**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**Form 10-K**

 

| **ý** | **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934** |
|------------|-----------------------------------------------------------------------------------------|

 

**Forthe fiscal year ended December 31, 2001**

 

**or**

 

| **o** | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------|

 

**For thetransition period from                  to                  **

 

**CommissionFile Number 0-27024**

 

**METRO ONE TELECOMMUNICATIONS, INC.**

(Exact name of registrantas specified in its charter)

 

| **Oregon**                                                                                                                              |   | **93-0995165**                        |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization)                                                                         |   | (I.R.S. Employer  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) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  YES   ý    NO    o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  o

 

The aggregate market value of registrant’s commonstock held by non-affiliates, based on the closing price of the common stock asreported by the Nasdaq stock market on March 21, 2002, was $648,762,865.

 

The number of shares outstanding of the registrant’scommon stock, as of March 21, 2002, was 24,509,364.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of the registrant’s Proxy Statement for its2002 Annual Meeting, to be filed with the Securities and Exchange Commissionwithin 120 days of the registrant’s fiscal year end, are incorporated byreference into Part III of this Report.

 

 

**METRO ONE TELECOMMUNICATIONS, INC.**

**2001 FORM 10-K ANNUAL REPORT**

**TABLE OF CONTENTS**

 
| **PART I**   |
|--------------|
|         |   |
| Item 1       | Business |
|         |   |
| Item 2       | Properties |
|         |   |
| Item 3       | Legal Proceedings |
|         |   |
| Item  4      | Submission  of Matters to a Vote of Security Holders |
|         |   |
| **PART II**  |
|         |   |
| Item  5      | Market  for Registrant’s Common Equity and Related Stockholder Matters |
|         |   |
| Item 6       | Selected Financial  Data |
|         |   |
| Item  7      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|         |   |
| Item  7A     | Quantitative  and Qualitative Disclosures about Market Risk |
|         |   |
| Item  8      | Financial  Statements and Supplementary Data |
|         |   |
| Item  9      | Changes  In and Disagreements With Accountants on Accounting and Financial Disclosure |
|         |   |
| **PART III** |
|         |   |
| Item  10     | Directors  and Executive Officers of the Registrant |
|         |   |
| Item 11      | Executive Compensation |
|         |   |
| Item  12     | Security  Ownership of Certain Beneficial Owners and Management |
|         |   |
| Item  13     | Certain  Relationships and Related Transactions |
|         |   |
| **PART IV**  |
|         |   |
| Item  14     | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K |
|         |   |
|         | Signatures |

 

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*In this annual report on Form 10-K,“Metro One” and the terms “Company,” “we,” “us” and “our” refer to Metro OneTelecommunications, Inc.*

 

**PART I**

 

**ITEM 1.                  BUSINESS.**

 

Metro One is a leading developer and provider of Enhanced DirectoryAssistance® and information services for the telecommunications industry.  We primarily contract with wireless carriersto provide our services to their subscribers. In 1989, we opened our first call center and began testing and offeringour enhanced directory assistance and information services.  In 1991, we entered into our first contractwith a wireless carrier to provide our services to that carrier’s subscriberson a charge per call basis.  Ourcustomers include many of the leading wireless telecommunications carriers suchas Sprint PCS, AT&T Wireless Services, Nextel Communications, CingularWireless and ALLTEL Communications.  Inaddition, we have expanded into the landline telecommunications market andprovide our services to regional competitive local exchange carriers.

 

**Telecommunications Industry**

 

The U.S. telecommunications industry is generally characterized bystrong growth and increased competition due to new technologies, a more favorableregulatory environment and, for carriers, an increasingly sophisticated anddemanding subscriber. Telecommunications carriers face increasing competitive pressures todifferentiate their products and establish brand loyalty.  With rising costs to acquire newsubscribers, carriers are seeking ways to minimize subscriber turnover throughthe use of, among other things, value-added services and features.  In addition, carriers are increasinglyoffering local, long distance, wireless, cable and Internet services bundledinto one package in order to appeal to a wider market.  Competitive pressures are particularly acutefor wireless and newer landline carriers, such as competitive local exchangecarriers.  The industry has alsoexperienced a considerable amount of consolidation and investment in newtechnologies and alternative methods of delivery, including cable and theInternet.

 

*Wireless Telecommunications.* The U.S. wireless telecommunications market has experienced dramaticgrowth over the last decade.  Thisgrowth has been largely due to technological advances that give callersaffordable, high-quality mobile services. According to industry analysts, the number of wireless subscribers inthe United States approached 130 million at the end of 2001, and expertsestimate that by 2005, there will be over 200 million wireless phone users inthe United States.  A relatively smallnumber 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, CingularWireless and Verizon Wireless.  Othernationwide carriers include Sprint PCS, VoiceStream and Nextel Communications.

 

In most of the major U.S. markets, at least five carriers compete forwireless subscribers.  As a result,carriers are seeking to differentiate themselves from their competitors.  While price continues to be an importantcompetitive factor, carriers increasingly focus on value-added services andfeatures as a means of differentiating themselves.

 

*LandlineTelecommunications.*  The U.S. landline telecommunications marketis significantly larger than the U.S. wireless market.  For example, in 1999, domestic landlineservices generated approximately $221 billion in revenues as compared toapproximately $48 billion in revenues generated by wireless services, accordingto the Federal Communications Commission. Like the wireless market, the landline market is dominated by arelatively small number of major carriers. Carriers providing local service include the regional Bell operatingcompanies, such as SBC Communications, independent telephone companies, such asALLTEL Communications, and competitive local exchange carriers, such as TimeWarner and Integra Telecom.  Carriersproviding long distance service include AT&T, MCI WorldCom and Sprint Corp.

 

Local and long distance carriers competing in each other’s markets, aswell as against newer and smaller independent carriers, have added tocompetition in the landline market. With deregulation, the entry of new landline competitors and theincreasing affordability of wireless services, subscribers who werehistorically bound to local carriers as a matter of geography are nowincreasingly able to choose their carriers. This includes the opportunity to select a competitive local exchangecarrier.  These companies compete withincumbent local carriers to provide a variety of services, including local,long distance and Internet and other data services.  As a result, the landline telecommunications market is rapidlybecoming subscriber-based and carriers must find ways to differentiate theirservices to attract and retain subscribers. In addition, to maintain operational focus, competitive local exchangecarriers often outsource non-core operations, including directory assistanceservices.  While many incumbent carriersprovide directory assistance services on an outsourced basis, the competitivelocal exchange carriers may prefer to outsource their directory assistanceneeds to independent companies rather than use the services of theircompetitors.

 

3

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*InternationalTelecommunications.*  The international telecommunications marketis characterized by increasing privatization, competition and, in the wirelessmarket, rapid growth.  As governmentsprivatize their national telecommunications companies, these companies faceincreased competition from large international carriers who have access to andinterest in the newly opened markets.

 

**Directory Assistance Market**

 

Revenues generated by the wireless directory assistance market in theUnited States are estimated to grow significantly through 2003, according tovarious industry sources, and among which individual estimates vary widely.  Wireless subscribers tend to be heavy usersof directory assistance services. According to Frost & Sullivan, growth in the wireless directoryassistance market is driven by a number of factors, including growth in thewireless subscriber base, rising wireless penetration, increasing subscribermobility and the offering of enhanced directory assistance services by wirelesscarriers.

 

The landline directory assistance market is significantly larger thanthe wireless directory assistance market. Revenue generated by the landline directory assistance market isestimated to grow to $4.3 billion in 2003, according to Frost &Sullivan.  Growth in the landlinedirectory services market is driven by a number of factors, including thegrowing information needs of subscribers and the offering by landline carriersof call completion services.

 

**Our Business Strategy**

 

Metro One’s business strategy includes the following key elements:

 

•      *Build on ourcurrent carrier relationships, while seeking new domestic and internationalcustomers, including landline carriers and other corporate customers*

 

We are continuing to expand our relationships with ourexisting carrier customers.  We believethat our services can increase carriers’ revenues by minimizing subscriberturnover, increasing the number of calls made and, in the case of wireless andlong distance carriers, increasing billable airtime.  Further, our national call center network, integrated searchengines and database systems allow carriers operating in multiple markets tooffer consistent enhanced directory assistance and other information serviceson a nationwide basis.  This consistencypermits greater system-wide marketing opportunities and brand identificationfor these carriers.  We believe that ourexisting relationships and the quality of our services will allow us to expandour business with our existing customers, providing us an opportunity todeliver our services to them and their affiliates in additional markets,including international markets.

 

We are also aggressively pursuing businessopportunities with additional wireless and landline carriers with a view toleveraging our reputation for high quality service and our nationwide callcenter network.  We believe increasingcompetition among landline carriers is leading to an increasinglysubscriber-based business, which will result in the need to differentiate theirproduct offerings.  Our services providean opportunity to do so and, accordingly, could help us expand into the significantlylarger landline directory assistance market.

 

The information content that resides in our databasesystems, along with our ability to store, maintain, manipulate and deliver it,provides an opportunity to pursue other business customers and provide themwith our services over private networks or otherwise.

 

•      *Develop andoffer additional value-added services and features*

 

We believe we are well positioned to continuedeveloping and providing the types of services and features that enhance theutility of the telephone and other communications devices.  For example, our MetroDex® service isdesigned to provide individual callers and corporate users with the ability toquickly and efficiently access their personal or corporate contact databases,including otherwise unpublished numbers, and potentially take advantage ofadditional services such as accessing a “personal assistant” over thetelephone.  Such innovative featureswill permit our customers to distinguish themselves further from theircompetitors and increase their subscriber satisfaction.

 

•      *Expand ournational call center network and its capabilities, while adding greaterbandwidth, storage capacity, speed and efficiency to our systems*

 

We intend to continue to expand our network capacityand efficiency, including adding to our call routing flexibility, redundancyand signaling systems.  We may alsobuild additional call centers as required by demand and customercommitments.  In addition, we intend toadd to our storage capacity both for purposes of database backup and fordelivery of personal database, concierge and other personalized andfulfillment-oriented services.  We maybuild or license specialty call centers to deliver special products such ascustomer service and fulfillment assistance, as well as international callcenters, should attractive opportunities arise.

 

4

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•      *Enhance thequantity and quality of our current content databases*

 

We intend to continue to improve the breadth and depthof the information content within our database systems.  We intend to seek additional content to makeour directory listings and other data more useful and to enhance our ability toprovide other services.  Additions tothis content may be virtual, through the Internet or other links that allow usto license or barter content.  Some ofthis information will be deliverable to subscribers through portals other thanthe voice telephony portal, such as those available on the Internet.

 

•      *Leverage ourvoice telephony portal by delivering greater volumes of existing and newservices through our call center network as well as through other portals*

 

Our strength has been to provide enhanced servicesthrough the voice telephony portal we have created.  We are seeking opportunities to provide access to some of thecontent we acquire, develop and maintain, as well as our applications andrelated features, to other portals, including those available through theInternet.  We believe that telephonecarriers and other customers could use our content, applications and featuresto provide high quality services that are consistent across various portals andgeographic areas.  In so doing, thesecustomers, particularly the telephone carriers, could further bind theirsubscribers to them as competition in their markets becomes increasinglysubscriber-based.

 

**Customers**

 

Metro One provides enhanced directory assistance and informationservices to several of the nation’s leading wireless carriers in all or aportion of their service areas.  Ourcustomers include Sprint PCS, AT&T Wireless Services, NextelCommunications, Cingular Wireless (formerly Pacific Bell Wireless), and ALLTELCommunications.  In addition, we haveexpanded into the landline telecommunications market and provide our servicesto competitive local exchange carriers. Customers that accounted for more than 10% of our revenues during any ofthe periods indicated are as follows:

 
| **Customer**                                        |   | **2001** |   | **2000** |   | **1999** |   |
|-----------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Sprint PCS                                          |   | 32       | %      | 31       | %      | 40       | %      |
| AT&T  Wireless Services                         |   | 30       |   | 29       |   | 30       |   |
| Nextel  Communications                              |   | 23       |   | 21       |   | 5        |   |
| Cingular  Wireless (formerly Pacific Bell Wireless) |   | 7        |   | 7        |   | 11       |   |
| Verizon Wireless                                    |   | 3        |   | 6        |   | 11       |   |

 

We offer our services to a carrier’s subscribers under a brand nameselected by the carrier, such as “AT&T Connect” or “Sprint PCS DirectoryAssistance.”  The carrier establishesits own fee structure with its subscribers. Subscribers typically pay the carrier's fees ranging from $0.75 to $1.40plus airtime charges for our services. Metro One charges carriers directly and bears no subscriber collectionrisk.  We charge our carriers on a percall basis.  To stimulate increased callvolume and to attract and expand customer commitments, we offer volume pricingdiscounts to our customers. Our success with this program resulted insignificant call volume increases in 2001, 2000 and 1999 which, in turn, causedvolume-based pricing in our existing contracts to become a factor indetermining our average revenue per call.

 

We have service contracts with 13 carriers, which include servicesprovided to various affiliates of AT&T Wireless Services and SprintPCS.  The terms of these contracts aregenerally similar, with variations in the geographic market to be served, theservices 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 othercarriers.  The carriers agree to routesome or all of their directory assistance and/or alphanumeric messaging callsto us.

 

**Call Center Network**

 

We operate 30 call centers located in strategic local marketsthroughout the United States, and expect to add at least one additional newcall center by the end of 2002.  Ourcall center network enables us to provide enhanced directory assistance andinformation services nationwide.  We aresituated in or near major metropolitan areas and therefore are located locallyfor more than one-half of the U.S. population. We believe that the local nature of our call centers and operatorspermits us to offer more accurate and valuable service than would be availablethrough a single or a few call centers attempting to serve the entire U.S.market.  We operate our call centers 24hours a day, seven days a week, 365 days a year.

