**United States**

**Securities and Exchange Commission**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

| **ý****   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|----------------------------------------------------------------------------------------------------------------------|
|                                                                                                                 |
| **For  the Quarterly Period Ended September 30, 2002**                                                               |
|                                                                                                                 |
| **o****   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|                                                                                                                 |
| **Commission File Number 0-27024**                                                                                   |
|                                                                                                                 |   |   |
| **METRO ONE  TELECOMMUNICATIONS, INC.**                                                                              |
| (Exact name of registrant as specified in its charter)                                                               |
|                                                                                                                 |
| **OREGON**                                                                                                           |   | **93-0995165** |
| (State or other jurisdiction of  incorporation or organization)                                                      |   | (I.R.S. Employer  Identification No.) |
|                                                                                                                 |   |   |
| **11200 Murray Scholls Place, Beaverton, Oregon  97007**                                                        |
| (Address of principal executive offices) (zip code)                                                                  |
|                                                                                                                 |   |   |
| **(503) 643-9500**                                                                                                   |
| (Registrant’s telephone number, including area code)                                                            |
|                                                                                                                      |  |  |  |  |

 

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

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   o  No   ý

 

Number of shares of common stock outstandingas of November 6, 2002: 24,676,462 shares, no par value per share.

 

 

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**METRO ONE TELECOMMUNICATIONS, INC.**

 

**INDEXTO FORM 10 - Q**

 
| Part I   | Financial Information                                                                            |
|----------|--------------------------------------------------------------------------------------------------|
|     |                                                                                             |
| Item 1.  | Financial Statements (Unaudited)                                                                 |
|     |                                                                                             |
|     | Condensed  Statements of Income for the three and nine months ended September 30, 2002  and 2001 |
|     |                                                                                             |
|     | Condensed  Balance Sheets as of September 30, 2002 and December 31, 2001                         |
|     |                                                                                             |
|     | Condensed  Statements of Cash Flows for the nine months ended September 30, 2002 and  2001       |
|     |                                                                                             |
|     | 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.**

**CondensedStatements of Income (Unaudited)**

 
|                                       |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|--------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
| **(In  thousands, except per share data)** |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
|                                       |   |                                   |   |                                  |   |   |   |   |   |
| Revenues                                   |   | $                                      | 66,172 |                                  | $      | 60,868 |   | $ | 195,789 |   | $ | 170,246 |   |
|                                       |   |                                   |   |                                  |   |   |   |   |   |
| Costs and  expenses:                       |   |                                   |   |                                  |   |   |   |   |   |
| Direct operating                           |   | 37,133                                 |   | 35,194                                |   | 109,901 |   | 96,846 |   |
| General and  administrative                |   | 17,134                                 |   | 16,954                                |   | 53,624 |   | 48,189 |   |
|                                       |   | 54,267                                 |   | 52,148                                |   | 163,525 |   | 145,035 |   |
|                                       |   |                                   |   |                                  |   |   |   |   |   |
| Income from  operations                    |   | 11,905                                 |   | 8,720                                 |   | 32,264 |   | 25,211 |   |
|                                       |   |                                   |   |                                  |   |   |   |   |   |
| Other income,  net                         |   | 210                                    |   | 267                                   |   | 671 |   | 1,001 |   |
| Interest expense  and loan fees            |   | —                                 |   | (15                                   | )      | (10 | ) | (877 | ) |
|                                       |   |                                   |   |                                  |   |   |   |   |   |
| Income before  income taxes                |   | 12,115                                 |   | 8,972                                 |   | 32,925 |   | 25,335 |   |
| Income tax  expense                        |   | 4,726                                  |   | 1,397                                 |   | 12,633 |   | 4,997 |   |
|                                       |   |                                   |   |                                  |   |   |   |   |   |
| Net income                                 |   | $                                      | 7,389  |                                  | $      | 7,575 |   | $ | 20,292 |   | $ | 20,338 |   |
|                                       |   |                                   |   |                                  |   |   |   |   |   |
| Earnings per  share:                       |   |                                   |   |                                  |   |   |   |   |   |
| Basic                                      |   | $                                      | .30    |                                  | $      | .31 |   | $ | .83 |   | $ | .87 |   |
| Diluted                                    |   | $                                      | .30    |                                  | $      | .30 |   | $ | .81 |   | $ | .83 |   |

