goodwill associated with the acquisitions of TWR Telecom, Inc., McKenzie
Telecommunications Group, Inc., and Communication Consulting Services, Inc.,
along with the increase in capitalized assets to support the growth of our
business.
INTEREST EXPENSE. Interest expense is primarily related to interest on
notes payable to related parties and our banking facilities. We may enter into
future borrowings or issue notes related to future acquisitions, and we may
incur additional interest expense as a result. Interest expense increased 34%
from $623,000 for the three months ended September 30, 1999 to $836,000 for the
three months ended September 30, 2000. The higher expense in 2000 represents
increased use of our line of credit up to the time of our initial public
offering. As a percentage of revenues, interest expense fell from approximately
6.8% of revenues for the three months ended September 30, 1999 to approximately
2.2% of revenues for the three months ended September 30, 2000.
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Interest expense increased 94% from $1.7 million for the nine months
ended September 30, 1999 to $3.2 million for the nine months ended September 30,
2000. As a percentage of revenues, interest expense fell from approximately 6.6%
of revenues for the nine months ended September 30, 1999 to approximately 3.4%
of revenues for the nine months ended September 30, 2000. The increase in
absolute dollars is attributable to higher utilization of our bank line of
credit for acquisition purposes and working capital needs.
OTHER INCOME (EXPENSE). For the three months ended September 30, 2000,
other income was $68,000 as compared to $57,000 for the three months ended
September 30, 1999.
For the nine months ended September 30, 2000, other expenses were $13.6
million as compared to other income of $88,000 for the nine months ended
September 30, 1999. This expense for the nine months ended September 30, 2000,
was attributable to a one-time increase in the fair value of put warrants. The
put provision of the common stock put warrants expired upon completion of the
initial public offering.
INCOME TAX (BENEFIT) EXPENSE. Income tax benefit of $303,000 was
recorded for the three months ended September 30, 2000, compared to a benefit of
$1.6 million for the three months ended September 30, 1999, which was primarily
due to the elimination of a deferred income tax asset valuation allowance.
For the nine months ended September 30, 2000, the income tax expense
was $465,000, compared to an income tax benefit of $1.6 million for the nine
months ended September 30, 1999, which was primarily due to the elimination of a
deferred income tax asset valuation allowance.
EXTRAORDINARY ITEM. For the three months ended September 30, 2000, we
recorded an extraordinary loss of approximately $6.4 million, related to the
early extinguishment of indebtedness. Approximately $3.8 million of this
extraordinary loss represents the amount of the then unaccreted discount on our
senior subordinated notes that was expensed upon the early repayment of the
notes with proceeds from the initial public offering. The remaining $2.6 million
of this loss related to the write-off of the then remaining capitalized loan
costs relating to loans repaid. There were no extraordinary items for the three
months ended September 30, 1999.
For the nine months ended September 30, 2000, we recorded extraordinary
loss of approximately $6.4 million, related to the early extinguishment of
indebtedness. Approximately $3.8 million of this represents the amount of the
then unaccreted discount on our senior subordinated notes that was expensed upon
the early repayment of the notes with proceeds from the initial public offering.
The remaining $2.6 million of this loss related to the write-off of the then
remaining capitalized loan costs relating to loans repaid. There were no
extraordinary items for the nine months ended September 30, 1999.
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NET INCOME (LOSS). Net loss for the three months ended September 30,
2000 was $4.2 million, as compared to net income of $1.4 million for the three
months ended September 30, 1999. The net loss for the three months ended
September 30, 2000 is attributable in part to the extraordinary item discussed
above in "Extraordinary Item". The net income for the three months ended
September 30, 1999 is attributable in part to the elimination of a deferred
income tax asset valuation allowance.
Net loss for the nine months ended September 30, 2000 was $17.0
million, as compared to a net loss of $911,000 for the nine months ended
September 30, 1999. The increase in the net loss for the nine months ended
September 30, 2000 is attributable to the $13.7 million non-cash charge as
described above in "Other Income (Expense)" and the extraordinary item as
discussed above in "Extraordinary Item".