 

5

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We continually upgrade our network and systems to allow greaterutility, speed and efficiency in processing calls.  We are also continually expanding capacity to store, manipulateand 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 switchesso that they can handle large volumes of calls in tandem.  These systems are monitored from our networkoperations center located at our corporate headquarters, which provides 24-hoursupport for our call center network. Our systems are designed to permit redundancy and avoid downtime fromnatural disasters or other adverse events.

 

Because a carrier offers our services to its subscribers under itsbrand name, we believe quality and reliability are important considerations ina carrier’s decision to use our services. To ensure high quality and consistency, we emphasize training,monitoring and customer support.  Wemaintain a national training force with training personnel in each callcenter.  Our operators undergo extensivetraining and testing on search techniques, etiquette and local information,including landmarks, major thoroughfares and geography.  We continually monitor, test and evaluatecall center performance.  We alsomonitor our call centers for compliance with contract performance standards andreport this information to the carriers on a regular basis.  In addition to accessing our systemsmaintenance and support personnel, carriers can obtain extensive customer usageinformation.

 

**Our Services and Features**

 

We use a customized array of hardware and software, along withproprietary database search engines, to provide our enhanced directoryassistance and information services.  Wereceive 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 theappropriate carrier’s brand name.  Uponreceiving information requests from callers, operators search applicabledatabases using one or more of our search engines.  The operator then connects the caller to the called party orsupplies the caller with the requested information.  We offer a variety of information and services, including thefollowing:

 

•      Directorylistings information, which may be retrieved by methods that include reverseand category searches;

 

•      Time,weather and traffic information;

 

•      Movieand restaurant information;

 

•      TeleConcierge®services;

 

•      Localevents and venue information; and

 

•      Turn-by-turndriving instructions.

 

Our enhanced directory assistance and information services alsoincorporate connectivity features that make the telephone more useful andeasier to use.  These connectivityfeatures include the following:

 

•      Callcompletion — allows a caller to be directly connected to the number requestedwithout the need to redial;

 

•      StarBack® —allows the caller to return to a live operator simply by pressing a key, suchas the star [*] key or by otherwise issuing a command at any time during acall;

 

•      AutoBack® —automatically returns the caller to a live operator or other options upon abusy signal, “ring-no-answer” or other common situations without pressing asingle key;

 

•      MessageBack®— delivers a caller’s message to a desired party and, when configured withAutoBack, provides a convenient tool for ensuring communication;

 

•      NumberBack®— sends the caller the called number simply by pressing the number [#] key; and

 

•      QuickSend®  — a short messaging service that allows ouroperators to send customized alphanumeric messages on behalf of a caller.

 

We are developing, testing and improving new services that add newcontent and connectivity features, such as MetroDex, which allows callers touse their telephone or the Internet to access their personal or corporatecontact databases, and “PersonalProfiler”, which allows subscribers tocustomize how our services are delivered to them as well as allowing them tohave access to “personal assistant” types of services.  Other features under development includeon-line research and verification utilities for use by businesses with a directprivate connection to us.  Equipment atour corporate headquarters facilitates this development and testing by simulatingnormal call center operations.

 

**Database Systems and Content**

 

We believe the quality of our services is, in large measure, related tothe scope, quality and quantity of the information content that resides in ourdatabase systems.  The majority of theinformation that we acquire, develop and maintain is telephone listingsdata.  We obtain these listings datafrom multiple sources, including the regional Bell operating companies,independent telephone companies and other commercial sources, to ensure highquality and accuracy.  These data areenhanced by our direct data collection efforts and a principal database oflocal information is developed for each call center or region.

 

6

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Our proprietary operator interface software allows operators toefficiently search and reverse-search both their local databases and othernational databases.  We use proprietarydatabase management systems to maintain and update our directory listings.  We continually acquire additional content oraccess to content that will, in many cases, build on these listings data tomake them more useful.  Acquisitions aremade from a variety of sources and are supplemented with information relatingto local events and amenities.

 

In February 2001, we completed the purchase of a developer of web-baseddata extraction and processing technology. This group builds application-specific databases for a variety ofportals, be they wired or wireless, voice or data.  Our proprietary data extraction and processing technology enablesthe creation and ongoing maintenance of high quality databases from distributedand fragmented data on the web and elsewhere. We believe that these capabilities will contribute to the expansion ofour services and data offerings to our wireless and other customers.

 

**Marketing**

 

We market directly to telecommunications carriers.  The marketing process involves aconsiderable amount of time and attention by our senior management.  Call center managers also play a key role inmaintaining and developing carrier relationships.  Some of our contracts provide for customer promotion of theservices we provide to their subscribers. In addition, we occasionally assist our carrier customers in thepromotion of these services.

 

We communicate on a regular basis with our existing carrier customersthrough our quality assurance and customer service programs.  We have developed proprietary programs thatallow us and our customers to monitor the quality of our performance and thevolume and duration of directory assistance and information requests on areal-time basis.  These programs alsogive us an opportunity to learn more about our carriers’ evolving needs.

 

**Technology**

 

Our ability to provide enhanced directory assistance and informationservices is dependent to a great extent on our proprietary technology.  Our proprietary software applicationsenhance our call handling and delivery capabilities and provide the basis forour connectivity features.  We havedeveloped search engines to quickly access information from our databases.  We continue to upgrade our operatorinterface software, database management systems and search engines to increasethe efficiency and broaden the search capability of our operators.

 

Our call processing systems incorporate programmable switchingequipment, host computers, voice response units and database servers.  Our advanced technology is based oncustomized software running Sun Microsystems and Dell servers and Lucentswitching equipment.  One of the characteristicsof our call processing systems is the ability to take all calls from acarrier’s switch and have them run through our switch for the entire length ofthe call so that we are able to provide a full range of our services to thecaller.

 

We are also monitoring technological advances in the methods ofdelivery of information and data and are working to insure that our systems arecompatible 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 theInternet.  Opportunities that this maypresent include using the content we have available to us in this format.  We believe that by expanding reliance on thetelephone as a source of information, the application of this technology willalso benefit our enhanced directory and information services business.

 

**Intellectual Property**

 

We rely on a combination of trademark, patent and trade secrets lawsand confidentiality procedures to protect our intellectual propertyrights.  We have nine U.S. patentsissued, including three relating to our StarBack technology and anotherassociated with our turn-by-turn directions service.  We have approximately 31 applications pending for additional U.S.patents and ten applications pending for foreign patents.  We also have U.S. and foreign registeredtrademarks for, among others, “Metro One Telecommunications,” “Metro One,”“Enhanced Directory Assistance,” “StarBack,” “TeleConcierge,”“LocationPro,”  “AutoBack,” “MetroDex”and “NumberBack,” and applications pending for U.S. trademark registrationsfor, among others, “InfoPro” and “PersonalProfiler.”

 

**Competition**

 

The directory assistance and information services markets arecharacterized by rapidly changing market forces, technological advancements andincreasing competition from large carrier-affiliated companies and small,independent companies.  Our principalcompetitors include regional Bell operating companies and other independentproviders.  Telephone carriers providedirectory assistance or information services both in and outside their ownoperating regions.  Although we believethat none of these competitors offers a form of directory assistance thatincorporates all of our features, they may have substantially greaterfinancial, technical and marketing resources than us and may be able to offerfeatures similar to ours in the future. We also face competition from independent companies seeking to offerforms of directory assistance and, in some cases, other information services.

 

7

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We believe the principal competitive factors in the directoryassistance market are quality and range of features, technological innovation,experience, responsiveness to customers and price.  Historically, we have sought to distinguish ourselves from ourcompetitors based on the quality of our services, the development of usefulfeatures, the breadth of the content provided and our extensive nationalnetwork of call centers.

 

**Government Regulation**

 

While our principal business is not directly regulated, it is dependentupon relationships with companies that are regulated by the FederalCommunications Commission and state public utility commissions.  This regulation applies to allcommunications common carriers, such as AT&T, the regional Bell operatingcompanies and other long distance and local exchange carriers.

 

**Employees**

 

As of December 31, 2001, Metro One had approximately 6,500 employees,including approximately 28% who were employed on a part-time basis.  Most of our employees are operators, and thenumber of full-time and part-time operators varies from time to time reflectingfluctuations in the volume of calls. None of our employees are subject to a collective bargainingagreement.  Our management considersrelations with our employees to be good.

 

We invest significant resources in the recruitment, training andretention of qualified operators.  Ourorganizational structure provides opportunities and encourages talentedindividuals to take on roles of increasing responsibility.  We also invest considerable resources inpersonnel motivation, including providing incentive plans for our operators,management and corporate staff.

 

**ITEM 2.                  PROPERTIES.**

 

We lease our principal executive and administrative offices, consistingprincipally of two adjacent locations totaling approximately 57,000 square feetof space, in Beaverton, Oregon.  Theterms of the leases extend through 2009.

 

We also lease office facilities for our call center operations, whichgenerally range in size from 5,000 to 30,000 square feet.  We have 34 leases for call centers and otherremote facilities, with remaining terms of up to seven years.  We believe that expansion of our call centernetwork may require us to lease additional office facilities within the nextyear.  From time to time, we arerequired to move our call centers or lease additional space to meet expandingvolume from existing or new customers.

 

**ITEM3.                  LEGAL PROCEEDINGS.**

 

In August 1999, we commenced an action against a competitor in theUnited States District Court in Delaware claiming infringement of one of ourpatents relating to our StarBack feature. The defendant denied that it infringed the patent and asserted, amongother things, that our patent was invalid and unenforceable.  In February 2000 the competitor and anotherplaintiff counter-sued us in the United States District Court, Eastern Districtof Texas.  During 2001, our suit and thecounter-suit were settled.  While termsof the settlement agreement are confidential, court orders were issued barringthe competitor from offering the StarBack-like feature.  In conjunction with the settlement, our suitand the counter-suit were dismissed with prejudice.

 

We are not aware of any other pending legal proceedings other thanroutine litigation that is incidental to the business.

 

**ITEM4.                  SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS.**

 

No matters were submitted during the quarter ended December 31, 2001 toa vote of security holders.

 

8

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**PART II**

 

**ITEM5.                  MARKET FORREGISTRANT’S COMMON EQUITY AND RELATED**

**                                STOCKHOLDERMATTERS.**

 

Metro One’s common stock trades on the NASDAQ National Market under thesymbol “MTON.”  The high and low closingsales prices as reported on the Nasdaq National Market for each quarterlyperiod within the two most recent fiscal years were as follows:

 
| **2001**                          |   | **High** |   | **Low** |   |
|-----------------------------------|--------|----------|--------|---------|--------|
| Quarter ended  December 31, 2001  |   | $        | 39.30  |    | $      | 22.20 |   |
| Quarter ended  September 30, 2001 |   | 45.75    |   | 21.50   |   |
| Quarter ended  June 30, 2001      |   | 44.27    |   | 17.38   |   |
| Quarter ended  March 31, 2001     |   | 23.67    |   | 13.67   |   |
|                                   |        |          |        |         |        |  |  |

 
| **2000**                          |   | **High** | ** ** | **Low** | ** ** |
|-----------------------------------|--------|----------|------------|---------|------------|
| Quarter ended  December 31, 2000  |   | $        | 16.67      |    | $          | 8.29 |   |
| Quarter ended  September 30, 2000 |   | 9.92     |       | 6.50    |       |
| Quarter ended  June 30, 2000      |   | 8.58     |       | 6.00    |       |
| Quarter ended  March 31, 2000     |   | 10.92    |       | 7.38    |       |
|                                   |        |          |            |         |            |  |  |

 

On May 16, 2001, the Board of Directors approved a three-for-two stocksplit in the form of a 50% stock dividend, distributing approximately 8,100,000shares on June 29, 2001.  All share andper share data presented in the table above and elsewhere in this report havebeen adjusted to give effect to the stock split.

 

The approximate number of shareholders of record as of March 21, 2002was 150.  We believe we haveapproximately 11,000 shareholders including an estimate of shareholders withshares held in street name.  On March21, 2002, the closing price of our common stock, as reported on the NasdaqNational Market, was $26.47 per share.

 

We have never declared or paid cash dividends on our common stock.  We intend to retain earnings from operationsfor use in the operation and expansion of our business and do not anticipatepaying cash dividends with respect to our common stock in the foreseeablefuture.

 

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**ITEM6.                  SELECTED FINANCIALDATA.**

 

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, 2001 have beenderived from our audited financial statements. The financial data should be read in conjunction with the FinancialStatements and related Notes that appear elsewhere in this Annual Report andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations set forth in Item 7.

 
|                                 |   | **Years  Ended December 31,** |    |
|--------------------------------------|--------|-------------------------------|---------|
|                                 |   | **2001**                      |    | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                 |   |                          |    | **(In  thousands, except per share amounts)** |   |   |   |
| Operations data:                     |   |                          |    |   |   |   |   |   |   |   |   |
| Revenues                             |   | $                             | 233,318 |   | $ | 156,981 |   | $ | 77,831 |   | $ | 45,139 |   | $ | 26,090 |   |
| Direct operating  expenses           |   | 131,851                       |    | 97,438 |   | 46,494 |   | 23,107 |   | 13,017 |   |
| General and  administrative expenses |   | 65,246                        |    | 45,892 |   | 28,711 |   | 18,334 |   | 11,702 |   |
| Income from  operations              |   | 36,221                        |    | 13,651 |   | 2,626 |   | 3,698 |   | 1,371 |   |
| Net income                           |   | 28,422                        |    | 9,742 |   | 1,906 |   | 3,603 |   | 1,432 |   |
|                                 |   |                          |    |   |   |   |   |   |   |   |   |
| Basic income per  share              |   | 1.20                          |    | .56 |   | .11 |   | .22 |   | .09 |   |
| Diluted income  per share            |   | 1.15                          |    | .54 |   | .11 |   | .21 |   | .09 |   |
| Cash flow from  operations           |   | 49,862                        |    | 5,350 |   | 3,326 |   | 6,546 |   | 3,293 |   |
|                                 |   |                          |    |   |   |   |   |   |   |   |   |
| Balance sheet  data (1):             |   |                          |    |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents           |   | $                             | 54,592  |   | $ | 6,463 |   | $ | 9,564 |   | $ | 7,570 |   | $ | 8,554 |   |
| Working capital                      |   | 73,747                        |    | 17,066 |   | 11,750 |   | 8,414 |   | 9,844 |   |
| Total assets                         |   | 169,759                       |    | 106,641 |   | 65,475 |   | 36,311 |   | 29,125 |   |
| Long-term  obligations               |   | 3,844                         |    | 29,074 |   | 18,940 |   | 719 |   | 1,416 |   |
| Shareholders’  equity           |   | 147,369                       |    | 45,404 |   | 31,979 |   | 28,242 |   | 23,676 |   |

----

| (1) |   | In February 2001, we completed a transaction with  Sonera Media Holding B. V. (“Sonera”), a wholly owned subsidiary of Sonera  Corporation of Helsinki, Finland, whereby Sonera purchased six million  newly-issued shares of our common stock at a price of $11.33 per share, for  an aggregate price of $64.6 million and an approximate 25.5% ownership  position at that time.  Sonera  develops and provides mobile value-added services.  A portion of the proceeds from this transaction was used to pay  off all outstanding debt. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

**ITEM7.                  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL**

**                                CONDITIONAND RESULTS OF OPERATIONS.**

 

All statements and trend analyses contained in this item and elsewherein this report on Form 10-K relative to the future constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  These forward-lookingstatements are subject to the business and economic risks faced by us, and ouractual results of operations may differ materially from those contained in theforward looking statements.  For adiscussion of such risks, see “Issues and Uncertainties.”  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datehereof.  We undertake no obligation topublicly release any revisions to these forward-looking statements to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events.

