----

----

**UnitedStatesSecurities 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 June 30, 2001**                                               |
|       |   |                                                                                           |
| **o**      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|       |   |
|       |   |                                                                                           |
|       |   | **Commission File Number 0-27024**                                                             |

 

**METROONE TELECOMMUNICATIONS, INC.**(Exact name ofregistrant as specified in its charter)

 

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

 

**11200 Murray Scholls Place,Beaverton, Oregon  97007**(Address ofprincipal executive offices)

 

**(503) 643-9500**(Registrant’stelephone number)

Indicate bycheck mark whether the registrant has (1) filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yesý  Noo

Number ofshares of common stock outstanding as of July 24, 2001: 24,152,707 shares, nopar value per share

----

----

**METRO ONE TELECOMMUNICATIONS,INC.**

**INDEX TO FORM 10 - Q**

 

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

 

**MetroOne Telecommunications, Inc**

| **Condensed  Statements of Income****(Unaudited)** |
|----------------------------------------------------|
| ****                                               |

** **

 

|                                   | **Three  Months Ended June 30,****** |   | **Six  Months Ended June 30,****** |   |
|----------------------------------------|--------------------------------------|--------|------------------------------------|--------|
| (In  thousands, except per share data) | **2000**                             |   | **2001**                           |   | **2001** |   | **2000** |   |
|                                   | ****                                 |   | ****                               |   | **** |   | **** |   |
|                                   |                                 |   |                               |   |   |   |   |   |
| Revenues                               | $                                    | 59,162 |                               | $      | 36,589 |   | $ | 109,378 |   | $ | 66,300 |   |
|                                   |                                      |   |                                    |   |  |   |  |   |
|                                   |                                 |   |                               |   |   |   |   |   |
| Costs  and expenses:                   |                                 |   |                               |   |   |   |   |   |
|                                   | Direct  operating                    | 32,875 |                               | 24,036 |   | 61,652 |   | 42,559 |   |
|                                   | General  and administrative          | 16,761 |                               | 10,668 |   | 31,235 |   | 19,987 |   |
|                                   |                                      |   |                                    |   |  |   |  |   |
|                                   | 49,636                               |   | 34,704                             |   | 92,887 |   | 62,546 |   |
|                                   |                                      |   |                                    |   |  |   |  |   |
|                                   |                                 |   |                               |   |   |   |   |   |
| Income  from operations                | 9,526                                |   | 1,885                              |   | 16,491 |   | 3,754 |   |
|                                   |                                 |   |                               |   |   |   |   |   |
| Other  income (expense), net           | 317                                  |   | 40                                 |   | 734 |   | (59 | ) |
| Interest  expense and loan fees        | (9                                   | )      | (727                               | )      | (862 | ) | (1,335 | ) |
|                                   |                                      |   |                                    |   |  |   |  |   |
|                                   |                                 |   |                               |   |   |   |   |   |
| Income  before income taxes            | 9,834                                |   | 1,198                              |   | 16,363 |   | 2,360 |   |
| Income  tax expense                    | 2,074                                |   | 42                                 |   | 3,600 |   | 83 |   |
|                                   |                                      |   |                                    |   |  |   |  |   |
|                                   |                                 |   |                               |   |   |   |   |   |
| Net  income                            | $                                    | 7,760  |                               | $      | 1,156 |   | $ | 12,763 |   | $ | 2,277 |   |
|                                   |                                      |   |                                    |   |  |   |  |   |
|                                   |                                 |   |                               |   |   |   |   |   |
|                                   |                                 |   |                               |   |   |   |   |   |
| Earnings  per share                    |                                 |   |                               |   |   |   |   |   |
|                                   | Basic                                | $      | .32                                |   | $ | .07 |   | $ | .56 |   | $ | .13 |   |
|                                   | Diluted                              | $      | .31                                |   | $ | .06 |   | $ | .53 |   | $ | .13 |   |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

