**UnitedStates**

**Securitiesand 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 PeriodEnded March 31, 2005**

 

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

 

**CommissionFile Number 0-27024**

 

**METRO ONE TELECOMMUNICATIONS, INC.**

(Exact name ofregistrant as specified in its charter)

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

 

###### **11200 MurrayScholls Place, Beaverton, Oregon  97007**

(Address ofprincipal executive offices) (zip code)

 

**(503)643-9500**

(Registrant’stelephone number, including area code)

 

**Indicate by check mark whetherthe registrant has (1) filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter 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 whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).Yes  ****ý  No ****o**

 

**Number of shares of common stockoutstanding as of May 6, 2005: 25,098,853 shares, no par value per share.**

 

 

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**METRO ONETELECOMMUNICATIONS, INC.**

 

**INDEX TO FORM 10 - Q**

 
| Part I  | Financial Information                                                                                |   |
|---------|------------------------------------------------------------------------------------------------------|--------|
|    |                                                                                                 |   |
| Item 1. | Financial Statements  (Unaudited)                                                                    |   |
|    |                                                                                                 |   |
|    | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2005 and 2004 |   |
|    |                                                                                                 |   |
|    | Condensed  Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004                    |   |
|    |                                                                                                 |   |
|    | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2005 and 2004 |   |
|    |                                                                                                 |   |
|    | Notes  to Condensed Consolidated Financial Statements                                                |   |
|    |                                                                                                 |   |
| Item 2. | Management’s Discussion and Analysis of  Financial Condition and Results of Operations          |   |
|    |                                                                                                 |   |
| Item 3. | Quantitative and Qualitative Disclosures About  Market Risk                                          |   |
|    |                                                                                                 |   |
| Item 4. | Controls and Procedures                                                                              |   |
|    |                                                                                                 |   |
| Part II | Other Information                                                                                    |   |
|    |                                                                                                 |   |
| Item 6. | Exhibits                                                                                             |   |
|    |                                                                                                 |   |
|    | Signatures                                                                                           |   |

 

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**Metro One Telecommunications,Inc.**

**Condensed Consolidated Statementsof Operations (Unaudited)**

 
| ** **                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|
| **(In thousands, except per share  data)** | ** ** | **2005**                          | ** ** | **2004** | ** ** |
|                                       |       |                              |       |   |   |
| Revenues                                   |       | $                                 | 18,379     |   | $ | 43,529 |   |
|                                       |       |                              |       |   |   |
| Costs and  expenses:                       |       |                              |       |   |   |
| Direct operating                           |       | 17,220                            |       | 25,543 |   |
| Selling, general  and administrative       |       | 14,829                            |       | 25,954 |   |
|                                       |       | 32,049                            |       | 51,497 |   |
|                                       |       |                              |       |   |   |
| Loss from  operations                      |       | (13,670                           | )          | (7,968 | ) |
|                                       |       |                              |       |   |   |
| Other income,  net                         |       | 295                               |       | 119 |   |
|                                       |       |                              |       |   |   |
| Loss before  income taxes                  |       | (13,375                           | )          | (7,849 | ) |
| Income tax  benefit                        |       | (31                               | )          | — |   |
|                                       |       |                              |       |   |   |
| Net loss                                   |       | $                                 | (13,344    | ) | $ | (7,849 | ) |
|                                       |       |                              |       |   |   |
| Net loss per  common share:                |       |                              |       |   |   |
| Basic                                      |       | $                                 | (0.53      | ) | $ | (0.32 | ) |
| Diluted                                    |       | $                                 | (0.53      | ) | $ | (0.32 | ) |
|                                       |       |                              |       |   |   |
| Weighted average  shares outstanding:      |       |                              |       |   |   |
| Basic                                      |       | 24,984                            |       | 24,775 |   |
| Diluted                                    |       | 24,984                            |       | 24,775 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**Metro One Telecommunications,Inc.**