 

Results of operations for the periods discussed below should not beconsidered indicative of the results to be expected in any future period andfluctuations in operating results may also result in fluctuations in the marketprice of our common stock.  Ourquarterly and annual operating results have in the past and may in the futurevary significantly depending on factors such as changes in thetelecommunications 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 introductionof new versions of our products or features, the timing of the initiation ofwireless services or their acceptance in new market areas by telecommunicationscustomers, the timing and expense of the expansion of our national call centernetwork, the general employment environment, general economic conditions andthe other factors discussed under the heading “Issues and Uncertainties” inthis Item 7.

 

**Overview**

 

We are a leading developer and provider of enhanced directoryassistance and information services for the telecommunications industry.  We primarily contract with wireless carriersto provide these services to their subscribers.

 

Under our contracts, the carriers agree to route some or all of theirdirectory assistance and/or alphanumeric messaging calls to us.  We also offer our services to multiplecarriers within the same market.  When acarrier’s subscribers dial a typical directory assistance number, such as“411,” “555-1212” or “00,” the calls are answered by our operators identifyingthe service by that carrier’s brand name, such as “AT&T Connect,” or“Sprint PCS Directory Assistance.”

 

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Each carrier establishes its own directory assistance fee structure forits subscribers.  Wireless subscriberstypically pay fees ranging from $0.75 to $1.40 plus airtime charges for ourservices.  We bear no subscribercollection risk.

 

We charge our carriers directly on a per call basis, with pricesvarying in some cases based on call volume. In order to encourage our customers to route more of their calls to us,our long-term strategy has been based in part on reducing the price we chargeour customers.  Our average revenue percall decreased in 2001 as call volume increased.  We expect a decrease in average revenue per call to continue in2002, although at a lower rate than that of prior years, as we believe thisreduced pricing better positions us to retain and expand service with existingcarrier customers, to attract new wireless and landline carriers, and toachieve greater operating margins over time.

 

In 2002, we expect to continue our call center and network expansion toprepare for anticipated growth.  Thisgrowth is expected to come from existing customers in the form of new marketsacquired, as well as from increased usage within geographic markets currentlybeing served.  We will also continue toopportunistically pursue additional significant new business.  Our call center and network expansionefforts will increase our local service coverage and our capacity to processadditional call volume.

 

Our growth plan involves both capital expenditures and operatingexpenses, as we build infrastructure and recruit and train qualifiedpersonnel.  To better serve ourcustomers and strengthen our relationships, we attempt to match the operatingreadiness of our call centers to the timing of when our customers transitioncall volume to us.  At times, ourcustomers have experienced delays, and may experience some additional delays inthe future, in the timing of delivery of call volume to us.  These delays can increase our ongoingoperating 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 varywidely.  However, we intend to continueto pursue and prepare for significant additional call volume in order to seekto achieve greater earnings over the long run.

 

**Results of Operations**

 

The following table shows selected items of our statements ofoperations data expressed as a percentage of revenues:

 
|                                   |   | **Years  Ended December 31,** |   |
|----------------------------------------|--------|-------------------------------|--------|
|                                   |   | **2001**                      |   | **2000** |   | **1999** |   |
| Revenues                               |   | 100.0                         | %      | 100.0 | % | 100.0 | % |
| Direct operating  expenses             |   | 56.5                          |   | 62.1 |   | 59.7 |   |
| General and  administrative expenses   |   | 28.0                          |   | 29.2 |   | 36.9 |   |
| Income from  operations                |   | 15.5                          |   | 8.7 |   | 3.4 |   |
| Other income  (expense)                |   | 0.5                           |   | (0.0 | ) | 0.1 |   |
| Interest and  loan fees                |   | (0.3                          | )      | (2.1 | ) | (1.0 | ) |
| Income before  income taxes            |   | 15.7                          |   | 6.6 |   | 2.5 |   |
| Income tax  expense                    |   | 3.5                           |   | 0.4 |   | 0.1 |   |
| Net income                             |   | 12.2                          | %      | 6.2 | % | 2.4 | % |
|                                   |   |                          |   |   |   |   |   |
| Call centers in  operation at year-end |   | 30                            |   | 28 |   | 24 |   |

 

**2001 Compared to 2000**

* *

*Revenues.* Revenues increased 48.6% to $233.3 million in 2001 from $157.0 millionin 2000.  We have offered volumediscount pricing for the last several years in order to encourage customers tosend additional call volume to us.  Asan ongoing result of this pricing policy, as well as numerous other factorsincluding the quality of our services, call volume has continued to increaseeach year.  Call volume grew toapproximately 472 million calls in 2001 from approximately 302 million calls in2000.  This increase resulted fromgrowth in call volume under existing contracts and markets, as well as new callvolume from new contracts and new markets. Our average revenue per call was approximately $0.49 in 2001 compared to$0.52 in 2000.

 

*Directoperating expenses.*  Direct operating expenses consist of callcenter personnel and listings data and content acquisition costs.  These expenses increased 35.3%, to $131.9million in 2001 from $97.4 million in 2000. This increase was primarily due to the costs of servicing increased callvolumes.  As a percentage of revenues,direct operating expenses decreased to 56.5% in 2001 from 62.1% in 2000, dueprimarily to operating efficiencies realized from greater call volumes andlower costs of accessing information content.

 

*Generaland administrative expenses.*  General andadministrative expenses increased 42.2%, to $65.2 million in 2001 from $45.9million in 2000.  This increase resultedprimarily from additional costs necessary to support our larger base of callcenters and increased call volumes.* *As a percentage of revenues,general and administrative expenses decreased to 28.0% in 2001 from 29.2% in2000.  This decrease resulted primarilyfrom efficiencies associated with the growth of our business.

 

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*Depreciationand amortization.*  Depreciation and amortization increased by51.2% to $15.8 million in 2001 from $10.5 million in 2000, due primarily toequipment purchased for new call centers, for upgrades and expansions ofexisting call centers, product development activities and amortization relatedto business acquisition.

 

*Otherincome (expense).*  Other income for the year ended December 31,2001 consisted primarily of interest income of approximately $1.3 millionpartially offset by losses on disposal of assets.  Other expense for the year ended December 31, 2000 consistedprimarily of losses on the disposition of assets of $220,000 and othermiscellaneous non-operating expenses of $106,000 offset by interest income of$301,000.  The increase in interestincome resulted primarily from increases in cash and cash equivalents due tothe issuance of common stock to Sonera Media Holding B.V. (see"Significant Events").

 

*Interestexpense and loan fees.*  Interest expense and loan feesdecreased 72.1%, to $895,000 in 2001 from $3.2 million in 2000.  This decrease resulted from a decrease inaverage debt outstanding during the year. All debt was paid in full as of March 31, 2001.

 

*Incometax expense.*  Income tax expense for the year endedDecember 31, 2001 was $8.1 million for an effective tax rate of approximately22.2%.  Income tax expense for the yearended December 31, 2000 was $678,000 for an effective tax rate of approximately6.5%.  These rates differ from thecombined federal and state statutory rate of approximately 38% due primarily tothe use of net operating loss carryforwards and the use of various federal andstate tax credits.

 

**2000 Compared to 1999**

* *

*Revenues.* Revenues increased 101.6% to $156.9 million in 2000 from $77.8 millionin 1999.  Call volume grew toapproximately 302 million calls in 2000 from approximately 142 million calls in1999.  This increase resulted fromgrowth in call volume under existing contracts and markets, as well as new callvolume from new contracts and new markets. Our average revenue per call was approximately $0.52 in 2000 compared to$0.55 in 1999.

 

*Directoperating expenses.*  Direct operating expenses consist of callcenter personnel and listings data and content acquisition costs.  These expenses increased 109.6%, to $97.4million in 2000 from $46.5 million in 1999. This increase was primarily due to the costs of servicing increased callvolumes.  As a percentage of revenues,direct operating expenses increased to 62.1% in 2000 from 59.7% in 1999, dueprimarily to the reduction in the average revenue per call.

 

*Generaland administrative expenses.*  General andadministrative expenses increased 59.8%, to $45.9 million in 2000 from $28.7million in 1999.  This increase resultedprimarily from costs associated with the start-up of new call centers and theinvestment in infrastructure necessary to support additional call volume andthe increase in depreciation expense associated with additional callcenters.  As a percentage of revenues,general and administrative expenses decreased to 29.2% in 2000 from 36.9% in1999.  This decrease resulted primarilyfrom efficiencies associated with the expansion of our operations.

 

*Depreciationand amortization.*  Depreciation and amortization increased by68.1%, to $10.5 million in 2000 from $6.2 million in 1999, due primarily toequipment purchased for new call centers, for upgrades and expansions of  existing call centers and corporateoperations.

 

*Otherincome (expense).*  Other expense for the year ended December31, 2000 consisted primarily of losses upon the disposition of assets of$220,000 and other miscellaneous non-operating expenses of $106,000 offset byinterest income of $301,000.  Otherincome for the year ended December 31, 1999 was $128,000 and consistedprimarily of interest income of $192,000, offset by losses upon the dispositionof assets of $67,000.

 

*Interestexpense and loan fees.*  Interest expense and loan feesincreased 314.7%, to $3.2 million from $773,000.  This increase was attributable to an increase in average debtoutstanding during 2000.

 

*Incometax expense.*  Income tax expense for the year endedDecember 31, 2000 was $678,000 for an effective tax rate of approximately6.5%.  December 31, 1999 was $75,000,for an effective tax rate of approximately 3.8%.  These rates differ from the combined federal and state statutoryrate of approximately 38% due primarily to the use of net operating losscarryforwards.

 

**Liquidity and Capital Resources**

 

Cash and cash equivalents are recorded at cost which approximates theirfair market value.  As ofDecember 31, 2001, we had approximately $54.6 million in cash and cashequivalents compared to approximately $6.5 million at December 31,2000.  The net increase of $48.1 millionresulted primarily from the investment by Sonera and cash generated from operationsoffset by the payment of debt and cash paid in business acquisition.  Total capital expenditures for the yearended December 31, 2001 were approximately $28.0 million.  All debt was paid in full as of March 31, 2001.

 

Working capital was $73.7 million at December 31, 2001, compared to$17.1 million at December 31, 2000. This increase was primarily due to workingcapital provided by the investment by Sonera and from working capital generatedfrom operations, offset by the use of working capital for capital expenditures,the repayment of debt and cash paid in business acquisition.

 

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*Cashflow from operations.*  Net cash provided by operatingactivities was $49.9 million for the year ended December 31, 2001 resultingprimarily from net income, the effect of non-cash depreciation andamortization, decreases in accounts receivable and increases in accountspayable and accrued expenses, offset by increases in prepaid expenses and otherassets.  Net cash provided by operatingactivities was $5.4 million and $3.3 million for the years ended December 31,2000 and 1999, respectively, resulting primarily from net income, the effect ofnon-cash depreciation and amortization and increases in accounts payable,offset by increases in accounts receivable.

 

*Cash flowfrom investing activities.*  Cash used ininvesting activities was $31.4 million, $26.8 million and $23.3 million for theyears ended December 31, 2001, 2000 and 1999, respectively and was relatedprimarily to capital expenditures for the purchase of equipment for new callcenters, the upgrade and expansion of existing call centers, upgrades andexpansions of corporate networks and infrastructure and, in 2001, cash paid inthe acquisition of a data extraction and processing company as discussed below in"Significant Events."

 

*Cashflow from financing activities. *Cash provided by financing activities was$29.6 million for the year ended December 31, 2001 resulting primarily from theproceeds of the investment by Sonera and the receipt of cash proceeds from theexercise of stock options, offset by the repayment of all outstandingdebt.  Net cash provided by financingactivities was $18.3 million in 2000 and $23.5 million in 1999, resultingprimarily from borrowings under credit facilities and the receipt of cashproceeds from the exercise of stock options, offset by the repayment of debtobligations

 

*Futurecapital needs and resources.*  The primaryuses of our capital in the near future are expected to be the development oracquisition of technologies, features and content complementary to our businessand to expand our call center and network capacity to serve existing andpotential new customers and for general corporate purposes, including possibleacquisitions and other corporate development activities and workingcapital.  We anticipate that our capitalexpenditures will be approximately $25 to $30 million in 2002, resultingprimarily from projected call center expansions, increased network capacity andcorporate development activities.