**MetroOne Telecommunications, Inc**
| **Condensed Balance Sheets (Unaudited)** |
|------------------------------------------|
| ****                                     |

** **

 
|                                                   | **June 30,**                                         |       | **December 31,** |       |
|--------------------------------------------------------|------------------------------------------------------|------------|------------------|------------|
|                                                   | ****                                                 |       | ****             |       |
| (In  thousands)                                        | **2001**                                             |       | **2000**         |       |
|                                                   | ****                                                 |       | ****             |       |
|                                                   |                                                 | ** ** |             | ** ** |
| **Assets**                                             |                                                 | ** ** |             | ** ** |
|                                                   |                                                 |       |             |       |
| Current  assets:                                       |                                                 |       |             |       |
|                                                   | Cash  and cash equivalents                           | $          | 31,181           |       | $ | 6,463 |   |
|                                                   | Accounts  receivable                                 | 43,956     |             | 36,559     |   |
|                                                   | Prepaid  costs and other current assets              | 2,023      |             | 1,864      |   |
|                                                   |                                                      |       |                  |       |
|                                                   |                                                 |       |             |       |
|                                                   | Total  current assets                                | 77,160     |             | 44,886     |   |
|                                                   |                                                 |       |             |       |
| Furniture,  fixtures and equipment, net                | 62,718                                               |       | 54,749           |       |
| Other  assets                                          | 8,485                                                |       | 2,663            |       |
|                                                   |                                                      |       |                  |       |
|                                                   |                                                 |       |             |       |
|                                                   | $                                                    | 148,363    |             | $          | 102,298 |   |
|                                                   |                                                      |       |                  |       |
|                                                   |                                                 |       |             |       |
| **Liabilities  and Shareholders’ Equity**         |                                                 |       |             |       |
|                                                   |                                                 |       |             |       |
| Current  liabilities:                                  |                                                 |       |             |       |
|                                                   | Accounts  payable                                    | $          | 4,154            |       | $ | 2,633 |   |
|                                                   | Accrued  liabilities                                 | 6,262      |             | 6,088      |   |
|                                                   | Accrued  payroll and related costs                   | 10,383     |             | 9,181      |   |
|                                                   | Operating  line of credit                            | -          |             | 4,750      |   |
|                                                   | Current  portion of long-term debt                   | -          |             | 9,511      |   |
|                                                   |                                                      |       |                  |       |
|                                                   |                                                 |       |             |       |
|                                                   | Total  current liabilities                           | 20,799     |             | 32,163     |   |
|                                                   |                                                 |       |             |       |
| Long-term  debt                                        | -                                                    |       | 24,731           |       |
|                                                   |                                                      |       |                  |       |
|                                                   |                                                 |       |             |       |
|                                                   | 20,799                                               |       | 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, |                                                 |       |             |       |
|                                                   | 24,153  and 17,747 shares issued and outstanding     |       |             |       |   |
|                                                   | at  June 30, 2001 and December 31, 2000 respectively | 113,388    |             | 43,991     |   |
| Retained  earnings                                     | 14,176                                               |       | 1,413            |       |
|                                                   |                                                      |       |                  |       |
|                                                   |                                                 |       |             |       |
| Shareholders’  equity                             | 127,564                                              |       | 45,404           |       |
|                                                   |                                                      |       |                  |       |
|                                                   |                                                 |       |             |       |
|                                                   | $                                                    | 148,363    |             | $          | 102,298 |   |
|                                                   |                                                      |       |                  |       |
|                                                        |                                                      |            |                  |            |  |  |  |  |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