**Condensed Consolidated BalanceSheets (Unaudited)**

 
| ** **                                                                                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|
| **(In thousands)**                                                                                                                   | ** ** | **2005**      | ** ** | **2004**         | ** ** |
| ** **                                                                                                                           | ** ** | ** **    | ** ** | ** **       | ** ** |
| **Assets**                                                                                                                           | ** ** | ** **    | ** ** | ** **       | ** ** |
|                                                                                                                                 |       |          |       |             |       |
| Current assets:                                                                                                                      |       |          |       |             |       |
| Cash and cash  equivalents                                                                                                           |       | $             | 15,525     |             | $          | 24,093 |   |
| Short-term  investments, available for sale                                                                                          |       | 25,325        |       | 25,375           |       |
| Restricted cash                                                                                                                      |       | 4,900         |       | 4,900            |       |
| Accounts  receivable, net                                                                                                            |       | 12,348        |       | 17,524           |       |
| Prepaid costs  and other current assets                                                                                              |       | 6,599         |       | 4,850            |       |
|                                                                                                                                 |       |          |       |             |       |
| Total current  assets                                                                                                                |       | 64,697        |       | 76,742           |       |
|                                                                                                                                 |       |          |       |             |       |
| Furniture,  fixtures and equipment, net                                                                                              |       | 12,248        |       | 12,701           |       |
| Intangible  assets                                                                                                                   |       | 6,216         |       | 5,916            |       |
| Other assets                                                                                                                         |       | 471           |       | 471              |       |
|                                                                                                                                 |       |          |       |             |       |
| Total assets                                                                                                                         |       | $             | 83,632     |             | $          | 95,830 |   |
|                                                                                                                                 |       |          |       |             |       |
| **Liabilities  and Shareholders’ Equity**                                                                                       |       |          |       |             |       |
|                                                                                                                                 |       |          |       |             |       |
| Current  liabilities:                                                                                                                |       |          |       |             |       |
| Accounts payable                                                                                                                     |       | $             | 2,131      |             | $          | 1,107 |   |
| Accrued  liabilities                                                                                                                 |       | 1,768         |       | 2,003            |       |
| Accrued payroll  and related costs                                                                                                   |       | 12,490        |       | 12,125           |       |
|                                                                                                                                 |       |          |       |             |       |
| Total current  liabilities                                                                                                           |       | 16,389        |       | 15,235           |       |
|                                                                                                                                 |       |          |       |             |       |
| Other long-term  liabilities                                                                                                         |       | 1,150         |       | 1,158            |       |
|                                                                                                                                 |       |          |       |             |       |
| Total  liabilities                                                                                                                   |       | 17,539        |       | 16,393           |       |
|                                                                                                                                 |       |          |       |             |       |
| Commitments and  contingencies                                                                                                       |       |          |       |             |       |
|                                                                                                                                 |       |          |       |             |       |
| Shareholders’  equity:                                                                                                          |       |          |       |             |       |
| Preferred stock,  no par value; 10,000 shares authorized, no shares issued or outstanding                                            |       | —        |       | —           |       |
| Common stock, no  par value; 50,000 shares authorized, 24,984 shares issued and outstanding at  March 31, 2005 and December 31, 2004 |       | 119,948       |       | 119,948          |       |
| Retained deficit                                                                                                                     |       | (53,855       | )          | (40,511          | )          |
|                                                                                                                                 |       |          |       |             |       |
| Total  shareholders’ equity                                                                                                     |       | 66,093        |       | 79,437           |       |
|                                                                                                                                 |       |          |       |             |       |
| Total  liabilities and shareholders’ equity                                                                                     |       | $             | 83,632     |             | $          | 95,830 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**Metro One Telecommunications,Inc.**

