**United StatesSecurities and Exchange Commission**

**Washington, D.C.  20549**

 

**Form 10-Q**

 

**ý****  QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15 (d)****OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended March 31, 2004**

 

**o****  TRANSITION REPORTPURSUANT TO SECTION 13 OR 15 (d)****OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Commission FileNumber 0-27024**

 

**METRO ONE TELECOMMUNICATIONS, INC.**

**(Exact name ofregistrant as specified in its charter)**

 

| **OREGON**                                                      |   | **93-0995165**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

###### **11200 Murray SchollsPlace, Beaverton, Oregon  97007**

(Address of principal executive offices) (zipcode)

 

 

**(503) 643-9500**

(Registrant’s telephone number, includingarea code)

 

**Indicate by check mark whether the registranthas (1) filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  Yes  ****ý     No  ****o**

 

**Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  ****ý     No  ****o**

 

**Number of shares of common stock outstandingas of May 5, 2004: 24,775,341 shares, no par value per share.**

 

 

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**METRO ONETELECOMMUNICATIONS, INC.**

 

**INDEX TO FORM 10 - Q**

 
|    |                                                                                        | **Page No.** |
|---------|---------------------------------------------------------------------------------------------|--------------|
| Part I  | Financial  Information                                                                      |         |
|    |                                                                                        |         |
| Item 1. | Financial  Statements (Unaudited)                                                           |         |
|    |                                                                                        |         |
|    | Condensed  Statements of Operations for the three months ended March 31, 2004 and 2003      |         |
|    |                                                                                        |         |
|    | Condensed  Balance Sheets as of March 31, 2004 and December 31, 2003                        |         |
|    |                                                                                        |         |
|    | Condensed Statements of Cash Flows for the  three months ended March 31, 2004 and 2003      |         |
|    |                                                                                        |         |
|    | Notes to Condensed Financial Statements                                                     |         |
|    |                                                                                        |         |
| Item 2. | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |         |
|    |                                                                                        |         |
| Item 3. | Quantitative and Qualitative Disclosures  About Market Risk                                 |         |
|    |                                                                                        |         |
| Item 4. | Controls and Procedures                                                                     |         |
|    |                                                                                        |         |
| Part II | Other Information                                                                           |         |
|    |                                                                                        |         |
| Item 6. | Exhibits and Reports on Form 8-K                                                            |         |
|    |                                                                                        |         |
|    | Signatures                                                                                  |         |

 

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**Metro One Telecommunications, Inc.Condensed Statements of Operations (Unaudited)**

 
|                                       |   | **Three  Months Ended  March 31,** |   |
|--------------------------------------------|--------|------------------------------------|--------|
| **(In  thousands, except per share data)** |   | **2004**                           |   | **2003** |   |
|                                       |   |                               |   |   |   |
| Revenues                                   |   | $                                  | 43,529 |   | $ | 59,336 |   |
|                                       |   |                               |   |   |   |
| Costs and expenses:                        |   |                               |   |   |   |
| Direct operating                           |   | 25,543                             |   | 33,513 |   |
| Selling, general and administrative        |   | 25,954                             |   | 19,199 |   |
|                                       |   | 51,497                             |   | 52,712 |   |
|                                       |   |                               |   |   |   |
| (Loss) income from operations              |   | (7,968                             | )      | 6,624 |   |
|                                       |   |                               |   |   |   |
| Other income, net                          |   | 119                                |   | 212 |   |
|                                       |   |                               |   |   |   |
| (Loss) income before income taxes          |   | (7,849                             | )      | 6,836 |   |
| Income tax expense                         |   | —                             |   | 2,726 |   |
|                                       |   |                               |   |   |   |
| Net (loss) income                          |   | $                                  | (7,849 | ) | $ | 4,110 |   |
|                                       |   |                               |   |   |   |
| Net (loss) income per common share:        |   |                               |   |   |   |
| Basic                                      |   | $                                  | (0.32  | ) | $ | .17 |   |
| Diluted                                    |   | $                                  | (0.32  | ) | $ | .17 |   |
|                                       |   |                               |   |   |   |
| Weighted average shares outstanding:       |   |                               |   |   |   |
| Basic                                      |   | 24,775                             |   | 24,682 |   |
| Diluted                                    |   | 24,775                             |   | 24,709 |   |

 

The accompanying notes are an integral part of these condensedfinancial statements.

