** **

**UnitedStates**

**Securities and Exchange Commission**

**Washington,D.C.   20549**

 

**Form10-Q**

 

 

**ý****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15 (d)**

**OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**ForThe Quarterly Period Ended September 30, 2001**

 

**o****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15 (d)**

**OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**Commission File Number 0-27024**

 

 

 

**METROONE TELECOMMUNICATIONS, INC.**

(Exact name of registrant as specified in itscharter)

 

 

| **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)                      |   |                |

 

 

**(503) 643-9500**

(Registrant’s telephone number)

 

 

**Indicate by check mark whether the registrant has (1) filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days.   Yes****ý****  No****o**

 

**Number of shares of common stock outstanding as of November9, 2001: 24,350,877 shares, no par value per share**

 

**METRO ONE TELECOMMUNICATIONS,INC.**

 

 

**INDEXTO FORM 10 - Q**

 

 
| Part I  | Financial Information                                                                            |   |
|---------|--------------------------------------------------------------------------------------------------|--------|
|    |                                                                                             |   |
| Item 1. | Financial Statements  (Unaudited)                                                                |   |
|    |                                                                                             |   |
|    | Condensed  Statements of Income for the three and nine months ended September 30, 2001  and 2000 |   |
|    |                                                                                             |   |
|    | Condensed Balance  Sheets as of September 30, 2001 and December 31, 2000                         |   |
|    |                                                                                             |   |
|    | Condensed  Statements of Cash Flows for the nine months ended September 30, 2001 and  2000       |   |
|    |                                                                                             |   |
|    | 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                                      |   |
|    |                                                                                             |   |
| Part II | Other  Information                                                                               |   |
|    |                                                                                             |   |
| Item 6. | Exhibits and Reports  on Form 8-K                                                                |   |
|    |                                                                                             |   |
|    | Signature                                                                                        |   |

 

 

**Metro One Telecommunications,Inc.**

**Condensed Statements of Income (Unaudited)**
|                                      |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|-------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
| **(In thousands, except per share data)** |   | **2001**                               |   | **2000**                              |   | **2001** |   | **2000** | ** ** |
|                                      |   |                                   |   |                                  |   |   |   |   |   |
| Revenues                                  |   | $                                      | 60,868 |                                  | $      | 42,953 |   | $ | 170,246 |   | $ | 109,253 |   |
|                                      |   |                                   |   |                                  |   |   |   |   |   |
| Costs  and expenses:                      |   |                                   |   |                                  |   |   |   |   |   |
| Direct  operating                         |   | 35,194                                 |   | 26,879                                |   | 96,846 |   | 69,439 |   |
| General  and administrative               |   | 16,954                                 |   | 12,219                                |   | 48,189 |   | 32,205 |   |
|                                      |   | 52,148                                 |   | 39,098                                |   | 145,035 |   | 101,644 |   |
|                                      |   |                                   |   |                                  |   |   |   |   |   |
| Income  from operations                   |   | 8,720                                  |   | 3,855                                 |   | 25,211 |   | 7,609 |   |
|                                      |   |                                   |   |                                  |   |   |   |   |   |
| Other  income (expense), net              |   | 267                                    |   | 50                                    |   | 1,001 |   | (8 | ) |
| Interest  expense and loan fees           |   | (15                                    | )      | (931                                  | )      | (877 | ) | (2,267 | ) |
|                                      |   |                                   |   |                                  |   |   |   |   |   |
| Income  before income taxes               |   | 8,972                                  |   | 2,974                                 |   | 25,335 |   | 5,334 |   |
| Income  tax expense                       |   | 1,397                                  |   | 210                                   |   | 4,997 |   | 293 |   |
|                                      |   |                                   |   |                                  |   |   |   |   |   |
| Net  income                               |   | $                                      | 7,575  |                                  | $      | 2,764 |   | $ | 20,338 |   | $ | 5,041 |   |
|                                      |   |                                   |   |                                  |   |   |   |   |   |
|                                      |   |                                   |   |                                  |   |   |   |   |   |
| Earnings  per share                       |   |                                   |   |                                  |   |   |   |   |   |
| Basic                                     |   | $                                      | .31    |                                  | $      | .16 |   | $ | .87 |   | $ | .29 |   |
| Diluted                                   |   | $                                      | .30    |                                  | $      | .15 |   | $ | .83 |   | $ | .28 |   |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