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had available cash of approximately $13.3
million. Since our inception, we have primarily financed our operations through
commercial bank borrowings, the issuance of subordinated notes, and the sale of
preferred and common stock. Cash provided by and used in operations is primarily
derived from our contracts in process and changes in working capital. Cash used
in operations was approximately $10.6 million for the nine months ended
September 30, 2000 and $3.6 million for the nine months ended September 30,
1999.
Cash used in investing activities was approximately $3.5 million for
the nine months ended September 30, 2000 and approximately $2.2 million for the
nine months ended September 30, 1999. Investing activities consist primarily of
acquisitions, as well as capital expenditures to support our growth.
Cash provided by financing activities for the nine months ended
September 30, 2000 was approximately $26.4 million. This consisted primarily of
$62.7 million received as net proceeds from issuance of common stock in the
initial public offering, $16.1 million borrowed under our revolving credit
agreement, offset by repayment of $31.3 million borrowed under our revolving
credit agreement, $13 million for repayment of our senior subordinated notes and
$7.9 million to redeem our Series D preferred stock. Cash provided by financing
activities for the nine months ended September 30, 1999 was $6.3 million
consisting primarily of $3.9 million borrowed under our revolving credit
agreement and $3 million from the sale of preferred stock.
In September 2000, we amended our syndicated credit agreement with
Wachovia Bank, N.A. as agent to increase the amount available under the facility
to $35 million and to convert the entire facility to a revolving credit
facility. The credit facility is due November 1, 2004, and bears interest based
on LIBOR plus a margin of up to 2.25%. The line of credit is secured by
substantially all of our business assets, is guaranteed by our subsidiaries and
is senior to approximately $4.5 million of subordinated indebtedness. Under the
terms of the credit agreement, we are required to provide the lenders with
periodic budgets, financial statements and public reports and filings, and we
must meet specified thresholds with respect to profitability and
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debt to net worth ratios. Additionally, the negative covenants in the credit
agreement limit our ability to sell our assets outside the ordinary course of
business, merge with or acquire other businesses or make capital expenditures
over a specified amount in any fiscal year. The covenants also prohibit us from
issuing dividends, creating liens or incurring additional indebtedness. As of
September 30, 2000, we had no borrowings under the credit facility.
We believe that our cash equivalent balances, funds available under our
existing line of credit, and net proceeds from our initial public offering will
be sufficient to satisfy our cash requirements for at least the next 12 months.
The estimates for the periods for which we expect the net proceeds from this
offering and our available cash balances and credit facilities to be sufficient
to meet our capital requirements are forward-looking statements that involve
risks and uncertainties as set forth under the caption "Risk Factors" in our
Registration Statement on Form S-1 (No. 333-36678). Our capital requirements
will depend on numerous factors, including commercial acceptance of new service
offerings, possible acquisitions of complementary businesses or technologies,
the resources we dedicate to new technologies and new markets and demand for our
suite of services.
We may need to raise additional capital if we expand more rapidly than
initially planned, to develop new technologies and/or services, to respond to
competitive pressures or to acquire complementary businesses or technologies. If
additional funds are raised through the issuance of equity or convertible debt
securities, the percentage ownership of our shareholders will be reduced, our
shareholders may experience additional dilution and such securities may have
rights, preferences or privileges senior to those of our shareholders. There can
be no assurance that additional financing will be available or on terms
favorable to us. If adequate funds are not available or are not available on
acceptable terms, our ability to fund our expansion, take advantage of
unanticipated opportunities, expand our suite of services or otherwise respond
to competitive pressures could be significantly limited. Our business may be
harmed by such limitations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from changes in interest rates that may
impact our financial position. In January 2000, we entered into an interest rate
swap agreement with our senior lender in accordance with our loan agreement. The
swap agreement allows the Company to swap interest rate payments from a floating
rate of LIBOR to a fixed interest payment of 7.25% on a notional principal of
$6.25 million. The swap agreement terminates on January 7, 2003. The net amount
paid or received will be recorded as an adjustment to interest expense over the
term of the agreement. The Company's accounting policies for this instrument are
based on the Company's designation of such instrument as a hedging transaction
against the Company's debt.