 

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**Metro One Telecommunications, Inc.Condensed Balance Sheets (Unaudited)**

 
| **(In  thousands)**                                                                                                                                           |   | **March 31,  2004** |    | **December  31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
|                                                                                                                                                          |   |                |    |                    |   |
| **Assets**                                                                                                                                                    |   |                |    |                    |   |
|                                                                                                                                                          |   |                |    |                    |   |
| Current assets:                                                                                                                                               |   |                |    |                    |   |
| Cash and cash equivalents                                                                                                                                     |   | $                   | 49,252  |                    | $      | 44,381 |   |
| Restricted cash                                                                                                                                               |   | 4,900               |    | 4,900                   |   |
| Accounts receivable                                                                                                                                           |   | 30,420              |    | 32,078                  |   |
| Prepaid costs and other current assets                                                                                                                        |   | 6,914               |    | 15,944                  |   |
|                                                                                                                                                          |   |                |    |                    |   |
| Total current assets                                                                                                                                          |   | 91,486              |    | 97,303                  |   |
|                                                                                                                                                          |   |                |    |                    |   |
| Furniture, fixtures and equipment, net                                                                                                                        |   | 58,679              |    | 62,187                  |   |
| Intangible assets                                                                                                                                             |   | 5,032               |    | 4,819                   |   |
| Other assets                                                                                                                                                  |   | 490                 |    | 575                     |   |
|                                                                                                                                                          |   |                |    |                    |   |
| Total assets                                                                                                                                                  |   | $                   | 155,687 |                    | $      | 164,884 |   |
|                                                                                                                                                          |   |                |    |                    |   |
| **Liabilities and Shareholders’ Equity**                                                                                                                 |   |                |    |                    |   |
|                                                                                                                                                          |   |                |    |                    |   |
| Current liabilities:                                                                                                                                          |   |                |    |                    |   |
| Accounts payable                                                                                                                                              |   | $                   | 1,952   |                    | $      | 3,146 |   |
| Accrued liabilities                                                                                                                                           |   | 1,883               |    | 2,634                   |   |
| Accrued payroll and related costs                                                                                                                             |   | 12,857              |    | 12,297                  |   |
|                                                                                                                                                          |   |                |    |                    |   |
| Total current liabilities                                                                                                                                     |   | 16,692              |    | 18,077                  |   |
|                                                                                                                                                          |   |                |    |                    |   |
| Deferred tax liabilities                                                                                                                                      |   | 3,799               |    | 3,799                   |   |
| Other long-term liabilities                                                                                                                                   |   | 707                 |    | 670                     |   |
|                                                                                                                                                          |   |                |    |                    |   |
| Total liabilities                                                                                                                                             |   | 21,198              |    | 22,546                  |   |
|                                                                                                                                                          |   |                |    |                    |   |
| 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, 24,775 and 24,682 shares issued and outstanding at March 31, 2004  and December 31, 2003, respectively |   | 119,683             |    | 119,683                 |   |
| Retained earnings                                                                                                                                             |   | 14,806              |    | 22,655                  |   |
|                                                                                                                                                          |   |                |    |                    |   |
| Total shareholders’ equity                                                                                                                               |   | 134,489             |    | 142,338                 |   |
|                                                                                                                                                          |   |                |    |                    |   |
| Total liabilities and shareholders’ equity                                                                                                               |   | $                   | 155,687 |                    | $      | 164,884 |   |

 

The accompanying notes are an integral part of these condensedfinancial statements.

 

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**Metro One Telecommunications, Inc.Condensed Statements of Cash Flows (Unaudited)**