**Condensed Consolidated Statementsof Cash Flows (Unaudited)**

 
| ** **                                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(In thousands)**                                                                         | ** ** | **2005**                         | ** ** | **2004** | ** ** |
|                                                                                       |       |                             |       |   |   |
| Cash flows from  operating activities:                                                     |       |                             |       |   |   |
| Net loss                                                                                   |       | $                                | (13,344    | ) | $ | (7,849 | ) |
| Adjustments to  reconcile net loss to net cash (used in) provided by operating activities: |       |                             |       |   |   |
| Depreciation and  amortization                                                             |       | 1,612                            |       | 5,595 |   |
| Loss on disposal  of fixed assets                                                          |       | 1                                |       | 11 |   |
| Deferred rent                                                                              |       | (7                               | )          | 37 |   |
| Changes in  certain assets and liabilities:                                                |       |                             |       |   |   |
| Accounts  receivable                                                                       |       | 5,176                            |       | 1,658 |   |
| Prepaid costs  and other assets                                                            |       | (2,216                           | )          | 8,755 |   |
| Accounts payable  and other liabilities                                                    |       | 1,153                            |       | (1,385 | ) |
|                                                                                       |       |                             |       |   |   |
| Net cash (used  in) provided by operating activities                                       |       | (7,625                           | )          | 6,822 |   |
|                                                                                       |       |                             |       |   |   |
| Cash flows from  investing activities:                                                     |       |                             |       |   |   |
| Purchases of  short-term securities                                                        |       | (10,500                          | )          | — |   |
| Sales of  short-term securities                                                            |       | 10,550                           |       | — |   |
| Capital  expenditures                                                                      |       | (993                             | )          | (1,951 | ) |
|                                                                                       |       |                             |       |   |   |
| Net cash used in  investing activities                                                     |       | (943                             | )          | (1,951 | ) |
|                                                                                       |       |                             |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                                      |       | (8,568                           | )          | 4,871 |   |
|                                                                                       |       |                             |       |   |   |
| Cash and cash  equivalents, beginning of period                                            |       | 24,093                           |       | 44,381 |   |
|                                                                                       |       |                             |       |   |   |
| Cash and cash  equivalents, end of period                                                  |       | $                                | 15,525     |   | $ | 49,252 |   |
|                                                                                       |       |                             |       |   |   |
| Supplemental  disclosure of cash flow information:                                         |       |                             |       |   |   |
| Cash paid  (refunded) for income taxes, net                                                |       | $                                | 43         |   | $ | (10,072 | ) |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**Metro One Telecommunications,Inc.**

**Notes to Condensed ConsolidatedFinancial Statements (Unaudited)**

 

**1.     Summary of Significant Accounting Policies**

 

**Basis of Presentation**

 

The accompanying unaudited interim condensed consolidated financialstatements have been prepared by Metro One Telecommunications, Inc. inconformity with accounting principles generally accepted in the United Statesof America for interim financial information. Accordingly, certain financial information and footnotes have beenomitted or condensed.  In the opinion ofmanagement, the condensed financial statements include all adjustmentsnecessary for a fair presentation of the results for the interim periods.  These condensed consolidated financialstatements and notes thereto should be read in conjunction with our auditedfinancial statements included in our Annual Report on Form 10-K for the yearended December 31, 2004.  The results ofoperations for the interim period shown in this report are not necessarilyindicative of results for future interim periods or the entire fiscal year.

 

The condensedconsolidated financial statements include the accounts of Metro One Telecommunications,Inc. and all of its wholly-owned subsidiaries. All significant intercompany balances and transactions have beeneliminated in consolidation.

 

**Advertising**

 

Costs of advertising areexpensed as incurred except for commercial advertising production costs, whichare expensed at the time the related commercials are first run.  Advertising expense was approximately $1.1million and $6.0 million in the three-month periods ended March 31, 2005 and2004, respectively.  These expenses wereprimarily related to marketing and promotion of our Infone service.