**MetroOne Telecommunications, Inc**

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

** **

|                                                                | **Six Months Ended June 30,**                                                                 |    |
|---------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|---------|
|                                                                | ****                                                                                          |    |
| (In  thousands)                                                     | **2001**                                                                                      |    | **2000** |   |
|                                                                | ****                                                                                          |    | **** |   |
|                                                                |                                                                                          |    |   |   |
| Cash  flows from operating activities:                              |                                                                                          |    |   |   |
|                                                                | Net  income                                                                                   | $       | 12,763 |   | $ | 2,277 |   |
|                                                                | Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |    |   |   |   |
|                                                                | Depreciation  and amortization                                                                | 7,349   |   | 4,625 |   |
|                                                                | Loss  on disposal of fixed assets                                                             | 122     |   | 153 |   |
|                                                                | Changes  in certain assets and liabilities:                                                   |    |   |   |   |
|                                                                | Accounts  receivable                                                                          | (7,397  | ) | (14,439 | ) |
|                                                                | Prepaid  expenses and other assets                                                            | 951     |   | (848 | ) |
|                                                                | Accounts  payable, accrued liabilities and payroll and related costs                          | 938     |   | 4,060 |   |
|                                                                |                                                                                               |    |  |   |
|                                                                |                                                                                          |    |   |   |
|                                                                | Net  cash provided by (used in) operating activities                                          | 14,726  |   | (4,172 | ) |
|                                                                |                                                                                               |    |  |   |
|                                                                |                                                                                          |    |   |   |
| Cash  flows from investing activities:                              |                                                                                          |    |   |   |
|                                                                | Capital  expenditures                                                                         | (13,769 | ) | (12,638 | ) |
|                                                                | Cash  paid in business combination                                                            | (3,639  | ) | - |   |
|                                                                | Proceeds  from sale of assets                                                                 | 195     |   | - |   |
|                                                                | Maturity  of short-term investments                                                           | -       |   | 400 |   |
|                                                                |                                                                                               |    |  |   |
|                                                                |                                                                                          |    |   |   |
|                                                                | Net  cash used in investing activities                                                        | (17,213 | ) | (12,238 | ) |
|                                                                |                                                                                               |    |  |   |
|                                                                |                                                                                          |    |   |   |
| Cash  flows from financing activities:                              |                                                                                          |    |   |   |
|                                                                | Proceeds  from issuance of debt                                                               | -       |   | 8,992 |   |
|                                                                | Repayment  of debt                                                                            | (34,241 | ) | (2,745 | ) |
|                                                                | Net  (repayment) borrowings on line of credit                                                 | (4,750  | ) | 5,700 |   |
|                                                                | Repayment  of capital lease obligations                                                       | -       |   | (91 | ) |
|                                                                | Net  proceeds from sale of common stock                                                       | 64,670  |   | - |   |
|                                                                | Proceeds  from exercise of stock options                                                      | 1,526   |   | 1,983 |   |
|                                                                |                                                                                               |    |  |   |
|                                                                |                                                                                          |    |   |   |
|                                                                | Net  cash provided by financing activities                                                    | 27,205  |   | 13,839 |   |
|                                                                |                                                                                               |    |  |   |
|                                                                |                                                                                          |    |   |   |
| Net  increase (decrease) in cash and cash equivalents               | 24,718                                                                                        |    | (2,573 | ) |
|                                                                |                                                                                          |    |   |   |
| Cash  and cash equivalents, beginning of period                     | 6,463                                                                                         |    | 9,564 |   |
|                                                                |                                                                                               |    |  |   |
|                                                                |                                                                                          |    |   |   |
| Cash  and cash equivalents, end of period                           | $                                                                                             | 31,181  |   | $ | 6,991 |   |
|                                                                |                                                                                               |    |  |   |
|                                                                |                                                                                          |    |   |   |
|                                                                |                                                                                          |    |   |   |
| Supplementary  disclosure of non-cash transactions                  |                                                                                          |    |   |   |
|                                                                |                                                                                          |    |   |   |
| Issuance  of 103,651 shares of common stock in business combination | $                                                                                             | 3,200   |   | - |   |
|                                                                |                                                                                          |    |   |   |
|                                                                     |                                                                                               |         |  |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