 
|                                                                                      |   | **Three  Months Ended March 31,** |    |
|-------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
| **(In  thousands)**                                                                       |   | **2004**                          |    | **2003** |   |
|                                                                                      |   |                              |    |   |   |
| Cash flows from operating activities:                                                     |   |                              |    |   |   |
| Net (loss) income                                                                         |   | $                                 | (7,849  | ) | $ | 4,110 |   |
| Adjustments to reconcile net (loss) income  to net cash provided by operating activities: |   |                              |    |   |   |
| Depreciation and amortization                                                             |   | 5,595                             |    | 5,106 |   |
| Loss on disposal of fixed assets                                                          |   | 11                                |    | 37 |   |
| Deferred income taxes                                                                     |   | —                            |    | (1,891 | ) |
| Deferred rent                                                                             |   | 37                                |    | 59 |   |
| Changes in certain assets and liabilities:                                                |   |                              |    |   |   |
| Accounts receivable                                                                       |   | 1,658                             |    | 1,537 |   |
| Prepaid expenses and other assets                                                         |   | 8,755                             |    | 390 |   |
| Accounts payable and other liabilities                                                    |   | (1,385                            | )       | 5,064 |   |
|                                                                                      |   |                              |    |   |   |
| Net cash provided by operating activities                                                 |   | 6,822                             |    | 14,412 |   |
|                                                                                      |   |                              |    |   |   |
| Cash flows from investing activities:                                                     |   |                              |    |   |   |
| Capital expenditures                                                                      |   | (1,951                            | )       | (4,000 | ) |
|                                                                                      |   |                              |    |   |   |
| Net cash used in investing activities                                                     |   | (1,951                            | )       | (4,000 | ) |
|                                                                                      |   |                              |    |   |   |
| Net increase in cash and cash equivalents                                                 |   | 4,871                             |    | 10,412 |   |
|                                                                                      |   |                              |    |   |   |
| Cash and cash equivalents, beginning of  period                                           |   | 44,381                            |    | 76,528 |   |
|                                                                                      |   |                              |    |   |   |
| Cash and cash equivalents, end of period                                                  |   | $                                 | 49,252  |   | $ | 86,940 |   |
|                                                                                      |   |                              |    |   |   |
| Supplemental disclosure of cash flow  information:                                        |   |                              |    |   |   |
| Cash (refunded) paid for income taxes, net                                                |   | $                                 | (10,072 | ) | $ | 845 |   |
| Cash paid for interest                                                                    |   | $                                 | —  |   | $ | 9 |   |

 

The accompanying notes are an integral part of these condensedfinancial statements.

 

3

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**Metro One Telecommunications, Inc.Notes to Condensed Financial Statements (Unaudited)**

 

**1.****             ****Summary of Significant Accounting Policies**

 

**Basis of Presentation**

 

The accompanying unauditedinterim condensed financial statements have been prepared by Metro OneTelecommunications, Inc. in conformity with accounting principles generally acceptedin the United States of America for interim financial information.  Accordingly, certain financial informationand footnotes have been omitted or condensed. In the opinion of management, the condensed financial statements includeall adjustments, consisting only of normal recurring adjustments, necessary fora fair presentation of the results for the interim periods.  These condensed financial statements andnotes thereto should be read in conjunction with our audited financialstatements included in our Annual Report on Form 10-K for the year endedDecember 31, 2003.  The results ofoperations for the interim period shown in this report are not necessarilyindicative of results for any future interim period or the entire fiscalyear.  Certain balances in the priorperiod financial statements have been reclassified to conform to current periodpresentation.  Such reclassificationshad no effect on reported net income.

 

**Advertising**

 

Costs of advertising areexpensed as incurred except for commercial advertising production costs, whichare expensed at the time the related commercials are first run.  Advertising expense was approximately $6.0million in the three-month period ended March 31, 2004, primarily related tomarketing and promotion of our Infone service launched in May 2003.  Subsequent to March 31, 2004, we also havecommitted to approximately $5.0 million of additional advertising and promotionfunding which is expected to be expensed during the second quarter of 2004.

 

**Stock-Based Compensation**

 

We have elected to account forstock options according to Accounting Principles Bulletin No. 25, “Accountingfor Stock Issued to Employees,” and to furnish the pro forma disclosuresrequired under Statement of Financial Accounting Standards (“SFAS”) No. 148,“Accounting for Stock-Based Compensation — Transition and Disclosure — anamendment of FASB Statement No. 123.”  Accordingly, no compensation cost has been recognized in the financialstatements related to stock options issued under our 1994 Stock Incentive Plan(the “Plan”).

 

If compensation cost on stock options grantedunder the Plan in the first three months of 2004 and 2003 had been determinedbased on the fair value of the options as of the grant date in a methodconsistent with that described in SFAS No. 123, “Accounting for Stock-BasedCompensation,” our net (loss) income and net (loss) income per share would havebeen changed to the pro forma amounts indicated below for the three monthperiods ended March 31:

