**United StatesSecurities and Exchange Commission**

**Washington, D.C.  20549**

 

**Form 10-Q**

 

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

 

**For the Quarterly Period Ended June 30, 2003**

 

**o****  TRANSITION REPORTPURSUANT TO SECTION 13 OR 15 (d)OF THE SECURITIES 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 Scholls Place, Beaverton,  Oregon  97007**  |
| (Address of principal executive  offices) (zip code)            |
|                                                            |
| **(503) 643-9500**                                              |
| (Registrant’s telephone number,  including area 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 August 7, 2003: 24,697,948 shares, no par value per share.**

 

 

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**METRO ONETELECOMMUNICATIONS, INC.**

 

**INDEX TO FORM 10 - Q**

 
| Part I  | Financial  Information                                                                        |
|---------|-----------------------------------------------------------------------------------------------|
|    |                                                                                          |
| Item 1. | Financial  Statements (Unaudited)                                                             |
|    |                                                                                          |
|    | Condensed Statements of Operations for the  three and six months ended June 30, 2003 and 2002 |
|    |                                                                                          |
|    | Condensed Balance Sheets as of June 30,  2003 and December 31, 2002                           |
|    |                                                                                          |
|    | Condensed Statements of Cash Flows for the  six months ended June 30, 2003 and 2002           |
|    |                                                                                          |
|    | 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 4. | Submission of Matters to a Vote of Security  Holders                                          |
|    |                                                                                          |
| 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 June 30,** |   | **Six Months  Ended June 30,** |   |
|--------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **(In  thousands, except per share data)** |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Revenues                                   |   | $                                | 51,035 |                           | $      | 67,853 |   | $ | 110,370 |   | $ | 129,618 |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Costs and expenses:                        |   |                             |   |                           |   |   |   |   |   |
| Direct operating                           |   | 28,981                           |   | 37,518                         |   | 62,494 |   | 72,768 |   |
| Selling, general and administrative        |   | 36,829                           |   | 18,482                         |   | 56,028 |   | 36,491 |   |
|                                       |   | 65,810                           |   | 56,000                         |   | 118,522 |   | 109,259 |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| (Loss) income from operations              |   | (14,775                          | )      | 11,853                         |   | (8,152 | ) | 20,359 |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Other income, net                          |   | 186                              |   | 197                            |   | 399 |   | 451 |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| (Loss) income before income taxes          |   | (14,589                          | )      | 12,050                         |   | (7,753 | ) | 20,810 |   |
| Income tax (benefit) expense               |   | (5,409                           | )      | 4,579                          |   | (2,683 | ) | 7,908 |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Net (loss) income                          |   | $                                | (9,180 | )                              | $      | 7,471 |   | $ | (5,070 | ) | $ | 12,902 |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Net (loss) income per common share:        |   |                             |   |                           |   |   |   |   |   |
| Basic                                      |   | $                                | (.37   | )                              | $      | .30 |   | $ | (.21 | ) | $ | .53 |   |
| Diluted                                    |   | $                                | (.37   | )                              | $      | .30 |   | $ | (.21 | ) | $ | .51 |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Weighted average shares outstanding:       |   |                             |   |                           |   |   |   |   |   |
| Basic                                      |   | 24,693                           |   | 24,555                         |   | 24,703 |   | 24,521 |   |
| Diluted                                    |   | 24,693                           |   | 25,115                         |   | 24,703 |   | 25,145 |   |

 

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

 

