**United States**

**Securities and ExchangeCommission**

**Washington, D.C. 20549**

 

**Form 10-Q**

 
| **ý**                                             | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|
| ** **                                             | ** ** |                                                                                                      |
| **For  the Quarterly Period Ended June 30, 2005** |
| ** **                                             | ** ** | ** **                                                                                                |
| **o**                                                  | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**Commission File Number 0-27024**

 

**METRO ONE TELECOMMUNICATIONS,INC.**

(Exact name of registrant as specified in its charter)

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

 

###### **11200Murray Scholls Place, Beaverton, Oregon 97007**

(Address of principal executive offices) (zip code)

 

**(503) 643-9500**

(Registrant’s telephone number, including area code)

 

**Indicateby check mark whether the registrant has (1) filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  ****ý   No  ****o**

 

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

 

**Number ofshares of common stock outstanding as of August 5, 2005: 25,098,853 shares,no par value per share.**

 

 

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**METRO ONE TELECOMMUNICATIONS, INC.**

 

**INDEXTO FORM 10 - Q**

** **
| Part I  | Financial  Information                                                                                           |   |
|--------------|------------------------------------------------------------------------------------------------------------------|--------|
|         |                                                                                                             |   |
| Item 1.      | Financial  Statements (Unaudited)                                                                                |   |
|         |                                                                                                             |   |
|         | Condensed Consolidated  Statements of Operations for the three and six months ended June 30,  2005 and 2004 |   |
|         |                                                                                                             |   |
|         | Condensed Consolidated  Balance Sheets as of June 30, 2005 and December 31, 2004                       |   |
|         |                                                                                                             |   |
|         | Condensed Consolidated  Statements of Cash Flows for the six months ended June 30, 2005 and 2004            |   |
|         |                                                                                                             |   |
|         | Notes to Condensed  Consolidated 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                                                                                                         |   |
|         |                                                                                                             |   |
|         | Signatures                                                                                                       |   |

 

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**Metro OneTelecommunications, Inc.**

**CondensedConsolidated Statements of Operations (Unaudited)**

 
| ** **                                 | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(In thousands, except per share  data)** | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| Revenues                                   |       | $                                    | 20,149     |                               | $          | 43,539 |   | $ | 38,528 |   | $ | 87,068 |   |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| Costs and expenses:                        |       |                                 |       |                               |       |   |   |   |   |
| Direct operating                           |       | 14,743                               |       | 24,174                             |       | 31,963 |   | 49,717 |   |
| Selling, general and administrative        |       | 13,701                               |       | 25,030                             |       | 28,530 |   | 50,985 |   |
| Restructuring charges                      |       | 1,275                                |       | —                             |       | 1,275 |   | — |   |
|                                       |       | 29,718                               |       | 49,204                             |       | 61,768 |   | 100,702 |   |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| Loss from operations                       |       | (9,570                               | )          | (5,665                             | )          | (23,240 | ) | (13,634 | ) |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| Other income, net                          |       | 273                                  |       | 292                                |       | 568 |   | 411 |   |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| Loss before income taxes                   |       | (9,297                               | )          | (5,373                             | )          | (22,672 | ) | (13,223 | ) |
| Income tax expense (benefit)               |       | (50                                  | )          | 124                                |       | (81 | ) | 124 |   |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| Net loss                                   |       | $                                    | (9,247     | )                                  | $          | (5,497 | ) | $ | (22,591 | ) | $ | (13,347 | ) |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| Net loss per common share:                 |       |                                 |       |                               |       |   |   |   |   |
| Basic                                      |       | $                                    | (.37       | )                                  | $          | (.22 | ) | $ | (.90 | ) | $ | (.54 | ) |
| Diluted                                    |       | $                                    | (.37       | )                                  | $          | (.22 | ) | $ | (.90 | ) | $ | (.54 | ) |
|                                       |       |                                 |       |                               |       |   |   |   |   |
| Weighted average shares outstanding:       |       |                                 |       |                               |       |   |   |   |   |
| Basic                                      |       | 25,061                               |       | 24,845                             |       | 25,023 |   | 24,810 |   |
| Diluted                                    |       | 25,061                               |       | 24,845                             |       | 25,023 |   | 24,810 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

1

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**Metro OneTelecommunications, Inc.**

**CondensedConsolidated Balance Sheets (Unaudited)**

 
| ** **                                                                                                                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(In thousands)**                                                                                                                                                     | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| ** **                                                                                                                                                             | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                             | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                                                                   |       |              |       |                  |       |
| Current assets:                                                                                                                                                        |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                              |       | $                 | 31,227     |                  | $          | 24,093 |   |
| Short-term investments, available for sale                                                                                                                             |       | —            |       | 25,375                |       |
| Restricted cash                                                                                                                                                        |       | 6,860             |       | 4,900                 |       |
| Accounts receivable                                                                                                                                                    |       | 13,540            |       | 17,524                |       |
| Prepaid costs and other current assets                                                                                                                                 |       | 2,844             |       | 4,850                 |       |
|                                                                                                                                                                   |       |              |       |                  |       |
| Total current assets                                                                                                                                                   |       | 54,471            |       | 76,742                |       |
|                                                                                                                                                                   |       |              |       |                  |       |
| Furniture, fixtures and equipment, net                                                                                                                                 |       | 11,215            |       | 12,701                |       |
| Intangible assets                                                                                                                                                      |       | 6,566             |       | 5,916                 |       |
| Other assets                                                                                                                                                           |       | 471               |       | 471                   |       |
|                                                                                                                                                                   |       |              |       |                  |       |
| Total assets                                                                                                                                                           |       | $                 | 72,723     |                  | $          | 95,830 |   |
|                                                                                                                                                                   |       |              |       |                  |       |
| **Liabilities and Shareholders’ Equity**                                                                                                                          |       |              |       |                  |       |
|                                                                                                                                                                   |       |              |       |                  |       |
| Current liabilities:                                                                                                                                                   |       |              |       |                  |       |
| Accounts payable                                                                                                                                                       |       | $                 | 1,272      |                  | $          | 1,107 |   |
| Accrued liabilities                                                                                                                                                    |       | 2,699             |       | 2,003                 |       |
| Accrued payroll and related costs                                                                                                                                      |       | 10,732            |       | 12,125                |       |
|                                                                                                                                                                   |       |              |       |                  |       |
| Total current liabilities                                                                                                                                              |       | 14,703            |       | 15,235                |       |
|                                                                                                                                                                   |       |              |       |                  |       |
| Other long-term liabilities                                                                                                                                            |       | 1,071             |       | 1,158                 |       |
|                                                                                                                                                                   |       |              |       |                  |       |
| Total liabilities                                                                                                                                                      |       | 15,774            |       | 16,393                |       |
|                                                                                                                                                                   |       |              |       |                  |       |
| 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, 25,099 and 24,984 shares issued and outstanding at June 30,  2005 and December 31, 2004, respectively |       | 120,051           |       | 119,948               |       |
| Retained earnings                                                                                                                                                      |       | (63,102           | )          | (40,511               | )          |
|                                                                                                                                                                   |       |              |       |                  |       |
| Total shareholders’ equity                                                                                                                                        |       | 56,949            |       | 79,437                |       |
|                                                                                                                                                                   |       |              |       |                  |       |
| Total liabilities and shareholders’ equity                                                                                                                        |       | $                 | 72,723     |                  | $          | 95,830 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