 
|                                              |   | **2004**                                      |   | **2003** |   |
|---------------------------------------------------|--------|-----------------------------------------------|--------|----------|--------|
|                                              |   | **(In  thousands, except per share amounts)** |   |
|                                              |   |                                          |   |     |   |
| Net (loss) income, as reported                    |   | $                                             | (7,849 | )        | $      | 4,110 |   |
| Stock-based compensation expense                  |   | (878                                          | )      | (936     | )      |
| Net (loss) income, pro forma                      |   | $                                             | (8,727 | )        | $      | 3,174 |   |
|                                              |   |                                          |   |     |   |
| Basic net (loss) income per share, as  reported   |   | $                                             | (.32   | )        | $      | .17 |   |
| Basic net (loss) income per share, pro  forma     |   | $                                             | (.35   | )        | $      | .13 |   |
|                                              |   |                                          |   |     |   |
| Diluted net (loss) income per share, as  reported |   | $                                             | (.32   | )        | $      | .17 |   |
| Diluted net (loss) income per share, pro  forma   |   | $                                             | (.35   | )        | $      | .13 |   |

 

4

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**2.****              NetIncome Per Share**

 

Basic net (loss) income pershare is based on the weighted average number of common sharesoutstanding.  Diluted net (loss) incomeper share reflects the potential dilution that could occur if securities orother contracts to issue common stock were exercised or converted into commonstock.  There were no adjustments to net(loss) income in the calculation of both basic and diluted net (loss) incomeper share for all periods presented.

 

The calculation of weightedaverage outstanding shares is as follows:

 
|                                                                                       |   | **Three  Months Ended  March 31,** |   |
|--------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                       |   | **2004**                           |   | **2003** |   |
|                                                                                       |   | **(in  thousands****)**            |   |
| Weighted average shares outstanding used in  computing basic net (loss) income per share   |   | 24,775                             |   | 24,682 |   |
| Potential common shares resulting from the  exercise of stock options                      |   | —                             |   | 27 |   |
|                                                                                       |   |                               |   |   |   |
| Weighted average shares outstanding used in  computing diluted net (loss) income per share |   | 24,775                             |   | 24,709 |   |

 

Options to purchase 3,082,000and 1,856,000 shares of common stock were outstanding at March 31, 2004 and2003, respectively, but were not included in the computation of diluted net(loss) income per share because their effect would be anti-dilutive.

 

**3.****              Commitmentsand Contingencies**

 

We are party to various legalactions and administrative proceedings arising in the ordinary course ofbusiness.  We believe the disposition ofthese matters will not have a material adverse effect on our financialposition, results of operations or cash flows.

 

From time to time, in thenormal course of our business, we issue standby letters of credit and bankguarantees.  At March 31, 2004, we hadone letter of credit outstanding in the amount of $4,900,000 related to ourworkers’ compensation program.  Theletter of credit is secured by a certificate of deposit for the same amountthat is recorded as restricted cash. This letter of credit expires in April 2005.

 

**4.****           SignificantEvents**

 

Our contract with AT&TWireless expired on December 1, 2003, and we were unable to reach an economicarrangement acceptable to both parties; thus, our negotiations did not resultin a new contract to replace the existing one. AT&T Wireless accounted for approximately 45% and 35% of ourrevenues in the first quarter of 2004 and 2003, respectively.  We expect that substantially all of the callvolume from AT&T Wireless will transition away from us during the secondquarter of 2004.  The expiration of ourcontract with AT&T Wireless will have a material adverse effect on ourfinancial position, future operating results and cash flows, as well as ouroperations.

 

Our contract with Sprint PCSexpired on December 31, 2002.  We agreedto an arrangement with Sprint PCS, pursuant to which we continued to handle aportion of its subscribers’ calls during a transition period that wassubstantially completed by June 30, 2003. Revenue from Sprint PCS accounted for approximately 33% of our totalrevenue in the first quarter of 2003.

 

We have begun to adjustpersonnel, and expect to further adjust personnel, call centers and networkcapacities in order to address varying business circumstances, including theexpiration of these contracts.

 

5

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**ITEM 2****.****                                                     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

All statementsand trend analyses contained in this item and elsewhere in this report on Form10-Q relative to the future constitute “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements may, but donot necessarily, also include words such as “believes,” “expects,”“anticipates,” “plans,” “estimates,” “may,” “will,” “should,” “could,”“continue” or similar expressions. Forward-looking statements are not guarantees.  They involve known and unknown business and economic risks,uncertainties and other factors that may cause our actual results, performanceor achievements to be materially different from any future results, performanceor achievements expressed or implied by such forward-looking statements.  These risks, uncertainties and other factorsinclude those discussed in our 2003 Annual Report on Form 10-K filed with theSecurities and Exchange Commission. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publiclyrelease any revisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events.