1

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

 
| **(In  thousands)**                                                                                                                                          |   | **June 30,  2003** |       | **December  31,  2002** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------------|------------|
|                                                                                                                                                         |   |               | ** ** |                    | ** ** |
| **Assets**                                                                                                                                                   |   |               | ** ** |                    | ** ** |
|                                                                                                                                                         |   |               |       |                    |       |
| Current assets:                                                                                                                                              |   |               |       |                    |       |
| Cash and cash equivalents                                                                                                                                    |   | $                  | 65,037     |                    | $          | 76,528 |   |
| Restricted cash                                                                                                                                              |   | 4,900              |       | 3,348                   |       |
| Accounts receivable                                                                                                                                          |   | 24,019             |       | 31,321                  |       |
| Prepaid costs and other current  assets                                                                                                                      |   | 17,592             |       | 6,498                   |       |
|                                                                                                                                                         |   |               |       |                    |       |
| Total current assets                                                                                                                                         |   | 111,548            |       | 117,695                 |       |
|                                                                                                                                                         |   |               |       |                    |       |
| Furniture, fixtures and  equipment, net                                                                                                                      |   | 70,249             |       | 71,668                  |       |
| Goodwill                                                                                                                                                     |   | 4,432              |       | 4,432                   |       |
| Intangible assets                                                                                                                                            |   | 4,803              |       | 4,316                   |       |
| Other assets                                                                                                                                                 |   | 585                |       | 578                     |       |
|                                                                                                                                                         |   |               |       |                    |       |
| Total assets                                                                                                                                                 |   | $                  | 191,617    |                    | $          | 198,689 |   |
|                                                                                                                                                         |   |               |       |                    |       |
| **Liabilities and Shareholders’ Equity**                                                                                                                |   |               |       |                    |       |
|                                                                                                                                                         |   |               |       |                    |       |
| Current liabilities:                                                                                                                                         |   |               |       |                    |       |
| Accounts payable                                                                                                                                             |   | $                  | 1,885      |                    | $          | 1,366 |   |
| Accrued liabilities                                                                                                                                          |   | 3,307              |       | 1,054                   |       |
| Accrued payroll and related  costs                                                                                                                           |   | 10,362             |       | 11,570                  |       |
|                                                                                                                                                         |   |               |       |                    |       |
| Total current liabilities                                                                                                                                    |   | 15,554             |       | 13,990                  |       |
|                                                                                                                                                         |   |               |       |                    |       |
| Deferred tax liabilities                                                                                                                                     |   | 5,076              |       | 8,789                   |       |
| Other long-term liabilities                                                                                                                                  |   | 607                |       | 521                     |       |
|                                                                                                                                                         |   |               |       |                    |       |
| Total liabilities                                                                                                                                            |   | 21,237             |       | 23,300                  |       |
|                                                                                                                                                         |   |               |       |                    |       |
| 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, 24,698 and 24,682 shares issued and outstanding at  June 30, 2003 and December 31, 2002, respectively |   | 119,486            |       | 119,425                 |       |
| Retained earnings                                                                                                                                            |   | 50,894             |       | 55,964                  |       |
|                                                                                                                                                         |   |               |       |                    |       |
| Total shareholders’ equity                                                                                                                              |   | 170,380            |       | 175,389                 |       |
|                                                                                                                                                         |   |               |       |                    |       |
| Total liabilities and  shareholders’ equity                                                                                                             |   | $                  | 191,617    |                    | $          | 198,689 |   |

 

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

 

2

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

 
|                                                                                                |   | **Six Months  Ended June 30,** |   |
|-----------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
| **(In  thousands)**                                                                                 |   | **2003**                       |   | **2002** |   |
|                                                                                                |   |                           |   |   |   |
| Cash flows from operating  activities:                                                              |   |                           |   |   |   |
| Net (loss) income                                                                                   |   | $                              | (5,070 | ) | $ | 12,902 |   |
| Adjustments to reconcile net  (loss) income to net cash (used in) provided by operating activities: |   |                           |   |   |   |
| Depreciation and amortization                                                                       |   | 10,312                         |   | 8,926 |   |
| Loss on disposal of fixed assets                                                                    |   | 75                             |   | 26 |   |
| Deferred income taxes                                                                               |   | (4,060                         | )      | — |   |
| Tax benefit from stock option  plans                                                                |   | —                         |   | 467 |   |
| Changes in certain assets and  liabilities:                                                         |   |                           |   |   |   |
| Accounts receivable                                                                                 |   | 7,301                          |   | (15,607 | ) |
| Prepaid expenses and other  assets                                                                  |   | (11,498                        | )      | 1,059 |   |
| Accounts payable and other  liabilities                                                             |   | 1,651                          |   | (1,832 | ) |
|                                                                                                |   |                           |   |   |   |
| Net cash (used in) provided by  operating activities                                                |   | (1,289                         | )      | 5,941 |   |
|                                                                                                |   |                           |   |   |   |
| Cash flows from investing  activities:                                                              |   |                           |   |   |   |
| Capital expenditures                                                                                |   | (8,775                         | )      | (11,803 | ) |
| Proceeds from sale of assets                                                                        |   | 65                             |   | 8 |   |
|                                                                                                |   |                           |   |   |   |
| Net cash used in investing  activities                                                              |   | (8,710                         | )      | (11,795 | ) |
|                                                                                                |   |                           |   |   |   |
| Cash flows from financing  activities:                                                              |   |                           |   |   |   |
| Restricted cash to secure  letter of credit                                                         |   | (1,552                         | )      | (2,448 | ) |
| Proceeds from exercise of stock  options and employee stock purchases                               |   | 60                             |   | 985 |   |
|                                                                                                |   |                           |   |   |   |
| Net cash used in financing  activities                                                              |   | (1,492                         | )      | (1,463 | ) |
|                                                                                                |   |                           |   |   |   |
| Net decrease in cash and cash  equivalents                                                          |   | (11,491                        | )      | (7,317 | ) |
|                                                                                                |   |                           |   |   |   |
| Cash and cash equivalents,  beginning of period                                                     |   | 76,528                         |   | 53,692 |   |
|                                                                                                |   |                           |   |   |   |
| Cash and cash equivalents, end  of period                                                           |   | $                              | 65,037 |   | $ | 46,375 |   |
|                                                                                                |   |                           |   |   |   |
| Supplemental disclosure of cash  flow information:                                                  |   |                           |   |   |   |
| Cash paid for interest                                                                              |   | $                              | — |   | $ | 10 |   |
| Cash paid for income taxes                                                                          |   | $                              | 638    |   | $ | 3,530 |   |