2

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**Metro OneTelecommunications, Inc.**

**CondensedConsolidated Statements of Cash Flows (Unaudited)**

 
| ** **                                                                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(In thousands)**                                                                         | ** ** | **2005**                           | ** ** | **2004** | ** ** |
|                                                                                       |       |                               |       |   |   |
| Cash flows from operating activities:                                                      |       |                               |       |   |   |
| Net loss                                                                                   |       | $                                  | (22,591    | ) | $ | (13,347 | ) |
| Adjustments to reconcile net loss to net cash (used  in) provided by operating activities: |       |                               |       |   |   |
| Depreciation and amortization                                                              |       | 3,205                              |       | 11,133 |   |
| Loss on disposal of fixed assets                                                           |       | 5                                  |       | 143 |   |
| Changes in certain assets and liabilities:                                                 |       |                               |       |   |   |
| Accounts receivable                                                                        |       | 3,984                              |       | 7,155 |   |
| Prepaid costs and other assets                                                             |       | 1,010                              |       | 9,294 |   |
| Accounts payable and other liabilities                                                     |       | (618                               | )          | (2,113 | ) |
|                                                                                       |       |                               |       |   |   |
| Net cash (used in) provided by operating activities                                        |       | (15,005                            | )          | 12,265 |   |
|                                                                                       |       |                               |       |   |   |
| Cash flows from investing activities:                                                      |       |                               |       |   |   |
| Purchases of short-term securities                                                         |       | (36,805                            | )          | — |   |
| Sales of short-term securities                                                             |       | 62,180                             |       | — |   |
| Restricted cash to secure letter of credit                                                 |       | (1,960                             | )          | — |   |
| Capital expenditures                                                                       |       | (1,395                             | )          | (2,469 | ) |
| Proceeds from sale of assets                                                               |       | 16                                 |       | 22 |   |
|                                                                                       |       |                               |       |   |   |
| Net cash provided by (used in) investing activities                                        |       | 22,036                             |       | (2,447 | ) |
|                                                                                       |       |                               |       |   |   |
| Cash flows from financing activities:                                                      |       |                               |       |   |   |
| Proceeds from exercise of stock options and employee  stock purchases                      |       | 103                                |       | 146 |   |
|                                                                                       |       |                               |       |   |   |
| Net cash provided by financing activities                                                  |       | 103                                |       | 146 |   |
|                                                                                       |       |                               |       |   |   |
| Net increase in cash and cash equivalents                                                  |       | 7,134                              |       | 9,964 |   |
|                                                                                       |       |                               |       |   |   |
| Cash and cash equivalents, beginning of period                                             |       | 24,093                             |       | 44,381 |   |
|                                                                                       |       |                               |       |   |   |
| Cash and cash equivalents, end of period                                                   |       | $                                  | 31,227     |   | $ | 54,345 |   |
|                                                                                       |       |                               |       |   |   |
| Supplemental disclosure of cash flow information:                                          |       |                               |       |   |   |
| Cash refunded for income taxes, net                                                        |       | $                                  | 2,955      |   | $ | 10,032 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

3

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**Metro OneTelecommunications, Inc.**

**Notes toCondensed Consolidated Financial Statements (Unaudited)**

 

**1.****                                     ****Summary of Significant AccountingPolicies**

 

**Basis ofPresentation**

 

The accompanying unaudited interim condensedconsolidated financial statements have been prepared by Metro OneTelecommunications, Inc. in conformity with accounting principlesgenerally accepted in the United States of America for interim financialinformation.  Accordingly, certainfinancial information and footnotes have been omitted or condensed.  In the opinion of management, the condensedfinancial statements include all adjustments necessary for a fair presentationof the results for the interim periods. These condensed consolidated financial statements and notes theretoshould be read in conjunction with our audited financial statements included inour Annual Report on Form 10-K for the year ended December 31,2004.  The results of operations for theinterim periods shown in this report are not necessarily indicative of resultsfor future interim periods or the entire fiscal year.

 

The condensedconsolidated financial statements include the accounts of Metro OneTelecommunications, Inc. and all of its wholly-owned subsidiaries.  All significant intercompany balances andtransactions have been eliminated in consolidation.

 

**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 $700,000and $1.8 million in the three-month and six month periods ended June 30,2005, respectively, and approximately $6.0 million and $12.0 million in thethree-month and six month periods ended June 30, 2004, respectively.  These expenses were primarily related tomarketing and promotion of our Infone service.