 

Results ofoperations for the periods discussed below should not be considered indicativeof the results to be expected in any future period, and fluctuations inoperating results may also result in fluctuations in the market price of ourcommon stock.  Our quarterly and annualoperating results have in the past and may in the future vary significantlydepending on factors such as changes in the telecommunications market, theaddition or expiration of customer contracts, increased competition, changes inpricing policies by us or our competitors, lengthy sales cycles, advertisingcosts or lack of market acceptance associated with the introduction of newversions of our products or features, the cost and success of new growthstrategies, the timing of the initiation of wireless or othertelecommunications services through new delivery systems or their acceptance bycustomers, the timing and expense of the expansion or contraction of ournational call center network, the general employment environment, general economicconditions and the other factors discussed in our 2003 Annual Report on Form10-K filed with the Securities and Exchange Commission.

 

**Overview**

 

We are theleading developer and provider of Enhanced Directory Assistance® andinformation services for the telecommunications industry.  In recent years, our efforts have focused oncontracting with wireless carriers to provide our services to theirsubscribers.

 

Under ourcontracts, carriers agree to route some or all of their directory assistancecalls to us.  We offer our services tomultiple carriers within the same market. When a carrier’s subscribers dial a typical directory assistance number,such as “411,” “555-1212” or “00,” the calls are routed to and answered by ouroperators identifying the service by that carrier’s brand name.

 

Each carriercustomer establishes its own directory assistance fee structure for itssubscribers.  Wireless subscriberstypically pay fees to their carrier ranging from $1.00 to $1.40 plus airtimecharges for our services.  We bear nosubscriber collection risk with respect to carrier subscribers; however, theremay be collection risk to the extent growth and profitability in thetelecommunications industry decreases and to the extent we provide services toother types of customers, including businesses, governmental units or callersattracted through other means or affiliations.

 

We charge ourcarrier customers directly on a per call basis, with prices varying in somecases based on call volume.  In order toencourage our carrier customers to route more of their calls to us, ourlong-term strategy has been based in part on reducing the price we chargethem.  We expect that average revenueper call may continue to decrease over time, as we believe this pricingstrategy better positions us to retain and expand service with existing carriercustomers, where profitable, and to attract new carrier customers.  Prices for services provided to other typesof customers, including individuals, businesses, governmental units or othercallers, may vary based on the nature of the service, volume and othercircumstances.

 

Competition inthe telecommunications industry, and in the directory assistance market inwhich we participate, has recently been intense.  With slowing subscriber growth and declining revenue per user,carriers are looking to lower their costs of providing directory assistance andother services through, among other ways,

 

6

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outsourcing to low costdomestic or overseas operators and utilizing automation to reduce costs.  In response to these and other issues, inMay 2003, we launched Infone, a service that provides enhanced directory andpersonal assistant services directly to consumers.  Callers may use the service from nearly any domestic telephone,landline or wireless, simply by dialing “888-411-1111.”  Billing is handled by using a major creditcard.  Calls can be connected nationwideand to Canada and Puerto Rico for the all-inclusive price of 89 cents for anycall of up to 15 minutes, plus 5 cents per minute after that.

 

The initiallaunch of Infone was accompanied by a significant nationwide marketing andpromotion campaign designed to build brand awareness and encourage customers tosign up for Infone.  During the first quarterof 2004, we spent approximately $6.0 million on such marketing and promotioncampaigns, and we will likely spend significant additional funds on marketingand promotional activities in the future.

 

**SignificantEvents**

 

Our contractwith AT&T Wireless expired on December 1, 2003, and we were unable to reachan economic arrangement acceptable to both parties; thus, our negotiations didnot result in a new contract to replace the existing one.  AT&T Wireless accounted forapproximately 45% and 35% of our revenues in the first quarter of 2004 and2003, respectively.  We expect thatsubstantially all of the call volume from AT&T Wireless will transitionaway from us during the second quarter of 2004.  The expiration of our contract with AT&T Wireless will have amaterial adverse effect on our financial position, future operating results andcash flows, as well as our operations.

 

Our contractwith Sprint PCS expired on December 31, 2002. We agreed to an arrangement with Sprint PCS, pursuant to which we continuedto handle a portion of its subscribers’ calls during a transition period thatwas substantially completed by June 30, 2003. Revenue from Sprint PCS accounted for approximately 33% of our totalrevenue in the first quarter of 2003.

