**United StatesSecurities and Exchange Commission**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

**ý****  QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended March 31, 2003**

 

**o****  TRANSITION REPORT PURSUANT TOSECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission File Number 0-27024**

 

**METRO ONE TELECOMMUNICATIONS, INC.**

(Exactname of registrant as specified in its charter)

 

| **OREGON**                                                    |   | **93-0995165**      |
|---------------------------------------------------------------|--------|---------------------|
| (State or other jurisdiction of                               |   | (I.R.S. Employer    |
| incorporation or organization)                                |   | 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)     |

 

**Indicateby check mark whether the registrant has (1) filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes****ý No****o**

 

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

 

**Numberof shares of common stock outstanding as of May 6, 2003: 24,697,948 shares, nopar value per share.**

 

 

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**METRO ONE TELECOMMUNICATIONS, INC.**

 

**INDEX TO FORM 10 - Q**

 
| Part I   | Financial Information                                                                       |
|----------|---------------------------------------------------------------------------------------------|
|     |                                                                                        |
| Item 1.  | Financial Statements (Unaudited)                                                            |
|     |                                                                                        |
|     | Condensed  Statements of Income for the three months ended March 31, 2003 and 2002          |
|     |                                                                                        |
|     | Condensed Balance  Sheets as of March 31, 2003 and December 31, 2002                        |
|     |                                                                                        |
|     | Condensed  Statements of Cash Flows for the three months ended March 31, 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 6.  | Exhibits and  Reports on Form 8-K                                                           |
|     |                                                                                        |
|     | Signatures                                                                                  |

 

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**Metro One Telecommunications, Inc.**

**Condensed Statements of Income(Unaudited)**

 
|                                      |   | **Three  Months Ended  March 31,** |   |
|-------------------------------------------|--------|------------------------------------|--------|
| **(In thousands, except per share data)** |   | **2003**                           |   | **2002** |   |
|                                      |   |                               |   |   |   |
| Revenues                                  |   | $                                  | 59,336 |   | $ | 61,765 |   |
|                                      |   |                               |   |   |   |
| Costs and  expenses:                      |   |                               |   |   |   |
| Direct operating                          |   | 33,513                             |   | 35,250 |   |
| General and  administrative               |   | 19,199                             |   | 18,013 |   |
|                                      |   | 52,712                             |   | 53,263 |   |
|                                      |   |                               |   |   |   |
| Income from  operations                   |   | 6,624                              |   | 8,502 |   |
|                                      |   |                               |   |   |   |
| Other income,  net                        |   | 212                                |   | 268 |   |
| Interest expense  and loan fees           |   | —                             |   | (9 | ) |
|                                      |   |                               |   |   |   |
| Income before  income taxes               |   | 6,836                              |   | 8,761 |   |
| Income tax  expense                       |   | 2,726                              |   | 3,329 |   |
|                                      |   |                               |   |   |   |
| Net income                                |   | $                                  | 4,110  |   | $ | 5,432 |   |
|                                      |   |                               |   |   |   |
| Net income per  common share:             |   |                               |   |   |   |
| Basic                                     |   | $                                  | .17    |   | $ | .22 |   |
| Diluted                                   |   | $                                  | .17    |   | $ | .22 |   |
|                                      |   |                               |   |   |   |
| Weighted average  shares outstanding:     |   |                               |   |   |   |
| Basic                                     |   | 24,682                             |   | 24,487 |   |
| Diluted                                   |   | 24,709                             |   | 25,195 |   |

 

The accompanying notesare an integral part of these condensed financial statements.

 

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**Metro OneTelecommunications, Inc.**