 

 

**Metro One Telecommunications,Inc.**

**Condensed Balance Sheets (Unaudited)**
|                                                                                                                                                             |   | **September  30,** |       | **December  31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------|------------|
| **(In  thousands)**                                                                                                                                              |   | **2001**           |       | **2000**          |       |
|                                                                                                                                                             |   |               | ** ** |              | ** ** |
| **Assets**                                                                                                                                                       |   |               | ** ** |              | ** ** |
|                                                                                                                                                             |   |               |       |              |       |
| Current assets:                                                                                                                                                  |   |               |       |              |       |
| Cash and cash equivalents                                                                                                                                        |   | $                  | 33,807     |              | $          | 6,463 |   |
| Accounts receivable                                                                                                                                              |   | 40,776             |       | 36,559            |       |
| Prepaid costs and other current assets                                                                                                                           |   | 2,193              |       | 1,864             |       |
|                                                                                                                                                             |   |               |       |              |       |
| Total current assets                                                                                                                                             |   | 76,776             |       | 44,886            |       |
|                                                                                                                                                             |   |               |       |              |       |
| Furniture, fixtures and equipment, net                                                                                                                           |   | 65,369             |       | 54,749            |       |
| Other assets                                                                                                                                                     |   | 8,767              |       | 2,663             |       |
|                                                                                                                                                             |   |               |       |              |       |
|                                                                                                                                                             |   | $                  | 150,912    |              | $          | 102,298 |   |
|                                                                                                                                                             |   |               |       |              |       |
| **Liabilities and Shareholders’ Equity**                                                                                                                    |   |               |       |              |       |
|                                                                                                                                                             |   |               |       |              |       |
| Current liabilities:                                                                                                                                             |   |               |       |              |       |
| Accounts payable                                                                                                                                                 |   | $                  | 1,675      |              | $          | 2,633 |   |
| Accrued liabilities                                                                                                                                              |   | 4,790              |       | 6,088             |       |
| Accrued payroll and related costs                                                                                                                                |   | 8,532              |       | 9,181             |       |
| Operating line of credit                                                                                                                                         |   | -                  |       | 4,750             |       |
| Current portion of long-term debt                                                                                                                                |   | -                  |       | 9,511             |       |
|                                                                                                                                                             |   |               |       |              |       |
| Total current liabilities                                                                                                                                        |   | 14,997             |       | 32,163            |       |
|                                                                                                                                                             |   |               |       |              |       |
| Long-term debt                                                                                                                                                   |   | -                  |       | 24,731            |       |
|                                                                                                                                                             |   |               |       |              |       |
|                                                                                                                                                             |   | 14,997             |       | 56,894            |       |
|                                                                                                                                                             |   |               |       |              |       |
| 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, 24,246 and 17,747 shares issued and outstanding at September 30,  2001 and December 31, 2000 respectively |   | 114,163            |       | 43,991            |       |
| Retained earnings                                                                                                                                                |   | 21,752             |       | 1,413             |       |
|                                                                                                                                                             |   |               |       |              |       |
| Shareholders’ equity                                                                                                                                        |   | 135,915            |       | 45,404            |       |
|                                                                                                                                                             |   |               |       |              |       |
|                                                                                                                                                             |   | $                  | 150,912    |              | $          | 102,298 |   |

Theaccompanying notes are an integral part of these condensed financialstatements.

 

** **

**MetroOne Telecommunications, Inc.**

**Condensed Statements of Cash Flows (Unaudited)**
|                                                                                           |   | **Nine  Months Ended September 30,** |          |
|------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------------|
| **(In  thousands)**                                                                            |   | **2001**                             |          | **2000** |   |
|                                                                                           |   |                                 |          |   |   |
| Cash  flows from operating activities:                                                         |   |                                 |          |   |   |
| Net  income                                                                                    |   | $                                    | 20,338        |   | $ | 5,041 |   |
| Adjustments  to reconcile net income to net cash