 

We have begunto adjust personnel, and expect to further adjust personnel, call centers andnetwork capacities in order to address varying business circumstances,including the expiration of these contracts.

 

**Results of Operations**

 

This tableshows selected items from our statements of income expressed as a percentage ofrevenues:

 
|                                      |   | **Three  Months Ended  March 31,** |       |
|-------------------------------------------|--------|------------------------------------|------------|
|                                      |   | **2004**                           |       | **2003** |   |
|                                      |   |                               | ** ** |   | ** ** |
| Revenues                                  |   | 100.0                              | %          | 100.0 | % |
| Direct operating costs                    |   | 58.7                               |       | 56.5 |   |
| Selling, general and administrative costs |   | 59.6                               |       | 32.4 |   |
| (Loss) income from operations             |   | (18.3                              | )          | 11.1 |   |
| Other income, net                         |   | 0.3                                |       | 0.4 |   |
| (Loss) income before income taxes         |   | (18.0                              | )          | 11.5 |   |
| Income tax expense                        |   | —                             |       | 4.6 |   |
| Net (loss) income                         |   | (18.0                              | )%         | 6.9 | % |

 

*Comparison of first quarter 2004 to firstquarter 2003*

 

Revenuesdecreased 26.6% to $43.5 million from $59.3 million.  Call volume decreased to approximately 94 million calls fromapproximately 127 million calls.  Thesedecreases resulted primarily from lower call volume from Sprint PCS due toexpiration of their contract, partially offset by growth in call volume underother existing contracts and markets. Our average revenue per call was between $0.46 and $0.47 in the firstquarter of both 2004 and 2003.

 

Directoperating costs consist of salaries, wages, benefits and taxes relating to callcenter personnel and costs of listings data and content acquisition.  These costs decreased 23.8% to $25.5 millionfrom $33.5 million.  This decrease wasprimarily due to lower personnel and data costs associated with servicing lowercall volumes.  As

 

7

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a percentage of revenues,direct operating costs increased to 58.7% from 56.5%, due primarily to highercosts associated with payroll taxes and our workers’ compensation and medicalinsurance programs.

 

Selling,general and administrative costs increased 35.2% to $26.0 million from $19.2million.  This increase resultedprimarily from marketing and promotion costs of approximately $6.0 million andincreased network costs associated with our Infone service.  As a percentage of revenues, selling,general and administrative costs increased to 59.6% from 32.4% resulting fromlower revenue and increased marketing, promotion and network costs.

 

Depreciationand amortization expense, a component of selling, general and administrativecosts, increased 9.6% to $5.6 million from $5.1 million and increased to 12.9%from 8.6% of revenue.  The increase indepreciation and amortization was due primarily to the purchase of equipmentfor upgrades of our corporate-wide infrastructure, including expendituresintended to increase efficiency in routing calls, and for equipment used inproduct development activities.

 

Other incomewas $119,000 and $212,000 in the first quarter of 2004 and 2003, respectively,and consisted primarily of interest income earned on cash and cashequivalents.  The decrease in 2004compared to 2003 resulted primarily from a decrease in cash available forinvestment and a decrease in market interest rates.

 

Because of ouroperating loss in the first quarter of 2004, we recorded no income taxexpense.  In the first quarter of 2003,income tax expense was $2.7 million, for an effective tax rate of approximately39.9%, reflecting our estimated combined net federal and state statutory incometax rate.

 

**Liquidityand Capital Resources**

 

As ofMarch 31, 2004, we had approximately $54.2 million in cash and cashequivalents and restricted cash (including $4.9 million of restricted cash)compared to approximately $49.3 million (including $4.9 million of restrictedcash) at December 31, 2003.  Thenet increase of $4.9 million resulted primarily from our receipt of a refund offederal income taxes of approximately $10.1 million, partially offset by ouruse of cash to advertise, market and promote our Infone service and to purchasecapital equipment.  We have nooutstanding debt.

 

Workingcapital was $74.8 million at March 31, 2004, compared to $79.2 million atDecember 31, 2003. This decrease was primarily due to working capital used toadvertise, market and promote Infone and the use of working capital to purchasecapital equipment.