 

**Short-term Investments**

 

Short-term investmentsare carried at fair value and at March 31, 2005 consisted of $25.3 million ofavailable-for-sale auction rate securities (“ARS”) that we classify as currentassets based upon our intent and ability to use these funds as necessary tosatisfy short-term liquidity requirements. Our portfolio at March 31, 2005 consisted of two types of ARS.  We held $11.8 million of investment-gradetaxable auction rate notes of municipal issuers, which are debt-securities withvariable interest rates that reset through a Dutch auction with principaltraded at par.  The rate typically resetson a periodic basis, usually between 7 and 49 days.  Actual maturities of the underlyingsecurities are greater than ten years. In addition, at March 31, 2005, we held $13.5 million of auction ratepreferred securities which consist of shares of closed-end investment fundsinvested in long-term fixed income securities. These funds generally issue auction rate preferred shares that provideliquidity at par value every 28 days through the auction rate market.  The reset rate for both types of ARS is setby a modified Dutch auction process in which bids are filled from lowest yieldbid to highest; the highest bid cleared sets the rate for all winningbidders.  Although the underlyingsecurities have long-term contractual maturities, we can sell or buy thesecurities at par on auction dates. Thus, they are classified as short-term investments since they areintended to be available to fund current operations.  Fair values are based on quoted market pricesand at March 31, 2005, the fair value of these securities approximated theircarrying value.  As a result of theinterest rate resets, we had no cumulative unrealized or realized holding gainsor losses from these investments in the quarter ended March 31, 2005.

 

**Stock-Based Compensation**

 

We have elected toaccount for stock options and shares issued under our Employee Stock PurchasePlan (“ESPP”) according to Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” and to furnish the pro forma disclosuresrequired under Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accountingfor Stock-Based Compensation — Transition and Disclosure — an amendment of FASBStatement No. 123.”  Accordingly, nocompensation cost has been recognized in the financial statements related tostock options issued under our Stock Incentive Plan (the “Plan”) or sharesissued under our ESPP.

 

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If compensation cost onstock options granted and ESPP shares issued in the three-month periods endedMarch 31, 2005 and 2004 under the Plan had been determined based on the fairvalue of the options and ESPP shares as of the grant or issue date in a methodconsistent with that described in SFAS No. 123, “Accounting for Stock-BasedCompensation,” our net loss and net loss per share would have been changed tothe pro forma amounts indicated below for the three-month periods ended March31:

 
| ** **                               | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|----------|------------|
| ** **                               | ** ** | **(In thousands, except per share amounts)** | ** ** |
|                                     |       |                                         |       |     |       |
| Net loss, as  reported                   |       | $                                            | (13,344    | )        | $          | (7,849 | ) |
| Stock-based  compensation expense        |       | (1,970                                       | )          | (908     | )          |
| Net loss, pro  forma                     |       | $                                            | (15,314    | )        | $          | (8,757 | ) |
|                                     |       |                                         |       |     |       |
| Basic net loss  per share, as reported   |       | $                                            | (.53       | )        | $          | (.32 | ) |
| Basic net loss  per share, pro forma     |       | $                                            | (.61       | )        | $          | (.35 | ) |
|                                     |       |                                         |       |     |       |
| Diluted net loss  per share, as reported |       | $                                            | (.53       | )        | $          | (.32 | ) |
| Diluted net loss  per share, pro forma   |       | $                                            | (.61       | )        | $          | (.35 | ) |

 

In March 2005, our Boardof Directors accelerated vesting on all of the then outstanding stock options,of which all had fair market values that were less than the exercise prices atthat time.  In determining to acceleratethe vesting of these options, the Board considered the effect on our reportedstock option expense in future periods, the comparability of our statements ofoperations in prior and subsequent periods, and the potential benefit to MetroOne and our shareholders in retaining the services of affected officers andemployees.  The pro forma expenseincluded in the stock-based compensation expense noted above associated withthe accelerated vesting was approximately $1,592,000.