 

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

 

3

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

 

**1. Summary of Significant Accounting Policies**

 

**Basis of Presentation**

 

The accompanyinginterim condensed financial statements have been prepared by Metro OneTelecommunications, Inc. without audit and in conformity with accountingprinciples generally accepted in the United States of America for interimfinancial information.  Accordingly,certain financial information and footnotes have been omitted orcondensed.  In the opinion ofmanagement, the condensed financial statements include all adjustments,consisting only of normal recurring adjustments, necessary for a fairpresentation of the results for the interim periods.  These condensed financial statements and notes thereto should beread in conjunction with our audited financial statements included in ourAnnual Report on Form 10-K for the year ended December 31, 2002.  The results of operations for the interimperiod shown in this report are not necessarily indicative of results for anyfuture interim period or the entire fiscal year.  Certain balances in the prior period financial statements havebeen reclassified to conform to current period presentations.  Such reclassifications had no effect onreported net income.

 

**Advertising**

 

Costs ofadvertising are expensed as incurred except for commercial advertisingproduction costs, which are expensed at the time the related commercials arefirst run.  Advertising expense wasapproximately $17 million and $18 million in the three and six months periodsended June 30, 2003, respectively.

 

**Stock-Based Compensation**

 

We have elected tocontinue to account for stock options according to Accounting PrinciplesBulletin No. 25, “Accounting for Stock Issued to Employees,” and to furnish thepro forma disclosures required under Statement of Financial AccountingStandards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation —Transition and Disclosure — an amendment of FASB Statement No. 123.”  No stock-based employee compensation cost isreflected in net income, as all options granted under the Metro OneTelecommunications, Inc. 1994 Stock Incentive Plan had an exercise price equalto the market value of the underlying common stock on the date of thegrant.  The following table illustratesthe effect on net income and net income per share as if we had applied the fairvalue recognition principles of SFAS No. 123, “Accounting for Stock-Based Compensation”to stock options issued:

 
|                                              |   | **Three  Months Ended June 30,**              |    | **Six Months  Ended June 30,** |   |
|---------------------------------------------------|--------|-----------------------------------------------|---------|--------------------------------|--------|
|                                              |   | **2003**                                      |    | **2002**                       |   | **2003** |   | **2002** |   |
|                                              |   | **(In  thousands, except per share amounts)** |    |
| Net (loss) income, as reported                    |   | $                                             | (9,180  | )                              | $      | 7,471 |   | $ | (5,070 | ) | $ | 12,902 |   |
| Stock-based compensation expense                  |   | (987                                          | )       | (959                           | )      | (1,917 | ) | (1,851 | ) |
| Net (loss) income, pro forma                      |   | $                                             | (10,167 | )                              | $      | 6,512 |   | $ | (6,987 | ) | $ | 11,051 |   |
|                                              |   |                                          |    |                           |   |   |   |   |   |
| Diluted net (loss) income per share, as  reported |   | $                                             | (0.37   | )                              | $      | 0.30 |   | $ | (0.21 | ) | $ | 0.51 |   |
| Stock-based compensation expense                  |   | (0.04                                         | )       | (0.04                          | )      | (0.07 | ) | (0.07 | ) |
| Diluted net (loss) income per share, pro  forma   |   | $                                             | (0.41   | )                              | $      | 0.26 |   | $ | (0.28 | ) | $ | 0.44 |   |

 

**2.****                                      Net(Loss) Income 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.

 

4

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The calculation of weightedaverage outstanding shares is as follows:

 
|                                                                                         |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|----------------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                                         |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                                                                         |   | **(in  thousands)**              |   |
| Weighted average shares outstanding (used  in computing Basic net (loss) income per share)   |   | 24,693                           |   | 24,555                         |   | 24,703 |   | 24,521 |   |
| Potential common shares resulting from the  exercise of stock options                        |   | —                           |   | 560                            |   | — |   | 624 |   |
|                                                                                         |   |                             |   |                           |   |   |   |   |   |
| Weighted average shares outstanding (used  in computing Diluted net (loss) income per share) |   | 24,693                           |   | 25,115                         |   | 24,703 |   | 25,145 |   |

 

Options to purchase 2,812,000and 906,000 shares of common stock were outstanding at June 30, 2003 and 2002,respectively, but were not included in the computation of diluted net (loss)income per share for the three months ended June 30, 2003 and 2002,respectively, because their effect would be anti-dilutive.  Options to purchase 2,723,000 and 897,000shares of common stock were outstanding at June 30, 2003 and 2002,respectively, but were not included in the computation of diluted net (loss)income per share for the six months ended June 30, 2003 and 2002, respectively,because their effect would be anti-dilutive.

 

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

 

We are party tovarious legal actions and administrative proceedings arising in the ordinarycourse of business.  We believe thedisposition of these matters will not have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

From time to time,in the normal course of our business, we issue standby letters of credit andbank guarantees.  At June 30, 2003, wehad one 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.  Thisletter of credit expires in April 2004.