 

**Short-termInvestments**

 

Short-term investments,if any, are carried at fair value and typically consist of available-for-saleauction rate securities (“ARS”) that we classify as current assets based uponour intent and ability to use these funds as necessary to satisfy short-termliquidity requirements.  We had no suchshort-term investments at June 30, 2005. Our portfolio at December 31, 2004 consisted of two types ofARS.  We held $15.4 million ofinvestment-grade taxable auction rate notes of municipal issuers, which aredebt-securities with variable interest rates that reset through a Dutch auctionwith principal traded at par.  The ratetypically resets on a periodic basis, usually between 7 and 49 days.  Actual maturities of the underlyingsecurities are greater than ten years. In addition, at December 31, 2004, we held $10.0 million of auctionrate preferred securities which consist of shares of closed-end investmentfunds invested in long-term fixed income securities.  These funds generally issue auction rate preferredshares that provide liquidity at par value every 28 days through the auctionrate market.  The reset rate for bothtypes of ARS is set by a modified Dutch auction process in which bids arefilled from lowest yield bid to highest; the highest bid cleared sets the ratefor all winning bidders.  Although theunderlying securities have long-term contractual maturities, we can sell or buythe securities at par on auction dates. Thus, they are classified as short-term investments since they areintended to be available to fund current operations.  Fair values are based on quoted market pricesand at December 31, 2004, the fair value of these securities approximatedtheir carrying value.  As a result of theinterest rate resets, we had no cumulative unrealized or realized holding gainsor losses from these investments in the three or six months ended June 30,2005.

 

4

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**Stock-BasedCompensation**

 

We have elected toaccount for stock options and shares issued under our Employee Stock PurchasePlan (“ESPP”) according to Accounting Principles Board Opinion 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 Stock Incentive Plan (the “Plan”)or shares issued under our ESPP.

 

If compensation cost onstock options granted and ESPP shares issued in the three and six-month periodsended June 30, 2005 and 2004 under the Plan had been determined based onthe fair value of the options and ESPP shares as of the grant or issue date ina method consistent with that described in SFAS No. 123, “Accounting forStock-Based Compensation,” our net loss and net loss per share would have beenchanged to the pro forma amounts indicated below for the three and six-monthperiods ended June 30:

 
| ** **                              | ** ** | **Three Months Ended  June 30,**        | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | **2005**                                     | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Net loss, as reported                   |       | $                                            | (9,247     | )                                   | $          | (5,497 | ) | $ | (22,591 | ) | $ | (13,347 | ) |
| Stock-based compensation expense        |       | (39                                          | )          | (851                                | )          | (2,006 | ) | (1,759 | ) |
| Net loss, pro forma                     |       | $                                            | (9,286     | )                                   | $          | (6,348 | ) | $ | (24,597 | ) | $ | (15,106 | ) |
|                                    |       |                                         |       |                                |       |   |   |   |   |
| Basic net loss per share, as reported   |       | $                                            | (0.37      | )                                   | $          | (0.22 | ) | $ | (0.90 | ) | $ | (0.54 | ) |
| Basic net loss per share, pro forma     |       | $                                            | (0.37      | )                                   | $          | (0.26 | ) | $ | (0.98 | ) | $ | (0.61 | ) |
|                                    |       |                                         |       |                                |       |   |   |   |   |
| Diluted net loss per share, as reported |       | $                                            | (0.37      | )                                   | $          | (0.22 | ) | $ | (0.90 | ) | $ | (0.54 | ) |
| Diluted net loss per share, pro forma   |       | $                                            | (0.37      | )                                   | $          | (0.26 | ) | $ | (0.98 | ) | $ | (0.61 | ) |

 

In March 2005,our Board of Directors accelerated vesting on all of the then outstanding stockoptions, of which all had fair market values that were less than the exerciseprices at that time.  In determining toaccelerate the vesting of these options, the Board considered the effect on ourreported stock option expense in future periods, the comparability of ourstatements of operations in prior and subsequent periods, and the potentialbenefit to Metro One and our shareholders in retaining the services of affectedofficers and employees.  The pro formaexpense included in the stock-based compensation expense noted above associatedwith the accelerated vesting was approximately $1,592,000.

 

**RecentAccounting Pronouncements**

 

In December 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(Revised 2004), “Share-Based Payment” (“SFAS No. 123R”) an amendment ofFASB Statement No. 123, “Accountingfor Stock-Based Compensation” and Statement No. 95, “Statement of CashFlows,” which requires companies to recognize in their statements ofoperations the grant-date fair value of stock options and other equity-basedcompensation issued to employees.  Wewill adopt SFAS No. 123R in our first quarter of 2006.  We are still evaluating the effects thatadoption of this statement will have on our operations and cash flows.

 

5

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**2.****                                     ****Restructuring Charges and ExitActivities**

 

In June 2005,we announced that, as part of our ongoing corporate-wide program to cut costsand align expenses with reduced revenues, we would be closing and consolidatingthe operations of 11 of our call centers during the second and third quartersof 2005.  During the quarter ended June 30,2005, we closed three call centers and eight additional call centers arescheduled to be closed by the end of August 2005 with call volume beingtransferred to our remaining 20 call centers.

 

Weexpect to incur approximately $1.9 million of severance costs related to thecall center consolidations discussed above. We also expect to incur approximately $1.1 million of other costs,primarily related to dismantling of the closed call centers.  In addition, we expect to incur costs, whichcannot be accurately estimated at this time, associated with ongoing leaseobligations of certain of the closed call centers.