**CondensedBalance Sheets (Unaudited)**

 
| **(In thousands)**                                                                                                                  |   | **March 31,  2003** | ** ** | **December  31,  2002** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|-------------------------|------------|
|                                                                                                                                |   |                | ** ** |                    | ** ** |
| **Assets**                                                                                                                          |   |                | ** ** |                    | ** ** |
|                                                                                                                                |   |                |       |                    |       |
| Current assets:                                                                                                                     |   |                |       |                    |       |
| Cash and cash equivalents                                                                                                           |   | $                   | 86,940     |                    | $          | 76,528 |   |
| Restricted cash                                                                                                                     |   | 3,348               |       | 3,348                   |       |
| Accounts receivable                                                                                                                 |   | 29,784              |       | 31,321                  |       |
| Prepaid costs and other current assets                                                                                              |   | 5,967               |       | 6,498                   |       |
|                                                                                                                                |   |                |       |                    |       |
| Total current assets                                                                                                                |   | 126,039             |       | 117,695                 |       |
|                                                                                                                                |   |                |       |                    |       |
| Furniture, fixtures and equipment, net                                                                                              |   | 70,650              |       | 71,668                  |       |
| Goodwill                                                                                                                            |   | 4,432               |       | 4,432                   |       |
| Intangible assets                                                                                                                   |   | 4,215               |       | 4,023                   |       |
| Other assets                                                                                                                        |   | 938                 |       | 871                     |       |
|                                                                                                                                |   |                |       |                    |       |
| Total assets                                                                                                                        |   | $                   | 206,274    |                    | $          | 198,689 |   |
|                                                                                                                                |   |                |       |                    |       |
| **Liabilities  and Shareholders’ Equity**                                                                                      |   |                |       |                    |       |
|                                                                                                                                |   |                |       |                    |       |
| Current liabilities:                                                                                                                |   |                |       |                    |       |
| Accounts payable                                                                                                                    |   | $                   | 1,911      |                    | $          | 1,366 |   |
| Accrued liabilities                                                                                                                 |   | 2,069               |       | 1,054                   |       |
| Income taxes payable                                                                                                                |   | 3,535               |       | —                  |       |
| Accrued payroll and related costs                                                                                                   |   | 11,538              |       | 11,570                  |       |
|                                                                                                                                |   |                |       |                    |       |
| Total current liabilities                                                                                                           |   | 19,053              |       | 13,990                  |       |
|                                                                                                                                |   |                |       |                    |       |
| Deferred tax liabilities                                                                                                            |   | 7,141               |       | 8,789                   |       |
| Other long-term liabilities                                                                                                         |   | 581                 |       | 521                     |       |
|                                                                                                                                |   |                |       |                    |       |
| Total liabilities                                                                                                                   |   | 26,775              |       | 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, 24,682 shares  issued and outstanding at March 31, 2003 and December 31, 2002 |   | 119,425             |       | 119,425                 |       |
| Retained earnings                                                                                                                   |   | 60,074              |       | 55,964                  |       |
|                                                                                                                                |   |                |       |                    |       |
| Total shareholders’ equity                                                                                                     |   | 179,499             |       | 175,389                 |       |
|                                                                                                                                |   |                |       |                    |       |
| Total liabilities and shareholders’ equity                                                                                     |   | $                   | 206,274    |                    | $          | 198,689 |   |

 

The accompanying notesare an integral part of these condensed financial statements.

 

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**Metro One Telecommunications,Inc.**

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

 
|                                                                                         |   | **Three  Months Ended March 31,** |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
| **(In thousands)**                                                                           |   | **2003**                          |   | **2002** |   |
|                                                                                         |   |                              |   |   |   |
| Cash flows from operating activities:                                                        |   |                              |   |   |   |
| Net income                                                                                   |   | $                                 | 4,110  |   | $ | 5,432 |   |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities: |   |                              |   |   |   |
| Depreciation and amortization                                                                |   | 5,106                             |   | 4,324 |   |
| Loss on disposal of fixed assets                                                             |   | 37                                |   | 5 |   |
| Deferred income taxes                                                                        |   | (1,891                            | )      | — |   |
| Tax benefit from stock option plans                                                          |   | —                            |   | 304 |   |
| Changes in certain assets and liabilities:                                                   |   |                              |   |   |   |
| Accounts receivable                                                                          |   | 1,537                             |   | (7,019 | ) |
| Prepaid expenses and other assets                                                            |   | 390                               |   | (1,641 | ) |
| Accounts payable and other liabilities                                                       |   | 5,123                             |   | (3,692 | ) |
|                                                                                         |   |                              |   |   |   |
| Net cash provided by (used in) operating activities                                          |   | 14,412                            |   | (2,287 | ) |
|                                                                                         |   |                              |   |   |   |
| Cash flows from investing activities:                                                        |   |                              |   |   |   |
| Capital expenditures                                                                         |   | (4,000                            | )      | (6,151 | ) |
|                                                                                         |   |                              |   |   |   |
| Net cash used in investing activities                                                        |   | (4,000                            | )      | (6,151 | ) |
|                                                                                         |   |                              |   |   |   |
| Cash flows from financing activities:                                                        |   |                              |   |   |   |
| Proceeds from exercise of stock options and employee stock purchases                         |   | —                            |   | 267 |   |
|                                                                                         |   |                              |   |   |   |
| Net cash provided by financing activities                                                    |   | —                            |   | 267 |   |
|                                                                                         |   |                              |   |   |   |
| Net increase (decrease) in cash and cash equivalents                                         |   | 10,412                            |   | (8,171 | ) |
|                                                                                         |   |                              |   |   |   |
| Cash and cash equivalents, beginning of period                                               |   | 76,528                            |   | 54,592 |   |
|                                                                                         |   |                              |   |   |   |
| Cash and cash equivalents, end of period                                                     |   | $                                 | 86,940 |   | $ | 46,421 |   |
|                                                                                         |   |                              |   |   |   |
| Supplemental disclosure of cash flow information:                                            |   |                              |   |   |   |
| Cash paid for interest                                                                       |   | $                                 | 2      |   | $ | 9 |   |
| Cash paid for income taxes                                                                   |   | $                                 | 624    |   | $ | 845 |   |