 

*Cash flow from operations. *Net cash providedby operations was $6.8 million in the first quarter of 2004 compared to $14.4million in the first quarter of 2003. This difference resulted primarily from a decrease in revenues, anincrease in cash paid for advertising and promotion expenses and an increase incash paid to vendors and suppliers, partially offset by a decrease in cash paidto or on behalf of our employees and our receipt of a federal income tax refundin the first quarter of 2004 versus tax payments paid in the first quarter of2003.  Cash received from customersdecreased by approximately $15.7 million and cash paid to or on behalf ofemployees decreased by approximately $7.8 million primarily as a result of thedecrease in call volume from Sprint PCS. We also paid $6.0 million to advertise, market and promote Infone duringthe first quarter of 2004 compared to no such expenditures in the first quarterof 2003.  During the first quarter of2004, we received a refund of federal income taxes of approximately $10.1million compared to tax payments of approximately $845,000 made in the firstquarter of 2003.  The increase in cash paidto vendors and suppliers was mainly due to the timing of payments for productsand/or services, the costs of which may have been accrued or expensed in aperiod other than that in which the payments were made.

 

*Cash flow from investing activities. *Cash used ininvesting activities was $2.0 million in the first quarter of 2004 resultingprimarily from capital expenditures for equipment purchased for upgrades of ourcorporate-wide infrastructure, including expenditures intended to increaseefficiency in routing calls, and for equipment used in product developmentactivities.

 

*Cash flow from financing activities. *There was nosignificant cash expended or generated related to financing activities in thefirst quarter of 2004.

 

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*Future capital needs and resources. *The primary uses ofour capital in the near future are expected to be for the continuedadvertising, marketing and promotion of Infone, the development or acquisitionof technologies, features and content complementary to our business and forgeneral corporate purposes.  Thesegeneral corporate purposes could include acquisitions, efforts to pursue andmarket new growth strategies, other corporate development activities andworking capital.

 

We believe ourexisting cash and cash equivalents and cash from operations will be sufficientto fund our operations for the next twelve months.  Although cash on hand (including restricted cash) at March 31,2004 was approximately $54.2 million, future activities, including advertising,marketing and promoting Infone, execution of new product initiatives and growthstrategies and new product development and rollout may reduce availablecash.  As necessary, we will attempt toestablish borrowing arrangements in order to maintain adequate liquidity.   Depending on the development of ourbusiness, we believe we will have access to future financing sources, althoughwe cannot provide assurance that financing will be available in amounts or onterms acceptable to us.

 

Subsequent toMarch 31, 2004, we committed approximately $5.0 million to future promotion ofvarious information services, which amount we expect to expense in the secondquarter of 2004 as the related marketing activities take place.

 

**CriticalAccounting Policies**

 

We prepare ourfinancial statements in conformity with accounting principles generallyaccepted in the United States of America. As such, we are required to make certain estimates, judgments andassumptions that we believe are reasonable based upon the informationavailable.  These estimates andassumptions affect the reported amounts of assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the periods presented. Management believes that of our significant accounting policies (seeNote 1 to the financial statements in our Annual Report on Form 10-K for theperiod ended December 31, 2003), those governing accounts receivable, the livesand recoverability of the carrying amount of equipment and other long-livedassets, such as existing intangibles, estimates involving the levels of ourcontingent liabilities for workers’ compensation and medical self-insurance andestimates of current and deferred taxes owed may involve a higher degree ofjudgment, estimation and uncertainty.

 

*Accounts receivable. *Our customer base has primarily consisted oflarge wireless telephone carriers in the United States.  As such, we have had minimal risk ofuncollectibility, at any point in time, related to outstanding accounts receivablewith these customers.  We have notexperienced significant collection issues or write-offs related to thesecustomers.  Since our accountsreceivable are concentrated in relatively few of these wholesale customers, asignificant change in the liquidity or financial position of any one of themcould adversely impact collection of our accounts receivable and therefore havea material adverse effect on our financial position and future operatingresults.  In addition, with the launchof our Infone service, we generate receivables from retail customers andbusinesses that may expose us to greater risk of uncollectible receivables thanwe have experienced in the past.

 

*Long-lived assets. *Weevaluate the remaining life and recoverability of equipment and other assets, includingpatents and trademarks and internally developed software, whenever events orchanges in circumstances indicate that the carrying amount of the asset may notbe recoverable.  At such time, weestimate the future cash flows expected upon eventual disposition and, if lowerthan the carrying amount, adjust the carrying amount of the asset to itsestimated fair value.  Because of ourchanging business conditions and dependence on a relatively small number ofcustomers for a significant portion of our revenues, our estimates of futurecash flows to be generated from our operations could change materially,resulting in the need for us to record an impairment charge.  In addition, as a result of our changingbusiness conditions, we expect to adjust personnel, call centers and networkcapacities.  If any of these activitiesresult in certain of our assets no longer being used in operations, we may needto record an impairment charge.