 

We believe our existing cash and cash equivalents and cash fromoperations will be sufficient to fund our operations for the next twelvemonths.

 

*Commitments.* We generally lease our facilities through non-cancelable operatingleases extending for up to ten years. Annual payments on non-cancelable operating lease commitments aredetailed in Note 5 of the financial statements.

 

From time to time, in the normal course of our business, we issuestandby letters of credit and bank guarantees. At December 31, 2001, we had one letter of credit outstanding in theamount of $900,000 related to our workers’ compensation program.  The letter of credit is secured by acertificate of deposit for the same amount. This commitment expires on April 1, 2002 and is typically renewed on an annualbasis.

 

In accordance with accounting principles generally accepted in theUnited States of America, these commitments are not reflected in our balancesheets.

 

 

**Significant Events**

 

In February 2001, we completed a transaction with Sonera Media HoldingB. V. (“Sonera”), a wholly owned subsidiary of Sonera Corporation of Helsinki,Finland, whereby Sonera purchased six million newly-issued shares of our commonstock at a price of $11.33 per share, for an aggregate price of $64.6 millionand an approximate 25.5% ownership position at that time.  Sonera develops and provides mobilevalue-added services.  A portion of theproceeds from this transaction was used to pay off all outstanding debt.

 

In February 2001, we acquired Enthusiasm Technologies, Inc., aSeattle-based developer of web-based data extraction and processing technologywhich has become our Content Development department, for a combination of cashand stock.  This group buildsapplication-specific databases for a variety of portals, be they wired orwireless, voice or data.  Ourproprietary data extraction and processing technology enables the creation andongoing maintenance of high quality databases from distributed and fragmenteddata on the web and elsewhere. We believe that these capabilities willcontribute to the expansion of our services and data offerings to our wirelessand other customers.  The purchase pricein this transaction was not material to our financial position.

 

**Significant Accounting Policies**

 

We prepare our financial statements in conformity with accountingprinciples generally accepted in the United States of America.  As such, we are required to make certainestimates, judgments and assumptions that we believe are reasonable based uponthe information available.  These estimatesand assumptions affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the periods presented. Management believes that of our significant accounting policies (seeNote 1 to the financial statements), those governing accounts receivable andthe lives and recoverability of the carrying amount of equipment and otherlong-lived assets, such as existing intangibles, internally developed softwareand goodwill, may involve a higher degree of judgment, estimation anduncertainty.

 

 

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Our customer base consists of mostly very large wireless telephonecarriers in the United States.  As such,management believes we have minimal risk of uncollectibility, at any point intime, related to outstanding accounts receivable.  We have not experienced significant collection issues orwrite-offs related to these customers, consequently, we do not maintain anallowance for doubtful accounts.  Sinceour accounts receivable are concentrated in relatively few customers, asignificant change in the liquidity or financial position of any one of thesecustomers could adversely impact collection of our accounts receivable andtherefore have a material adverse effect on our financial position and futureoperating results.

 

We evaluate the remaining life and recoverability of equipment andother assets, including patents and trademarks and internally developedsoftware, whenever events or changes in circumstances indicate that thecarrying amount of the asset may not be recoverable.  At such time, we estimate the future cash flows expected uponeventual disposition and, if lower than the carrying amount, adjust thecarrying amount of the asset to its estimated fair value.

 

Purchased goodwill, which represents the excess of cost over the fairvalue of net assets acquired in a business combination, was amortized on astraight-line basis, over the estimated economic life, through December 31,2001.

 

**Recent Accounting Pronouncements**

 

In June 2001, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 141, “BusinessCombinations”.  The statementdiscontinues the use of the pooling of interests method of accounting forbusiness combinations.  The statement iseffective for all business combinations occurring after June 30, 2001.  We believe the impact of this statement willnot have a material impact on our financial statements.

 

In June 2001, the FASB issued SFAS No. 142, “Goodwill and OtherIntangible Assets”.  This new statementaddresses financial accounting and reporting for goodwill and other intangibleassets. Under this new standard, goodwill and other intangible assets that aredeemed to have an indefinite life will no longer be amortized.  However, goodwill and other intangibleassets will be tested for impairment on an annual basis by applying a fairvalue based test.  We are evaluating theimpact of SFAS No. 142, and, other than cessation of amortization of goodwill,we believe the impact of adoption will not have a material impact on ourfinancial position or results of operations. The amount of amortization expense related to goodwill and otherintangible assets with indefinite lives was $517,819 in 2001.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets”.  The provisions of this statement are effective with fiscal yearsbeginning after December 15, 2001.  SFASNo. 144 establishes a single accounting model for long-lived assets to bedisposed of and replaces SFAS No. 121 "Accounting for the Impairment ofLong-Lived Assets and for Long-lived Assets to Be Disposed of," andAccounting Principals Bulletin No. 30, "Reporting Results of Operations -Reporting the Effects of Disposal of A Segment of Business."  We believe the impact of this statement willnot have a material impact on our financial position or results or operations.

 

**Effect of Inflation**

 

Inflation did not materially affect our business during the lastseveral years.

 

**Issues and Uncertainties**

 

While management is optimistic about our long-term prospects, thefollowing issues and uncertainties, among others, should be considered inevaluating our outlook.

 

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*Ourquarterly and annual operating results may vary significantly in part due tofactors outside our control.*

 

In the future, as in the past, our quarterly and annual operatingresults may vary significantly as a result of a number of factors.  We cannot control many of these factors,which include, among others:

 

•      Changes inthe telecommunications market, including the addition or withdrawal of carriersfrom the market, changes in technology and increased competition from existingand new competitors;

 

•      The timingof the commencement of our services under new or existing contracts with ourcarrier customers, which depends in part on the customers’ ability to adapttheir networks and billing systems to allow them to transfer calls to us;

 

•      The timingand expense of our call center network expansion, including increased staffingand infrastructure expenses related to anticipated new call volume;

 

•      Theaddition or expiration of contracts with carrier customers;

 

•      Changesin our or our competitors’, customers’ or suppliers’ pricing policies;

 

•      Lengthysales cycles for new and extended contracts;

 

•      Lackof market acceptance or delays or increased development costs related to theintroduction of our services or features; 

        and

 

•      Generaleconomic conditions.

 

For these reasons, you should not rely on period-to-period comparisonsof our financial results as an indication of any future results.  Our future operating results could fallbelow the expectations of securities industry analysts or investors.  Any such shortfall could result in a declinein the market price of our common stock. Fluctuations in our operating results would likely increase thevolatility of our common stock price.

 

*Therapidly changing telecommunications market could unfavorably affect us.*

 

The telecommunications market is subject to rapid change anduncertainty that may result in competitive situations which could unfavorablyaffect us.  These changes anduncertainties are due to, among other factors:

 

•      Mergers,acquisitions and alliances among carriers and among our competitors, which canresult in fewer carriers in the marketplace, lost carrier customers, increasednegotiating leverage for newly affiliated carriers and more effective competitors;

 

•      Changes inthe regulatory environment, which may affect us directly, by affecting ourability to access and update listings data at a reasonable cost, or indirectly,by restricting our carrier customers’ ability to operate or provide a competitiveservice;

 

•      Increasingavailability of alternative methods for delivery of directory assistance andother information services, including the Internet; and

 

•      Evolvingindustry standards, including frequent technological changes and new productintroductions.

 

*We havecontracts with a limited number of carrier customers.  If we fail to extend or renew these contracts, or if thesecontracts are terminated prior to their expiration, our business could beadversely affected.*

 

A limited number of customers account for substantially all ourrevenues.  For example, our top fivecustomers accounted for approximately 96% of our revenues in 2001.  Our two largest customers, Sprint PCS andAT&T Wireless Services accounted for approximately 32% and 30% of our revenues,respectively, in 2001.  Our businesswould be adversely affected by the loss of either Sprint PCS or AT&TWireless Services and could be adversely affected by the loss of any othersignificant customer.

 

Of our contracts with significant customers, two expire in 2002,including Sprint PCS.  The remainder,including AT&T Wireless Services and Nextel Communications, expire in 2003and beyond.  Some contracts containperformance and other standards and may be terminated prior to their scheduledexpiration dates under specified circumstances.

 

If we fail to extend or replace our contracts, or our contracts areterminated prior to their expiration, our business could be adverselyaffected.  Although we seek to increasethe number of our customers, and maintain good relationships with our existingcustomers, a small number of companies dominate the telecommunicationsmarket.  This limits the potentialcustomer base and our expansion opportunities.

 

*We havea long sales cycle which may cause delays that adversely affect our revenuegrowth and operating results.*

 

A customer’s decision to contract for our directory assistance andinformation services involves a significant commitment of technical and otherresources.  As a result, we have a longsales cycle for both new and extended contracts, particularly with largecustomers.  The selling process involvesdemonstrating the value-added benefits of outsourcing directory assistance andusing our services rather than those of our competitors.  Any delays due to lengthy sales cycles couldsignificantly affect our revenue growth and operating results.

 

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*Ouroperating results are significantly affected by our ability to accuratelyestimate the amount and timing of call volume. The actual amount and timing of call volume is often subject to factorsoutside of our control.*

 

Our operating results are significantly affected by costs incurred forstaffing and expanding infrastructure. We incur significant staffing and general and administrative costs inanticipation of call volume under our customer contracts.  If such call volume does not arrive asscheduled, in the amount anticipated, or at all, our operating results can beadversely affected.  This could increaseour operating expenses without a corresponding increase in revenues from theanticipated call volume.

 

*We facesubstantial competition from a number of other companies.*

 

Many of our competitors in the directory assistance market, includingthe regional Bell operating companies, have far greater resources and bettername recognition.  The regional Belloperating companies also may have the advantage of being the local telephonecarrier in their area of operation. Some of these companies are or may be developing their own versions ofenhanced directory assistance services. We also face competition from a number of other independent directoryassistance providers.  If we are unableto 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 toanticipate and appropriately respond to many factors, including theintroduction of new services and products by our competitors, changes insubscriber preferences, changes in economic conditions and discount pricingstrategies by our competitors.

 

*Ourinability to achieve desired pricing levels could adversely affect ourprofitability and operations.*

 

We are subject to competitive pressures with respect to pricing, whichcould adversely affect our profitability and operations.  The prices that we charge our carriercustomers are subject to the terms of our contracts.  The changing telecommunications market, the relative leverage ofthe negotiating parties and the overall competitive landscape can significantlyimpact contract pricing negotiations. We charge our carriers on a per call basis, with prices varying in somecases based on call volume.  Ourlong-term strategy is based in part on reducing the price we charge ourcustomers.  Generally, our pricinglevels have declined and, in the future, will likely continue to decline ascall volumes increase.  If we were tosubstantially reduce our prices without correspondingly increasing volume,there could be an adverse impact on our ability to operate profitably.

 

*We aredependent on the wireless telecommunications industry, and a decrease inwireless usage by subscribers could have an adverse impact on our results ofoperations.*

 

Almost all of our revenues come fromproviding enhanced directory assistance and information services to ourwireless customers’subscribers.  A decrease in wirelessusage in general, or of our products in particular, could have an adverseeffect on our results of operations. Wireless usage by subscribers appears to be affected by a number offactors, many of which are beyond our control, including pricing, safetyconcerns, reliability and availability of the wireless network, governmentregulation and reliability and availability of alternative technologies.

 

*We needto expand call volume and increase efficiencies in order to be successful.*

 

In order to successfully execute our business strategies, we need toincrease the volume of calls made to our call center network, while realizingthe benefits of operating leverage.  Weintend to increase call volume by seeking additional customers, includinglandline carrier customers, as well as seeking additional business from ourexisting customers.  We have limitedexperience in the landline market, which is dominated by the regional Belloperating companies.  If we are unableto expand our wireless business or attract significant landline business, on acost effective basis or at all, we may be unable to increase profitability orsustain past growth rates.

 

*If weare unable to anticipate changes in technology and industry standards and todevelop new services and features, we may not succeed.*

 

Our success depends, in part, on our ability to anticipate changes intechnology and industry standards and to develop and introduce new services andfeatures that are accepted by the marketplace and cost effective for us toprovide as a part of our overall service offerings.  The development of new services and features can be veryexpensive.  Further, given rapidtechnological changes, frequent introduction of new products, services andfeatures, and changing consumer demands that characterize our industry, it canbe difficult to correctly anticipate future changes in technology and industrystandards.  If we fail to develop newservices and features, encounter difficulties that delay the introduction ofsuch services and features, or incorrectly anticipate future changes anddevelop services and features that are not accepted by the marketplace or arenot cost effective for us to provide as a part of our overall serviceofferings, we may not succeed at our business.

 

*Alternativemethods for delivery of directory assistance and information services couldreduce the demand for our services.*

 

Our business comes primarily from providing enhanced directoryassistance and information services to telephone users.  However, information can be transmitted inother ways, including more intelligent communications devices and othertechnologies and protocols, and over the Internet.  For example, as the Internet continues to develop and becomeseasier to use and access, technologies may be developed that decrease oreliminate the demand for telephone-based or voice-based directory orinformation services.  Widespreadacceptance of existing and developing technologies and protocols, such as voicerecognition and wireless application protocol, could adversely affect ourbusiness.  Our call volume could declineif telephone users change their usage habits and rely on the Internet or otheralternatives as their primary source for information.

 

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*Systemsfailures, 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 reliableservices.  Our operations could beinterrupted by significant damage to or failure of our network, our connectionsto third parties, our computer hardware or software or our customers’ orsuppliers’ computer hardware or software. Any such significant damage or failure could disrupt the operations ofour network and the provision of our services and result in the loss of currentand potential customers.  In addition,as call volume increases, we will need to expand and upgrade our technology andnetwork hardware and software in order to provide services.  Capacity limits on our technology andnetwork hardware and software may make it difficult for us to expand andupgrade our systems in a timely and economical manner.