 

As of June 30, 2003, we havecommitted to and paid out approximately $12 million for future advertising andpromotion of our InfoneTM service which we expect to expense overthe remainder of 2003 as the related advertising and promotion activitiesoccur.  These expenditures are includedin prepaid costs and other current assets on the balance sheet at June 30,2003.  In addition, subsequent to June30, 2003, we committed to and paid approximately $9 million of additionaladvertising and promotion funding which is expected to be expensed during 2003.

 

**4.****                                   SignificantEvents**

 

Our contract withSprint PCS expired on December 31, 2002. We agreed to a transition arrangement with Sprint PCS, pursuant to whichwe continued to handle its subscribers’ calls subsequent to December 31, 2002.  The transition began in March 2003 and wassubstantially completed as of June 30, 2003. Sprint PCS accounted for approximately 13% and 33% of our revenues inthe three-month periods ended June 30, 2003 and 2002, respectively, andapproximately 23% and 34% of our revenues in the six month periods ended June30, 2003 and 2002, respectively.  Theexpiration of the Sprint PCS contract has had and will likely continue to havean adverse effect on our financial position, cash flows and future operatingresults, particularly when compared with prior periods.

 

Our contract withCingular Wireless expired in May 2002. We continued to serve Cingular Wireless customers in its California,Nevada and Washington markets until October 2002.  There were no revenues from Cingular Wireless in the first threeor six months of 2003.  CingularWireless accounted for approximately 6% of our revenues during the three andsix month periods ended June 30, 2002.

 

5

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**5.****                                      RecentAccounting Pronouncements**

 

In December 2002, the FinancialAccounting Standards Board issued SFAS No. 148, which provides alternativemethods of transition for a voluntary change to the fair-value-based method ofaccounting for stock-based employee compensation.  In addition, SFAS No. 148 amends the disclosure requirements ofSFAS No. 123 to require prominent disclosure in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effects of the method used on reported results.  The interim disclosure provisions wereeffective January 1, 2003.  At present,we do not intend to adopt the fair-value-based method of accounting for ourstock compensation plans.  We haveadopted the disclosure provisions of SFAS No. 148 in our financial reports forthe year ended December 31, 2002 and the interim reports in 2003.

 

6

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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 2002 Annual Report on Form 10-K filed with theSecurities and Exchange Commission and our Current Report on Form 8-K filedwith the Securities and Exchange Commission on May 27, 2003.  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 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, lack of marketacceptance or delays in the introduction of new versions of our products orfeatures, the cost and success of new growth strategies, the timing of theinitiation of wireless services through new delivery systems or theiracceptance by customers, the timing and expense of the expansion or contractionof our national call center network, the general employment environment,general economic conditions, significant world events and other factors,including but not limited to, factors discussed in our 2002 Annual Report onForm 10-K filed with the Securities and Exchange Commission.  In addition, the launch of our new Infoneservice to consumers subjects us to new risks and uncertainties including, butnot limited to, factors discussed in our Current Report on Form 8-K filed withthe Securities and Exchange Commission on May 27, 2003.

 

#### **Overview**

 

We are aleading 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 our existing contracts with wireless carriers, those carriersagree to route some or all of their directory assistance and/or alphanumericmessaging calls to us.  We typicallyoffer our services to multiple carriers within the same market.  When a carrier’s subscribers dial a typicaldirectory assistance number, such as “411,” “555-1212” or “00,” the callsare answered by our operators identifying the service by that carrier’s brandname, such as “AT&T Wireless Connect,” or “Nextel 411.”  We intend to provide services to additionalcarriers, businesses, governmental units and callers in general throughalternate strategies intended to attract calls, information queries and othertransactions.

 

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 charge our carriercustomers directly and, at present, bear no subscriber collection risk with respectto 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 our carrier customers directly on a per call basis, withprices varying in some cases based on call volume.  In order to encourage our carrier customers to route more oftheir calls to us, our long-term strategy has been based in part on reducingthe price we charge them.  We expectthat average revenue per call will continue to 

 

7

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decrease over timeas we believe this pricing strategy better positions us to retain and expandservice with existing carrier customers. Prices for services provided to other types of customers, includingbusinesses, governmental units or other callers may vary based on the nature ofthe service, volume and other circumstances.

 

In May 2003, we launched InfoneTM, a new service that providesenhanced directory assistance, personal assistant services and other telephoneservices directly to consumers and other entities.  Callers may use the service from virtually any domestictelephone, wireline or wireless, by dialing “888-411-1111.”  Billing is handled through creditcards.  Calls can be connectednationwide and to Canada for the all-inclusive price of 89 cents for any callof up to 15 minutes, plus 5 cents per minute after that.  A number of connectivity features areoffered, including “My Infone,” a personal assistant service to handlecontacts, calendars and personal preferences, and “TeleConcierge,” for makingreservations and performing other concierge services.  Infone also provides connection and transport of calls.  As of July 25, 2003, the date of our secondquarter 2003 financial results press release, we had obtained approximately20,000 Infone subscribers.