 

*Self-insurance reserves.*  We self-insure a portion of our workers’compensation and employee medical insurance programs.  We purchase stoploss coverage at varying levels in order to mitigate our potential futurelosses.  The nature of these liabilities, which may not fully manifestthemselves for several years, requires significant judgment.  We evaluatepending workers’ compensation and medical claims periodically to determine thereasonableness of the reserves we have recorded for such claims.  Our evaluation includes estimates of potentialincurred-but-unreported claims as well as factors that may cause originalestimates of such claims to increase over

 

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time, such as available claimsdata and historical trends and experience, as well as future projections ofultimate losses, expenses, premiums and administrative costs.  We adjustthese reserves if events or changes in circumstances indicate that ultimatepayments related to the claims will be different than the recordedreserves.  While we believe that theamounts reserved for these obligations are appropriate, any significant changein the number of claims and costs associated with claims made under these planscould have a material effect on our financial position, results of operationsor cash flows.

 

*Income taxes. *Accounting for income taxes requires us toestimate our income taxes in each jurisdiction in which we operate.  Dueto differences in the recognition of items included in income for accountingand tax purposes, temporary differences arise which are recorded as deferredtax assets or liabilities.  We estimate the likelihood of recovery ofthese assets, which is dependent on future levels of profitability and enactedtax rates.  Should any amounts be determined not to be recoverable, orassumptions change, we would be required to take a charge, which could have amaterial effect on our financial position, results of operations or cash flows.

 

**ITEM 3****.****                                                     QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Substantiallyall of our liquid investments are invested in money market instruments, andtherefore, the fair market value of these investments is affected by changes inmarket interest rates.  However, theseinvestments were invested in overnight money market instruments at March 31,2004 and were redeemable on a daily basis. All of the underlying investments in the money market fund hadmaturities of three months or less.  Asa result, we believe the market risk arising from our holdings of financialinstruments is minimal.  A hypothetical1% fluctuation in interest rates would not have a material adverse effect onour financial position, results of operations or cash flows.

 

**ITEM 4****.****                                                     CONTROLSAND PROCEDURES**

 

We maintaindisclosure controls and procedures that are designed to ensure that theinformation required to be disclosed in our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure based closely on the definition of “disclosure controls andprocedures” in Rule 13a-15(e).  In designingand evaluating the disclosure controls and procedures, our managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management necessarily was required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures in reaching that level of reasonable assurance.

 

As of the endof the fiscal quarter covered by this report, we carried out an evaluation,under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of our disclosure controls and procedures.  Based on the foregoing, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective.

 

There has notbeen any change in our internal control over financial reporting, that occurredduring the fiscal quarter covered by this report, that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

 

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**PARTII****.****                                                OTHERINFORMATION**

 

**ITEM 6****.****                                                     EXHIBITSAND REPORTS ON FORM 8-K**

 

(a)          Exhibits

 

31.1                           Certificationof Timothy A. Timmins pursuant to Securities and Exchange Commission Rule13a-14(a)

 

31.2                           Certificationof Dale N. Wahl pursuant to Securities and Exchange Commission Rule 13a-14(a)

 

32                                    CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act Of 2002

 

(b) Reports on Form 8-K

 

On February 20, 2004, we filed a current report on Form 8-K, datedFebruary 20, 2004, under Item 12, Results of Operations and Financial Condition(which was filed under Item 9, Regulation FD Disclosure) which furnished ourfourth quarter and full year financial statements for the year ended December31, 2003.

 

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SIGNATURES

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Date:                  May 10, 2004

 

 
|   | METRO ONE  TELECOMMUNICATIONS, INC. |
|--------|-------------------------------------|
|   |                                |
|   |                                |
|   | By:                                 | /s/  Dale N. Wahl |   |
|   | Dale N. Wahl                        |
|   | Senior Vice  President,             |
|   | Chief  Financial Officer            |
|   | (Principal  Financial Officer)      |
|   |                                |
|   |                                |
|   | By:                                 | /s/  Duane C. Fromhart |   |
|   | Duane C.  Fromhart                  |
|   | Vice  President, Finance            |
|   | (Principal  Accounting Officer)     |

 

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