provided  by (used in) operating activities: |   |                                 |     |   |     |
| Depreciation  and amortization                                                                 |   | 11,449                               |          | 7,422 |   |
| Loss  on disposal of fixed assets                                                              |   | 143                                  |          | 148 |   |
| Changes  in operating assets and liabilities:                                                  |   |                                 |          |   |   |
| Accounts  receivable                                                                           |   | (4,217                               | )             | (23,966 | ) |
| Prepaid  costs and other current assets                                                        |   | 259                                  |          | (1,823 | ) |
| Accounts  payable, accrued liabilities and payroll and related costs                           |   | (4,864                               | )             | 6,987 |   |
|                                                                                           |   |                                 |          |   |   |
| Net  cash provided by (used in) operating activities                                           |   | 23,108                               |          | (6,191 | ) |
|                                                                                           |   |                                 |          |   |   |
| Cash  flows from investing activities:                                                         |   |                                 |          |   |   |
| Capital  expenditures                                                                          |   | (20,301                              | )             | (20,269 | ) |
| Cash  paid in business combination                                                             |   | (3,639                               | )             | - |   |
| Proceeds  from sale of assets                                                                  |   | 196                                  |          | 8 |   |
| Maturity  of short-term investments                                                            |   | -                                    |          | 400 |   |
|                                                                                           |   |                                 |          |   |   |
| Net  cash used in investing activities                                                         |   | (23,744                              | )             | (19,861 | ) |
|                                                                                           |   |                                 |          |   |   |
| Cash  flows from financing activities:                                                         |   |                                 |          |   |   |
| Proceeds  from issuance of debt                                                                |   | -                                    |          | 13,630 |   |
| Repayment  of debt                                                                             |   | (34,241                              | )             | (4,549 | ) |
| Net  (repayment) borrowings on line of credit                                                  |   | (4,750                               | )             | 11,500 |   |
| Repayment  of capital lease obligations                                                        |   | -                                    |          | (127 | ) |
| Net  proceeds from sale of common stock                                                        |   | 64,670                               |          | - |   |
| Proceeds  from exercise of stock options                                                       |   | 2,301                                |          | 2,311 |   |
|                                                                                           |   |                                 |          |   |   |
| Net  cash provided by financing activities                                                     |   | 27,980                               |          | 22,765 |   |
|                                                                                           |   |                                 |          |   |   |
| Net  increase (decrease) in cash and cash equivalents                                          |   | 27,344                               |          | (3,287 | ) |
|                                                                                           |   |                                 |          |   |   |
| Cash  and cash equivalents, beginning of period                                                |   | 6,463                                |          | 9,564 |   |
|                                                                                           |   |                                 |          |   |   |
| Cash  and cash equivalents, end of period                                                      |   | $                                    | 33,807        |   | $ | 6,277 |   |
|                                                                                           |   |                                 |          |   |   |
|                                                                                           |   |                                 |          |   |   |
| Supplementary  disclosure of non-cash investing activity                                       |   |                                 |          |   |   |
|                                                                                           |   |                                 |          |   |   |
| Issuance  of 103,651 shares of common stock in business combination                            |   | $                                    | 3,200         |   | - |   |

**                                                               **

 

Theaccompanying notes are an integral part of these condensed financialstatements.

**Metro One Telecommunications,Inc.****Notes to Condensed Financial Statements (in 000s, unaudited)**

 

**1.     Basis of Presentation**

The accompanyinginterim condensed financial statements have been prepared by Metro OneTelecommunications, Inc. without audit and in conformity with accountingprinciples generally accepted in the United States of America for interimfinancial information.  Accordingly,certain financial information and footnotes have been omitted orcondensed.  In the opinion ofmanagement, the condensed financial statements include all adjustments,consisting only of normal recurring adjustments, necessary for a 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, 2000.  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.

 

 

**2.     Earnings Per Share**

Basic earnings per share is based on theweighted average number of common shares outstanding.  Diluted earnings per share reflects the dilutive effect of stockoptions outstanding.  Net income for thecalculation of both basic and diluted earnings per share is the same for all periods.