 

Thefollowing summarizes the provisions, payments, adjustments and liability forcosts associated with our cost reduction efforts for the periods shown (in thousands):

 
| ** **                     | ** ** | **One-time  termination  benefits** | ** ** | **Lease  termination costs** | ** ** | **Other** | ** ** | **Total** | ** ** |
|--------------------------------|------------|-------------------------------------|------------|------------------------------|------------|-----------|------------|-----------|------------|
|                           |       |                                |       |                         |       |      |       |      |       |
| Balance at March 31, 2005 |       | $                                   | —     |                         | $          | —    |       | $         | —     |   | $ | — |   |
| Provisions                     |       | 126                                 |       | 1,114                        |       | 35        |       | 1,275     |       |
| Payments                       |       | (126                                | )          | (226                         | )          | (35       | )          | (387      | )          |
| Adjustments                    |       | —                              |       | —                       |       | —    |       | —    |       |
| Balance at June 30, 2005  |       | $                                   | —     |                         | $          | 888       |       | $         | —     |   | $ | 888 |   |

 

**3.****                                     ****Net Loss Per Share**

 

Basicnet loss per share is based on the weighted average number of common sharesoutstanding.  Diluted net loss per sharereflects the potential dilution that could occur if outstanding options topurchase common stock were exercised or converted into common stock.  Basic and diluted weighted average sharesoutstanding were the same for the three and six-month periods ending June 30,2005 and 2004 because inclusion of the potential dilutive effect of commonstock options in the calculation would be anti-dilutive.  There were no adjustments to net loss for thecalculation of both basic and diluted net loss per share for all periods.

 

Options to purchase 3,439,000and 3,015,000 shares of common stock were outstanding at June 30, 2005 and2004, respectively, but were not included in the computation of diluted netloss per share for the three and six months ended June 30, 2005 and 2004,respectively, because their effect would be anti-dilutive.

 

**4.****                                     ****Commitments and Contingencies**

 

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

 

From time to time, in the normal course of ourbusiness, we issue standby letters of credit and bank guarantees.  At June 30, 2005, we had one letter ofcredit outstanding in the amount of $6,860,000 related to our workers’compensation program.  The letter ofcredit is secured by a certificate of deposit for the same amount that is recordedas restricted cash.  This letter ofcredit expires in April 2006.

 

6

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**5.****                                     ****Significant Events**

 

In February 2005, we entered into a MasterServices Agreement for Directory Assistance Services (the “Services Agreement”)with Nextel Operations, Inc., acting on behalf of certain affiliates(collectively “Nextel”) of Nextel Communications, Inc.  The Services Agreement supercedes ourprevious services agreement dated in June 1999.  Under the Services Agreement, we agreed toprovide directory assistance services to Nextel’s customers on a non-exclusivebasis.  Price levels in the ServicesAgreement are lower than those of the previous agreement and, additionally,Nextel may transition call volume away from us on short notice and/or terminateservices entirely.  The ServicesAgreement is for a three year term, and is renewable by Nextel for twoadditional one-year periods.

 

Our contract with AT&T Wireless expired in December 2003,and our negotiations did not result in a new contract.  The call volume from AT&T Wirelesstransitioned away during the second and third quarters of 2004.  AT&T Wireless accounted for approximately40% and 43% of our revenues in the three and six-month periods ended June 30,2004, respectively.

 

In June 2005, weannounced that we expect to cease service for ALLTEL Communications, Inc.(“ALLTEL”) during the third quarter of 2005, approximately six weeks prior tothe expiration of our contract with them.  We serve ALLTEL under anagreement that expires in mid-October 2005 and we were notified thatALLTEL intends to transition call volume away from us by the end of August 2005. ALLTEL represented approximately 11.7% and 8.9% of the our revenues for thethree months ended June 30, 2005 and 2004, respectively and representedapproximately 11.6% and 8.7% of our revenues for the six months ended June 30,2005 and 2004, respectively.

 

We have experienced netlosses in each of the quarterly and annual periods since the first quarter of2003.  We expect to meet our cashrequirements in 2005 through a combination of existing cash and cashequivalents and cash from operations.  Wemay require more capital in the future to fund our operations and/or financevarious corporate initiatives.  We cannotbe certain that additional funds will be available on terms favorable to us orat all.  If adequate funds are notavailable on acceptable terms, we may be forced to reduce our operations orabandon expansion opportunities.

 

7

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#### **ITEM2.**                  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

#### ** **

Allstatements and trend analyses contained in this item and elsewhere in thisreport on Form 10-Q relative to the future constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  These forward-lookingstatements may, but do not necessarily, also include words such as “believes,” “expects,”“anticipates,” “plans,” “estimates,” “may,” “will,” “should,” “could,” “continue”or similar expressions.  Forward-lookingstatements are not guarantees.  Theyinvolve known and unknown business and economic risks, uncertainties and otherfactors that may cause our actual results, performance or achievements to bematerially different from any future results, performance or achievementsexpressed or implied by such forward-looking statements.  These risks, uncertainties and other factorsinclude the expiration or pricing of customer contracts, advertising costs orlack of market acceptance associated with our Infone service, the introductionof new versions of our products or features, the successful execution of ourcost reduction efforts and current business strategy, and our ability togenerate cash from operations, and other risks, including those discussed inour 2004 Annual Report on Form 10-K filed with the Securities and ExchangeCommission (“the SEC”) and those described in our other filings with the SEC,press releases and other communications. Any forward-looking statement in this report reflects our expectationsat the time of this report only.  Weundertake no obligation to publicly release any revisions to theseforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.

 

#### **Overview**

#### ** **

We are the leadingdeveloper and provider of Enhanced Directory Assistance® and other informationservices for the telecommunications industry. We contract primarily with wireless carriers to provide our services totheir subscribers.

 

Typically, under ourwholesale contracts, carriers agree to route some or all of their directoryassistance calls to us.  We offer ourservices 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 calls arerouted to and answered by our operators identifying the service by that carrier’sbrand name.