 

*If weare unable to obtain or adequately update directory or information content atan economical cost, we may be unable to provide current levels of service orimprove our service.*

 

Our operations depend on our access to the names, telephone numbers andother information that we supply directly to callers or we use in providing ourservices.  The availability, cost,quality and usefulness of such data varies widely across geographicregions.  If we are unable to obtain orupdate directory or information content at an economical cost, we may be unableto provide current levels of service, improve our enhanced directory assistanceservice or provide new services and features. Ultimately, the satisfaction of our carrier customers, and our abilityto renew and extend our current customer contracts and enter into new customercontracts, depends on the quality of services we provide to the carrier’ssubscribers.  The quality of ourservices is directly related to the quality of our listings data and otherinformation content.

 

*As werely on a limited number of suppliers, an abrupt loss of any key supplier couldadversely affect our business operations or delay our development efforts.*

 

We rely on some key suppliers to provide us with programming andengineering services and to license us their technology.  An abrupt loss of any current key suppliercould cause a disruption in our operations or a delay in our developmentefforts, including the planned expansion of our call center network, and couldadversely affect our business operations.

 

*If weare unable to continue to attract and retain qualified senior management,technical personnel and call center operators, or our call center staff isunionized, our operations could be adversely affected.*

 

Our success depends to a significant extent on the efforts andabilities of our senior management, technical personnel and call centeroperators.  The loss of the services ofour senior management and technical personnel could have a material adverseeffect on our business and our ability to meet our strategic objectives.  We also depend on the continued service ofour call center operators, who we hire from the available labor pool.  As we continue to expand our call centernetwork, the ability to attract and retain qualified senior management,technical personnel, operators and other skilled employees is extremelyimportant to the operation of our business. If we are unable to attract and retain qualified individuals, or we arerequired to pay significantly higher wages and other benefits to suchindividuals, or if our call center staff is unionized, it could adverselyaffect our business operations.  We findit more difficult to recruit and retain qualified individuals during periods oflow unemployment and, therefore, may be subject to increasing pressure to offerhigher wages and other benefits during such periods.  In our call center hiring, we may also feel the effects of thetelecommunications industry in general, which has widespread union membershipamong its operators and other workers.

 

*If weare unable to use and protect our intellectual property, we may be unable toprovide some of our enhanced directory assistance and information services orprofitably operate our business.*

 

We regard aspects of our enhanced directory assistance and informationservices and their features and processes to be proprietary.  If we are unable to use and protect ourintellectual property, we may be unable to provide some of our enhanceddirectory assistance and information services or profitably operate ourbusiness.  To a limited extent, we relyon a combination of trade secret, patent and other intellectual property law,nondisclosure agreements and other protective measures to protect our intellectualproperty.  However, these measures maybe difficult and costly to meaningfully enforce.  In addition, attempts to enforce our intellectual property rightsmay bring into question the validity of these rights.  Litigation with respect to patents or other intellectual propertyrights can result in substantial costs and diversion of management and otherresources.

 

17

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*Futureacquisitions may strain our operations.*

 

We intend to evaluate, and in the future may pursue, acquisitionopportunities that are consistent with our business strategy.  If we fail to adequately address financialand operational risks associated with such acquisitions, future acquisitionsmay adversely harm our business.

 

These risks can include, among other things:

 

•      Difficultiesin assimilating the operations, technology, information systems and personnelof the acquired company, including the inability to maintain uniform standards,controls and policies, and the loss of key employees of the acquired company;

 

•      Diversionof management’s attention from other business concerns;

 

•      Impairmentof relationships with licensors, customers and suppliers;

 

•      Difficultiesin entering into markets in which we have no direct prior experience;

 

•      Use of cashresources, potentially dilutive issuances of equity securities and incurrenceof additional debt and contingent liabilities; and

 

•      Significantwrite-offs and amortization expenses related to goodwill and other intangibleassets.

 

*If weexpand our business into international markets, we will encounter risks whichcould adversely affect us.*

 

We currently operate only in the United States; however, an element ofour business strategy is to continue to explore international businessopportunities.  If we expand into one ormore international markets, we will encounter significant risks anduncertainties.  These risks anduncertainties include increased operational difficulties arising from, amongother things:

 

•      Our abilityto attract sufficient business or locate a suitable partner or joint venturecandidate to enable us to overcome logistical and economic barriers to entry;

 

•      Our abilityand cost to gather sufficient information content and listings data, properlymodify our features and services to meet applicable standards, and hire andtrain personnel;

 

•      Fluctuationsin foreign currency exchange rates; and

 

•      Political,regulatory and economic developments and cultural differences.

 

*Regulationsaffecting our customers and suppliers and future regulations to which we may besubject may adversely affect our business.*

 

Although we are not directly subject to telecommunications industryregulation, the business of our customers and certain suppliers is subject toregulation 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 orderegulation on our business.

 

*We mayneed additional capital in the future, and it may not be available onacceptable terms.*

 

We may require more capital in the future to fund our operations,finance investments in equipment and infrastructure needed to maintain andexpand our call center and network capabilities, enhance and expand the rangeof services and features we offer, and respond to competitive pressures andpotential opportunities, such as investments, acquisitions and internationalexpansion.  We cannot be certain thatadditional financing will be available on terms favorable to us or at all.  The terms of available financing may placelimits on our financial and operating flexibility.  If adequate funds are not available on acceptable terms, we maybe forced to reduce our operations or abandon expansion opportunities.

 

*Ourcommon stock price is volatile.*

 

The market price of our common stock has experienced volatility and islikely to continue to experience significant fluctuations in response to anumber of factors.  These factorsinclude, among others:

 

•      Announcementsof extensions, expirations or changes in our contracts and the opening of newcall centers to support such activity;

 

•      Announcementsrelating to material events concerning our customers;

 

•      Actualor anticipated variations in our results of operations;

 

•      Changesin financial estimates by securities analysts;

 

•      Obsolescenceof technologies that we or our customers use;

 

•      Introductionsof new technologies; and

 

•      Generalmarket conditions.

 

18

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From January 1, 2001 through December 31, 2001, our common stock pricefluctuated from $13.67 per share to $45.75 per share and has on several daysfluctuated more than 10%.  Similarmarket fluctuations have affected the market prices of equity securities ofmany telecommunications companies and other public companies generally.  These trading prices and valuations maychange significantly and arbitrarily. In addition, broad market factors affecting telecommunications ortechnology stocks may adversely affect the market price of our common stock.  General economic, political and marketconditions, including interest rate changes and recession, may also adverselyaffect our stock price.

 

*Ourresults of operations could be impacted by a significant increase in the rateof inflation.*

 

Inflation has not historically had a material affect on ourbusiness.  Operating expenses such assalaries, employee benefits and occupancy costs are, however, subject to normalinflationary pressures which could adversely affect our operating results.

 

*Oregonlaw and provisions of our charter could make the acquisition of our companymore difficult.*

 

We are authorized to issue up to *10,000,000*shares of preferred stock, and the board of directors has the authority to fixthe preferences, limitations and relative rights of those shares without anyvote or action by the shareholders.  Thepotential issuance of preferred stock may delay or prevent a change in controlof our company, may discourage bids for the common stock at a premium over themarket price and may adversely affect the market price of, and the voting andother rights of the holders of, our common stock.  In addition, provisions under Oregon law limit the ability ofparties who acquire a significant amount of voting stock to exercise controlover our company.  These provisions mayhave the effect of lengthening the time required for a person to acquirecontrol of our company through a proxy contest or the election of a majority ofthe board of directors and may deter efforts to obtain control of our company.

 

**ITEM7A.               QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

Substantially all of our liquid investments are invested in moneymarket instruments, and therefore, the fair market value of these investmentsis affected by changes in market interest rates.  However, substantially all of our investments at December 31,2001 were invested in overnight money market instruments and were redeemable ona daily basis.  All of the underlyinginvestments in the money market fund had maturities of three months orless.  As a result, we believe themarket risk arising from our holdings of financial instruments is minimal.  In addition, we may be exposed to interestrate risk primarily through use of short-term and long-term borrowings tofinance operations.  A hypothetical 1%fluctuation in interest rates would not have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

**ITEM8.                  FINANCIAL STATEMENTSAND SUPPLEMENTARY DATA.**

 

See pages 24 through 35.

 

**ITEM9.                  CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING**

**                                AND FINANCIALDISCLOSURE.**

None.

 

**PART III**

 

**ITEM 10.               DIRECTORS AND EXECUTIVE OFFICERSOF THE REGISTRANT.**

 

The information required by Item 10 is incorporated by reference to theProxy Statement for our 2002 Annual Meeting, to be filed with the Securitiesand Exchange Commission within 120 days of our fiscal year end, under thecaptions “Management” and “Nominees and Directors.”

 

**ITEM11.               EXECUTIVE COMPENSATION.**

 

The information required by Item 11 is incorporated by reference to theProxy Statement for our 2002 Annual Meeting, to be filed with the Securitiesand Exchange Commission within 120 days of our fiscal year end.

19

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**ITEM 12.               SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT.**

 

The information required by Item 12 is incorporated by reference to theProxy Statement for our 2002 Annual Meeting, to be filed with the Securitiesand Exchange Commission within 120 days of our fiscal year end.

 

**ITEM13.               CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS.**

 

The information required by Item 13 is incorporated by reference to theProxy Statement for our 2002 Annual Meeting, to be filed with the Securitiesand Exchange Commission within 120 days of our fiscal year end.

 

 

**PART IV**

** **

**ITEM14.****               EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.**

 

 
| **(a)(1)** | **Financial Statements**                                                                                            |
|------------|---------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                |
| Pg. 23     | Independent Auditors Report                                                                                         |
|       |                                                                                                                |
| Pg. 24     | Statements of Income for each of the years ended  December 31, 2001, 2000 and 1999                                  |
|       |                                                                                                                |
| Pg. 25     | Balance Sheets at December 31, 2001 and 2000                                                                        |
|       |                                                                                                                |
| Pg. 26     | Statements of Shareholders' Equity for each of the  years ended December 31, 2001, 2000 and 1999                    |
|       |                                                                                                                |
| Pg. 27     | Statements of Cash Flows for each of the years ended  December 31, 2001, 2000 and 1999                              |
|       |                                                                                                                |
| Pg 28      | Notes to Financial Statements                                                                                       |
|       |                                                                                                                |
| **(a)(2)** | **Exhibits**                                                                                                        |
|       |                                                                                                                |
| 3.1        | Third Restated Articles of Incorporation of Metro  One Telecommunications, Inc. (4)                                 |
|       |                                                                                                                |
| 3.2        | Amended and Restated Bylaws of Metro One  Telecommunications, Inc. (1)                                              |
|       |                                                                                                                |
| 10.1       | Form of Enhanced Directory Assistance Agreement (6)                                                                 |
|       |                                                                                                                |
| 10.5       | 1995 Employment Agreement with Timothy A. Timmins  (5)*                                                             |
|       |                                                                                                                |
| 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 (3)(8) |
|       |                                                                                                                |
| 10.11      | Lease Agreement between and among Murray Scholls,  LLC, Gramor Development Northwest, Inc. and the Company (3)      |
|       |                                                                                                                |
| 10.12      | Amendment #1 to Specific Agreement between Sprint  Spectrum L.P. and the Company dated December 9, 1998 (3)(8)      |

 

20

----

 
| 10.18  | Amendment to 1995 Employment Agreement with Timothy  A. Timmins (7)*                                                                     |
|--------|------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                     |
| 10.19  | Stock Purchase Agreement between the Company and Sonera  Media Holding B.V. dated as of November 8, 2000 (9)                             |
|   |                                                                                                                                     |
| 10.20  | Investment Agreement between the Company and Sonera  Media Holding B.V. dated as of February 2, 2001 (10)                                |
|   |                                                                                                                                     |
| 10.21  | Registration Rights Agreement between the Company  and Sonera Media Holding B.V. dated as of February 2, 2001 (10)                       |
|   |                                                                                                                                     |
| 10.22  | Commercial Lease Agreement between Murray Scholls,  LLC and the Company (11)                                                             |
|   |                                                                                                                                     |
| 10.23  | Deferred Compensation Plan Document (11)*                                                                                                |
|   |                                                                                                                                     |
| 10.24  | Agreement for Enhanced Directory Assistance Services  between Metro One and AT&T Wireless Services, Inc. dated December 1, 2000  (8) |
|   |                                                                                                                                     |
| 10.25  | 1999 Employee Stock Purchase Plan (11)*                                                                                                  |
|   |                                                                                                                                     |
| 10.27  | 1994 Stock Incentive Plan (12)*                                                                                                          |
|   |                                                                                                                                     |
| 23.1   | Consent of Deloitte & Touche LLP, independent  auditors                                                                              |

 

----

*  Management contract or compensatoryplan

 

(1)           Incorporated herein by reference tothe Company’s Registration Statement on Form S-1 dated August 22, 1996, FileNo.

                333-05183.

 

(2)           Incorporated herein by reference tothe Company’s Registration Statement on Form SB-2, File No. 33-88926-LA.

 

(3)           Incorporated herein by reference tothe Company’s Annual Report on Form 10-K dated March 31, 1999, Commission No.

                0-27024.

 

(4)           Incorporated herein by reference tothe Company’s Annual Report on Form 10-KSB dated March 31, 1998, Commission No.0-27024.

 

(5)           Incorporated herein by reference tothe Company’s Annual Report on Form 10-KSB dated August 20, 1996, CommissionNo. 0-27024.

 

(6)           Incorporated herein by reference tothe Company’s Quarterly Report on Form 10-Q dated October 22, 1999, CommissionNo. 0-27024.

 

(7)           Incorporated herein by reference tothe Company’s Annual Report on Form 10-K dated March 30, 2000, Commission No. 0-27024.

 

(8)           Certain portions of Exhibits 10.7,10.12, 10.14 and 10.24 are the subject of a request for confidential treatmentand have been omitted from the Exhibit and have been filed separately with theCommission.