 

The accompanying notesare an integral part of these condensed financial statements.

 

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**Metro One Telecommunications,Inc.**

**Notes to Condensed FinancialStatements (Unaudited)**

 

**1.**              **Summary ofSignificant Accounting Policies**

 

**Basisof Presentation**

 

The accompanying interim condensed financial statements have beenprepared by Metro One Telecommunications, Inc. without audit and in conformitywith accounting principles generally accepted in the United States of Americafor interim financial information. Accordingly, certain financial information and footnotes have beenomitted or condensed.  In the opinion ofmanagement, the condensed financial statements include all adjustments,consisting only of normal recurring adjustments, necessary for a fair statementof the results for the interim periods. These condensed financial statements and notes thereto should be read inconjunction with our audited financial statements included in our Annual Reporton Form 10-K for the year ended December 31, 2002.  The results of operations for the interim period shown in thisreport are not necessarily indicative of results for any future interim periodor the entire fiscal year.  Certainbalances in the prior period financial statements have been reclassified toconform to current period presentations. Such reclassifications had no effect on reported net income.

 

**Stock-BasedCompensation**

 

We have elected to continue to account for stock options according toAccounting Principles Bulletin No. 25, “Accounting for Stock Issued toEmployees,” and to furnish the pro forma disclosures required under Statementof Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-BasedCompensation — Transition and Disclosure — an amendment of FASB Statement No.123.”  No stock-based employeecompensation cost is reflected in net income, as all options granted under thePlan had an exercise price equal to the market value of the underlying commonstock on the date of the grant.  Thefollowing table illustrates the effect on net income and net income per shareas if we had applied the fair value recognitions of SFAS No. 123, “Accountingfor Stock-Based Compensation” to stock options issued:

 
|                                    |   | **Three  Months Ended  March 31,**           |   |
|-----------------------------------------|--------|----------------------------------------------|--------|
|                                    |   | **2003**                                     |   | **2002** |   |
|                                    |   | **(In thousands, except per share amounts)** |   |
| Net income, as reported                 |   | $                                            | 4,110  |   | $ | 5,432 |   |
| Stock-based compensation expense        |   | (936                                         | )      | (892 | ) |
| Net income, pro forma                   |   | $                                            | 3,174  |   | $ | 4,540 |   |
|                                    |   |                                         |   |   |   |
| Diluted earnings per share, as reported |   | $                                            | .17    |   | $ | .22 |   |
| Stock-based compensation impact         |   | (.04                                         | )      | (.04 | ) |
| Diluted earnings per share, pro forma   |   | $                                            | .13    |   | $ | .18 |   |

 

Options to purchase1,858,000 and 286,000 shares of common stock were outstanding at March 31, 2003and 2002, respectively, but were not included in the computation of diluted netincome per share because their effect would be anti-dilutive.

 

**2.**              **Net Income Per Share**

 

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

 

4

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The calculation of weighted average outstanding shares is as follows:

 
|                                                                                  |   | **Three  Months Ended  March 31,** |   |
|---------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                  |   | **2003**                           |   | **2002** |   |
|                                                                                  |   | **(in  thousands)**                |   |
| Weighted average  shares outstanding (used in computing Basic net income per share)   |   | 24,682                             |   | 24,487 |   |
| Potential common  shares resulting from the exercise of stock options                 |   | 27                                 |   | 708 |   |
|                                                                                  |   |                               |   |   |   |
| Weighted average  shares outstanding (used in computing Diluted net income per share) |   | 24,709                             |   | 25,195 |   |

 

**3.**              **Commitments and Contingencies**

 

We are party to various legal actions and administrative proceedingsarising in the ordinary course of business. We believe the disposition of these matters will not have a materialadverse effect on our financial position, results of operations or cash flows.