**MetroOne Telecommunications, Inc**
| **Notes to Condensed Financial Statements (in 000s, except  per share amounts, unaudited)** |
|---------------------------------------------------------------------------------------------|
| ****                                                                                        |

 

**1.**          **Basis of Presentation**

The accompanying interim condensedfinancial statements have been prepared by Metro One Telecommunications, Inc.without audit and in conformity with accounting principles generally acceptedin the United States of America for interim financial information.  Accordingly, certain financial informationand footnotes have been omitted or condensed. In the opinion of management, the condensed financial statements includeall adjustments, consisting only of normal recurring adjustments, necessary fora fair statement of the results for the interim periods.  These condensed financial statements andnotes thereto should be read in conjunction with our audited financialstatements included in our Annual Report on Form 10-K for the year endedDecember 31, 2000.  The results ofoperations for the interim period shown in this report are not necessarilyindicative of results for any future interim period or 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 allperiods.

A reconciliation of basic weightedaverage shares outstanding to diluted weighted average shares outstanding is asfollows:
|                                                | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|-----------------------------------------------------|---------------------------------|--------|---------------------------------------------------|--------|
|                                                | ****                            |   | ****                                              |   |
|                                                | **2001**                        |   | **2000**                                          |   | **2001** |   | **2000** |   |
|                                                | ****                            |   | ****                                              |   | **** |   | **** |   |
|                                                |                            |   |                                              |   |   |   |   |   |
| Weighted  average shares outstanding – Basic   | 24,035                          |   | 17,371                                            |   | 22,872 |   | 17,307 |   |
| Dilutive  effect of stock options                   | 1,242                           |   | 419                                               |   | 1,113 |   | 585 |   |
|                                                |                                 |   |                                                   |   |  |   |  |   |
|                                                |                            |   |                                              |   |   |   |   |   |
| Weighted  average shares outstanding – Diluted | 25,277                          |   | 17,790                                            |   | 23,985 |   | 17,892 |   |
|                                                |                                 |   |                                                   |   |  |   |  |   |
|                                                     |                                 |        |                                                   |        |  |  |  |  |  |

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 pershare data presented in the accompanying financial statements and notes theretohave been restated for the 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 ourfinancial position, results of operations or cash flows.

 

**4.**          **Supplemental Cash Flow Information**
|            | **Six Months Ended June 30,** |   |
|-----------------|-------------------------------|--------|
|            | ****                          |   |
|            | **2001**                      |   | **2000** |   |
|            | ****                          |   | **** |   |
| Cash  paid for: |                          |   |   |   |
|            | Interest                      | $      | 959 |   | $ | 1,270 |   |
|            | Income  taxes                 | 1,887  |   | 51 |   |
|                 |                               |        |  |  |  |  |  |

**MetroOne Telecommunications, Inc.Notes to Condensed Financial Statements (in 000s, except per share amounts,unaudited)**

**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, we reduced ourdeferred tax valuation allowance to reflect deferred tax assets used to reducecurrent year income taxes.  Ourquarterly and annual operating results have in the past and may in the futurevary 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 our national call centernetwork, general employment environment, general economic conditions and otherfactors.  Given the variability inoperating results, we will continue to review the valuation allowance on aquarterly basis and make adjustments as appropriate.

For fiscal year 2001, we expect ourcombined effective federal and state income tax rate to be approximately22%.  The difference between taxescalculated at the statutory federal and state tax rates and the effectivecombined rates for the year ended December 31, 2001 are expected to primarilyresult from changes in the deferred tax asset valuation allowance due to theutilization of net operating loss carryforwards.