 

Each carrier customerestablishes its own directory assistance fee structure for itssubscribers.  Wireless subscriberstypically pay fees to their carrier ranging from $1.00 to $1.50 plus airtimecharges for our services.  We bear no subscribercollection risk with respect to carrier subscribers; however, there may becollection 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 customerson a per call basis.  We have offeredvolume pricing discounts in the past to stimulate increased call volume and toattract and expand customer commitments, as well as meet competitive pressures,which caused our average revenue per call to decrease.  We expect that average revenue per call maycontinue to decrease over time, as we believe this pricing strategy betterpositions us to retain and expand service with existing carrier customers andto attract new carrier customers.  Pricesfor services provided to other types of customers, including individualconsumers, businesses, governmental units or other callers, may vary based onthe nature of the service, volume and other circumstances.

 

Competition in the telecommunicationsindustry, and in the directory assistance market in which we participate, isintense.  With slowing subscriber growthand declining revenue per user, carriers are looking to lower their costs ofproviding directory assistance and other services through, among other ways,outsourcing to low cost domestic or overseas operators and utilizing automationto reduce costs.  In response to theseand other issues, in May 2003, we launched Infone, a service that providesenhanced directory and personal assistant services directly to consumers.  Callers may use the service from nearly anydomestic 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.

 

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The launch of Infone hasbeen accompanied by a significant nationwide marketing and promotion campaigndesigned to build brand awareness and encourage customers to sign up forInfone.  During the second quarter of2005, we spent approximately $700,000, and for the six month period ended June 30,2005, we spent approximately $1.8 million on such marketing and promotioncampaigns.  We will likely spendsignificant additional funds on marketing and promotional activities in thefuture.  As of the date of this filing,we had obtained approximately 179,000 registered Infone users.

 

**Significant Events**

 

In February 2005,we entered into a Master Services Agreement for Directory Assistance Services(the “Services Agreement”) with Nextel Operations, Inc., acting on behalfof certain affiliates (collectively “Nextel”) of Nextel Communications, Inc.  The Services Agreement supercedes ourprevious services agreement dated in June 1999.  Under the Services Agreement, we agreed toprovide directory assistance services to Nextel’s customers on a non-exclusivebasis.  Price levels in the ServicesAgreement are lower than those of the previous agreement and, additionally,Nextel may transition call volume away from us on short notice and/or terminateservices entirely.  The term of theServices Agreement is for three years, and may be renewed by Nextel for twoadditional one-year periods.

 

Our contract withAT&T Wireless expired in December 2003, and our negotiations did notresult in a new contract.  The callvolume from AT&T Wireless transitioned away during the second and thirdquarters of 2004.  AT&T Wirelessaccounted for approximately 40% and 43% of our revenues in the three andsix-month periods ended June 30, 2004, respectively.

 

In June 2005, weannounced that we expect to cease service for ALLTEL Communications, Inc.(“ALLTEL”) during the third quarter of 2005, approximately six weeks prior tothe expiration of our contract with them.  We serve ALLTEL under anagreement that expires in mid-October 2005 and we were notified thatALLTEL intends to transition call volume away from us by the end of August 2005. ALLTEL represented approximately 11.7% and 8.9% of the our revenues for thethree months ended June 30, 2005 and 2004, respectively and representedapproximately 11.6% and 8.7% of our revenues for the six months ended June 30,2005 and 2004, respectively.

 

In June 2005, we announced that, as part of ourongoing corporate-wide program to cut costs and align expenses with reducedrevenues, we would be closing and consolidating the operations of 11 of ourcall centers during the second and third quarters of 2005.  During the quarter ended June 30, 2005,we closed three call centers and eight additional call centers are scheduled tobe closed by the end of August 2005 with call volume being transferred toour remaining 20 call centers.

 

We expect to incurapproximately $1.9 million of severance costs related to the call centerconsolidations discussed above.  We alsoexpect to incur approximately $1.1 million of other costs, primarily related todismantling of the closed call centers. In addition, we expect to incur costs, which cannot be accuratelyestimated at this time, associated with ongoing lease obligations of certain ofthe closed call centers.  See additionaldiscussion under Liquidity and Capital Resources, *Futurecapital needs and resources.*

 

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**Resultsof Operations**

 

Thistable shows selected items from our statements of operations expressed as apercentage of revenues:

 
| ** **                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                      |       |                                  |       |                                |       |   |   |   |   |
| Revenues                                  |       | 100.0                                 | %          | 100.0                               | %          | 100.0 | % | 100.0 | % |
| Direct operating costs                    |       | 73.2                                  |       | 55.5                                |       | 83.0 |   | 57.1 |   |
| Selling, general and administrative costs |       | 74.3                                  |       | 57.5                                |       | 77.3 |   | 58.6 |   |
|                                      |       |                                  |       |                                |       |   |   |   |   |
| Loss from operations                      |       | (47.5                                 | )          | (13.0                               | )          | (60.3 | ) | (15.7 | ) |
| Other income, net                         |       | 1.4                                   |       | 0.7                                 |       | 1.5 |   | 0.5 |   |
| Loss before income taxes                  |       | (46.1                                 | )          | (12.3                               | )          | (58.8 | ) | (15.2 | ) |
| Income tax expense (benefit)              |       | (0.2                                  | )          | 0.3                                 |       | (0.2 | ) | 0.1 |   |
| Net loss                                  |       | (45.9                                 | )%         | (12.6                               | )%         | (58.6 | )% | (15.3 | )% |

 

 

*Comparisonof second quarter 2005 to second quarter 2004*

 

Revenues decreased 53.7%to $20.1 million from $43.5 million. Call volume decreased to approximately 63 million calls fromapproximately 94 million calls.  Thesedecreases resulted primarily from lower call volume from AT&T Wireless dueto expiration of its contract and to a reduction in our average revenue percall.  These reductions were partiallyoffset by growth in call volume under other existing contracts andmarkets.  Our average revenue per call decreasedto approximately $0.32 in the second quarter of 2005 from approximately $0.46per call in the second quarter of 2004.