 

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

 

1

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**Metro One Telecommunications, Inc.**

**CondensedBalance Sheets (Unaudited)**

 
| **(In  thousands)**                                                                                                                                              |   | **September  30,  2002** |       | **December  31,  2001** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|-------------------------|------------|
|                                                                                                                                                             |   |                     | ** ** |                    | ** ** |
| **Assets**                                                                                                                                                       |   |                     | ** ** |                    | ** ** |
|                                                                                                                                                             |   |                     |       |                    |       |
| Current assets:                                                                                                                                                  |   |                     |       |                    |       |
| Cash and cash equivalents                                                                                                                                        |   | $                        | 53,417     |                    | $          | 53,692 |   |
| Restricted cash                                                                                                                                                  |   | 3,348                    |       | 900                     |       |
| Accounts receivable                                                                                                                                              |   | 45,108                   |       | 32,794                  |       |
| Prepaid costs and other current assets                                                                                                                           |   | 3,878                    |       | 4,907                   |       |
|                                                                                                                                                             |   |                     |       |                    |       |
| Total current assets                                                                                                                                             |   | 105,751                  |       | 92,293                  |       |
|                                                                                                                                                             |   |                     |       |                    |       |
| Furniture, fixtures and equipment, net                                                                                                                           |   | 73,654                   |       | 69,066                  |       |
| Goodwill                                                                                                                                                         |   | 4,432                    |       | 4,432                   |       |
| Other assets                                                                                                                                                     |   | 4,759                    |       | 3,968                   |       |
|                                                                                                                                                             |   |                     |       |                    |       |
| Total assets                                                                                                                                                     |   | $                        | 188,596    |                    | $          | 169,759 |   |
|                                                                                                                                                             |   |                     |       |                    |       |
| **Liabilities and Shareholders’  Equity**                                                                                                                   |   |                     |       |                    |       |
|                                                                                                                                                             |   |                     |       |                    |       |
| Current liabilities:                                                                                                                                             |   |                     |       |                    |       |
| Accounts payable                                                                                                                                                 |   | $                        | 2,407      |                    | $          | 1,276 |   |
| Accrued liabilities                                                                                                                                              |   | 1,507                    |       | 6,180                   |       |
| Accrued payroll and related costs                                                                                                                                |   | 7,479                    |       | 11,090                  |       |
|                                                                                                                                                             |   |                     |       |                    |       |
| Total current liabilities                                                                                                                                        |   | 11,393                   |       | 18,546                  |       |
|                                                                                                                                                             |   |                     |       |                    |       |
| Other long-term liabilities                                                                                                                                      |   | 7,980                    |       | 3,844                   |       |
|                                                                                                                                                             |   |                     |       |                    |       |
| Total liabilities                                                                                                                                                |   | 19,373                   |       | 22,390                  |       |
|                                                                                                                                                             |   |                     |       |                    |       |
| 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, 24,590 and 24,463  shares issued and outstanding at September 30, 2002 and December 31, 2001  respectively |   | 119,096                  |       | 117,534                 |       |
| Retained earnings                                                                                                                                                |   | 50,127                   |       | 29,835                  |       |
|                                                                                                                                                             |   |                     |       |                    |       |
| Total shareholders’ equity                                                                                                                                  |   | 169,223                  |       | 147,369                 |       |
|                                                                                                                                                             |   |                     |       |                    |       |
| Total liabilities and shareholders’ equity                                                                                                                  |   | $                        | 188,596    |                    | $          | 169,759 |   |

 

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

 

2

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**Metro One Telecommunications, Inc.**