 

**Recent Accounting Pronouncements**

 

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

 

**2.     Net Loss Per Share**

 

Basic net loss per shareis based on the weighted average number of common shares outstanding.  Diluted net loss per share reflects thepotential dilution that could occur if outstanding options to purchase commonstock were exercised or converted into common stock.  Basic and diluted weighted average sharesoutstanding were the same for the periods ending March 31, 2005 and 2004because inclusion of the potential dilutive effect of common stock options inthe calculation would be anti-dilutive.  Therewere no adjustments to net loss for the calculation of both basic and dilutednet loss per share for all periods.

 

Options to purchase 3,467,000 and 3,082,000 shares of common stock wereoutstanding at March 31, 2005 and 2004, respectively, but were not included inthe computation of diluted net loss per share because their effect would beanti-dilutive.

 

5

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**3.     Commitments and Contingencies**

 

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

 

From time to time, in the normal course of our business, we issuestandby letters of credit and bank guarantees. At March 31, 2005, we had one letter of credit outstanding in the amountof $4,900,000 related to our workers’ compensation program.  The letter of credit is secured by acertificate of deposit for the same amount that is recorded as restrictedcash.  This letter of credit was renewedin April 2005 in the amount of $6,860,000.

 

**4.     Significant Events**

 

In February 2005, we entered into a Master Services Agreement forDirectory Assistance Services (the “Services Agreement”) with NextelOperations, Inc., acting on behalf of certain affiliates (collectively “Nextel”)of Nextel Communications, Inc.  TheServices Agreement supercedes our previous services agreement dated in June1999.  Under the Services Agreement, weagreed to provide directory assistance services to Nextel’s customers on anon-exclusive basis.  Price levels in theServices Agreement are lower than those of the previous agreement and,additionally, Nextel may transition call volume away from us on short noticeand/or terminate services entirely.  TheServices Agreement is for a three year term, and is renewable by Nextel for twoadditional one-year periods.

 

Our contract with AT&T Wireless expired in December 2003, and ournegotiations did not result in a new contract. The call volume from AT&T Wireless transitioned away during thesecond and third quarters of 2004.  AT&TWireless accounted for approximately 45% of our revenues in the first quarterof 2004.

 

We have experienced netlosses in each of the quarterly and annual periods since the first quarter of2003.  We expect to meet our cashrequirements in 2005 through a combination of existing cash and cashequivalents and short-term investments. We may require more capital in the future to fund our operations and/orfinance various corporate initiatives. We cannot be certain that additional funds will be available on termsfavorable to us or at all.  If adequatefunds are not available on acceptable terms, we may be forced to reduce ouroperations or abandon expansion opportunities.

 

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| **ITEM 2**. | ** ** | **MANAGEMENT’S DISCUSSION  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 may, but do not necessarily, alsoinclude words such as “believes,” “expects,” “anticipates,” “plans,” “estimates,”“may,” “will,” “should,” “could,” “continue” or similar expressions.  Forward-looking statements are notguarantees.  They involve known andunknown business and economic risks, uncertainties and other factors that maycause our actual results, performance or achievements to be materiallydifferent from any future results, performance or achievements expressed orimplied by such forward-looking statements. These risks, uncertainties and other factors include those discussed inour 2004 Annual Report on Form 10-K filed with the Securities and ExchangeCommission (“the SEC”).  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 publicly release any revisions to theseforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.

 

Results of operations forthe periods discussed below should not be considered indicative of the resultsto be expected in any future period, and fluctuations in operating results mayalso result in fluctuations in the market price of our common stock.  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, expiration or pricing of customercontracts, increased competition, changes in pricing policies by us or ourcompetitors, lengthy sales cycles, advertising costs or lack of marketacceptance associated with our Infone service and the introduction of newversions of our products or features, the cost and success of new growthstrategies, the timing and expense of the expansion or contraction of ournational call center network, the general employment environment, generaleconomic conditions and the other factors discussed in our 2004 Annual Reporton Form 10-K filed with the SEC.