 

A reconciliation of basic weightedaverage shares outstanding to diluted weighted average shares outstanding is asfollows:

 
|                                              |   | **Three Months Ended September 30,** |   | **Nine Months Ended September 30,** |   |
|---------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
|                                              |   | **2001**                             |   | **2000**                            |   | **2001** |   | **2000** |   |
|                                              |   |                                 |   |                                |   |   |   |   |   |
| Weighted  average shares outstanding – Basic |   | 24,208                               |   | 17,471                              |   | 23,324 |   | 17,372 |   |
| Dilutive  effect of stock options                 |   | 1,356                                |   | 504                                 |   | 1,226 |   | 556 |   |
|                                              |   |                                 |   |                                |   |   |   |   |   |
| Weighted  average shares outstanding - Diluted    |   | 25,564                               |   | 17,975                              |   | 24,550 |   | 17,928 |   |

 

The amount of dilution attributable tothe stock options, determined by the treasury stock method, is dependent on theaverage market price of our common stock for each period.

 

On May 16, 2001, the Company's Board ofDirectors effected a three-for-two stock split by declaring a 50% stockdividend, distributing 8.1 million shares on June 29, 2001.  All share and per share data presented inthe accompanying financial statements and notes thereto have been restated forthe stock split.

 

 

**3.        Commitments and Contingencies**

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

 

 

**4.        Supplemental Cash Flow Information**
|           |   | **Nine  Months Ended September 30,** |   |
|----------------|--------|--------------------------------------|--------|
|           |   | **2001**                             |   | **2000** |   |
| Cash paid for: |   |                                 |   |   |   |
| Interest       |   | $                                    | 975    |   | $ | 2,198 |   |
| Income  taxes  |   | 4,308                                |   | 159 |   |
|                |        |                                      |        |  |  |  |  |

**5.      ****Income Taxes**

 

At December 31, 2000, we hadapproximately $11.4 million of net operating loss carryforwards expiring duringthe years 2005 to 2010.  Ownershipchanges as defined by section 382 of the Internal Revenue Code could limit theamount of net operating loss carryforwards used in any one year or in theaggregate.

 

During the quarter, wereduced our deferred tax valuation allowance to reflect deferred tax assetsused to reduce current year income taxes. Our quarterly and annual operating results have in the past and may inthe future vary significantly depending on factors such as changes in thetelecommunications market, the addition or expiration of customer contracts,increased competition, changes in pricing policies by us or our competitors,lengthy sales cycles, lack of market acceptance or delays in the introductionof new versions of our products or features, the timing of the initiation ofwireless services or their acceptance in new market areas by telecommunicationscustomers or their subscribers, the timing and expense of the expansion of ournational call center network, general employment environment, general economicconditions, significant world events and other factors.  Given the variability in operating results,we will continue to review the valuation allowance on a quarterly basis andmake adjustments as appropriate.

 

For fiscal year 2001, we expect ourcombined effective federal and state income tax rate to be about 20%.  The difference between taxes calculated atthe statutory federal and state tax rates and the effective combined rates forthe year ended December 31, 2001 is expected to primarily result from changesin the deferred tax asset valuation allowance due to the utilization of netoperating loss carryforwards.

 

**6.  Significant Transactions**

In February 2001, we completed the saleand issuance to Sonera Media Holding B.V. (“Sonera”) of Finland, of six millionshares of our common stock at a price of US$11.33 per share, for an aggregateprice of $68 million (net proceeds of $64.7 million) and an approximate 25.5%ownership position. Under the terms of the agreement, Sonera has gainedrepresentation on our Board of Directors and can further acquire up to anaggregate 33% ownership position. We have utilized a portion of the cashreceived to retire approximately $35 million of debt. We intend to use theadditional cash to further expand our infrastructure and capacity throughexpansion of existing call centers and new call centers in selected markets andfor other corporate purposes.

 

In February 2001,we completed the purchase of a developer of web-based data extraction andprocessing technology. The transaction has been recorded using the purchasemethod of accounting.  The purchaseprice has been allocated to the assets acquired, which consisted primarily ofproprietary technology and intangibles and goodwill.  Pro forma financial information is not presented, as the impacton the Company’s results of operations was not material.

 

**7.     Recent Accounting Pronouncements**

 

In July 2001, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).This new statement addresses financial accounting and reporting for goodwilland other intangible assets. Under this new standard, goodwill and otherintangible assets that are deemed to have an indefinite life will no longer beamortized. However, goodwill and other intangible assets will be tested forimpairment on an annual basis by applying a fair value based test. SFAS 142will be effective for the Company beginning January 1, 2002. Management iscurrently evaluating the impact of this statement.  However, we do not expect the impact on the Company’s results ofoperations to be material.