**CondensedStatements of Cash Flows (Unaudited)**

 
|                                                                               |   | **Nine  Months Ended September 30,** |   |
|------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
| **(In  thousands)**                                                                |   | **2002**                             |   | **2001** |   |
|                                                                               |   |                                 |   |   |   |
| Cash flows from operating activities:                                              |   |                                 |   |   |   |
| Net income                                                                         |   | $                                    | 20,292 |   | $ | 20,338 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                                 |   |   |   |
| Depreciation and amortization                                                      |   | 13,817                               |   | 11,449 |   |
| Loss on disposal of fixed assets                                                   |   | 60                                   |   | 143 |   |
| Tax benefit from stock option plans                                                |   | 498                                  |   | — |   |
| Changes in certain assets and liabilities:                                         |   |                                 |   |   |   |
| Accounts receivable                                                                |   | (12,314                              | )      | (4,217 | ) |
| Prepaid expenses and other assets                                                  |   | 3,915                                |   | 259 |   |
| Accounts payable and other liabilities                                             |   | (6,969                               | )      | (4,864 | ) |
|                                                                               |   |                                 |   |   |   |
| Net cash provided by operating activities                                          |   | 19,299                               |   | 23,108 |   |
|                                                                               |   |                                 |   |   |   |
| Cash flows from investing  activities:                                             |   |                                 |   |   |   |
| Capital expenditures                                                               |   | (18,198                              | )      | (20,301 | ) |
| Acquisition of business                                                            |   | —                               |   | (3,639 | ) |
| Proceeds from sale of assets                                                       |   | 8                                    |   | 196 |   |
|                                                                               |   |                                 |   |   |   |
| Net cash used in investing activities                                              |   | (18,190                              | )      | (23,744 | ) |
|                                                                               |   |                                 |   |   |   |
| Cash flows from financing activities:                                              |   |                                 |   |   |   |
| Cash restricted to secure letter of credit                                         |   | (2,448                               | )      | — |   |
| Net repayment of line of credit                                                    |   | —                               |   | (4,750 | ) |
| Repayment of debt                                                                  |   | —                               |   | (34,241 | ) |
| Proceeds from issuance of common stock, net                                        |   | —                               |   | 64,670 |   |
| Proceeds from exercise of stock options and employee stock purchases               |   | 1,064                                |   | 2,301 |   |
|                                                                               |   |                                 |   |   |   |
| Net cash (used in) provided by financing activities                                |   | (1,384                               | )      | 27,980 |   |
|                                                                               |   |                                 |   |   |   |
| Net (decrease) increase in cash and cash equivalents                               |   | (275                                 | )      | 27,344 |   |
|                                                                               |   |                                 |   |   |   |
| Cash and cash equivalents, beginning of period                                     |   | 53,692                               |   | 6,463 |   |
|                                                                               |   |                                 |   |   |   |
| Cash and cash equivalents, end of period                                           |   | $                                    | 53,417 |   | $ | 33,807 |   |
|                                                                               |   |                                 |   |   |   |
| Summary of non-cash investing and financing activities:                            |   |                                 |   |   |   |
|                                                                               |   |                                 |   |   |   |
| Issuance of 155 shares of common stock in business combination                     |   | —                               |   | $ | 3,200 |   |

 

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

 

3

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**Metro One Telecommunications, Inc.**

**Notes****to Condensed Financial Statements (unaudited)**

 

**1.     Basis of 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, 2001.  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.

 

**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.

 

The calculation of weighted average outstanding shares is as follows:

 
|                                              |   | **Three  Months Ended  September 30,** |   | **Nine Months  Ended  September 30,** |   |
|---------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                              |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
|                                              |   | **(in thousands)**                     |   |
| Weighted average  shares outstanding – Basic |   | 24,588                                 |   | 24,208                                |   | 24,544 |   | 23,324 |   |
| Dilutive effect  of stock options                 |   | 399                                    |   | 1,356                                 |   | 568 |   | 1,226 |   |
|                                              |   |                                   |   |                                  |   |   |   |   |   |
| Weighted average  shares outstanding - Diluted    |   | 24,987                                 |   | 25,564                                |   | 25,112 |   | 24,550 |   |

 

For the three and nine month periods ended September 30, 2002, 938,000and 906,000 shares, respectively, of common stock issuable upon the exercise ofoutstanding stock options have been excluded from the calculation of dilutednet income per share since their effect would have been anti-dilutive.  There were 39,000 and 15,000 shares excludedfrom the calculation of diluted net income per share for the three and ninemonth periods ended September 30, 2001, respectively, for this reason.