 

**6.          SignificantTransactions**

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 thepurchase of Enthusiasm Technologies, Inc., a developer of web-based dataextraction and processing technology. The transaction has been recorded usingthe purchase method of accounting.  Thepurchase price has been allocated to the assets acquired, which consistedprimarily of proprietary technology and intangibles and goodwill.  Pro forma financial information is notpresented, as the impact on the Company’s results of operations was notmaterial.

 

**7.**          **Recent Accounting Pronouncements**

In June 2001, the Financial Accounting StandardsBoard 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 usbeginning January 1, 2002. Management is currently evaluating the impact ofthis statement.  However, we do notexpect the impact on the Company’s results of operations to be material.

** **

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

             Resultsof operations for the periods discussed below should not be consideredindicative of the results to be expected in any future period and fluctuationsin operating results may also result in fluctuations in the market price of ourcommon stock. Our quarterly and annual operating results have in the past andmay in the future vary significantly depending on factors such as changes inthe telecommunications market, the addition or expiration of customercontracts, increased competition, changes in pricing policies by us or ourcompetitors, lengthy sales cycles, lack of market acceptance or delays in theintroduction of new versions of our products or features, the timing of theinitiation of wireless services or their acceptance in new market areas bytelecommunications customers or their subscribers, the timing and expense ofthe expansion of our national call center network, general employmentenvironment, general economic conditions and other factors, including but notlimited to, factors detailed in our annual report on Form 10-K filed with theSecurities and Exchange Commission.

 

**Overview**

             Weare the leading developer and provider of Enhanced Directory Assistance("EDA") and other enhanced telecom services. We have contracts withwireless and landline carriers (“customers”) to provide EDA and other servicesin numerous U.S. markets. Our recent operations have been characterized byrapid call volume and revenue growth as well as growth in profits. Call volumeand revenues increased 70% and 62%, respectively, in the second quarter of 2001from the second quarter of 2000, and profits grew to $7,760,000 from$1,156,000.

             Ourmarketing strategy includes efforts to increase our share of the directoryassistance and information services markets by expanding services to existingcustomers, adding new customers and subsequently expanding our call centernetwork into new geographic markets. We have had ongoing business discussionsabout new contracts with other telecommunications companies. We opened one newcall center in the first three months of 2001 and anticipate that we will openadditional call centers or expand or relocate existing call centers, as needed,during 2001 and beyond to serve new or existing customers. With our increasingsize, we expect that costs associated with opening each new call center shouldhave a diminishing impact on results of operations.

             Tostimulate an increase in call volume and to attract and expand customercommitments, our strategy has included price discounts based on call volumes.We expect that our average price per call will continue to decrease in theremainder of 2001 as increasing call volumes trigger volume-based pricingdiscounts. In addition, as we enter into additional or new contracts, theaverage price per call may decrease as we attempt to increase market share. Webelieve that our reduced pricing better positions us to retain and expandservice with existing customers, to extend service to new customers and toachieve greater operating margins over time.

             InFebruary 2001, we completed the sale and issuance to Sonera Media Holding B.V.(“Sonera”) of Finland, of six million shares of our common stock at a price ofUS$11.33 per share, for an aggregate price of $68 million (net proceeds of$64.7 million) and an approximate 25.5% ownership position. Under the terms ofthe agreement, Sonera has gained representation on our Board of Directors andcan further acquire up to an aggregate 33% ownership position. We have utilizeda portion of the cash received to retire approximately $35 million of debt. Weintend to use the additional cash to further expand our infrastructure andcapacity through expansion of existing call centers and new call centers inselected markets and for other corporate purposes.

             InFebruary 2001, we completed the purchase of Enthusiasm Technologies, Inc.(“Enthusiasm”), a developer of web-based data extraction and processingtechnology. Enthusiasm builds application-specific databases for a variety ofportals, be they wired or wireless, voice or data. Enthusiasm’s proprietarydata extraction and processing technology enables the creation and ongoingmaintenance of high quality databases from distributed and fragmented data onthe web and elsewhere. We believe that Enthusiasm will contribute to theexpansion of our services and data offerings to our wireless and othercustomers.