 

From time to time, in the normal course of our business, we issuestandby letters of credit and bank guarantees. At March 31, 2003, we had one letter of credit outstanding in the amountof $3,348,000 related to our workers’ compensation program.  The letter of credit is secured by acertificate of deposit for the same amount that is recorded as restrictedcash.  This letter of credit expired inApril 2003, and since then has been renewed with a new letter of credit in theamount of $4,900,000 for the same purpose.

 

Subsequent toMarch 31, 2003, we committed approximately $28 million to future promotion ofvarious information services, which amount we expect to expense over theremainder of 2003 as the related marketing activities take place.

 

**4.**              **Significant Events**

 

Our contract with Sprint PCS expired on December 31, 2002.  Sprint PCS notified us that it would notsign a new contract with us.  Sprint PCSaccounted for approximately 33% and 35% of our revenues in the three-monthperiods ended March 31, 2003 and 2002, respectively. In December 2002, we agreedto a transition arrangement with Sprint PCS, pursuant to which we will continueto handle its subscribers’ calls subsequent to December 31, 2002.  The transition began in March 2003 and isgoverned by a mutually agreed upon schedule that calls for a completion by themiddle of 2003; however, given uncertainties beyond our control and knowledge,we are unable to predict the exact timing of the completion of the Sprint PCStransition.  It is likely that theexpiration of the Sprint PCS contract will have an adverse effect on ourfinancial position and future operating results, as well as our operations,although it is not possible to determine the exact timing, nature or magnitudeat this time.

 

In May 2002, our contract with Cingular Wireless expired.  We continued to serve Cingular Wirelesscustomers in its California, Nevada and Washington markets subsequent to thecontract expiration while we attempted to secure a new contract or extension ofthe existing one.  Cingular Wirelessnotified us that it would not extend the existing contract or sign a newone.  Cingular Wireless accounted forapproximately 6% of our revenues during the first quarter of 2002.  Service to its customers ceased duringOctober 2002, thus, there were no revenues from Cingular Wireless in the firstquarter of 2003.

 

5

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**5.**              **Recent Accounting Pronouncements**

 

In December 2002, the Financial Accounting Standards Board issued SFASNo. 148, which provides alternative methods of transition for a voluntarychange to the fair-value-based method of accounting for stock-based employeecompensation.  In addition, SFAS No. 148amends the disclosure requirements of SFAS No. 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effects of the methodused on reported results. The transition guidance and annual disclosureprovisions of SFAS No. 148 are effective for fiscal years ending after December15, 2002.  The interim disclosureprovisions are effective for financial statements for interim periods beginningafter December 15, 2002.  At present, wedo not intend to adopt the fair-value-based method of accounting for our stockcompensation plans.  We have adopted thedisclosure provisions of SFAS No. 148 in the financial reports for the yearended December 31, 2002 and the quarter ended March 31, 2003.

 

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**ITEM 2.**                                                     **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

All statements and trend analyses contained in thisitem and elsewhere in this report on Form 10-Q relative to the futureconstitute “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These forward-looking statements may, but do not necessarily, alsoinclude words such as “believes,” “expects,” “anticipates,” “plans,”“estimates,” “may,” “will,” “should,” “could,” “continue” or similarexpressions.  Forward-looking statementsare not guarantees.  They involve knownand unknown business and economic risks, uncertainties and other factors thatmay cause our actual results, performance or achievements to be materiallydifferent from any future results, performance or achievements expressed orimplied by such forward-looking statements. These risks, uncertainties and other factors include those discussed inour 2002 Annual Report on Form 10-K filed with the Securities and ExchangeCommission.  Readers are cautioned notto place undue reliance on these forward-looking statements, which speak onlyas of the date hereof.  We undertake noobligation to publicly release any revisions to these forward-lookingstatements to reflect events or circumstances after the date hereof or toreflect the occurrence of unanticipated events.