 

On May 16, 2001, our Board of Directors approved a three-for-two stocksplit in the form of a 50% stock dividend, distributing approximately 8,100,000shares on June 29, 2001.  All share andper share data presented in the accompanying financial statements and notesthereto have been restated for the stock split.

 

**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 September 30, 2002, we had one letter of credit outstanding in theamount of $3,348,000 related to our workers’ compensation program.  The letter of credit is secured by acertificate of deposit for the same amount and is recorded as restricted cash.  While the letter of credit expires in April2003, we expect to continue to have a letter of credit requirement related toour workers’ compensation policy and expect to renew it on an annual basis asnecessary.

 

4

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**4.     SupplementalCash Flow Information**

 
|                        |   | **Nine  Months Ended September 30,** |   |
|-----------------------------|--------|--------------------------------------|--------|
|                        |   | **2002**                             |   | **2001** |   |
|                        |   | **(in thousands)**                   |   |
| Cash paid for  interest     |   | $                                    | 10     |   | $ | 975 |   |
| Cash paid for  income taxes |   | $                                    | 8,568  |   | $ | 4,308 |   |

 

**5.     SignificantEvents**

 

Our contract with Sprint PCS expires on December 31, 2002.  In October 2002, Sprint PCS notified us thatthey would not be signing a new contract with us upon expiration of theexisting one.  Sprint PCS accounted forapproximately 32% and 33%, respectively, of our revenue in the three and ninemonth periods ended September 30, 2002 and approximately 32% in both the threeand nine month periods ended September 30, 2001.  We expect that the call volume from Sprint PCS will transitionaway from us during 2003, although no transition agreement has been made as ofthe date of this filing.  The lack of acontract with Sprint PCS will likely have a material adverse effect on ourfinancial position and future operating results, as well as our operations,although it is not possible to determine the exact nature of those effects,their magnitude or timing at this time.

 

On January 31, 2001, our shareholders approved the issuance and sale toSonera Media Holding B.V. of 6,000,000 shares of our common stock for a netamount of approximately $64,600,000, which represented approximately 25.5% ofour outstanding common stock after the issuance.  Sonera Media Holding B.V. is a wholly owned subsidiary of SoneraCorporation, a publicly traded telecommunications company organized inFinland.  This transaction was completedin February 2001.  During February andMarch 2001, we paid all outstanding debt with a portion of the proceeds fromthis transaction.

 

In February 2001,we completed the purchase of a company involved in developing web-based dataextraction and processing technology. The transaction has been recorded using the purchase method ofaccounting.  The purchase price has beenallocated to the assets acquired, which consisted primarily of proprietarytechnology and goodwill and other intangibles assets.  Pro forma financial information is not presented as the impact onour results of operations was not material.

 

**6.****              RecentAccounting Pronouncements**

 

In September 2001, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.142, “Goodwill and Other Intangible Assets.” This new statement addressesfinancial accounting and reporting for goodwill and other intangibleassets.  Under this standard, goodwilland other intangible assets that are deemed to have an indefinite life will nolonger be amortized.  However, goodwilland other intangible assets will be tested for impairment on an annual basis byapplying a fair value based test.  Weadopted SFAS No. 142 as of January 1, 2002. Other than the cessation of amortization of goodwill, the adoption ofSFAS No. 142 had no impact on our results of operations or cash flows for thethree or nine month periods ended September 2002.   Goodwill amortization for the three and nine month periods endedSeptember 30, 2001 totaled $155,000 and $362,000, respectively.  During the second quarter of 2002, wecompleted a test on goodwill and determined that there was no impairment.

 

In August 2001, the FASB issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144establishes a single accounting model for long-lived assets to be disposed ofand replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed

 

5

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of,” and Accounting Principles Board Opinion No. 30,“Reporting Results of Operations - Reporting the Effects of Disposal of aSegment of Business.” We adopted SFAS No. 144 effective January 1, 2002.  The adoption of SFAS No. 144 had no impacton our financial position or results of operations.

 

In July 2002, the FASB issued SFAS No. 146 “Accountingfor Costs Associated with Exit or Disposal Activities.”  The statement requires that a liability fora cost associated with an exit or disposal activity be recognized when theliability is incurred.  Under previousguidance, a liability for an exit cost was recognized at the date of anentity’s commitment to an exit plan. The provisions of the statement are effective for exit or disposalactivities that are initiated after December 31, 2002.