**Results of Operations**

             Thefollowing table sets forth, for the periods indicated, the items of ourstatements of income as a percentage of revenues.

                        

|                              | Three Months Ended  June 30, | Six Months Ended June  30, |   |
|-----------------------------------|------------------------------|----------------------------|--------|
|                              |                              |                            |   |
|                              | 2001                         |                       | 2000   |   | 2001 |   | 2000 |   |
|                              |                              |                       |        |   |  |   |  |   |
| Revenues                          | 100.0                        | %                          | 100.0  | % | 100.0 | % | 100.0 | % |
| Direct  operating costs           | 55.6                         |                       | 65.7   |   | 56.4 |   | 64.2 |   |
| General  and administrative costs | 28.3                         |                       | 29.2   |   | 28.6 |   | 30.1 |   |
|                              |                              |                       |        |   |  |   |  |   |
| Income  from operations           | 16.1                         |                       | 5.2    |   | 15.1 |   | 5.7 |   |
| Other  income(expense), net       | 0.5                          |                       | 0.1    |   | 0.7 |   | (0.1 | ) |
| Interest  and loan fees           | (0.0                         | )                          | (2.0   | ) | (0.8 | ) | (2.0 | ) |
|                              |                              |                       |        |   |  |   |  |   |
| Income  before income taxes       | 16.6                         |                       | 3.3    |   | 15.0 |   | 3.6 |   |
| Income  tax expense               | 3.5                          |                       | 0.1    |   | 3.3 |   | 0.1 |   |
|                              |                              |                       |        |   |  |   |  |   |
| Net  income                       | 13.1                         |                       | 3.2    |   | 11.7 |   | 3.4 |   |
|                              |                              |                       |        |   |  |   |  |   |

*Comparisonof Second Quarter 2001 to Second Quarter 2000*

                Revenues increased 61.7% to$59.2 million in the second quarter of 2001 from $36.6 million in the secondquarter of 2000. Call volume grew to 119 million calls in the second quarter of2001 from approximately 70 million calls during the second 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 increased36.8% to $32.9 million in the second quarter of 2001 from $24.0 million in thesecond 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 55.6% in the second quarter of 2001 from65.7% in the second quarter of 2000. This decrease was due primarily tooperating efficiencies and lower listings data costs.

                General and administrative costsincreased 57.1% to $16.8 million in the second quarter of 2001 from $10.7million in the second 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 28.3% in the second quarter of 2001 from 29.2% in the secondquarter of 2000. This decrease resulted primarily from efficiencies associatedwith the expansion of our national network of call centers. Depreciation andamortization increased by 59.1% to $3.7 million in the second quarter of 2001from $2.3 million in the second quarter of 2000 due primarily to equipmentpurchased for new call centers, upgrades of existing call centers and productdevelopment activities.

                Other income, net for the threemonths ended June 30, 2001 was $317,000 consisting primarily of interest incomepartially offset by loss on disposal of assets. Other income, net for the threemonths June 30, 2000 was $40,000 and consisted primarily of interest incomeoffset by loss on disposal of assets.

                Interest expense and loan feesdecreased 98.8% to $9,000 from $727,000. This decrease was primarilyattributable to a decrease in average outstanding debt. All debt was paid infull as of March 31, 2001 using a portion of the proceeds from the investmentfrom Sonera.

                Incometax expense for the three months ended June 30, 2001 was $2.1 million, for aneffective tax rate of approximately 21.1%. Income tax expense for the threemonths ended June 30, 2000 was $42,000, for an effective tax rate ofapproximately 3.5%. These rates differ from the combined federal and state statutoryrate of approximately 41% due to the use of net operating loss carryforwards.