 

We expect to adjust call center and network capacities in order toaddress varying business circumstances, including changes in volume demands andexecution of our long-term business strategy including, but not limited to, thepursuit of additional new business and the promotion of our recently launchedInfone service.  Capacity needs couldvary significantly as a result of changes in volume from existing carriercustomers, changes in usage within existing markets served, changes in thecarrier customers and/or the number of calls routed to us or as a result of ourInfone service or alternative strategies to attract additional calls.  We will continue to opportunistically pursueadditional significant new business.

 

**Significant Events**

 

Our contract with Sprint PCS expired on December 31, 2002.  We agreed to a transition arrangement withSprint PCS, pursuant to which we continued to handle its subscribers’ callssubsequent to December 31, 2002.  Thetransition began in March 2003 and was substantially completed as of June 30,2003.  Sprint PCS accounted forapproximately 13% and 33% of our revenues in the three-month periods ended June30, 2003 and 2002, respectively, and approximately 23% and 33% of our revenuesin the six month periods ended June 30, 2003 and 2002, respectively.  The expiration of the Sprint PCS contracthas had and will likely continue to have an adverse effect on our financialposition, cash flows and future operating results, particularly when comparedto prior periods.

 

Our contract with Cingular Wireless expired in May 2002.  We continued to serve Cingular Wirelesscustomers in its California, Nevada and Washington markets until October2002.  There were no revenues fromCingular Wireless in the first six months of 2003.  Cingular Wireless accounted for approximately 6% of our revenuesduring the three and six month periods ended June 30, 2002.

 

**Results of Operations**

 

The followingtable shows selected items of our statements of income data expressed as apercentage of revenues:

 
|                                      |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                      |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
| Revenues                                  |   | 100.0                             | %      | 100.0                           | %      | 100.0 | % | 100.0 | % |
| Direct operating costs                    |   | 56.8                              |   | 55.3                            |   | 56.6 |   | 56.1 |   |
| Selling, general and administrative costs |   | 72.2                              |   | 27.2                            |   | 50.8 |   | 28.2 |   |
| (Loss) income from operations             |   | (29.0                             | )      | 17.5                            |   | (7.4 | ) | 15.7 |   |
| Other income, net                         |   | 0.4                               |   | 0.3                             |   | 0.4 |   | 0.4 |   |
| (Loss) income before income taxes         |   | (28.6                             | )      | 17.8                            |   | (7.0 | ) | 16.1 |   |
| Income tax (benefit) expense              |   | (10.6                             | )      | 6.8                             |   | (2.4 | ) | 6.1 |   |
| Net (loss) income                         |   | (18.0                             | %)     | 11.0                            | %      | (4.6 | )% | 10.0 | % |

 

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*Comparison of Second Quarter 2003 to SecondQuarter 2002*

 

Revenuesdecreased 24.8% to $51.0 million from $67.9 million while call volume decreasedto approximately 110 million calls from approximately 142 million calls.  This decrease resulted primarily from theexpiration of our contracts with Sprint PCS and Cingular Wireless partiallyoffset by increases in call volume and revenue under existing contracts.  The decrease in revenue also resulted from avolume-related decrease in our average revenue per call, primarily related to acustomer that exercised a contractual right to move to volume-based pricing.

 

Directoperating costs decreased 22.8% to $29.0 million from $37.5 million.  This decrease was primarily due to decreasedstaffing costs associated with decreased call volumes.  As a percentage of revenues, directoperating costs increased to 56.8% from 55.3%. This increase was due primarily to training costs incurred inpreparation for the launch of our Infone service.

 

Selling, generaland administrative costs increased 99% to $36.8 from $18.5 million.  As a percentage of revenues, selling,general and administrative costs increased to 72.2% from 27.2%.  These increases resulted primarily fromincreased advertising, promotion and network costs for our Infone service.  During the second quarter of 2003, we paidapproximately $29 million for advertising and promotion costs for the Infoneservice, of which approximately $17 million was expensed in the statement ofoperations in the quarter and approximately $12 million is included in prepaidcosts and other current assets on the balance sheet.  These prepaid costs are expected to be expensed over theremainder of 2003 as the related advertising and promotion efforts occur.  In addition, subsequent to June 30, 2003, wecommitted to and paid approximately $9 million of additional advertising andpromotion funding which is also expected to be expensed during 2003.

 

Depreciationand amortization increased by 18.2% to $5.2 from $4.4 million due primarily todepreciation expense on equipment purchased for upgrades of existing callcenters, product development activities and equipment purchased for our Infoneservice.

 

Other income,net for the three months ended June 30, 2003 and 2002 was $186,000 and$197,000, respectively.  Other incomeconsisted primarily of interest income in both periods.  The decrease in interest income during thesecond quarter of 2003 compared to the second quarter of 2002 resulted fromlower cash balances and a lower average interest rate received on cashequivalents invested in money market instruments.