 

6

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**ITEM 2****.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL**

**                 CONDITION 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 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 are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datehereof.  We undertake no obligation topublicly release any revisions to these forward-looking statements to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events.

 

Results 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 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, the 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® and other enhanced telecom services.  We primarily contract with wireless carriersto 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 offer our services to multiplecarriers within the same market.  When acarrier’s subscribers dial a typical 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.”

 

In addition to telephone listings, we providesubscribers with various enhanced services and features delivered viaproprietary systems and databases. Services we provide include, among other things, reverse and categorysearches, movie, restaurant and local event information and turn-by-turndriving instructions.  In addition, ourenhanced information services incorporate connectivity features that make thetelephone more useful and easier to use. These include our patented StarBack® feature, which allows a caller toreturn to a live operator simply by pressing a key, such as the star [*] keyany time during a call.

 

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.  Webear no subscriber collection risk.

 

We charge our carriers directly on a per call basis,with prices varying in some cases based on call volume.  In order to encourage our customers to routemore of their calls to us, our long-term strategy has been based in part onreducing the price we charge our customers. We believe this reduced pricing better positions us to retain and expandservice with existing carrier customers, to attract new wireless and landline carriers,and to achieve greater operating margins over time.

 

We operate 31 call centers located in strategic localmarkets in or near major metropolitan areas throughout the United States.  This network of call centers enables us toprovide nationwide enhanced directory assistance and information serviceslocally for more than one-half of the U.S. population.  We believe that the local nature of our callcenters and operators permits us to offer more accurate and valuable service tocallers.  We operate our call centers 24hours a day, seven days a week, 365 days a year.

 

7

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In the first nine months of 2002, we continued toexpand our call center and network capacity to serve existing customers and toprepare for anticipated growth.  Growthcan come from existing customers in the form of new markets acquired, fromincreased usage within geographic markets currently being served and from othernew business opportunities.  Our callcenter and network expansion efforts increase our local service coverage andour capacity to process additional call volume.

 

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.  Cingular Wireless subsequently notified us that they would not beextending the existing contract or signing a new one.  Cingular Wireless accounted for approximately six percent of ourrevenues in both the three and nine month periods ended September 30, 2002 andapproximately seven percent in both the three and nine month periods endedSeptember 30, 2001.  Service to CingularWireless customers ceased during October 2002.

 

Our contract with Sprint PCS expires on December 31,2002.  In October 2002, Sprint PCSnotified us that they would not be signing a new contract with us uponexpiration of the existing one.  SprintPCS accounted for approximately 32% and 33%, respectively, of our revenue inthe three and nine month periods ended September 30, 2002 and approximately 32%in both the three and nine month periods ended September 30, 2001.  We expect that the call volume from SprintPCS will transition away from us during 2003, although no transition agreementhas been made as of the date of this filing. The lack of a contract with Sprint PCS will likely have a materialadverse effect on our financial position and future operating results, as wellas our operations, although it is not possible to determine the exact nature ofthose effects, their magnitude or timing at this time.

 

On January 31, 2001, our shareholders approved theissuance and sale to Sonera Media Holding B.V. of 6,000,000 shares of ourcommon stock for a net amount of approximately $64,600,000, which representedapproximately 25.5% of our outstanding common stock after the issuance.  Sonera Media Holding B.V. is a wholly-ownedsubsidiary of Sonera Corporation, a publicly traded telecommunications companyorganized in Finland.  This transactionwas completed in February 2001.  DuringFebruary and March 2001, we paid all outstanding debt with a portion of theproceeds from this transaction.

 

In February 2001,we purchased a company involved in developing web-based data extraction andprocessing technology.  The transactionwas recorded using the purchase method of accounting.   The purchase price was allocated to the assets acquired, whichconsisted primarily of proprietary technology, intangibles and goodwill.  Pro forma financial information is notpresented, as the impact on our results of operations was not material.