 

SFAS No. 144,"Accounting for the Impairment or Disposal of Long-Lived Assets", addressesaccounting and reporting for the impairment or disposal of long-livedassets.  SFAS No. 144 supersedes SFASNo. 121, "Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed Of". SFAS No. 144 establishes a single accounting model for long-lived assetsto be disposed of by sale and expands on the guidance provided by SFAS No. 121with respect to cash flow estimations. SFAS No. 144 becomes effective January 1, 2002.  Management believes the adoption of SFAS No.144 will not have a significant impact on the Company’s financial position,results of operations or cash flows.

In September 2001, the Emerging IssuesTask Force (EITF) issued EITF 01-10, “Accounting for the Impact of theTerrorist Attacks of September 11, 2001”. This pronouncement discusses the classification and timing of reportinglosses directly associated with the terrorist attacks of September 11,2001.  The Company did not suffer directloss of employee life or Company property as a result of the attacks.  However, these and subsequent related worldevents appear to have impacted customer calling behaviors and call arrivaldistribution patterns.  The extent ofthe impact of these events on the Company’s results of operations for the thirdquarter of 2001 or future periods cannot accurately be determined.  At this time, management believes that theseevents will not have a material impact on the Company’s financial position,results of operations or cash flows.

#### **ITEM 2.**                                MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL

#### **                                CONDITION ANDRESULTS 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-looking statements are subject to the business andeconomic risks faced by us and our actual results of operations may differmaterially from those contained in the forward looking statements. Readers arecautioned not to place undue reliance on these forward-looking statements,which speak only as of the date hereof. We undertake no obligation to publiclyrelease any revisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events.

 

Results of operationsfor the periods discussed below should not be considered indicative of theresults to be expected in any future period and fluctuations in operatingresults may also result in fluctuations in the market price of our commonstock. Our quarterly and annual operating results have in the past and may inthe future vary significantly depending on factors such as changes in thetelecommunications market, the addition or expiration of customer contracts,increased competition, changes in pricing policies by us or our competitors,lengthy sales cycles, lack of market acceptance or delays in the introductionof new versions of our products or features, the timing of the initiation ofwireless services or their acceptance in new market areas by telecommunicationscustomers, the timing and expense of the expansion of our national call centernetwork, general employment environment, general economic conditions,significant world events and other factors, including but not limited to,factors detailed in our annual report on Form 10-K filed with the Securitiesand Exchange Commission.

 

#### **Overview**

 

                We are the leading developer and provider of EnhancedDirectory Assistance (“EDA”) and other enhanced telecom services. We havecontracts with wireless and landline carriers (“customers”) to provide EDA andother services in numerous U.S. markets. Our recent operations have beencharacterized by rapid call volume and revenue growth as well as growth inprofits. Call volume and revenues increased 50% and 42%, respectively, in thethird quarter of 2001 from the third quarter of 2000, and profits grew to$7,575,000 from $2,764,000.

 

                Our marketing strategy includes efforts to increaseour share of the directory assistance and information services markets byexpanding services to existing customers, adding new customers and subsequentlyexpanding our call center network into new geographic markets. We have hadongoing business discussions about new contracts with other telecommunicationscompanies. In order to serve new or existing customers, we anticipate that wewill open additional call centers or expand or relocate existing call centers,as needed, during the remainder of 2001 and beyond.  We opened one new call center in the first nine months of 2001.

 

                To stimulate an increase in call volume and toattract and expand customer commitments, our strategy has included pricediscounts based on call volumes. We expect that our average price per call willcontinue to decrease in the remainder of 2001 as increasing call volumestrigger volume-based pricing discounts. We believe that our pricing strategybetter positions us to retain and expand service with existing customers, toextend service to new customers and to achieve greater operating margins overtime.