 

Results of operations for the periods discussed belowshould not be considered indicative of the results to be expected in any futureperiod, and fluctuations in operating results may also result in fluctuationsin the market price of our common stock. Our quarterly and annual operating results have in the past and may inthe future vary significantly depending on factors such as changes in the telecommunicationsmarket, the addition or expiration of customer contracts, increasedcompetition, changes in pricing policies by us or our competitors, lengthysales cycles, lack of market acceptance or delays in the introduction of newversions of our products or features, the cost and success of new growthstrategies, the timing of the initiation of wireless or othertelecommunications services through new delivery systems or their acceptance bycustomers, the timing and expense of the expansion or contraction of ournational call center network, the general employment environment, generaleconomic conditions, significant world events and other factors, including butnot limited to, factors discussed in our 2002 Annual Report on Form 10-K filedwith the Securities and Exchange Commission.

 

#### **Overview**

 

We are the leading developer and provider of EnhancedDirectory Assistance® and information services for the telecommunicationsindustry.  We primarily contract withwireless carriers to provide our services to their subscribers.

 

Under our contracts, the carriers agree to route someor all of their directory assistance, and/or alphanumeric messaging calls tous.  We typically offer our services tomultiple carriers within the same market. When a carrier’s subscribers dial a directory assistance number, such as“411,” “555-1212” or “00,” the calls are answered by our operators identifyingthe service by that carrier’s brand name, such as “AT&T Wireless Connect”or “Nextel 411.”  We intend to provideservices to additional carriers, businesses, governmental units and callers ingeneral through alternate strategies intended to attract calls, informationqueries and other transactions.

 

Each carrier establishes its own directory assistancefee structure for its subscribers. Wireless subscribers typically pay fees ranging from $0.75 to $1.40 plusairtime charges for our services.  Wecharge our carrier customers directly and, at present, 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 carrier customers directly on a per callbasis, with prices varying in some cases based on call volume.  In order to encourage our carrier customersto route more of their calls to us, our long-term strategy has been based inpart on reducing the price we charge them. We expect that average revenue per call may continue to decrease overtime as we believe this pricing strategy better positions us to retain andexpand service with existing carrier customers where profitable, to attract newcarrier customers and to achieve greater operating margins over time.  Prices for services provided to other typesof customers, including businesses, governmental units or other callers mayvary based on the nature of the service, volume and other circumstances.

 

7

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In 2003, we expect to continue to expand or otherwiseadjust capacities in order to address varying business circumstances, includingchanges in volume demands and execution of our long-term businessstrategy.  Capacity needs could varysignificantly as a result of additional volume from existing customers in theform of new markets, increased usage within existing markets served, changes inthe carrier customers and/or the number of calls routed to us or as a result ofalternative strategies to attract additional calls.  We will also continue to opportunistically pursue additionalsignificant new business.  Call centerand network expansion efforts are intended to increase our local servicecoverage and our capacity to process additional call volume.

 

**Significant Events**

 

Our contract with Sprint PCS expired on December 31,2002.  Sprint PCS notified us that itwould not sign a new contract with us. Sprint PCS accounted for approximately 33% and 35% of our revenues in thethree-month periods ended March 31, 2003 and 2002, respectively.  In December 2002, we agreed to a transitionarrangement with Sprint PCS, pursuant to which we will continue to handle itssubscribers’ calls subsequent to December 31, 2002.  The transition began in March 2003 and is governed by a mutuallyagreed upon schedule that calls for a completion by the middle of 2003;however, given uncertainties beyond our control and knowledge, we are unable topredict the exact timing of the completion of the Sprint PCS transition.  It is likely that the expiration of theSprint PCS contract will have an adverse effect on our financial position andfuture operating results, as well as our operations, although it is not possibleto determine the exact timing, nature or magnitude at this time.

 

In May 2002, our contract with Cingular Wirelessexpired.  We continued to serve CingularWireless customers in its California, Nevada and Washington markets subsequentto the contract expiration while we attempted to secure a new contract orextension of the existing one.  CingularWireless notified us that it would not extend the existing contract or sign anew one.  Cingular Wireless accounted forapproximately 6% of our revenues during the first quarter of 2002.  Service to its customers ceased duringOctober 2002, thus, there were no revenues from Cingular Wireless in the firstquarter of 2003.