 

Directoperating costs consist of salaries, wages, benefits and taxes relating to callcenter personnel and costs of listings data and content acquisition.  These costs decreased 39.0% to $14.7 millionfrom $24.2 million.  This decrease wasprimarily due to lower personnel and data costs associated with servicing lowercall volumes.  As a percentage ofrevenues, direct operating costs increased to 73.2% from 55.5%, due primarilyto decreased revenues as a result of a reduction in our average revenue percall.

 

Selling,general and administrative costs decreased 45.3% to $13.7 million from $25.0million.  This decrease resultedprimarily from reductions in marketing and promotion costs of approximately $5.3million, a reduction in depreciation and amortization expenses of approximately$3.9 million resulting from our write-down of fixed assets in the fourthquarter of 2004 and reductions in other general and administrative expenses ofapproximately $2.1 million resulting from our ongoing corporate-wide program toreduce costs.  As a percentage ofrevenues, selling, general and administrative costs increased to 74.3% from 57.5%primarily due to lower revenues.

 

Restructuringcharges consist primarily of one-time termination benefits paid to employees,accrued lease termination costs and other costs related to the dismantling ofthe closed call centers resulting from of our ongoing cost reduction plans.  Such charges related to the three callcenters closed during the three months ended June 30, 2005 and amounted toapproximately $1.3 million.

 

Depreciationand amortization expense, a component of selling, general and administrativecosts, decreased 71.2% to $1.6 million from $5.5 million and decreased to 7.9%from 12.7% of revenue.  The decrease indepreciation and amortization was due primarily to the write-down of fixedassets in the fourth quarter of 2004 and the overall reduction in acquisitionof fixed assets in the last several years as operations have been reduced.

 

Otherincome was $273,000 and $292,000 in the second quarter of 2005 and 2004,respectively, and consisted primarily of interest income earned on cash and short-terminvestments and various miscellaneous items.

 

Incometax benefit in the second quarter of 2005 was approximately $50,000, primarily relatedto the receipt of carry-back refunds of various state income taxes paid inprior periods.  Because of our operatinglosses in 

 

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the second quarter of 2005and 2004, we recorded no federal income tax expense in either period.  In the second quarter of 2004, income tax expensewas approximately $124,000, primarily due to adjustment of prior estimates toactual state income tax returns filed.

 

*Comparisonof the first six months 2005 to the first six months of 2004*

 

Revenues decreased 55.7%to $38.5 million from $87.1 million. Call volume decreased to approximately 119 million calls fromapproximately 189 million calls.  Thesedecreases resulted primarily from lower call volume from AT&T Wireless dueto expiration of its contract and to a reduction in our average revenue percall.  These reductions were partiallyoffset by growth in call volume under other existing contracts and markets.  Our average revenue per call decreased toapproximately $0.32 in the first six months of 2005 from approximately $0.46per call in the first six months of 2004.

 

Directoperating costs decreased 35.7% to $32.0 million from $49.7 million.  This decrease was primarily due to lowerpersonnel and data costs associated with servicing lower call volumes.  As a percentage of revenues, direct operatingcosts increased to 83.0% from 57.1%, due primarily to decreased revenues as aresult of a reduction in our average revenue per call.

 

Selling,general and administrative costs decreased 44.0% to $28.5 million from $51.0million.  This decrease resultedprimarily from reductions in marketing and promotion costs of approximately $10.2million, a reduction in depreciation and amortization expenses of approximately$7.9 million resulting from our write-down of fixed assets in the fourthquarter of 2004 and reductions in other general and administrative expenses ofapproximately $4.3 million resulting from our ongoing corporate-wide program toreduce costs.  As a percentage ofrevenues, selling, general and administrative costs increased to 77.3% from 58.6%primarily due to lower revenues.

 

Restructuringcharges consist primarily of one-time termination benefits paid to employees,accrued lease termination costs and other costs related to the dismantling ofthe closed call centers resulting from of our ongoing cost reductionplans.  Such charges related to the threecall centers closed during the six months ended June 30, 2005 and amountedto approximately $1.3 million.

 

Depreciationand amortization expense, a component of selling, general and administrativecosts, decreased 71.2% to $3.2 million from $11.1 million and decreased to 8.3%from 12.7% of revenue.  The decrease indepreciation and amortization was due primarily to the write-down of fixedassets in the fourth quarter of 2004 and the overall reduction in acquisitionof fixed assets in the last several years as operations have been reduced.

 

Otherincome was $568,000 and $411,000 in the first six months of 2005 and 2004,respectively, and consisted primarily of interest income earned on cash and short-terminvestments and various miscellaneous items.

 

Incometax benefit in the second quarter of 2005 was approximately $81,000, primarilyrelated to the receipt of carry-back refunds of various state income taxes paidin prior periods.  Because of ouroperating losses in the first six months of 2005 and 2004, we recorded nofederal income tax expense in either period. In the first six months of 2004, income tax expense was approximately$124,000, primarily due to adjustment of prior estimates to actual state incometax returns filed.

 

#### **Liquidity and CapitalResources**

#### ** **

As of June 30,2005, we had approximately $38.1 million in cash and cash equivalents andrestricted cash, including $6.9 million of restricted cash, compared toapproximately $54.4 million in cash and cash equivalents, short-terminvestments and restricted cash, including $4.9 million of restricted cash, at December 31,2004.  The net decrease of $16.3 millionresulted primarily from decreased revenue received from customers andutilization of cash in our operations. We have no outstanding debt.

 

Workingcapital was $39.8 million at June 30, 2005, compared to $61.5 million at December 31,2004.  This decrease was primarily due toworking capital used in operations as well as decreased revenue received fromcustomers.