 

                In February 2001, we completed the sale and issuanceto Sonera Media Holding B.V. (“Sonera”) of Finland, of six million shares ofour common stock at a price of US$11.33 per share, for an aggregate price of$68 million (net proceeds of $64.7 million) and an approximate 25.5% ownershipposition. Under the terms of the agreement, Sonera has gained representation onour Board of Directors and can further acquire up to an aggregate 33% ownershipposition. We have utilized a portion of the cash received to retireapproximately $35 million of debt. We intend to use the additional cash tofurther expand our infrastructure and capacity through expansion of existingcall centers and new call centers in selected markets and for other corporatepurposes.                In February 2001, wecompleted the purchase of a developer of web-based data extraction andprocessing technology, which has become our Content Development department.This group builds application-specific databases for a variety of portals, bethey wired or wireless, voice or data. Our proprietary data extraction andprocessing technology enables the creation and ongoing maintenance of highquality databases from distributed and fragmented data on the web andelsewhere. We believe that these capabilities will contribute to the expansionof our services and data offerings to our wireless and other customers.

 

 

**Results of Operations**

 

                The following table sets forth, for the periodsindicated, the items of our statements of income as a percentage of revenues.

                        
|                              |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|-----------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                              |   | **2001**                               |   | **2000**                              |   | **2001** |   | **2000** |   |
| Revenues                          |   | 100.0                                  | %      | 100.0                                 | %      | 100.0 | % | 100.0 | % |
| Direct  operating costs           |   | 57.8                                   |   | 62.6                                  |   | 56.9 |   | 63.6 |   |
| General  and administrative costs |   | 27.9                                   |   | 28.4                                  |   | 28.3 |   | 29.5 |   |
| Income from operations            |   | 14.3                                   |   | 9.0                                   |   | 14.8 |   | 6.9 |   |
| Other  income (expense), net      |   | 0.4                                    |   | 0.1                                   |   | 0.6 |   | (0.0 | ) |
| Interest  and loan fees           |   | (0.0                                   | )      | (2.2                                  | )      | (0.5 | ) | (2.0 | ) |
| Income before income taxes        |   | 14.7                                   |   | 6.9                                   |   | 14.9 |   | 4.9 |   |
| Income  tax expense               |   | 2.3                                    |   | 0.5                                   |   | 2.9 |   | 0.3 |   |
| Net  income                       |   | 12.4                                   |   | 6.4                                   |   | 12.0 |   | 4.6 |   |

 

*Comparisonof Third Quarter 2001 to Third Quarter 2000*

 

                Revenues increased 41.7% to$60.9 million in the third quarter of 2001 from $43.0 million in the thirdquarter of 2000. Call volume grew to 125 million calls in the third quarter of2001 from approximately 83 million calls during the third quarter of 2000.These increases resulted primarily from the addition of new subscribers and newmarkets from existing customers, as well as increased usage of our services byexisting subscribers.

 

                Direct operating costs increased30.9% to $35.2 million in the third quarter of 2001 from $26.9 million in thethird quarter of 2000. This increase was primarily due to increased staffingcosts associated with increased call volumes. As a percentage of revenues,direct operating costs decreased to 57.8% in the third quarter of 2001 from62.6% in the third quarter of 2000. This decrease was due primarily tooperating efficiencies and lower costs of accessing information content.

 

                General and administrative costsincreased 38.8% to $17.0 million in the third quarter of 2001 from $12.2million in the third quarter of 2000. This increase resulted primarily fromadditional costs necessary to support our larger base of call centers andincreased call volumes. As a percentage of revenues, general and administrativecosts decreased to 27.9% in the third quarter of 2001 from 28.4% in the thirdquarter of 2000. This decrease resulted primarily from efficiencies associatedwith the growth of our business. Depreciation and amortization increased by64.0% to $4.1 million in the third quarter of 2001 from $2.5 million in thethird quarter of 2000 due primarily to equipment purchased for new callcenters, upgrades of existing call centers and product development activities.

 

                Other income, net for the threemonths ended September 30, 2001 and 2000 was $267,000 and $50,000, respectivelyand consisted primarily of interest income partially offset by losses ondisposal of assets in both periods.