 

**Resultsof Operations**

 

This table shows selecteditems from our statements of income expressed as a percentage of revenues:

 
|                              |   | **Three  Months Ended  March 31,** |   |
|-----------------------------------|--------|------------------------------------|--------|
|                              |   | **2003**                           |   | **2002** |   |
| Revenues                          |   | 100.0                              | %      | 100.0 | % |
| Direct operating  costs           |   | 56.5                               |   | 57.1 |   |
| General and  administrative costs |   | 32.4                               |   | 29.1 |   |
| Income from  operations           |   | 11.2                               |   | 13.8 |   |
| Other income,  net                |   | 0.4                                |   | 0.4 |   |
| Interest expense  and loan fees   |   | 0.0                                |   | 0.0 |   |
| Income before  income taxes       |   | 11.5                               |   | 14.2 |   |
| Income tax  expense               |   | 4.6                                |   | 5.4 |   |
| Net income                        |   | 6.9                                | %      | 8.8 | % |

 

*Comparison of First Quarter 2003 toFirst Quarter 2002*

 

Revenues decreased3.9% to $59.3 million from $61.8 million, while call volume decreased toapproximately 127 million calls from approximately 129 million calls.  These decreases resulted primarily from theexpiration of our contract with Cingular Wireless, partially offset byincreases in volume and revenue from ongoing 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.

 

Direct operatingcosts decreased 4.9% to $33.5 million from $35.3 million.  This decrease was primarily due to decreasedstaffing levels and related costs associated with decreased call volumes.  As a percentage of

 

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revenues, directoperating costs decreased to 56.5% from 57.1%. This decrease was due primarily to improved operating efficiencies andlower costs of accessing information content.

 

General andadministrative costs increased 6.6% to $19.2 million from $18.0 million.  As a percentage of revenues, general andadministrative costs increased to 32.4% from 29.2%.  Depreciation and amortization expense, a component of general andadministrative costs, increased by 22.1% to $5.1 million from $4.2 million andincreased to 8.6% from 6.8% of revenue. The increases in depreciation andamortization were due primarily to depreciation expense on equipment purchasedfor upgrades of existing call centers and for equipment used in productdevelopment activities. In addition, general and administrative costs increaseddue to expenditures intended to increase capacity and efficiency in routingcalls and from certain market research costs related to initiatives intended tocapture additional market share for our enhanced information services bydelivering those services to other types of customers.  Such increases were partially offset by theelimination of certain marketing costs for a customer that moved tovolume-based pricing as discussed previously.

 

Other income was$212,000 and $268,000 for the first quarter of 2003 and 2002,respectively.  Other income consistedprimarily of interest income in both periods. The decrease in interest income in the first quarter of 2003 compared tothe first quarter of 2002 resulted from lower interest rates earned on cashequivalents invested in money market instruments.

 

Income tax expensefor the three months ended March 31, 2003 was $2.7 million, for an effectivetax rate of approximately 39.9% reflecting the estimated combined net federaland state statutory income tax rate.  Income tax expense for the three months ended March 31, 2002 was$3.3 million, for an effective tax rate of approximately 38.0%.  The increase in the effective tax rate in2003 resulted primarily from an increase in our estimate of the effectiveoverall state income tax rate.  Theeffective state income tax rate results from the combined impact of rates ineffect in the various states in which we operate and the nature of ouroperations in those states.  The impactof individual state income tax rates can vary significantly depending onfactors such as the levels of revenues, payroll and equipment in each state.

 

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

 

Cash and cashequivalents are recorded at cost, which approximates the fair marketvalue.  As of March 31, 2003, we had$86.9 million in cash and cash equivalents compared to $76.5 million atDecember 31, 2002.  The net increase of$10.4 million resulted primarily from cash provided by operations which totaled$14.4 million, offset by capital expenditures of $4.0 million.  We have no outstanding debt.

 

Working capitalwas $107.0 million at March 31, 2003, compared to $103.7 million at December31, 2002.  This increase is dueprimarily to working capital provided by operations.

 

*Cash Flow from Operations. *Net cash provided byoperations was $14.4 million for the three months ended March 31, 2003resulting primarily from net income adjusted for the effect of non-cashdepreciation as well as a decrease in accounts receivable and increases inaccounts payable and other liabilities. This was partially offset by a decrease in our deferred tax liability.

 

*Cash Flow from InvestingActivities. *Cash usedin investing activities was $4.0 million for the three months ended March 31,2003 resulting primarily from capital expenditures for equipment purchased forupgrades of existing call centers and for equipment used in product developmentactivities.

 

*Cash Flow from FinancingActivities. *There wasno significant cash expended or generated related to financing activities forthe three months ended March 31, 2003.