 

#### **Overview**

 

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

 

Typically, under our wholesale contracts, carriers agree to route someor all of their directory assistance calls to us.  We offer our services to multiple carrierswithin the same market.  When a carrier’ssubscribers dial a typical directory assistance number, such as “411,” “555-1212”or “00,” the calls are routed to and answered by our operators identifying theservice by that carrier’s brand name.

 

Each carrier customer establishes its own directory assistance feestructure for its subscribers.  Wirelesssubscribers typically pay fees to their carrier ranging from $1.00 to $1.50plus airtime charges for our services. We bear no subscriber collection risk with respect to carriersubscribers; however, there may be collection risk to the extent growth andprofitability in the telecommunications industry decreases and to the extent weprovide services to other types of customers, including businesses,governmental units or callers attracted through other means or affiliations.

 

We charge our customers on a per call basis.  We have offered volume pricing discounts inthe past to stimulate increased call volume and to attract and expand customercommitments, as well as meet competitive pressures, which caused our averagerevenue per call to decrease.  We expectthat average revenue per call may continue to decrease over time, as we believethis pricing strategy better positions us to retain and expand service withexisting carrier customers and to attract new carrier customers.  Prices for services provided to other typesof customers, including individual consumers, businesses, governmental units orother callers, may vary based on the nature of the service, volume and othercircumstances.

 

Competition in the telecommunications industry, and in the directoryassistance market in which we participate, is intense.  With slowing subscriber growth and decliningrevenue per user, carriers are looking to lower their costs of providingdirectory assistance and other services through, among other ways, outsourcingto low cost domestic or overseas operators and utilizing automation to reducecosts.  In response to these and otherissues, in May 2003, we launched Infone, a service that provides enhanceddirectory and personal assistant services directly to

 

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consumers.  Callers may use the service from nearly anydomestic telephone, landline or wireless, simply by dialing “888-411-1111.”  Billing is handled by using a major creditcard.  Calls can be connected nationwideand to Canada and Puerto Rico for the all-inclusive price of 89 cents for anycall of up to 15 minutes, plus 5 cents per minute after that.

 

The launch of Infone has been accompanied by a significant nationwidemarketing and promotion campaign designed to build brand awareness andencourage customers to sign up for Infone. During the first quarter of 2005 and 2004, we spent approximately $1.1million and $6.0 million, respectively, on such marketing and promotioncampaigns, and we will likely spend significant additional funds on marketingand promotional activities in the future. As of April 29, 2005, the date of our first quarter 2005 financialresults press release, we had obtained approximately 178,000 registered Infoneusers.

 

We have experienced netlosses in each of the quarterly and annual periods since the first quarter of2003.  We expect to meet our cashrequirements in 2005 through a combination of existing cash and cashequivalents and short-term investments. We may require more capital in the future to fund our operations and/orfinance various corporate initiatives. We cannot be certain that additional funds will be available on termsfavorable to us or at all.  If adequatefunds are not available on acceptable terms, we may be forced to reduce ouroperations or abandon expansion opportunities.

 

**Significant Events**

 

In February 2005, we entered into a Master Services Agreement forDirectory Assistance Services (the “Services Agreement”) with NextelOperations, Inc., acting on behalf of certain affiliates (collectively “Nextel”)of Nextel Communications, Inc.  TheServices Agreement supercedes our previous services agreement dated in June1999.  Under the Services Agreement, weagreed to provide directory assistance services to Nextel’s customers on anon-exclusive basis.  Price levels in theServices Agreement are lower than those of the previous agreement and,additionally, Nextel may transition call volume away from us on short noticeand/or terminate services entirely.  Theterm of the Services Agreement is for three years, and may be renewed by Nextelfor two additional one-year periods.