 

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*Cash flowfrom operations. *Netcash used in operations was $15.0 million for the six months ended June 30,2005 compared to net cash provided by operations of $12.3 million for the sixmonths ended June 30, 2004.  Thisdifference of $27.3 million resulted primarily from a decrease in the amount ofcash received from customers as a result of decreased revenue and the receipt ofa smaller refund of federal income taxes in the first six months of 2005 ascompared to the first six months of 2004, partially offset by decreases in cashpaid for advertising and promotion expenses, cash paid to or on behalf of ouremployees and cash paid to vendors and suppliers.  Cash received from customers decreased byapproximately $51.7 million in the first six months of 2005 and federal incometax refunds decreased by approximately $7.3 million.  Cash paid to or on behalf of employees, cashpaid for advertising and promotion and cash paid to vendors and suppliersdecreased by approximately $17.6 million, $10.2 million and $5.8 million, respectivelyin the first six months of 2005 compared to the first six months of 2004.

 

*Cash flowfrom investing activities. *Cashused in investing activities was $22.0 million in the first six months of 2005 resultingprimarily from short-term investments being converted to cash and used inoperations, capital expenditures for equipment purchased for upgrades of ourcorporate-wide infrastructure and an increase in cash restricted to secure aletter of credit related to our workers’ compensation program.

 

*Cash flowfrom financing activities. *Therewas no significant cash expended or generated related to financing activities inthe first six months of 2005.

 

*Futurecapital needs and resources.*  The primary uses of our capital in the nearfuture are expected to be for working capital, the continued advertising,marketing and promotion of Infone, the development or acquisition oftechnologies, features and content complementary to our business and forgeneral corporate purposes.  Thesegeneral corporate purposes could include acquisitions, efforts to pursue andmarket new growth strategies and other corporate development activities.

 

Webelieve our existing cash and cash equivalents and cash from operations will besufficient to fund our operations for the next twelve months.  Although cash on hand, including restrictedcash of $6.9 million, at June 30, 2005 was approximately $38.1 million,future activities, including advertising, marketing and promoting Infone,execution of new product initiatives and growth strategies and new productdevelopment and rollout likely will reduce available cash.  In June 2005, as part of ourcorporate-wide ongoing cost reduction efforts, we announced that we would beclosing eleven call centers during the second and third quarters of 2005 andconsolidating their operations into the remaining twenty call centers.  We expect these consolidations, inconjunction with other cost reduction efforts, will result in a significantreduction in our use of cash over the next several quarters as the impact ofthese efforts is fully realized.  Weexpect that by year-end, the ongoing program to cut costs, coupled withefficiencies achieved through consolidating call volume, will reduce futurecash operating expenses at a rate of more than $24 million per year from thelevel at the time of the announcement. If, however, our cost reduction efforts do not produce the expectedresults or we are unable to successfully execute our current business strategy,there will be a material adverse impact to our liquidity and financial positionthat will require us to further reduce our expenditures or seek additionalcapital to enable us to continue operations. We cannot be certain that we will be able to establish borrowingarrangements or otherwise raise additional capital on terms favorable to us orat all.

 

On July 20,2005, we received a notice from the Nasdaq Stock Market stating that for thelast 30 consecutive business days, the bid price of our common stock had closedbelow the minimum $1.00 per share requirement for continued inclusion underMarketplace Rule 4450(a)(5).  Under Marketplace Rule 4450(e)(2),we have 180 calendar days, or until January 17, 2006, to regain complianceby having a closing bid price for our common stock of at least $1.00 per sharefor a minimum of ten consecutive business days.  After the initial 180 calendar day complianceperiod, we can apply to transfer our listing to The Nasdaq SmallCap Market if,on January 17, 2006, we meet The Nasdaq SmallCap Market initial inclusioncriteria set forth in Marketplace Rule 4310(c), except for the $1.00minimum bid price requirement.  If such atransfer were approved, we would be provided with an additional 180 calendarday compliance period to demonstrate compliance.  Failure to achieve continued listing on theNasdaq National Market will likely impact our ability to raise additional capital.

 

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#### **Critical AccountingPolicies**

#### ** **

Weprepare our financial statements in conformity with accounting principlesgenerally 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. Management believes that of our significant accounting policies (seeNote 1 to the financial statements in our Annual Report on Form 10-K forthe year ended December 31, 2004), those governing accounts receivable,the lives and recoverability of the carrying amount of equipment and otherlong-lived assets, such as existing intangibles, estimates involving the levelsof our contingent liabilities for workers’ compensation and medicalself-insurance and estimates of current and deferred taxes may involve a higherdegree of judgment, estimation and uncertainty.

 

*Accounts receivable. *Ourwholesale customer base has primarily consisted of large wireless telephonecarriers in the United States.  As such,we have had minimal risk of uncollectibility, at any point in time, related tooutstanding accounts receivable with these customers.  We have not experienced significantcollection issues or write-offs related to these customers.  Since our accounts receivable areconcentrated in relatively few of these wholesale customers, a significantchange in the liquidity or financial position of any one of them couldadversely impact collection of our accounts receivable and therefore have amaterial adverse effect on our financial position and future operatingresults.  In addition, with the launch ofour 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,including patents and trademarks and internally developed software, wheneverevents or changes in circumstances indicate that the carrying amount of theassets may not be recoverable.  At suchtime, we estimate the future cash flows expected from use of such assets andtheir eventual disposition and, if lower than the carrying amounts, adjust thecarrying amount of the assets to their estimated fair value.  Because of our changing business conditions,including lower wholesale prices 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 additional impairment charges.  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 additional impairment charge. As a result of certain of the circumstances noted above, we evaluatedour fixed assets for impairment in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” as of December 31, 2004.  We determined that the value of our fixedassets was impaired; thus, in the fourth quarter of 2004, we recorded a $32.2million write-down of those assets to their estimated fair market value.  As a result of the announcements of our costreduction efforts and the anticipated transition away of ALLTEL as a customeras discussed under Significant Events above, we again evaluated our fixedassets for impairment in accordance with SFAS No. 144 and determined theassets were not impaired.