 

Income taxbenefit for the three months ended June 30, 2003 was $5.4 million.  This is the estimated amount needed to bringour year-to-date tax benefit to the appropriate level.  The year to date tax benefit reflects theopportunity to carry back tax losses incurred in the current year to offsettaxable income in prior years and to receive refunds of income taxes paid inthose years.  Income tax expense for thethree months ended June 30, 2002 was $4.6 million, for an effective tax rate ofapproximately 38.0% which represented our estimated combined federal and stateeffective income tax rate.

 

*Comparison of the First Six Months of 2003 tothe First Six Months of 2002*

 

Revenuesdecreased 14.8% to $110.4 million from $129.6 million while call volumedecreased to approximately 236 million calls from approximately 270 millioncalls. This decrease resulted primarily from the expiration of our contractswith Sprint PCS and Cingular Wireless partially offset by increases in callvolume and revenue under existing contracts. The decrease in revenue also resulted from a volume-related decrease inour average revenue per call, primarily related to a customer that exercised acontractual right to move to volume-based pricing.

 

Directoperating costs decreased 14.1% to $62.5 million from $72.8 million. Thisdecrease was primarily due to decreased staffing costs associated withdecreased call volumes. As a percentage of revenues, direct operating costsincreased to 56.6% from 56.1%. This increase was due primarily to trainingcosts incurred in preparation for the launch of our Infone service.

 

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Selling,general and administrative costs increased 53.5% to $56.0 million from $36.5million.  As a percentage of revenues,selling, general and administrative costs increased to 50.8% from 28.2%.  These increases resulted primarily fromincreased advertising, promotion and network costs for our Infone service.  In the first half of 2003, we expensedapproximately $18 million in costs associated with advertising and promotingInfone.

 

Depreciationand amortization increased by 15.5% to $10.3 million from $8.9 million dueprimarily to depreciation expense on equipment purchased for upgrades ofexisting call centers, product development activities and equipment purchasedfor our Infone service.

 

Other income,net for the six months ended June 30, 2003 and 2002 was $399,000 and $451,000,respectively.  Other income consistedprimarily of interest income in both periods. The decrease in interest income resulted from a lower average interestrate received on cash equivalents invested in money market instruments.

 

Income taxbenefit for the six months ended June 30, 2003 was $2.7 million.  The year to date tax benefit reflects theopportunity to carry back tax losses incurred in the current year to offsettaxable income in prior years and to receive refunds of income taxes paid inthose years.  Income tax expense for thesix months ended June 30, 2002 was $7.9 million, for an effective tax rate ofapproximately 38.0%.

 

#### **Liquidity and Capital Resources**

 

Our cash andcash equivalents are recorded at cost, which approximates fair marketvalue.  As of June 30, 2003, we had$65.0 million in cash and cash equivalents compared to $76.5 million atDecember 31, 2002.  The net decrease of$11.5 million resulted primarily from cash used in operations, mainly due topayments made for advertising and promotion costs related to our Infoneservice, capital expenditures and an increase in cash restricted as securityfor a letter of credit.  We have nooutstanding debt.

 

Workingcapital was $96.0 million at June 30, 2003, compared to $103.7 million atDecember 31, 2002.  The decrease is dueprimarily to working capital used in operations, again primarily related toworking capital used to advertise and promote Infone.

 

*Cash Flow from Operations. *Net cash used inoperations was $1.3 million for the six months ended June 30, 2003, includingpayments of approximately $29 million made to advertise and promoteInfone.  Of the $29 million,approximately $17 million was expensed in the current quarter and approximately$12 million was advanced for future advertising and promotional activitiesrelated to Infone and is included in prepaid costs and other current assets onthe balance sheet at June 30, 2003.

 

*Cash Flow from Investing Activities. *Cash used ininvesting activities was $8.7 million for the six months ended June 30, 2003 resultingprimarily from capital expenditures for equipment purchased to upgrade existingcall centers, for product development activities and for equipment purchasedrelated to our Infone service.

 

*Cash Flow from Financing Activities. *Net cash used infinancing activities was $1.5 million for the six months ended June 30, 2003resulting primarily from additional cash used to secure a letter of credit,partially offset by proceeds from the employee stock purchase plan.

 

*Future Capital Needs and Resources. *The primary uses ofour capital in the near future are expected to be for advertising and promotionactivities related to Infone and other new business initiatives; for thedevelopment or acquisition of technologies, features and content complementaryto our business; for the upgrade and/or maintenance of our call center networkand its capacity to serve existing and potential new customers; and for generalcorporate purposes.  These generalcorporate purposes may include possible acquisitions, efforts to pursue andmarket new growth strategies and other corporate development activities andworking capital.  We expect to adjustour capacity  and use of cash in orderto address varying business circumstances, including changes in volume demandsand execution of our long-term business strategy.

 

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 June 30,2003 was approximately $70 million, future activities, including advertisingand promotion of Infone, execution of alternative business strategies, newproduct development and rollout, will impact the amount of available cash.  If necessary, we 

 

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may attempt to establishborrowing arrangements in order to maintain adequate liquidity.  We believe we will have access to futurefinancing sources, although we cannot provide assurance that funding will beavailable in amounts or on terms agreeable to us.