 

Our contract with AT&T Wireless expired inDecember 2003, and our negotiations did not result in a new contract.  The call volume from AT&T Wirelesstransitioned away during the second and third quarters of 2004.  AT&T Wireless accounted for approximately45% of our revenues in the first quarter of 2004.

 

**Results of Operations**

 

This table shows selected items from our statements ofoperations expressed as a percentage of revenues:

 
| ** **                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|
| ** **                                 | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | ** **                        | ** ** | ** ** | ** ** |
| Revenues                                   |       | 100.0                             | %          | 100.0 | % |
| Direct operating  costs                    |       | 93.7                              |       | 58.7 |   |
| Selling, general  and administrative costs |       | 80.7                              |       | 59.6 |   |
| Loss from  operations                      |       | (74.4                             | )          | (18.3 | ) |
| Other income,  net                         |       | 1.6                               |       | 0.3 |   |
| Loss before  income taxes                  |       | (72.8                             | )          | (18.0 | ) |
| Income tax  benefit                        |       | (0.2                              | )          | — |   |
| Net loss                                   |       | (72.6                             | )%         | (18.0 | )% |

 

*Comparison of first quarter 2005to first quarter 2004*

 

Revenues decreased 57.8% to $18.4 million from $43.5 million.  Call volume decreased to approximately 57million calls from approximately 94 million calls.  These decreases resulted primarily from lowercall volume from AT&T Wireless due to expiration of their contract andlower prices on other wholesale contracts, partially

 

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offset by growthin call volume under other existing contracts and in other markets.  Our average revenue per call was approximately$0.32 and $0.46 in the first quarter of 2005 and 2004, respectively.

 

Direct operating costs consist of salaries, wages,benefits and taxes relating to call center personnel and costs of listings dataand content acquisition.  These costs decreased32.6% to $17.2 million from $25.5 million. This decrease was primarily due to lower personnel and data costsassociated with servicing lower call volumes. As a percentage of revenues, direct operating costs increased to 93.7%from 58.7%, due primarily to decreased revenue associated with lower per callprices.

 

Selling, general and administrative costs decreased 42.9%to $14.8 million from $26.0 million. This decrease resulted primarily from decreased marketing and promotioncosts associated with our Infone service and decreased depreciation expenses resultingfrom our write-down of fixed assets in the fourth quarter of 2004.  As a percentage of revenues, selling, generaland administrative costs increased to 80.7% from 59.6% resulting from lowerrevenue.

 

Depreciation and amortization expense, a component ofselling, general and administrative costs, decreased 71.2% to $1.6 million from$5.6 million and decreased to 8.8% from 12.9% of revenue.  The decrease in depreciation and amortization wasdue primarily to our write-down of fixed assets in the fourth quarter of 2004.

 

Other income was $295,000 and $119,000 in the firstquarter of 2005 and 2004, respectively, and consisted primarily of interestincome earned on cash and cash equivalents and short-term investments.  The increase in 2005 compared to 2004resulted primarily from increased market interest rates.

 

Because of our operating losses in the first quarterof 2005 and 2004, we recorded no federal income tax expense.  We have a valuation allowance againstdeferred tax assets associated with operating losses in this and prior quartersand other deferred tax assets because it is deemed more likely than not thatthese assets will not be realized. Accordingly, no federal income tax benefit has been recorded withrespect to these deferred tax assets.  Inthe first quarter of 2005, we recorded a state income tax benefit of $31,000 toadjust prior estimates of state income taxes payable to actual income taxespaid.

 

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

 

As of March 31, 2005, we had approximately $45.8 millionin cash and cash equivalents, short-term investments and restricted cash(including $4.9 million of restricted cash) compared to approximately $54.4million (including $4.9 million of restricted cash) at December 31, 2004.  The net decrease of $8.6 million resultedprimarily from decreased revenue received from customers and utilization ofcash in our operations.  We have nooutstanding debt.