 

*Self-insurancereserves*.  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 ofpotential 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.  Weadjust these reserves if events or changes in circumstances indicate thatultimate payments related to the claims will differ significantly from therecorded reserves.  At June 30,2005, we have reserved approximately $5.7 and $1.0 million related to ourworkers’ compensation and medical programs, respectively.  While we believe that the amounts reservedfor these obligations are sufficient, any significant increase in the number ofclaims and costs associated with claims made under these plans could have amaterial effect on our financial position, results of operations or cash flows.

 

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*Income taxes.*  Accountingfor income taxes requires us to estimate our income taxes in each jurisdictionin which we operate.  Due to differences in the recognition of itemsincluded in income for accounting and tax purposes, temporary differences arisewhich are recorded as deferred tax assets or liabilities.  We estimate thelikelihood of recovery of these assets, which is dependent on future levels ofprofitability and enacted tax rates.  Should any amounts be determined notto be recoverable, or assumptions change, we would be required to take acharge, which could have a material effect on our financial position, resultsof operations or cash flows.

 

### **Recent AccountingPronouncements**

### ** **

In December 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(Revised 2004), “Share-Based Payment” (“SFAS No. 123R”) an amendment ofFASB Statement No. 123, “Accountingfor Stock-Based Compensation” and Statement No. 95, “Statement of CashFlows,” which requires companies to recognize in their statements ofoperations the grant-date fair value of stock options and other equity-basedcompensation issued to employees.  Wewill adopt SFAS No. 123R in our first quarter of 2006.  We are still evaluating the effects thatadoption of this statement will have on our operations and cash flows.

 

#### **ITEM 3.**     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK

#### ** **

Substantially all of ourliquid investments are invested in money market instruments, and therefore, thefair market value of these investments is affected by changes in marketinterest rates.  However, these investmentswere invested in overnight money market instruments at June 30, 2005 andwere redeemable on a daily basis.  All ofthe underlying investments in the money market fund had maturities of threemonths or less.  As a result, we believethe market risk arising from our holdings of financial instruments isminimal.  A hypothetical 1% fluctuationin interest rates would not have a material adverse effect on our financialposition, results of operations or cash flows.

 

#### **ITEM 4.**     CONTROLS AND PROCEDURES

#### ** **

Under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we conducted an evaluation of our disclosurecontrols and procedures (as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) atthe end of the period covered by this quarterly report.  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of the end of the period covered bythis quarterly report.

 

There has not been anychange in our internal control over financial reporting, that occurred duringthe fiscal quarter covered by this report, that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II.  OTHER INFORMATION**

### ** **

#### **ITEM 4.**     SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

#### ** **

The following is a description of matters submitted toa vote of our shareholders at an annual meeting of shareholders held on June 16,2005:

 

A.                                   RogerL. Pringle and Timothy A. Timmins were elected as directors to hold officeuntil the annual meeting in the expiration year detailed below and until theirsuccessors are elected and qualified. Votes cast for and votes withheld with respect to each nominee were asfollows:

 
| ** **         | ** ** | **New Term  Expiration** | ** ** | **Votes  For** | ** ** | **Votes  Withheld** | ** ** |
|--------------------|------------|--------------------------|------------|----------------|------------|---------------------|------------|
| Roger L. Pringle   |       | 2008                     |       | 17,862,229     |       | 4,183,912           |       |
| Timothy A. Timmins |       | 2008                     |       | 17,819,551     |       | 4,226,590           |       |

 

B.                                     Abrief description of each other matter voted upon at the annual meeting and thevotes cast for, votes cast against, abstentions and broker non-votes as to eachsuch matter is as follows:
| ** **                                                                                                                                               | ** ** | **Votes  For** | ** ** | **Votes  Against** | ** ** | **Abstained** | ** ** | **Broker  Non-votes** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|------------|--------------------|------------|---------------|------------|-----------------------|------------|
| Proposal to ratify the selection of Deloitte &  Touche LLP as Metro One’s independent auditors for the year ending December 31,  2005 |       | 21,640,429     |       | 347,663            |       | 58,049        |       | —                |       |
|                                                                                                                                                     |       |           |       |               |       |          |       |                  |       |
| Shareholder proposal regarding hiring of a proxy  advisory firm                                                                                          |       | 1,218,786      |       | 9,425,974          |       | 166,539       |       | 11,234,842            |       |

 

#### **ITEM 6.**     EXHIBITS

#### ** **

| **(a)**    | ** ** | **Exhibits** | ** ** | ** **                                                                                                                                                                                              |
|------------|------------|--------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **   | ** ** | ** **                                                                                                                                                                                              |
| ** ** | ** ** | **31.1**     | ** ** | **Certification  of Principal Executive Officer pursuant to Securities and Exchange Commission  Rule 13a-14(a).**                                                                                  |
| ** ** | ** ** | ** **   | ** ** | ** **                                                                                                                                                                                              |
| ** ** | ** ** | **31.2**     | ** ** | **Certification  of Principal Financial Officer pursuant to Securities and Exchange Commission  Rule 13a-14(a).**                                                                                  |
| ** ** | ** ** | ** **   | ** ** | ** **                                                                                                                                                                                              |
| ** ** | ** ** | **32.1**     | ** ** | **Certification  of Principal Executive Officer and Principal Financial Officer Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act Of 2002.** |

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
| Date:     August 9,  2005 |                                          |
|---------------------------------------------------------|-----------------------------------------------|
|                                                    | METRO ONE  TELECOMMUNICATIONS, INC.           |
|                                                    |                                          |
|                                                    | By:                                           | /s/ Duane C.  Fromhart |   |
|                                                    | Duane C.  Fromhart                            |
|                                                    | Senior Vice  President,                       |
|                                                    | Chief Financial  Officer                      |
|                                                    | (Principal  Financial and Accounting Officer) |

 

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