 

**Liquidity and Capital Resources**

                Our cash and cash equivalentsare recorded at cost, which approximates fair market value. As of June 30,2001, we had $31.2 million in cash and cash equivalents compared to $6.5million at December 31, 2000. The net increase of $24.7 million resultedprimarily from the investment by Sonera and operating cash inflows partiallyoffset by cash paid for capital expenditures, the repayment of debt and theacquisition of Enthusiasm.

                Working capital was $56.4million at June 30, 2001, compared to $12.8 million at December 31, 2000. Thisincrease is due primarily to working capital provided by the investment ofSonera, offset by the use of cash for capital expenditures, the repayment ofdebt and the acquisition of Enthusiasm.

                *Cash Flow from Operations.*Netcash provided by operations was $14.7 million for the six months ended June 30,2001 resulting primarily from net income, the effect of non-cash depreciationand amortization, a decrease in prepaid expenses and other assets exclusive ofinvesting activities and an increase in accounts payable and accruedliabilities.  This was partially offsetby an increase in accounts receivable.

                *Cash Flow from Investing Activities.*Cashused in investing activities was $17.2 million for the six months ended June30, 2001 resulting primarily from capital expenditures for the purchase ofequipment for new call centers, the upgrade and expansion of existing call centersand cash paid in the acquisition of Enthusiasm.

                *Cash Flow from Financing Activities.*Netcash provided by financing activities was $27.2 million for the six monthsended June 30, 2001 resulting primarily from the proceeds of the investment bySonera which was partially used for repayment of debt. Additional cash wasprovided by the exercise of common stock 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 (6.75% atJune 30, 2001) plus up to 0.5% based on the ratio of debt to cash flow, and allreceivables are pledged to the bank as collateral.  In addition, the line has an unused facility fee of up to 0.75%,also based on the ratio of debt to cash flow. The agreement contains minimum quick ratio, debt to equity andprofitability requirements, as well as other restrictive covenants, andprohibits the payment of any dividends and other distributions and redemptionsof our stock exceeding 10% of our tangible net worth.  As of June 30, 2001, we had no outstanding borrowings under thisagreement.

                *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, to expand 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 $30 million in 2001, resulting primarily from projected callcenter expansions, increased network capacity and corporate development activities.

             *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 usbeginning January 1, 2002. Management is currently evaluating the impact ofthis statement.  However, we do notexpect the impact on the Company’s results of operations to be material.

 

**ITEM 3.            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

             Substantiallyall of our cash and cash equivalents are invested in money market instruments,and therefore the fair market value of these instruments is affected by changesin market interest rates. However, substantially all of our investments at June30, 2001 were invested in overnight money market instruments and wereredeemable on a daily basis. Substantially all of the underlying investments inthe money market fund had maturities averaging three months or less. As aresult, we believe the market risk arising from our holdings of financialinstruments is minimal. A hypothetical 1% fluctuation in interest rates wouldnot have a material adverse effect on our financial position, results ofoperations or cash flows.

 

 

 

**PARTII.           OTHER INFORMATION**

 

**ITEM 1.**            **LEGAL PROCEEDINGS**

             InJune 2001, Metro One Telecommunications, Inc. completed the settlement of alawsuit it filed in August 1999 against InfoNXX, Inc. alleging infringement ofa Metro One Patent (U.S. Patent No. 5,797,092) relating to return to operatorcapabilities such as StarBack, as well as the settlement of a counter suitfiled by InfoNXX and others. Court Orders have been issued barring InfoNXX fromoffering StarBack-like connectivity and dismissing with prejudice Metro One’slawsuit and the counter suit.

 

**ITEM 6.            EXHIBITSAND 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:  August 14, 2001 |                                |                     |
|                   |                                |                     |
|                   |                                |                     |
|                   | /s/  Dale N. Wahl              |                     |
|                   |                                     |                     |
|                   | Dale  N. Wahl                       |                     |
|                   | Senior  Vice President              |                     |
|                   | Chief  Financial Officer            |                     |
|                   |                                |                     |