 

**Resultsof Operations**

 

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

 
|                              |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|-----------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                              |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
| Revenues                          |   | 100.0                                  | %      | 100.0                                 | %      | 100.0 | % | 100.0 | % |
| Direct operating  costs           |   | 56.1                                   |   | 57.8                                  |   | 56.1 |   | 56.9 |   |
| General and  administrative costs |   | 25.9                                   |   | 27.9                                  |   | 27.4 |   | 28.3 |   |
| Income from  operations           |   | 18.0                                   |   | 14.3                                  |   | 16.5 |   | 14.8 |   |
| Other income,  net                |   | 0.3                                    |   | 0.4                                   |   | 0.3 |   | 0.6 |   |
| Interest expense  and loan fees   |   | (0.0                                   | )      | (0.0                                  | )      | (0.0 | ) | (0.5 | ) |
| Income before  income taxes       |   | 18.3                                   |   | 14.7                                  |   | 16.8 |   | 14.9 |   |
| Income tax  expense               |   | 7.1                                    |   | 2.3                                   |   | 6.5 |   | 2.9 |   |
| Net income                        |   | 11.2                                   | %      | 12.4                                  | %      | 10.3 | % | 12.0 | % |

 

8

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*Comparison of Third Quarter 2002 toThird Quarter 2001*

 

Revenues increased8.7% to $66.2 million from $60.9 million, while call volume grew to approximately141 million calls from approximately 125 million calls.  These increases resulted primarily fromincreased call volume under existing contracts.  Increases in revenue as a result of increased call volumes wereslightly offset by volume-related decreases in the average revenue per call,primarily related to a customer that exercised a contractual right to move tovolume-based pricing

 

Direct operatingcosts increased 5.5% to $37.1 million from $35.2 million.  This increase was primarily due to increasedstaffing costs associated with increased call volumes.  As a percentage of revenues, directoperating costs decreased to 56.1% from 57.8%. This decrease was due primarily to improved operating efficiencies andlower costs of accessing information content.

 

General andadministrative costs increased 1.1% to $17.1 million from $17.0 million.  This increase resulted primarily fromadditional costs necessary to support our increased call volumes and relatedinfrastructure.  Such increases werepartially offset by the elimination of certain marketing costs for a customerthat moved to volume-based pricing as discussed previously.  As a percentage of revenues, general andadministrative costs decreased to 25.9% from 27.9%.  This decrease resulted primarily from efficiencies associatedwith the expansion of our national network of call centers and from theelimination of certain marketing costs as noted previously.  Depreciation and amortization increased by18.9% to $4.7 million from $4.0 million, due primarily to depreciation expenseon equipment purchased for new call centers, upgrades of existing call centersand product development activities.

 

Other income was$210,000 and $267,000 for the third quarters of 2002 and 2001, respectively,and consisted primarily of interest income partially offset by losses ondisposal of assets in both periods.  Adecrease in interest income during the third quarter of 2002 compared to thethird quarter of 2001 resulted from a lower average interest rate earned oncash equivalents invested in money market instruments.

 

Income tax expensefor the three months ended September 30, 2002 was $4.7 million, for aneffective tax rate of approximately 39.0% reflecting the approximate combinednet federal and state statutory income tax rate.  Income tax expense for the three months ended September 30, 2001was $1.4 million, for an effective tax rate of approximately 15.6%.  The increase in income tax expense and theeffective tax rate in 2002 resulted from the use of significant net operatingloss carryforwards in the prior year.

 

*Comparison of the First Nine Monthsof 2002 to the First Nine Months of 2001*

 

Revenues increased15.0% to $195.8 million from $170.2 million. Call volume grew to approximately411 million calls from approximately 343 million calls. These increasesresulted primarily from the addition of new subscribers and new markets fromexisting customers, as well as increased usage of our services by existingsubscribers.

 

Direct operatingcosts increased 13.5% to $109.9 million from $96.8 million.  This increase was primarily due to increasedstaffing costs associated with increased call volumes. As a percentage ofrevenues, direct operating costs decreased to 56.1% from 56.9%.  This decrease was due primarily to operatingefficiencies and lower costs of accessing information content.