At September 30, 2000 we had notes payable to an affiliate of
approximately $3.6 million with interest payable at a rate equal to 9% per
annum, which rate shall be adjusted on July 31 and December 31 of each year the
Note remains outstanding to a rate equal to the most recently announced by
Citibank, N.A., in the Wall Street Journal as its prime rate of interest.
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Our revolving credit facility bears interest at LIBOR plus a margin of
up to 2.25%. Accordingly, changes in LIBOR, which is affected by changes in
interest rates in general, will affect the interest rate on our revolving credit
facility.
We temporarily invest our excess cash in money market funds. Changes in
interest rates would not significantly affect the fair value of these cash
investments.
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PART II. - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(A) None.
(B) None.
(C) SALES OF UNREGISTERED SECURITIES.
During the nine months ended September 30, 2000, and in connection with
our initial public offering, we issued 812,795 shares of our common stock to
certain of our employees and directors for aggregate consideration of
approximately $926,000 pursuant to exercises of options granted under our 1998
Stock Option Plan. Such issuances were made in reliance upon an exemption from
the registration provisions of the Securities Act of 1933, as amended (the
"Securities Act") set forth in Rule 701 of the Securities Act.
On August 15, 2000, each of Stratford Capital Partners, L.P. and
Stratford Equity Partners, L.P. (collectively, "Stratford") exercised its
warrants to purchase an aggregate of 3,953,150 shares of our common stock, of
which 259,493 shares were sold in connection with the exercise of the
underwriters' over-allotment option. Accordingly, we issued 1,920,025 and
1,772,380 shares of our common stock to Stratford Capital Partners, L.P. and
Stratford Equity Partners, L.P., respectively. As the warrants were exercised on
a cashless basis (resulting in the cancellation of 1,252 shares), no
consideration was received by the Company in connection with this issuance.
On September 11, 2000, American Capital Strategies, Ltd. ("ACS")
exercised a portion of its warrant in connection with the exercise of the
underwriters' over-allotment option. Accordingly, we issued 179,614 shares to
ACS, all of which were sold in connection with the exercise of the underwriters'
over-allotment option and issued a new warrant (for the remaining balance) to
ACS to purchase 2,557,175 shares of our common stock at a price of $.0038 per
share. As the ACS warrant was exercised on a cashless basis (resulting in the
cancellation of 32 shares), no consideration was received by the Company in
connection with such issuance.
On September 11, 2000, we issued 133,768 shares of our common stock to
DFW Capital Partners, L.P. ("DFW"), pursuant to the exercise of its warrants,
all of which were sold in connection with the exercise of the underwriters'
over-allotment option. The warrants were exercised at an exercise price of
$.0038 per share, for total consideration received by the company of
approximately $500. In addition, on August 23, 2000, we issued 66,865 shares to
DFW pursuant to the exercise of another warrant held by DFW. As this warrant was
exercised on a cashless basis (resulting in the cancellation of 19 shares), no
consideration was received by the Company in connection with this issuance.
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The issuances of securities described above in the preceding three
paragraphs were made in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, as transactions by an
issuer not involving a public offering. All of the securities were acquired by
the recipients thereof for investment and with no view toward the resale or
distribution thereof. Each of the purchasers had a pre-existing relationship
with the Company or its founders, the offers and sales were made without any
public solicitation, and the stock certificates bear restrictive legends. No
underwriter was involved in any of the transactions and no commissions were
paid.
(D) USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES.
On August 21, 2000, the Company completed an initial public offering of
its Common Stock, $.0001 par value per share (the "Offering"). The managing
underwriters in the Offering were Chase Securities Inc., Credit Suisse First
Boston and Thomas Weisel Partners, LLC (the "Underwriters"). The shares of
Common Stock sold in the Offering and pursuant to the exercise of the
Underwriters' over-allotment option (an aggregate of 7,015,000 shares) were
registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (the "Registration Statement," registration number
333-36678). The Registration Statement was declared effective by the Securities
and Exchange Commission on August 15, 2000.