 

*Future Capital Needs andResources. *Theprimary uses of our capital in the near future are expected to be for marketingand promotion activities related to new business initiatives; for thedevelopment or acquisition of technologies, features and content complementaryto our business; for the potential expansion of our call center network and itscapacity 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 intend to expand orotherwise adjust our capacity in

 

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order to addressvarying business circumstances, including changes in volume demands andexecution 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 March 31,2003 was approximately $90 million, future activities, including execution ofalternative strategies, expanded marketing and new product development androllout will impact the amount of available cash.  If necessary, we may attempt to establish borrowing arrangementsin order to maintain adequate liquidity. We believe we will have access to future financing sources, although wecannot provide assurance that funding will be available in amounts or on termsagreeable to us.

 

Subsequent toMarch 31, 2003, we committed approximately $28 million to future promotion ofvarious information services, which amount we expect to expense over theremainder of 2003 as the related marketing activities take place.

#### ** **

#### **Critical Accounting Policies**

 

We prepare our financial statements in conformity withaccounting principles 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. Management believes that of our significant accounting policies (seeNote 1 to the financial statements in our Annual Report on Form 10-K for theperiod ended December 31, 2002), those governing accounts receivable, the livesand recoverability of the carrying amount of equipment and other long-livedassets and goodwill, estimates involving the levels of our liabilities forworkers’ compensation and medical self-insurance reserves and estimates ofcurrent and deferred taxes owed may involve a higher degree of judgment,estimation and uncertainty.

 

*Accountsreceivable. *Ourcustomer base has principally consisted of large wireless telephone carriers inthe United States.  As such, managementbelieves we have minimal risk of uncollectibility, at any point in time,related to outstanding accounts receivable. We have not experienced significant collection issues or write-offsrelated to these customers. Consequently, we do not maintain an allowance for doubtful accounts.  Since our accounts receivable areconcentrated in relatively few customers, a significant change in the liquidityor financial position of any one of these customers could adversely impactcollection of our accounts receivable and therefore have a material adverseeffect on our financial position and future operating results.

 

*Long-livedassets and goodwill. *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 theasset may not be recoverable.  At suchtime, we estimate the future cash flows expected from their continued use andeventual disposition and, if lower than the carrying amount, adjust thecarrying amount of the asset to its estimated fair value.

 

We account for goodwill in accordance with Statementof Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and OtherIntangible Assets.”  Under SFAS No. 142,we evaluate goodwill for impairment annually and whenever events or changes incircumstances indicate the carrying amount of goodwill may not berecoverable.  We perform our annualimpairment test in November each year. To perform that test, we compare the carrying value of our business toour estimates of the fair value of our business.  If our evaluation indicates that the fair value of our businessis less than its carrying value, we will write down the related goodwill to itsimplied fair value.  We use estimates offuture cash flows, discounted to present value, market prices and othermeasures to estimate the fair value of our business. It is reasonably possiblethat our estimates of future cash flows, discount rates and other assumptionsinherent in the calculation of the estimated fair value of our business willchange in the future, which could cause us to write down goodwill at that time.

 

*Self-insurancereserves. *Weself-insure a portion of our workers’ compensation and employee medicalinsurance programs.  Depending oncircumstances, in some cases we may purchase stop loss coverage at varying

 

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levels in order to mitigate our potential future losses.  The nature of these liabilities, which maynot fully manifest themselves for several years, requires significantjudgment.  We evaluate pending workers’compensation and medical claims periodically to determine the reasonableness ofthe reserves we have recorded for such claims. Our evaluation includes estimates of potential incurred-but-unreportedclaims as well as factors that may cause original estimates of such claims toincrease over time, such as available claims data and historical trends andexperience, as well as future projections of 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 from the recorded reserves.  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.

 

*Incometaxes.*  Accounting forincome taxes requires us to estimate our income taxes in each jurisdiction inwhich we operate.  Due to differences inthe recognition of items included in income for accounting and tax purposes,temporary differences arise which are recorded as deferred tax assets orliabilities.  We estimate the likelihoodof recovery of these assets, which is dependent on future levels ofprofitability.  Should any amounts bedetermined not to be recoverable, or assumptions change, we would be requiredto take a charge, which could have a material effect on our financial positionor results of operations.