 

                Interest expense and loan feesdecreased 98.4% to $15,000 in the third quarter of 2001 from $931,000 in thethird quarter of 2000. This decrease was primarily attributable to a decreasein average outstanding debt.  All debtwas paid in full as of March 31, 2001.*Comparison of the First Nine Months of 2001to the First Nine Months of 2000*

 

                Revenues increased 55.8% to$170.2 million in the first nine months of 2001 from $109.3 million in thefirst nine months of 2000. Call volume grew to approximately 343 million callsin the first nine months of 2001 from approximately 210 million calls duringthe first nine months of 2000. These increases resulted primarily from theaddition of new subscribers and new markets from existing customers, as well asincreased usage of our services by existing subscribers.

 

                Directing operating costsincreased 39.5% to $96.8 million in the first nine months of 2001 from $69.4million in the first nine months of 2000. This increased was primarily due toincreased staffing costs associated with increased call volumes. As apercentage of revenues, direct operating costs decreased to 56.9% in the firstnine months of 2001 from 63.6% in the first nine months of 2000. This decreasewas due primarily to operating efficiencies and lower costs of accessinginformation content.

 

                General and administrative costsincreased 49.6% to $48.2 million in the first nine months of 2001 from $32.2million in the first nine months of 2000. This increase resulted primarily fromadditional costs necessary to support our larger base of call centers andincreased call volumes. As a percentage of revenues, general and administrativecosts decreased to 28.3% in the first nine months of 2001 from 29.5% in thefirst nine months of 2000. This decrease resulted primarily from efficienciesassociated with the growth of our business. Depreciation and amortizationincreased by 60.1% to $11.0 million in the first nine months of 2001 from $6.9million in the first nine months of 2000 due primarily to equipment purchasedfor new call centers, upgrades of existing call centers and product developmentactivities.

 

                Other income, net for the ninemonths ended September 30, 2001 was $1.0 million and consisted primarily ofinterest income partially offset by losses on disposal of assets. Otherexpense, net for the nine months ended September 30, 2000 was $8,000 andconsisted primarily of losses on the disposal of fixed assets offset byinterest income.

 

                Interest expense and loan feesdecreased 61.3% to $877,000 in the first nine months of 2001 from $2.3 in thefirst nine months of 2000. This decrease was primarily attributable to adecrease in average outstanding debt. All debt was paid in full as of March 31,2001.

 

                Income tax expense for the ninemonths ended September 30, 2001 was $5.0 million, for an effective tax rate ofapproximately 19.7%. Income tax expense for the nine months ended September 30,2000 was $293,000, for an effective tax rate of approximately 5.5%. These ratesdiffer from the combined federal and state statutory rate of approximately 41%primarily due to the use of net operating loss carryfowards.

 

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

 

**               **Our cash andcash equivalents are recorded at cost, which approximates fair market value. Asof September 30, 2001, we had $33.8 million in cash and cash equivalentscompared to $6.5 million at December 31, 2000. The net increase of $27.3million resulted primarily from the investment by Sonera and operating cashinflows partially offset by cash paid for capital expenditures, the repaymentof debt and the acquisition of Enthusiasm.

 

                Working capital was $61.8million at September 30, 2001, compared to $12.8 million at December 31, 2000.This increase is due primarily to working capital provided by the investment ofSonera and from the results of operations, offset by the use of working capitalfor capital expenditures, the repayment of debt and the acquisition of a dataextraction and processing company.

 

*                Cash Flow from Operations.*Net cashprovided by operations was $23.1 million for the nine months ended September30, 2001 resulting primarily from net income and the effect of non-cashdepreciation and amortization partially offset by an increase in accountsreceivable and a decrease in accounts payable and accrued liabilities.

 

                *Cash Flow from Investing Activities.*Cashused in investing activities was $23.7 million for the nine months endedSeptember 30, 2001 resulting primarily from capital expenditures for thepurchase of equipment for new call centers, the upgrade and expansion ofexisting call centers, upgrades and expansions of corporate networks andinfrastructure and cash paid in the acquisition of a data extraction andprocessing company.

 

                *Cash Flow from Financing Activities.*Netcash provided by financing activities was $28.0 million for the nine monthsended September 30, 2001 resulting primarily from the proceeds of theinvestment by Sonera. Additional cash was provided by the exercise of commonstock options.