 

As of June 30,2003, we have committed to and paid out approximately $12 million for futurepromotion of our Infone service, which we expect to expense over the remainderof 2003 as the related advertising activities take place.  In addition, subsequent to June 30, 2003, wecommitted to and paid approximately $9 million of additional advertising andpromotion funding which is expected to be expensed during 2003.

 

### **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.  Theseestimates and assumptions affect the reported amounts of assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the periods presented. We believe that of our significant accounting policies (see Note 1 tothe financial statements in our Annual Report on Form 10-K for the period endedDecember 31, 2002), those governing accounts receivable, the lives andrecoverability of the carrying amount of equipment and other long-lived assetsand goodwill, estimates involving the levels of our liabilities for workers’compensation and medical self-insurance reserves and estimates of current anddeferred taxes owed may involve a higher degree of judgment, estimation anduncertainty.

 

*Accounts receivable. *Our customer basehas principally consisted of large wireless telephone carriers in the UnitedStates.  As such, we believe we haveminimal risk of uncollectibility, at any point in time, related to outstandingaccounts receivable.  We have notexperienced significant collection issues or write-offs related to thesecustomers; consequently, we do not maintain an allowance for doubtfulaccounts.  Since our accounts receivableare currently concentrated in relatively few customers, a significant change inthe liquidity or financial position of any one of these customers couldadversely impact collection of our accounts receivable and therefore have amaterial adverse effect on our financial position and future operating results.  With the introduction of our Infone service,since billing will be accomplished via a pre-validated credit card account, webelieve that collection issues will not be significant.  We will monitor and evaluate our collectionexperience over time to determine whether or not an allowance for doubtfulaccounts is necessary.

 

*Long-lived assets and goodwill.*  We evaluate the remaining life andrecoverability of equipment and other assets, including patents and trademarksand internally developed software, whenever events or changes in circumstancesindicate that the carrying amount of the asset may not be recoverable.  At such time, we estimate the future cashflows expected from their continued use and eventual disposition and, if lowerthan the carrying amount, adjust the carrying amount of the asset to itsestimated fair value.

 

We account forgoodwill in accordance with Statement of Financial Accounting Standards(“SFAS”) No. 142, “Goodwill and Other Intangible Assets.”  Under SFAS No. 142, we evaluate goodwill forimpairment annually and whenever events or changes in circumstances indicatethe carrying amount of goodwill may not be recoverable.  We perform our annual impairment test inNovember each year.  To perform thattest, we compare the carrying value of our business to our estimates of thefair value of our business.  If ourevaluation indicates that the fair value of our business is less than itscarrying value, we will write down the related goodwill to its implied fairvalue.  We use estimates of future cashflows, discounted to present value, market prices and other measures toestimate the fair value of our business. It is reasonably possible that ourestimates of future cash flows, discount rates and other assumptions inherentin the calculation of the estimated fair value of our business will change inthe future, which could cause us to write down goodwill at that time.

 

*Self-insurance reserves. *We self-insure aportion of our workers’ compensation and employee medical insuranceprograms.  Depending on circumstances,in some cases we may purchase stop loss coverage at varying levels in order tomitigate our potential future losses. The nature of these liabilities, which may not fully manifest themselvesfor several years, requires significant judgment.  We evaluate pending workers’ compensation and medical claimsperiodically to determine the reasonableness of the reserves we have recordedfor such claims.  Our 

 

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evaluation includes estimatesof potential incurred-but-unreported claims as well as factors that may causeoriginal estimates of such claims to increase over time, such as availableclaims data and historical trends and experience, as well as future projectionsof ultimate losses, expenses, premiums and administrative costs.  We adjust these reserves if events orchanges in circumstances indicate that ultimate payments related to the claimswill differ from the recorded reserves. While we believe that the amounts reserved for these obligations aresufficient, any significant increase in the number of claims and costsassociated with claims made under these plans could have a material effect onour financial position, results of operations or cash flows.

 

*Income taxes.*  Accounting for income taxes requires us toestimate our income taxes in each jurisdiction in which we operate.  Due to differences in the recognition ofitems included in income for accounting and tax purposes, temporary differencesarise which are recorded as deferred tax assets or liabilities.  We estimate the likelihood of recovery ofthese assets, which is dependent on future levels of profitability.  Should any amounts be determined not to berecoverable, or assumptions change, we would be required to take a charge,which could have a material effect on our financial position or results ofoperations.

 

*Recent accounting pronouncements. *In December 2002,the Financial Accounting Standards Board issued SFAS No. 148, which providesalternative methods of transition for a voluntary change to the fair-value-basedmethod of accounting for stock-based employee compensation.  In addition, SFAS No. 148 amends thedisclosure requirements of SFAS No. 123 to require prominent disclosure in bothannual and interim financial statements about the method of accounting forstock-based employee compensation and the effects of the method used onreported results.  The interimdisclosure provisions were effective January 1, 2003.  At present, we do not intend to adopt the fair-value-based methodof accounting for our stock compensation plans.  We have adopted the disclosure provisions of SFAS No. 148 in ourfinancial reports for the year ended December 31, 2002 and the interim reportsin 2003.