 

(9)           Incorporated herein by reference tothe Company’s Current Report on Form 8-K dated November 20, 2000, CommissionNo. 0-27024.

 

(10)         Incorporated herein by reference to theCompany’s Current Report on Form 8-K dated February 15, 2001, Commission No.0-27024.

 

(11)         Incorporated herein by reference to theCompany’s Annual Report on Form 10-K dated April 2, 2001, Commission No. 0-27024.

 

(12)         Incorporated herein by reference to theCompany’s Form S-8 dated February 12, 2002, Commission No. 0-27024.

 

**(b) Reports Filed on Form 8-K**

 

No reports on Form 8-K were filed during the quarter ended December 31,2001. 

 

21

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the ExchangeAct, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|   |           | Metro One Telecommunications, Inc. |
|--------|----------------|------------------------------------|
|   |           |                               |   |
|   |           |                               |   |
|   |           | By:                                | /s/ Timothy A. Timmins |   |
|   |           |                               | Timothy A. Timmins |
|   |           |                               | President and Chief Executive Officer |
|   |           |                               |   |
| Date:  | March 29, 2002 |                               |   |

 

Pursuant to the requirements of the Exchange Act, this report has beensigned below by the following persons on behalf of the registrant in thecapacities and on the date indicated:

 
| **Signature**                 |                           | **Title**                                       |           | **Date** |   |
|-------------------------------|--------------------------------|-------------------------------------------------|----------------|----------|--------|
|                          |                           |                                            |
| /s/ Timothy A. Timmins        |                           | President, Chief Executive Officer and Director | March 29, 2002 |
| Timothy A. Timmins            | (Principal Executive Officer)  |                                            |
|                          |                           |                                            |
| /s/ Dale N. Wahl              |                           | Senior Vice President, Chief Financial Officer  | March 29, 2002 |
| Dale N. Wahl                  | (Principal Financial Officer)  |                                            |
|                          |                           |                                            |
| /s/ Duane C. Fromhart         |                           | Vice President, Finance                         | March 29, 2002 |
| Duane C. Fromhart             | (Principal Accounting Officer) |                                            |
|                          |                           |                                            |
| /s/ William D. Rutherford     |                           | Chairman of the Board of Directors              | March 29, 2002 |
| William D. Rutherford         |                           |                                            |
|                          |                           |                                            |
| /s/ A. Jean de Grandpré  |                           | Director                                        | March 29, 2002 |
| A. Jean de Grandpré      |                           |                                            |
|                          |                           |                                            |
| /s/ Heikki Jämsänen |                           | Director                                        | March 29, 2002 |
| Heikki Jämsänen     |                           |                                            |
|                          |                           |                                            |
| /s/ Aimo Olkkonen             |                           | Director                                        | March 29, 2002 |
| Aimo Olkkonen                 |                           |                                            |
|                          |                           |                                            |
| /s/ James M. Usdan            |                           | Director                                        | March 29, 2002 |
| James M. Usdan                |                           |                                            |
|                          |                           |                                            |
| /s/ David A. Williams         |                           | Director                                        | March 29, 2002 |
| David A. Williams             |                           |                                            |
|                               |                                |                                                 |                |          |        |  |  |  |  |  |

 

22

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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 OneTelecommunications, Inc. as of December 31, 2001 and 2000 and the relatedstatements of income, shareholders’ equity, and cash flows for each of thethree years in the period ended December 31, 2001.  These financial statements are the responsibility of theCompany’s management.  Our responsibilityis to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, such financial statements present fairly, in allmaterial respects, the financial position of Metro One Telecommunications, Inc.as of December 31, 2001 and 2000 and the results of its operations and its cashflows for each of the three years in the period ended December 31, 2001 inconformity with accounting principles generally accepted in the United Statesof America.

 

 

DELOITTE & TOUCHE LLP

Portland, Oregon

February 6, 2002

 

23

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**MetroOne Telecommunications, Inc.**

**Statementsof Income**(Inthousands, except per share amounts)

 
|                          |   | **Years  ended December 31,** |    |
|-------------------------------|--------|-------------------------------|---------|
|                          |   | **2001**                      |    | **2000** |   | **1999** |   |
| Revenues                      |   | $                             | 233,318 |   | $ | 156,981 |   | $ | 77,831 |   |
|                          |   |                          |    |   |   |   |   |
| Costs and  expenses:          |   |                          |    |   |   |   |   |
| Direct operating              |   | 131,851                       |    | 97,438 |   | 46,494 |   |
| General and  administrative   |   | 65,246                        |    | 45,892 |   | 28,711 |   |
|                          |   | 197,097                       |    | 143,330 |   | 75,205 |   |
|                          |   |                          |    |   |   |   |   |
| Income from  operations       |   | 36,221                        |    | 13,651 |   | 2,626 |   |
|                          |   |                          |    |   |   |   |   |
| Other income  (expense)       |   | 1,212                         |    | (25 | ) | 128 |   |
| Interest and  loan fees       |   | (895                          | )       | (3,206 | ) | (773 | ) |
|                          |   |                          |    |   |   |   |   |
| Income before  income taxes   |   | 36,538                        |    | 10,420 |   | 1,981 |   |
| Income tax  expense           |   | 8,116                         |    | 678 |   | 75 |   |
| Net income                    |   | $                             | 28,422  |   | $ | 9,742 |   | $ | 1,906 |   |
|                          |   |                          |    |   |   |   |   |
| Net income per  common share: |   |                          |    |   |   |   |   |
| Basic                         |   | $                             | 1.20    |   | $ | .56 |   | $ | .11 |   |
| Diluted                       |   | $                             | 1.15    |   | $ | .54 |   | $ | .11 |   |

 

The accompanying notesare an integral part of these financial statements

 

24

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**MetroOne Telecommunications, Inc.**

**BalanceSheets**(Inthousands)

 
|                                                                                                                                                |   | **December  31,** |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                                                                                |   | **2001**          |    | **2000** |   |
| **Assets**                                                                                                                                          |   |              |    |   |   |
|                                                                                                                                                |   |              |    |   |   |
| Current assets:                                                                                                                                     |   |              |    |   |   |
| Cash and cash  equivalents                                                                                                                          |   | $                 | 54,592  |   | $ | 6,463 |   |
| Accounts receivable                                                                                                                                 |   | 32,794            |    | 36,559 |   |
| Prepaid costs  and other current assets                                                                                                             |   | 4,907             |    | 6,207 |   |
|                                                                                                                                                |   |              |    |   |   |
| Total current  assets                                                                                                                               |   | 92,293            |    | 49,229 |   |
|                                                                                                                                                |   |              |    |   |   |
| Furniture,  fixtures and equipment, net                                                                                                             |   | 69,066            |    | 54,749 |   |
| Other assets                                                                                                                                        |   | 8,400             |    | 2,663 |   |
|                                                                                                                                                |   |              |    |   |   |
| Total assets                                                                                                                                        |   | $                 | 169,759 |   | $ | 106,641 |   |
|                                                                                                                                                |   |              |    |   |   |
| **Liabilities and Shareholders’  Equity**                                                                                                      |   |              |    |   |   |
|                                                                                                                                                |   |              |    |   |   |
| Current  liabilities:                                                                                                                               |   |              |    |   |   |
| Accounts payable                                                                                                                                    |   | $                 | 1,276   |   | $ | 2,633 |   |
| Accrued  liabilities                                                                                                                                |   | 6,180             |    | 6,088 |   |
| Accrued payroll  and related costs                                                                                                                  |   | 11,090            |    | 9,181 |   |
| Line of credit  payable                                                                                                                             |   | —            |    | 4,750 |   |
| Current portion  of long-term debt                                                                                                                  |   | —            |    | 9,511 |   |
|                                                                                                                                                |   |              |    |   |   |
| Total current  liabilities                                                                                                                          |   | 18,546            |    | 32,163 |   |
|                                                                                                                                                |   |              |    |   |   |
| Long-term debt                                                                                                                                      |   | —            |    | 24,731 |   |
| Other long-term  liabilities                                                                                                                        |   | 3,844             |    | 4,343 |   |
|                                                                                                                                                |   |              |    |   |   |
| Total  liabilities                                                                                                                                  |   | 22,390            |    | 61,237 |   |
|                                                                                                                                                |   |              |    |   |   |
| 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, 24,463 and 17,747 shares issued and  outstanding at December 31, 2001 and 2000, respectively |   | 117,534           |    | 43,991 |   |
| Retained  earnings                                                                                                                                  |   | 29,835            |    | 1,413 |   |
|                                                                                                                                                |   |              |    |   |   |
| Shareholders’  equity                                                                                                                          |   | 147,369           |    | 45,404 |   |
|                                                                                                                                                |   |              |    |   |   |
| Total  liabilities and shareholders’ equity                                                                                                    |   | $                 | 169,759 |   | $ | 106,641 |   |

 

The accompanying notesare an integral part of these financial statements

 

25

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**Metro One Telecommunications, Inc.**

**Statementsof Shareholders’ Equity**(In thousands)

 
|                                   |   | **Shareholders’  Equity** |   |
|----------------------------------------|--------|--------------------------------|--------|
|                                   |   | **Common  Stock**              |   | **Retained Earnings****(Accumulated** |   | **Shareholders’** |   |
|                                   |   | **Shares**                     |   | **Amount** |   | **Deficit)** |   | **Equity** |   |
| Balances at  December 31, 1998         |   | 16,782                         |   | $ | 38,477 |   | $ | (10,235 | ) | $ | 28,242 |   |
|                                   |   |                           |   |   |   |   |   |   |   |
| Employee stock  options exercised, net |   | 339                            |   | 1,831 |   | — |   | 1,831 |   |
| Net income                             |   | —                         |   | — |   | 1,906 |   | 1,906 |   |
|                                   |   |                           |   |   |   |   |   |   |   |
| Balances at  December 31, 1999         |   | 17,121                         |   | 40,308 |   | (8,329 | ) | 31,979 |   |
|                                   |   |                           |   |   |   |   |   |   |   |
| Employee stock  options exercised, net |   | 587                            |   | 3,426 |   | — |   | 3,426 |   |
| Employee stock  purchase plan          |   | 39                             |   | 257 |   | — |   | 257 |   |
| Net income                             |   | —                         |   | — |   | 9,742 |   | 9,742 |   |
|                                   |   |                           |   |   |   |   |   |   |   |
| Balances at  December 31, 2000         |   | 17,747                         |   | 43,991 |   | 1,413 |   | 45,404 |   |
|                                   |   |                           |   |   |   |   |   |   |   |
| Issuance of  common stock, net         |   | 6,000                          |   | 64,607 |   | — |   | 64,607 |   |
| Shares issued in  business combination |   | 155                            |   | 3,200 |   | — |   | 3,200 |   |
| Employee stock  options exercised      |   | 510                            |   | 3,300 |   | — |   | 3,300 |   |
| Tax benefit from  stock plans          |   | —                         |   | 1,730 |   | — |   | 1,730 |   |
| Employee stock  purchase plan          |   | 51                             |   | 706 |   | — |   | 706 |   |
| Net income                             |   | —                         |   | — |   | 28,422 |   | 28,422 |   |
|                                   |   |                           |   |   |   |   |   |   |   |
| Balances at  December 31, 2001         |   | 24,463                         |   | $ | 117,534 |   | $ | 29,835 |   | $ | 147,369 |   |

 

The accompanying notesare an integral part of these financial statements

 

26

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**Metro One Telecommunications, Inc.**

**Statementsof Cash Flows **(In thousands)

 
|                                                                               |   | **Years  ended December 31,** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                               |   | **2001**                      |   | **2000** |   | **1999** |   |
| Cash flows from  operating activities:                                             |   |                          |   |   |   |   |   |
| Net income                                                                         |   | $                             | 28,422 |   | $ | 9,742 |   | $ | 1,906 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                          |   |   |   |   |   |
| Depreciation and  amortization                                                     |   | 15,824                        |   | 10,465 |   | 6,225 |   |
| Loss on disposal  of fixed assets                                                  |   | 176                           |   | 220 |   | 67 |   |
| Deferred income  taxes                                                             |   | 1,775                         |   | (96 | ) | (8 | ) |
| Tax benefit from  employee stock plans                                             |   | 1,730                         |   | — |   | — |   |
| Changes in  certain assets and liabilities:                                        |   |                          |   |   |   |   |   |
| Accounts  receivable                                                               |   | 3,765                         |   | (21,202 | ) | (7,929 | ) |
| Prepaid expenses  and other assets                                                 |   | (2,727                        | )      | (2,543 | ) | (728 | ) |
| Accounts payable  and other liabilities                                            |   | 897                           |   | 8,764 |   | 3,793 |   |
|                                                                               |   |                          |   |   |   |   |   |
| Net cash  provided by operating activities                                         |   | 49,862                        |   | 5,350 |   | 3,326 |   |
|                                                                               |   |                          |   |   |   |   |   |
| Cash flows from  investing activities:                                             |   |                          |   |   |   |   |   |
| Capital  expenditures                                                              |   | (27,966                       | )      | (27,168 | ) | (24,397 | ) |
| Acquisition of  business                                                           |   | (3,388                        | )      | — |   | — |   |
| Purchase of  short-term investments                                                |   | —                        |   | — |   | (400 | ) |
| Maturity of  short-term investments                                                |   | —                        |   | 400 |   | 1,507 |   |
|                                                                               |   |                          |   |   |   |   |   |
| Net cash used in  investing activities                                             |   | (31,354                       | )      | (26,768 | ) | (23,290 | ) |
|                                                                               |   |                          |   |   |   |   |   |
| Cash flows from  financing activities:                                             |   |                          |   |   |   |   |   |
| Net proceeds  from (repayment of) line of credit                                   |   | (4,750                        | )      | 4,750 |   | (1,400 | ) |
| Proceeds from  issuance of debt                                                    |   | —                        |   | 16,637 |   | 31,800 |   |
| Repayment of  debt                                                                 |   | (34,242                       | )      | (6,577 | ) | (8,474 | ) |
| Repayment of  capital lease obligations                                            |   | —                        |   | (176 | ) | (292 | ) |
| Proceeds from  issuance of common stock, net                                       |   | 64,607                        |   | — |   | — |   |
| Proceeds from  exercise of stock options and employee stock purchases              |   | 4,006                         |   | 3,683 |   | 1,831 |   |
|                                                                               |   |                          |   |   |   |   |   |
| Net cash  provided by financing activities                                         |   | 29,621                        |   | 18,317 |   | 23,465 |   |
|                                                                               |   |                          |   |   |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                              |   | 48,129                        |   | (3,101 | ) | 3,501 |   |
|                                                                               |   |                          |   |   |   |   |   |
| Cash and cash  equivalents, beginning of year                                      |   | 6,463                         |   | 9,564 |   | 6,063 |   |
|                                                                               |   |                          |   |   |   |   |   |
| Cash and cash  equivalents, end of year                                            |   | $                             | 54,592 |   | $ | 6,463 |   | $ | 9,564 |   |
|                                                                               |   |                          |   |   |   |   |   |
| Summary of  non-cash investing and financing activities:                           |   |                          |   |   |   |   |   |
| Issuance of 155  shares of common stock in business combination                    |   | $                             | 3,200  |   | $ | — |   | $ | — |   |

 

The accompanying notesare an integral part of the these financial statements

 

27

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**Metro One Telecommunications, Inc.**

**Notes ToFinancial Statements**

 

**1.             Summary of Operations andSignificant Accounting Policies**

 

***Nature of Operations. ***Weprovide enhanced directory assistance services to telecommunications carriersand their customers.  Revenues arederived principally through fees charged to telecommunications carriers.  We operate call centers located in manymetropolitan areas throughout the United States.