 

                We have a $10.0 million securedline of credit agreement with a commercial bank.  The agreement expires in December 2001.  Outstanding borrowings bear interest at the prime rate (6.00% atSeptember 30, 2001) plus up to 0.5% based on the ratio of debt to cash flow,and all receivables are pledged to the bank as collateral.  In addition, the line has an unused facilityfee of up to 0.75%, also based on the ratio of debt to cash flow.  The agreement contains minimum quick ratio,debt to equity and profitability requirements, as well as other restrictivecovenants, and prohibits the payment of any dividends and other distributionsand redemptions of our stock exceeding 10% of our tangible net worth.  As of September 30, 2001, we had nooutstanding borrowings under this agreement.

 

                *Future Capital Needs and Resources.*The primary uses of our capital in the near future are expected to be thedevelopment or acquisition of technologies, features and content complementaryto our business, expansion of our call center and network capacity to serveexisting and potential new customers and for general corporate purposes,including possible acquisitions, other corporate development activities andworking capital. We currently anticipate that our capital expenditures will beapproximately $25 to $30 million in 2001, resulting primarily from projectedcall center expansions, increased network capacity and corporate developmentactivities.

 

                *RecentAccounting Pronouncements.* In June 2001, the Financial AccountingStandards Board adopted Statement of Financial Accounting Standards No. 142,"Goodwill and Other Intangible Assets" (SFAS 142). This new statementaddresses financial accounting and reporting for goodwill and other intangibleassets. Under this new standard, goodwill and other intangible assets that aredeemed to have an indefinite life will no longer be amortized. However,goodwill and other intangible assets will be tested for impairment on an annualbasis by applying a fair value based test. SFAS 142 will be effective for theCompany beginning January 1, 2002. Management is currently evaluating theimpact of this statement.  However, wedo not expect the impact on the Company’s results of operations to be material.                SFAS No. 144,"Accounting for the Impairment or Disposal of Long-Lived Assets",addresses accounting and reporting for the impairment or disposal of long-livedassets.  SFAS No. 144 supersedes SFASNo. 121, "Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed Of". SFAS No. 144 establishes a single accounting model for long-lived assetsto be disposed of by sale and expands on the guidance provided by SFAS No. 121with respect to cash flow estimations. SFAS No. 144 becomes effective January 1, 2002.  Management believes the adoption of SFAS No.144 will not have a significant impact on the Company’s financial position,results of operations or cash flows.

 

#### **                InSeptember 2001, the Emerging Issues Task Force (EITF) issued EITF 01-10,“Accounting for the Impact of the Terrorist Attacks of September 11,2001”.  This pronouncement discusses theclassification and timing of reporting losses directly associated with theterrorist attacks of September 11, 2001. The Company did not suffer direct loss of employee life or Company propertyas a result of the attacks.  However,these and subsequent related world events appear to have impacted customercalling behaviors and call arrival distribution patterns.  The extent of the impact of these events onthe Company’s results of operations for the third quarter of 2001 or futureperiods cannot accurately be determined. At this time, management believes that these events will not have amaterial impact on the Company’s financial position or results of operations.**

#### **ITEM3.**                QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

 

                Substantially all of our cashand cash equivalents are invested in money market instruments, and thereforethe fair market value of these instruments is affected by changes in marketinterest rates. However, substantially all of our investments at September 30,2001 were invested in overnight money market instruments and were redeemable ona daily basis. Substantially all of the underlying investments in the moneymarket fund had maturities averaging three months or less. As a result, webelieve the market risk arising from our holdings of financial instruments isminimal. A hypothetical 1% fluctuation in interest rates would not have amaterial adverse effect on our financial position, results of operations or cashflows.

 

 

 

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

 

 

 

#### **ITEM6.**                EXHIBITS AND REPORTS ON FORM 8-K

 

                (a)                Exhibits

 

                None

 

                (b) Reports filed on Form 8-K

 

                None

 

SIGNATURE

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                                                   | Metro One  Telecommunications, Inc. |
|--------------------------------------------------------|-------------------------------------|
|                                                   | Registrant                          |
|                                                   |                                |
| Date:       November 14, 2001 |                                |
|                                                   |                                |
|                                                   |                                |
|                                                   | /s/  Dale N. Wahl              |
|                                                   | Dale N. Wahl                        |
|                                                   | Senior Vice President               |
|                                                   | Chief Financial Officer             |