 

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

 

Substantially all of our liquid investments are invested in moneymarket instruments, and therefore the fair market value of these instruments isaffected by changes in market interest rates. However, all of our investments at June 30, 2003 were invested in overnightmoney market instruments and were redeemable on a daily basis.  All of the underlying investments in themoney market fund had maturities of three months or less.  As a result, we believe the market riskarising 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.

 

#### **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 15d-15(e).  Indesigning and 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 end ofthe fiscal quarter covered by this report, we carried out an evaluation, underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe 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.

 

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There has not been any change in our internal controls over financialreporting, that occurred during the fiscal quarter covered by this report, thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

### **PART II.**                                                OTHER INFORMATION

 

#### **ITEM 4.**                                                     SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The following is a description of matters submitted to a vote of our shareholdersat an annual meeting of shareholders held on May 28, 2003:

 

A.                                   HelenaMattila, Roger L. Pringle, Aimo Olkkonen and David A. Williams were elected asdirectors to hold office until the annual meeting in the expiration yeardetailed below and until their successors are elected and qualified.  Votes cast for and votes withheld withrespect to each nominee were as follows:

 
|              |   | **New Term  Expiration** |   | **Votes  For** |   | **Votes  Withheld** |   |
|-------------------|--------|--------------------------|--------|----------------|--------|---------------------|--------|
| Helena Mattila    |   | 2004                     |   | 19,412,698     |   | 3,029,875           |   |
|              |   |                     |   |           |   |                |   |
| Roger L. Pringle  |   | 2005                     |   | 21,300,297     |   | 1,142,276           |   |
|              |   |                     |   |           |   |                |   |
| Aimo Olkkonen     |   | 2006                     |   | 16,566,332     |   | 5,876,241           |   |
|              |   |                     |   |           |   |                |   |
| David A. Williams |   | 2006                     |   | 22,207,341     |   | 235,232             |   |

 

B.                                     Abrief description of each other matter voted upon at the annual meeting and thevotes cast for, votes cast against and votes withheld as to each such matter isas follows:
|                                                                                                                                                 |   | **Votes  For** |   | **Votes  Against** |   | **Votes  Withheld** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|--------------------|--------|---------------------|--------|
| Proposal to approve an amendment of our articles of  incorporation to increase the range of the number of authorized directors                       |   | 19,216,967     |   | 3,219,816          |   | 5,790               |   |
|                                                                                                                                                 |   |           |   |               |   |                |   |
| Proposal to approve an amendment of the 1999  Employee Stock Purchase Plan to increase the number of shares of common stock  authorized for purchase |   | 11,693,923     |   | 6,311,538          |   | 32,860              |   |
|                                                                                                                                                 |   |           |   |               |   |                |   |
| Proposal to ratify the selection of Deloitte &  Touche LLP as our independent auditors for the year ending December 31, 2003                     |   | 22,134,391     |   | 305,056            |   | 3,126               |   |

 

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#### **ITEM 6.                  EXHIBITS AND REPORTS ON FORM8-K**

 

(a)          Exhibits

 

**31.1**                           Certification of Timothy A. Timmins pursuant to Rule15d-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuantto Section 302 of the Sarbanes-Oxley Act of 2002

**31.2**                           Certification of Dale N. Wahl pursuant to Rule15d-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuantto Section 302 of the Sarbanes-Oxley Act of 2002

**32.**                                 Certification Pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)         Reportsfiled on Form 8-K

 

On April 25, 2003,we filed a current report on Form 8-K, dated April 25, 2003, under Item 12.,Results of Operations and Financial Condition (which was filed under Item 9.,Regulation FD Disclosure) which furnished our second quarter 2003 financialstatements.

 

On May 27,2003, we filed a current report on Form 8-K, dated May 26, 2003, under Item 5.,Other Events, which furnished our press release “Metro One Launches ‘Infone’ –A Nationwide Enhanced Directory and Personal Assistant Service.”

 

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SIGNATURE

 

 

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.

 

 
|                                                | Metro One  Telecommunications, Inc.                                                          |   |
|-----------------------------------------------------|----------------------------------------------------------------------------------------------|--------|
|                                                | Registrant                                                                                   |   |
|                                                |                                                                                         |   |
|                                                |                                                                                         |   |
| Date:     August  14, 2003 |                                                                                         |
|                                                |                                                                                         |   |
|                                                |                                                                                         |   |
|                                                | /s/  Dale N. Wahl                                                                       |   |
|                                                | Dale N. Wahl  Senior Vice President,  Chief Financial Officer  (Principal Financial Officer) |
|                                                |                                                                                         |   |
|                                                |                                                                                         |   |
|                                                | /s/  Duane C. Fromhart                                                                  |   |
|                                                | Duane C.  Fromhart  Vice President, Finance  (Principal Accounting Officer)                  |

 

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