On August 16, 2000, the Company commenced the Offering. The Offering
closed on August 21, 2000 after the Company and certain selling shareholders had
sold 6,100,000 shares of Common Stock registered under the Registration
Statement. On September 11, 2000, the Underwriters exercised their
over-allotment option to purchase an additional 915,000 shares of Common Stock
from certain other selling shareholders. Of the total amount of 7,015,000 shares
sold in the Offering and pursuant to the exercise of the Underwriters'
over-allotment option, (i) 5,798,623 shares were sold by the Company (the
"Company Shares") and (ii) 1,216,377 shares were sold by selling shareholders
(the "Secondary Shares"). With respect to the Company Shares, the shares were
sold at a price to the public of $12.00 per share for an aggregate offering
price of $69,583,476. With respect to the Secondary Shares, the shares were sold
at a price to the public of $12.00 per share for an aggregate offering price of
$14,596,524. Details regarding the amount of Secondary Shares sold by each of
the selling shareholders can be found in the Company's final prospectus as filed
with the Securities and Exchange Commission on August 16, 2000.
From the effective date of the Registration Statement to August 21,
2000, the Company paid an aggregate of approximately $4,871,000 in underwriting
discounts and commissions. We estimate that our fees and expenses in connection
with the offering (other than underwriting discounts and commissions) were
approximately $2 million. None of the expenses shown were paid directly or
indirectly to any director, officer, general partner of the Company or their
associates, persons owning ten percent or more of any class of equity securities
of the Company, or an affiliate of the Company.
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After deducting underwriting discounts and commissions and the Offering
expenses described above, net proceeds to the Company from the Offering were
approximately $62.7 million. Of this amount, the Company used (i) $31 million to
repay indebtedness on its credit facility with Wachovia, N.A., (ii) $13 million
to redeem its senior subordinated notes held by American Capital Strategies,
Ltd., which beneficially owned greater than ten percent of our common stock upon
completion of the offering, and (iii) $7.9 million to redeem all of the shares
of Series D Preferred Stock held by Stratford, a beneficial owner of greater
than ten percent of our Common Stock. The remaining offering proceeds will be
used by the Company for general corporate purposes. Pending these uses, we will
invest the net proceeds of the offering in short-term and investment grade
securities. In addition, we may use a portion of the net proceeds to acquire
other businesses. Except as described above, none of the net proceeds of the
Offering were paid directly or indirectly to any director, officer, general
partner of the Company or their associates, persons owning ten percent or more
of any class of equity securities of the Company, or an affiliate of the
Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In lieu of a special meeting of the shareholders of the Company, on
August 11, 2000, the shareholders of the Company adopted by written consent the
Second Amended and Restated Articles of Incorporation of the Company which,
among others things, created a classified Board of Directors whereby each class
of directors will serve for a term of three years and eliminated the ability of
our shareholders to act by written consent. The affirmative vote of 13,406,148
shares, representing a majority of the shares outstanding and entitled to vote
on the matter, was received by written consent. The form of the Second Amended
and Restated Articles of Incorporation is filed as Exhibit 3.2 to the
Registration Statement on Form S-1 (No. 333-36678).
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.3.1 - Amended and Restated Credit Agreement
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K. No report on Form 8-K was filed during
the quarter ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
O2WIRELESS SOLUTIONS, INC.
Date: November 13, 2000 By: /s/ Stephen F. Johnston, Sr.
--------------------------------------------
Stephen F. Johnston, Sr.
Chairman and Chief Executive Officer
(principal executive officer)
Date: November 13, 2000 By: /s/ William J. Loughman
--------------------------------------------
William J. Loughman
Executive Vice President, Chief Financial
Officer, Secretary and Treasurer
(principal financial and accounting officer)
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EXHIBIT INDEX
4.3.1 - Amended and Restated Credit Agreement
27. - Financial Data Schedule (for SEC use only)
21