 

***Cash and Cash Equivalents.***** **Cash and cash equivalents include cashdeposits in banks and highly liquid investments with maturity dates of threemonths or less at the date of acquisition.

 

***Major Customers.***** **In each of the years ended December 31,2001, 2000 and 1999, twelve customers accounted for substantially all revenueand accounts receivable reported.  Ourthree largest customers accounted for approximately 32%, 30% and 23% of revenuein 2001.   Our three largest customersaccounted for approximately 31%, 29% and 21% of revenue in 2000.  Our four largest customers accounted forapproximately 40%, 30%, 11% and 11% of revenue in 1999.  We have historically not incurredsignificant losses related to our accounts receivable.

 

***Furniture, Fixtures and Equipment. ***Furniture, fixtures and equipment are stated at costand are depreciated over their estimated useful lives of three to seven yearsusing the straight-line method. Leasehold improvements are amortized over the lesser of the remaininglease term or the useful life.  Expensesfor repairs and maintenance are expensed as incurred.  Accumulated amortization for capital leases is included inaccumulated depreciation.  In the eventthat facts and circumstances indicate that the cost of furniture, fixtures andequipment may be impaired, an evaluation of recoverability would be performedand the asset’s carrying amount would be reduced to market value or discountedcash flow value.

 

***Other Assets. ***Otherassets include goodwill, patents, patents pending and trademarks.  These assets are carried at cost lessaccumulated amortization.  Other assetsare amortized over the estimated useful lives of the related assets of five toten years.  The related accumulated amortizationwas $820,257 and $92,885 for the years ended December 31, 2001 and 2000,respectively.  In the event that factsand circumstances indicate that the recorded value of goodwill, patents ortrademarks may be impaired, an evaluation of recoverability would be performedand the asset’s carrying amount would be reduced to market value or discountedcash flow value.

 

***Fair Value of Financial Instruments. ***The carrying value of cash and cash equivalents,accounts receivable, accounts payable, accrued liabilities and line of creditpayable approximate fair value due to the short-term maturities of these assetsand liabilities.

 

***Revenue Recognition. ***Under existing contracts with telecommunicationscarriers, we record revenue for the number of calls processed at the agreedupon price per call, calculated on a monthly basis.  Revenue per call may vary based on monthly volumes achieved.  Revenue is recognized as services areprovided.

 

***Net Income Per Share.*** We report basic and diluted net income per share in accordance withStatement of Financial Accounting Standards No. 128, “Earnings per Share”.  Basic net income per share is calculatedbased on the weighted average number of common shares outstanding during eachperiod.  Diluted net income per share iscalculated based on these same shares plus dilutive potential shares issuableupon assumed exercise of outstanding stock options based on the treasury stockmethod.

 

***Use of Estimates. ***Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires us to makeestimates and assumptions that effect reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the fiscal year.  Actual resultscould differ from those estimates.

 

***Commitments and Contingencies. ***We are party to various legal actions andadministrative proceedings arising in the ordinary course of business.  We believe the disposition of these matterswill not have a material adverse effect on our financial position, results ofoperations, or cash flows.

 

From time to time, in the normal course of our business, we issuestandby letters of credit and bank guarantees. At December 31, 2001, we had one letter of credit outstanding in theamount of $900,000 related to our workers’ compensation program.  The letter of credit is secured by acertificate of deposit for the same amount. This commitment expires on April 1, 2002 and is typically renewed on anannual basis.

 

***Recent Accounting Pronouncements.***  In June 2001, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 141, “BusinessCombinations”.  The statementdiscontinues the use of the pooling of

 

28

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interests method of accounting for business combinations.  The statement is effective for all businesscombinations occurring after June 30, 2001.

 

In June 2001, the FASB issued SFAS No. 142, “Goodwill and OtherIntangible Assets”.  This new statementaddresses financial accounting and reporting for goodwill and other intangibleassets. Under this new standard, goodwill and other intangible assets that aredeemed to have an indefinite life will no longer be amortized. However,goodwill and other intangible assets will be tested for impairment on an annualbasis by applying a fair value based test. We are evaluating the impact of SFAS No. 142, and, other than cessationof amortization of goodwill, we believe the impact of adoption will not have amaterial impact on our financial position or results of operations.  The amount of amortization expense relatedto goodwill and other intangible assets with indefinite lives was $517,819 in2001.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets”. The provisions of this statement are effective with fiscal yearsbeginning after December 15, 2001.  SFASNo. 144 establishes a single accounting model for long-lived assets to bedisposed of and replaces SFAS No. 121 “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed of”, and AccountingPrincipals Bulletin No. 30, “Reporting Results of Operations — Reporting theEffects of Disposal of A Segment of Business”. We believe the impact of this statement will not have a material impacton our financial position and results of operations.

 

***Reclassification. ***Certainbalances in the 2000 and 1999 financial statements have been reclassified toconform to 2001 presentations.  Suchreclassifications had no effect on reported net income.

 

**2.             Acquisition**

 

In February 2001, we completed the purchase of a company involved indeveloping web-based data extraction and processing technology. The transactionhas been recorded using the purchase method of accounting.  The purchase price has been allocated to theassets acquired, which consisted primarily of proprietary technology and intangiblesand goodwill.  Pro forma financialinformation is not presented, as the impact on our results of operations wasnot material.

 

**3.             Furniture, Fixtures and Equipment**

 

Furniture, fixtures and equipment by major classification aresummarized as follows:

 
|                      |   | **December  31,**   |       |
|---------------------------|--------|---------------------|------------|
|                      |   | **2001**            |       | **2000** | ** ** |
|                      |   | **(In  thousands)** | ** ** |
| Equipment                 |   | $                   | 86,914     |   | $ | 63,232 |   |
| Furniture and  fixtures   |   | 11,991              |       | 9,794 |   |
| Leasehold  improvements   |   | 6,436               |       | 5,037 |   |
|                      |   |                |       |   |   |
|                      |   | 105,341             |       | 78,063 |   |
|                      |   |                |       |   |   |
| Accumulated  depreciation |   | (36,275             | )          | (23,314 | ) |
|                      |   |                |       |   |   |
|                      |   | $                   | 69,066     |   | $ | 54,749 |   |

 

29

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**4.             Credit Facilities**

 

Long-term debt consisted of the following:

 
|                               |   | **December  31,**   |   |
|------------------------------------|--------|---------------------|--------|
|                               |   | **2001**            |   | **2000** |   |
|                               |   | **(In  thousands)** |   |
| Secured  Equipment Financing Loans |   | $                   | — |   | $ | 34,242 |   |
| Current portion  of long-term debt |   | —              |   | (9,511 | ) |
|                               |   |                |   |   |   |
|                               |   | $                   | — |   | $ | 24,731 |   |

 

***Loan Agreements. *** At various times during 2001 and 2000, we hadequipment financing loan arrangements with an equipment financing lender.  The arrangements provided us with borrowingcapacity to fund the expansion of our call center network and for otherequipment needs.  The arrangementsprovided for fixed or floating rate options and all assets purchased pursuantto the arrangements were pledged as collateral.  Individual borrowings under the arrangements had terms of 48months each, and prepayment of outstanding borrowings was allowable 12 monthsafter the funding dates, or, with certain restrictions, at any time prior, fora 1% fee.  Outstanding individualborrowings bore interest at fixed rates ranging from 8.10% to 10.09%.  As of December 31, 2001, we had nooutstanding borrowings under these arrangements (see Note 6).

 

***Line of Credit.*** During December 1999, we entered into a line of credit agreement with acommercial bank that replaced certain prior agreements.  The agreement consisted of a $10 millionrevolving line of credit bearing interest based on the bank’s prime rate andour debt to cash flow ratio.  The linewas secured by all accounts receivable and was subject to an unused facilityfee and various financial and restrictive covenants.  The line of credit was paid in full as of January 31, 2001 andthe facility expired at December 31, 2001 with no amounts outstanding (see Note6).

 

**5.**             **LeaseObligations**

 

We lease operating facilities and equipment under operating leases withunexpired terms of one to eight years. Rental expense for operating leases was approximately $7,496,000,$5,418,000 and $3,497,000 for 2001, 2000 and 1999, respectively.

 

Minimum annual rentals for the five years subsequent to 2001 and in theaggregate thereafter are as follows:

 
| **Year  Ending   December 31,** |   | **Annual lease payments** |   |
|---------------------------------|--------|---------------------------|--------|
|                            |   | **(In  thousands)**       |   |
| 2002                            |   | $                         | 8,430  |   |
| 2003                            |   | 8,190                     |   |
| 2004                            |   | 7,523                     |   |
| 2005                            |   | 6,275                     |   |
| 2006                            |   | 4,349                     |   |
| Thereafter                      |   | 4,577                     |   |
|                            |   |                      |   |
| Total minimum  lease payments   |   | $                         | 39,344 |   |

 

30

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**6.             Shareholders’ Equity**

 

***Significant transactions.*** On January 31, 2001, our shareholders approved the issuance and sale toSonera Media Holding B.V. of 6,000,000 shares of common stock for a net amountof approximately $64,600,000, which represented approximately 25.5% of ouroutstanding common stock after the issuance. Sonera Media Holding B.V. is a wholly-owned subsidiary of SoneraCorporation, a publicly traded telecommunications company organized inFinland.  This transaction was completedin February 2001.  During February andMarch 2001, we paid all outstanding debt with a portion of the proceeds fromthis transaction.

 

In addition, in conjunction with the Sonera transaction, on January 31,2001, the shareholders approved an amendment of our 1994 Stock Incentive Planto increase the number of shares available for issuance by 870,000 shares, from3,450,000 to 4,320,000 shares of common stock.

 

On May 16, 2001, the Board of Directors approved a three-for-two stocksplit in the form of a 50% stock dividend, distributing approximately 8,100,000shares on June 29, 2001.  All share andper share data presented in the accompanying financial statements and notesthereto have been restated for the stock split.

 

***Preferred Stock.*** We have authorized 10,000,000 shares of preferred stock forissuance.  Our board of directors hasthe authority to issue one or more series of preferred shares and the authorityto fix and determine the rights and preferences of such shares.  No preferred shares were issued oroutstanding as of December 31, 2001.

 

***Common Stock Options.*** We have a Stock Incentive Plan (the “Plan”), approved by theshareholders, which provides for the award of incentive stock options to keyemployees and the award of non-qualified stock options, stock sales and grantsto employees, outside directors, independent contractors and consultants.  As of December 31, 2001, 479,000 shares ofcommon stock were reserved for issuance under the Plan.  It is intended that the Plan will be usedprincipally to attract and retain key employees.

 

The option price per share of an incentive stock option may not be lessthan the fair market value of a share of common stock as of the date suchoption is granted.  The option price pershare of a non-qualified stock option may be at any price established by theboard of directors or a committee thereof established for purposes ofadministering the plan.  Options becomeexercisable at the times and subject to the conditions prescribed by the boardof directors.  Generally, options vestover a period of four years and the term of each option may not exceed tenyears.  Payment for shares purchasedpursuant to options may be made in cash or, subject to approval by the board ofdirectors, by delivery of shares of common stock having a market value equal tothe exercise price of the options.

 

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 qualifiedemployees essential to our success, and to provide such persons with anincentive to perform in our best interests. The ESPP allows qualified employeesto purchase shares of our common stock on a semi-annual basis, limited to 10%of pre-tax compensation.  The purchaseprice is set at 85% of the lower of the stock price at the beginning or endingof each purchase period.  As of December31, 2001, 225,000 shares of common stock were reserved for issuance under theESPP. Under the ESPP, during 2001, employees purchased approximately 51,000shares at an average price of $13.69 per share.  During 2000, employees purchased approximately 39,000 shares atan average of $6.63 per share.