 

General andadministrative costs increased 11.3% to $53.6 million from $48.2 million. Thisincrease resulted primarily from additional costs necessary to support ourlarger base of call centers and increased call volumes and was partially offsetby the elimination of certain marketing costs for a customer as discussedpreviously.  As a percentage ofrevenues, general and administrative costs decreased to 27.4% from 28.3%.  This decrease resulted primarily fromefficiencies associated with the growth of our business.  Depreciation and amortization increased by21.1% to $13.3 million from $11.0 million due primarily to equipment purchasedfor new call centers, upgrades of existing call centers and product developmentactivities.

 

Other income forthe nine months ended September 30, 2002 and 2001 was $671,000 and $1.0million, respectively, and consisted primarily of interest income partiallyoffset by losses on disposal of assets in both periods.  The decrease resulted primarily from a loweraverage interest rate earned on cash equivalents invested in money marketinstruments.

 

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Interest expenseand loan fees decreased 98.9% to $10,000 from $877,000.  This decrease was attributable to a decreasein average outstanding debt.  All debtwas paid in full as of March 31, 2001.

 

Income tax expensefor the nine months ended September 30, 2002 was $12.6 million, for aneffective tax rate of approximately 38.4%. Income tax expense for the nine months ended September 30, 2001 was $5.0million, for an effective tax rate of approximately 19.7%.  The increase in income tax expense and theeffective tax rate in 2002 resulted from the use of significant net operatingloss carryforwards in the prior year.

 

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

 

Our cash and cashequivalents are recorded at cost, which approximates fair market value.  As of September 30, 2002, we had $53.4million in cash and cash equivalents compared to $53.7 million at December 31,2001.  The net decrease of $300,000resulted primarily from cash provided by operations and cash received from theexercise of common stock options partially offset by capital expenditures andthe restriction of cash used to secure a letter of credit.

 

Working capitalwas $94.4 million at September 30, 2002, compared to $73.7 million at December31, 2001.  This increase is dueprimarily to working capital provided by operations.

 

*Cash Flow from Operations. *Net cash provided by operationswas $19.3 million for the nine months ended September 30, 2002 resultingprimarily from net income adjusted for the effect of non-cash depreciation,partially offset by increases in accounts receivable.

 

*Cash Flow from InvestingActivities. *Cash usedin investing activities was $18.2 million for the nine months ended September30, 2002 resulting primarily from capital expenditures for equipment purchasedfor new call centers, upgrades of existing call centers and product developmentactivities.

 

*Cash Flow from FinancingActivities. *Net cashused in financing activities was $1.4 million for the nine months endedSeptember 30, 2002 resulting primarily from cash used to secure a letter ofcredit partially offset by proceeds from the exercise of common stock optionsand employee stock purchases.

 

*Future Capital Needs andResources. *Theprimary uses of our capital in the near future are expected to be for thedevelopment or acquisition of technologies, features and content complementaryto our business, network capacity to serve existing and potential new customersand general corporate purposes, including possible acquisitions and othercorporate development activities and working capital.  We anticipate that our capital expenditures will be approximately$20 to $24 million for the full year 2002 as a result of these activities.

 

We believe ourexisting cash and cash equivalents and cash from operations will be sufficientto fund our operations for the next twelve months and the foreseeable future.

 

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#### **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 certain estimates,judgments and assumptions that we believe are reasonable based upon theinformation available.  These estimatesand assumptions affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the periods presented. Management believes that of our significant accounting policies (seeNote 1 to the financial statements in our 2001 Annual Report on Form 10-K forthe period ending December 31, 2001), those governing accounts receivable andthe lives and recoverability of the carrying amount of equipment and otherlong-lived assets, such as existing intangibles, internally developed softwareand goodwill, may involve a higher degree of judgment, estimation and uncertainty.

 

Our customer base principally consists of very largewireless telephone carriers in the United States.  As such, management believes we have minimal risk ofuncollectability related to outstanding accounts receivable.  We have not experienced significantcollection issues or write-offs related to these customers; consequently, we donot maintain an allowance for doubtful accounts.  Since our accounts receivable are concentrated in relatively fewcustomers, a significant change in the liquidity or financial position of anyone of these customers could adversely impact collection of our accountsreceivable and therefore have a material adverse effect on our financialposition and future operating results.