 

**RecentAccounting Pronouncements**

 

In December 2002, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 148 “Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of FASB Statement No.123.”  The statement providesalternative methods of transition for a voluntary change to thefair-value-based method of accounting for stock-based employee compensation.  In addition, SFAS No. 148 amends thedisclosure requirements of SFAS No. 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based employee compensation and the effects of the method used onreported results. The transition guidance and annual disclosure provisions ofSFAS No. 148 are effective for fiscal years ending after December 15,2002.  The interim disclosure provisionsare effective for financial statements for interim periods beginning afterDecember 15, 2002.  At present, we donot intend to adopt the fair-value-based method of accounting for our stockcompensation plans.  We have adopted thedisclosure provisions of SFAS No. 148 in the financial reports for the yearended December 31, 2002 and the quarter ended March 31, 2003.

 

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

 

Substantially all of our liquid investments areinvested in money market instruments, and therefore the fair market value ofthese instruments is affected by changes in market interest rates.  However, all of our investments at March 31,2003 were invested in overnight money market instruments and were redeemable ona daily basis.  All of the underlyinginvestments in the money market fund had maturities of three months orless.  As a result, we believe themarket risk arising from our holdings of financial instruments is minimal.  In addition, we may be exposed to interestrate risk primarily through use of short-term and long-term borrowings tofinance operations.  A hypothetical 1%fluctuation in interest rates would not have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

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

 

Under the supervision and with the participation ofour Chief Executive Officer and Chief Financial Officer, we have evaluated ourdisclosure controls and procedures within 90 days prior to the filing date ofthis report.  Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that such disclosure controls and procedures are adequate andeffective.  There have not been anysignificant changes in our internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of management’sevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

We intend to review and evaluate the design andeffectiveness of our disclosure controls and procedures on an ongoing basis andto improve our controls and procedures over time and to correct anydeficiencies that we may discover in the future.  Our goal is to ensure that our senior management has timelyaccess to all material financial and non-financial information concerning ourbusiness.  While we believe the presentdesign of our disclosure controls and procedures is effective to achieve ourgoal, future events affecting our business may cause us to significantly modifyour disclosure controls and procedures.

### ** **

#### **PART II.**                                                OTHERINFORMATION

 

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

 

(a)          Exhibits

 

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

 

(b)         Reports on Form 8-K

 

None

 

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SIGNATURE

 

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

 

 
|   | Date:      May 15,  2003 |                               |                         |
|--------|--------------------------------------------------------|------------------------------------|------------------------------|
|   |                                                   |                               |                         |
|   |                                                   | METRO ONE TELECOMMUNICATIONS, INC. |                         |
|   |                                                   |                               |                         |
|   |                                                   | By:                                | /s/  Dale N.  Wahl      |   |   |
|   |                                                   | Dale N. Wahl                       |                         |
|   |                                                   | Senior Vice President,             |                         |
|   |                                                   | Chief Financial Officer            |                         |
|   |                                                   | (Principal Financial Officer)      |                         |
|   |                                                   |                               |                         |
|   |                                                   |                               |                         |
|   |                                                   | By:                                | /s/  Duane C.  Fromhart |   |   |
|   |                                                   | Duane C. Fromhart                  |                         |
|   |                                                   | Vice President, Finance            |                         |
|   |                                                   | (Principal Accounting Officer)     |                         |

 

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#### **CERTIFICATION PURSUANT TO RULE 15d-14 OF THE SECURITIES EXCHANGE ACT 0F 1934, AS AMENDED AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

#### **CERTIFICATIONS**

#### ** **

I, Timothy A. Timmins, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Metro One Telecommunications, Inc;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              Presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             Any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in the internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:      May 15,  2003 |                          |
|--------------------------------------------------------|-------------------------------|
|                                                   |                          |
|                                                   | /s/  Timothy  A. Timmins |   |
|                                                   | Timothy A. Timmins            |
|                                                   | President, Chief Executive    |
|                                                   | Officer and Director          |

#### ** **

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#### **CERTIFICATION PURSUANT TO RULE 15d-14 OF THE SECURITIES EXCHANGE ACT 0F 1934, AS AMENDED AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

 

#### **CERTIFICATIONS**

 

I, Dale N. Wahl, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Metro One Telecommunications, Inc;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this quarterlyreport is being prepared;

 

b)             Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              Presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             Any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in the internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:      May 15,  2003 |                    |
|--------------------------------------------------------|-------------------------|
|                                                   |                    |
|                                                   | /s/  Dale N.  Wahl |   |
|                                                   | Dale N. Wahl            |
|                                                   | Senior Vice President,  |
|                                                   | Chief Financial Officer |

 

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