 

We have elected to continue to account for stock options according toAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees.”  Accordingly, nocompensation cost has been recognized in the financial statements related to stockoptions issued under the Plan.  Ifcompensation cost on stock options granted in 2001, 2000 and 1999 under thisPlan had been determined based on the fair value of the options granted as ofthe grant date in a method consistent with that described in Statement ofFinancial Accounting

 

31

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Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,”our net income and earnings per share would have been changed to the pro formaamounts indicated below for the years ended December 31:

 
|                                     |   | **2001**                                      |   | **2000** |   | **1999** |   |
|------------------------------------------|--------|-----------------------------------------------|--------|----------|--------|----------|--------|
|                                     |   | **(In  thousands, except per share amounts)** |   |
| Net income, as  reported                 |   | $                                             | 28,422 |     | $      | 9,742    |   | $ | 1,906 |   |
| Diluted earnings  per share, as reported |   | 1.15                                          |   | 0.54     |   | 0.11     |   |
|                                     |   |                                          |   |     |   |     |   |
| Net income, pro  forma                   |   | $                                             | 25,618 |     | $      | 8,747    |   | $ | 1,014 |   |
| Diluted earnings  per share, pro forma   |   | 1.03                                          |   | 0.48     |   | 0.06     |   |

 

The pro forma amounts may not be indicative of the effects on reportednet income for future periods due to the effect of options vesting over aperiod of years and the awarding of stock compensation in future years.

 

The fair value of each option grant was estimated on the date of grantusing the Black-Scholes option-pricing model with the following assumptions forthe years ending December 31:

 
|                                            |   | **2001** |   | **2000** |   | **1999** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Dividend yield                                  |   | 0.0      | %      | 0.0      | %      | 0.0      | %      |
| Risk free  interest rate                        |   | 4.4      | %      | 5.0      | %      | 5.9      | %      |
| Expected  volatility                            |   | 87.0     | %      | 75.4     | %      | 73.6     | %      |
| Expected life in  years                         |   | 4.0      |   | 4.0      |   | 4.0      |   |
|                                            |   |     |   |     |   |     |   |
| Weighted-average  fair value of options granted |   | $        | 15.59  |     | $      | 3.95     |   | $ | 5.41 |   |
|                                                 |        |          |        |          |        |          |        |  |  |  |

 

A summary of the status of our stock option plan as of December 31, andchanges during the years ending on those dates is as follows:

 
|                                                            |   | **2001**                                      |   | **2000**                            |   | **1999**   |   |
|-----------------------------------------------------------------|--------|-----------------------------------------------|--------|-------------------------------------|--------|------------|--------|
|                                                            |   | **Shares**                                    |   | **Weighted-  Average  Exer. Price** |   | **Shares** |   | **Weighted-  Average  Exer. Price** |   | **Shares** |   | **Weighted-  Average  Exer. Price** |   |
|                                                            |   | **(In  thousands, except per share amounts)** |   |
| Outstanding at  beginning of year                               |   | 2,056                                         |   | $                                   | 6.75   |       | 2,315  |   | $ | 6.12 |   | 2,647 |   | $ | 5.92 |   |
| Granted                                                         |   | 668                                           |   | 24.43                               |   | 510        |   | 8.67 |   | 82 |   | 10.50 |   |
| Exercised                                                       |   | (510                                          | )      | 6.47                                |   | (587       | )      | 5.84 |   | (340 | ) | 5.39 |   |
| Forfeited                                                       |   | (11                                           | )      | 9.81                                |   | (182       | )      | 6.98 |   | (74 | ) | 7.45 |   |
|                                                            |   |                                          |   |                                |   |       |   |   |   |   |   |   |   |
| Outstanding at  end of year                                     |   | 2,203                                         |   | $                                   | 12.16  |       | 2,056  |   | $ | 6.75 |   | 2,315 |   | $ | 6.12 |   |
|                                                            |   |                                          |   |                                |   |       |   |   |   |   |   |   |   |
| Options  exercisable at year-end                                |   | 1,448                                         |   |                                |   | 1,509      |   |   |   | 1,817 |   |   |   |
| Weighted-average  fair value of options exercisable at year end |   | $                                             | 9.15   |                                |   |       | $      | 6.28 |   |   |   | $ | 5.95 |   |   |   |
|                                                                 |        |                                               |        |                                     |        |            |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

32

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The following table summarizes information about stock optionsoutstanding and exercisable under the Plan at December 31, 2001:

 
|                          |              | **Outstanding**                               |   | **Exercisable**                                         |   |
|-------------------------------|-------------------|-----------------------------------------------|--------|---------------------------------------------------------|--------|
| **Range of  Exercise Prices** |              | **Number  of  Options**                       |   | **Weighted-Average  Remaining  Contractual Life (yrs)** |   | **Weighted-Average  Exercise Price** |   | **Number  of  Options** |   | **Weighted-Average  Exercise Price** |   |
|                          |              | **(In  thousands, except per share amounts)** |   |
| $                             | 5.37 – 8.00  |                                          | 1,199  |                                                    | 5.33   |   | $ | 6.16 |   | 1,014 |   | $ | 5.90 |   |
| 8.42 – 12.00             |              | 346                                           |   | 7.84                                                    |   | 9.56 |   | 225 |   | 9.45 |   |
| 22.55 – 23.00            |              | 577                                           |   | 9.15                                                    |   | 22.95 |   | 184 |   | 22.85 |   |
| 30.00 – 38.00            |              | 81                                            |   | 9.61                                                    |   | 35.05 |   | 25 |   | 37.40 |   |
| $                             | 5.37 – 38.00 |                                          | 2,203  |                                                    | 6.88   |   | $ | 12.16 |   | 1,448 |   | $ | 9.15 |   |

 

**7.             Other Income and Expense**

 

Included in other income (expense) are certain items that do not relatedirectly to current ongoing business activity. Included in this classification for the year ended December 31, 2001 isinterest income of $1,337,000 offset by losses on asset dispositions of$176,000 and other miscellaneous non-operating expenses of $51,000. For theyear ended December 31, 2000, other expense consisted primarily of losses onasset dispositions of $220,000 and other miscellaneous non-operating expensesof $106,000 offset by interest income of $301,000. For the year ended December31, 1999, other income consisted primarily of interest income of $192,000offset by losses on asset dispositions of $67,000.

 

**8.             Income Taxes**

 

The components of income tax expense for the years ended December 31are as follows:

 
|               |   | **2001** |   | **2000**            |   | **1999** |   |
|--------------------|--------|----------|--------|---------------------|--------|----------|--------|
|               |   |     |   | **(In  thousands)** |   |     |   |
| Current:           |   |     |   |                |   |     |   |
| Federal            |   | $        | 5,671  |                | $      | 96       |   | $ | 8 |   |
| State              |   | 670      |   | 678                 |   | 75       |   |
|               |   | 6,341    |   | 774                 |   | 83       |   |
| Deferred:          |   |     |   |                |   |     |   |
| Federal            |   | 1,775    |   | (96                 | )      | (8       | )      |
| State              |   | —   |   | —              |   | —   |   |
|               |   | 1,775    |   | (96                 | )      | (8       | )      |
|               |   |     |   |                |   |     |   |
| Total tax  expense |   | $        | 8,116  |                | $      | 678      |   | $ | 75 |   |

 

33

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Income tax expense differs from the amount that would result byapplying the U.S. statutory rate to income before taxes.  A reconciliation of this difference is asfollows:

 
|                                        |   | **December  31,** |   |
|---------------------------------------------|--------|-------------------|--------|
|                                        |   | **2001**          |   | **2000** |   | **1999** |   |
| Federal  statutory rate                     |   | 34.0              | %      | 34.0 | % | 34.0 | % |
| State income  taxes, net of federal benefit |   | 3.0               |   | 6.6 |   | 3.9 |   |
| Net operating  loss carryforwards           |   | (7.0              | )      | (34.8 | ) | (36.8 | ) |
| Federal and  state tax credits              |   | (6.0              | )      | — |   | — |   |
| Other                                       |   | (1.8              | )      | 0.7 |   | 2.7 |   |
|                                        |   |              |   |   |   |   |   |
| Effective tax  rate                         |   | 22.2              | %      | 6.5 | % | 3.8 | % |

 

The reconciliation reflects permanent items that impact income taxexpense.  Items that increase income taxexpense include state income taxes and various non-deductible expenses, whereasitems that decrease income tax expense include net operating loss carryforwardsand various federal and state tax credits.

 

Net deferred tax assets and liabilities are included in the followingbalance sheet line items:

 
|                                    |   | **December  31,**   |   |
|-----------------------------------------|--------|---------------------|--------|
|                                    |   | **2001**            |   | **2000** |   |
|                                    |   | **(In  thousands)** |   |
| Prepaid costs  and other current assets |   | $                   | 2,008  |   | $ | 4,534 |   |
| Other long-term  liabilities            |   | (3,591              | )      | (4,343 | ) |
|                                    |   |                |   |   |   |
| Net deferred tax  (liability) asset     |   | $                   | (1,583 | ) | $ | 191 |   |

 

The temporary differences and carryforwards that give rise to deferredtax assets and liabilities are as follows:

 
|                                |   | **December  31,**   |   |
|-------------------------------------|--------|---------------------|--------|
|                                |   | **2001**            |   | **2000** |   |
|                                |   | **(In  thousands)** |   |
| Deferred tax  asset:                |   |                |   |   |   |
| Net operating loss  carryforwards   |   | $                   | 827    |   | $ | 4,441 |   |
| Expenses not  currently deductible  |   | 1,136               |   | 800 |   |
| Tax credit  carryforwards           |   | 2,307               |   | 223 |   |
| Gross deferred  tax assets          |   | 4,270               |   | 5,464 |   |
| Valuation  allowance                |   | —              |   | (930 | ) |
|                                |   |                |   |   |   |
| Deferred tax  assets                |   | 4,270               |   | 4,534 |   |
|                                |   |                |   |   |   |
| Deferred tax  liability:            |   |                |   |   |   |
| Accumulated  depreciation           |   | 5,853               |   | 4,343 |   |
|                                |   |                |   |   |   |
| Net deferred tax  (liability) asset |   | $                   | (1,583 | ) | $ | 191 |   |

 

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At December 31, 2001, we had approximately $2,200,000 of net operatingloss carryforwards expiring during the years 2005 to 2010.  Ownership changes as defined by section 382of the Internal Revenue Code could limit the amount of net operating losscarryforwards used in any one year or in the aggregate.

 

**9.             Net Income Per Share**

 

Basic net income per share is based on the weighted average number ofcommon shares outstanding.  Diluted netincome per share reflects the potential dilution that could occur if securitiesor other contracts to issue common stock were exercised or converted intocommon stock.  There were no adjustmentsto net income for the calculation of both basic and diluted net income pershare for all periods.

 

The calculation of weighted-average outstanding shares is as follows:

 
|                                                                                         |   | **Average  Shares** |   |
|----------------------------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                                         |   | **2001**            |   | **2000** |   | **1999** |   |
|                                                                                         |   | **(In  thousands)** |   |
| Weighted average  common shares outstanding (used in computing Basic net income per share)   |   | 23,589              |   | 17,520 |   | 17,086 |   |
| Common stock  equivalents                                                                    |   | 1,223               |   | 665 |   | 896 |   |
|                                                                                         |   |                |   |   |   |   |   |
| Weighted average  common shares outstanding (used in computing Diluted net income per share) |   | 24,812              |   | 18,185 |   | 17,982 |   |

 

Options to purchase approximately 32,000, 85,000 and 8,000 shares ofcommon stock were outstanding at December 31, 2001, 2000 and 1999,respectively, but were not included in the computation of diluted net incomeper share because their effect would be anti-dilutive.

 

All common shares have been restated for a three-for-two stock spliteffective June 29, 2001.

 

**10.**          **BenefitPlans**

 

We have a deferred compensation savings plan for the benefit of oureligible employees.  The plan permitscertain 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 toparticipate in the savings plan six months following the initial date ofemployment.  The employee must alsocomplete at least 500 hours of service in any twelve-month period.  Under the plan, we can make discretionarycontributions to the plan as approved by the board of directors.

 

Participants’ interest in company contributions to the plan vest over afour-year period.  We made contributionsof approximately $159,000, $83,000 and $55,000 during 2001, 2000 and 1999,respectively.

 

**11.          Statement of Cash Flows**

 

Supplemental disclosure of Cash Flow information:

 
|                        |   | **December  31,** |   |
|-----------------------------|--------|-------------------|--------|
|                        |   | **2001**          |   | **2000** |   | **1999** |   |
|                        |   |              |   | **(In  thousands)** |   |   |   |
| Cash paid for  interest     |   | $                 | 993    |   | $ | 3,130 |   | $ | 718 |   |
| Cash paid for  income taxes |   | $                 | 4,395  |   | $ | 366 |   | $ | 78 |   |

 

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**QuarterlyFinancial Summary (Unaudited)**

 
|                                |   | **Quarter  ended**                           |   |
|-------------------------------------|--------|----------------------------------------------|--------|
|                                |   | **March 31**                                 |   | **June 30** |   | **September  30** |   | **December  31** |   |
|                                |   | **(In  thousands except per share amounts)** |   |
| **2001**                            |   |                                         |   |   |   |   |   |   |   |
| Revenues                            |   | $                                            | 50,216 |   | $ | 59,162 |   | $ | 60,868 |   | $ | 63,072 |   |
| Direct operating  expense           |   | 28,778                                       |   | 32,875 |   | 35,194 |   | 35,005 |   |
| General and  administrative expense |   | 14,474                                       |   | 16,761 |   | 16,954 |   | 17,058 |   |
| Income from  operations             |   | 6,964                                        |   | 9,526 |   | 8,720 |   | 11,009 |   |
| Net income                          |   | 5,003                                        |   | 7,760 |   | 7,575 |   | 8,083 |   |
| Basic net income  per share         |   | .22                                          |   | .32 |   | .31 |   | .33 |   |
| Diluted net  income per share       |   | .22                                          |   | .31 |   | .30 |   | .32 |   |
|                                |   |                                         |   |   |   |   |   |   |   |
| **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 net income  per share         |   | .07                                          |   | .07 |   | .16 |   | .27 |   |
| Diluted net  income per share       |   | .06                                          |   | .06 |   | .15 |   | .25 |   |

 

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