 

We evaluate the remaining life and recoverability ofequipment and other assets, including patents and trademarks and internallydeveloped software, whenever events or changes in circumstances indicate thatthe carrying amount of the asset may not be recoverable.  At such time, we estimate the future cashflows expected upon eventual disposition and, if lower than the carryingamount, adjust the carrying amount of the asset to its estimated fair value.

 

#### **Recent AccountingPronouncements**

* *

In September 2001, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.142, “Goodwill and Other Intangible Assets.” This new statement addressesfinancial accounting and reporting for goodwill and other intangibleassets.  Under this new standard,goodwill and other intangible assets that are deemed to have an indefinite lifewill 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. We adopted SFAS No. 142 as of January 1, 2002.  Other than the cessation of amortization of goodwill, theadoption of SFAS No. 142 had no impact on our results of operations or cashflows for the three months ended September 30, 2002.  Goodwill amortization for the three and nine month periods endedSeptember 30, 2001 totaled $155,000 and $362,000, respectively.  During the second quarter of 2002, wecompleted a test on goodwill and determined that there was no impairment.

 

In August 2001,the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal ofLong-Lived Assets.” SFAS No. 144 establishes a single accounting model forlong-lived assets to be disposed of and replaces SFAS No. 121 “Accounting forthe Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposedof,” and Accounting Principles Board Opinion No. 30, “Reporting Results ofOperations - Reporting the Effects of Disposal of A Segment of Business.” Weadopted SFAS No. 144 effective January 1, 2002.  The adoption of SFAS No. 144 had no impact on our financialposition or results of operations.

 

In July 2002, theFASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or DisposalActivities.”  The statement requiresthat a liability for a cost associated with an exit or disposal activity berecognized when the liability is incurred. Under previous guidance, a liability for an exit cost was recognized atthe date of an entity’s commitment to an exit plan.  The provisions of the statement are effective for exit ordisposal activities that are initiated after December 31, 2002.

 

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#### **ITEM 3**.                 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET 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 September30, 2002 were invested in overnight money market instruments and were redeemableon a 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**.                 CONTROLS AND 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.**                 EXHIBITS AND REPORTS ON FORM 8-K

 

(a)                   Exhibits

 

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

 

(b) Reportsfiled 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:     November 14, 2002 |                         |   |
|--------|--------------------------------------------|------------------------------|--------|
|   | 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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#### **CERTIFICATIONPURSUANT TO RULE 15d-14 OF THE SECURITIES EXCHANGE ACT OF 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 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 other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 

Date:    November 14, 2002

 
|   |   | /s/  Timothy  A. Timmins                    |   |
|--------|--------|--------------------------------------------------|--------|
|   |   | Timothy A. Timmins                               |
|   |   | President, Chief Executive  Officer and Director |

 

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#### **CERTIFICATIONPURSUANT TO RULE 15d-14 OF THE SECURITIES EXCHANGE ACT OF 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 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 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:    November 14, 2002

 
|   |   | /s/  Dale N.  Wahl                       |   |
|--------|--------|-----------------------------------------------|--------|
|   |   | Dale N. Wahl                                  |
|   |   | Senior Vice President,Chief Financial Officer |

 

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**CERTIFICATIONPURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002**

 

 

In connection with the Quarterly Report of Metro OneTelecommunications, Inc. (the “Company”) on Form 10-Q for the period endingSeptember 30, 2002 as filed with the Securities and Exchange Commission on thedate hereof (the “Report”), we, Timothy A. Timmins, Chief Executive Officer,and Dale N. Wahl, Chief Financial Officer of the Company, certify, pursuant to18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of2002, that:

 

(1) The Report fully complies with the requirements ofsection 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairlypresents, in all material respects, the financial condition and result ofoperations of the Company.

 

 
|   | /s/  Timothy A. Timmins                     |   |
|--------|--------------------------------------------------|--------|
|   | Timothy A. Timmins                               |
|   | President, Chief Executive  Officer and Director |
|   |                                             |
|   |                                             |
|   | /s/  Dale N. Wahl                           |   |
|   | Dale N. Wahl                                     |
|   | Senior Vice President,  Chief Financial Officer  |

 

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