 

Working capital was $48.3 million at March 31, 2005,compared to $61.5 million at December 31, 2004. This decrease was primarily dueto working capital used in operations as well as decreased revenue receivedfrom customers.

 

*Cash flow from operations. *Net cash used in operationswas $7.6 million in the first quarter of 2005 compared to cash provided by operationsof $6.8 million in the first quarter of 2004. This difference of $14.4 million resulted primarily from an increase inour net loss due primarily to decreased revenues and the receipt in the firstquarter of 2004 of a federal income tax refund (no such refund was received in2005), partially offset by a decrease in cash paid for advertising andpromotion expenses, a decrease in cash paid to or on behalf of our employees,and a decrease in cash paid to vendors and suppliers.  Cash received from customers decreased byapproximately $21.6 million in the first quarter of 2005 compared with thefirst quarter of 2004.  During the firstquarter of 2004, we received a refund of federal income taxes of approximately$10.1 million.  Cash paid to advertise, marketand promote Infone during the first quarter of 2005 was $1.1 million compared to$6.0 million in the first quarter of 2004 (a difference of $4.9 million) andcash paid to or on behalf of employees decreased by approximately $8.6 millionprimarily as a result of the decrease in call volume from AT&TWireless.  In addition, cash paid tovendors and suppliers decreased by $3.8 million mainly due to cost cuttingefforts and the timing of payments for products and/or services, the costs ofwhich may have been accrued or expensed in a period other than that in which thepayments were made.

 

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*Cash flow from investing activities. *Cash used in investingactivities was $943,000 in the first quarter of 2005 resulting primarily fromcapital expenditures for equipment purchased for maintenance of ourcorporate-wide infrastructure, including expenditures intended to increaseefficiency in routing calls, and for equipment used in product developmentactivities.

 

*Cash flow from financing activities. *There was no significantcash expended or generated related to financing activities in the first quarterof 2005.

 

*Future capital needs and resources. *The primary uses of ourcapital in the near future are expected to be for operations, the continuedadvertising, marketing and promotion of Infone, the development or acquisitionof technologies, features and content complementary to our business and forgeneral corporate purposes.  Thesegeneral corporate purposes could include acquisitions, efforts to pursue andmarket new growth strategies, other corporate development activities andworking capital.

 

We believe our existing cash and cash equivalents andcash from operations will be sufficient to fund our operations for the nexttwelve months.  Although cash on hand(including restricted cash) at March 31, 2005 was approximately $45.8 million,future activities, including operating losses, advertising, marketing andpromoting Infone, execution of new product initiatives and growth strategiesand new product development and rollout may reduce available cash.  As necessary, we will attempt to establishborrowing or other financing arrangements in order to maintain adequateliquidity.   Depending on the developmentof our business, we believe we will have access to future financing sources,although we cannot provide assurance that financing will be available inamounts or on terms acceptable to us.

 

#### **Critical Accounting Policies**

 

We prepare our financial statements in conformity withaccounting principles generally accepted in the United States of America.  As such, we are required to make certainestimates, judgments and assumptions that we believe are reasonable based uponthe information available.  Theseestimates and assumptions affect the reported amounts of assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the periods presented. Management believes that of our significant accounting policies (seeNote 1 to the financial statements in our Annual Report on Form 10-K for the yearended December 31, 2004), those governing accounts receivable, the lives andrecoverability of the carrying amount of equipment and other long-lived assets,such as existing intangibles, estimates involving the levels of our contingentliabilities for workers’ compensation and medical self-insurance and estimatesof current and deferred taxes may involve a higher degree of judgment,estimation and uncertainty.

 

*Accountsreceivable. *Ourwholesale customer base has primarily consisted of large wireless telephonecarriers in the United States.  As such,we have had minimal risk of uncollectibility, at any point in time, related tooutstanding accounts receivable with these customers.  We have not experienced significantcollection issues or write-offs related to these customers.  Since our accounts receivable areconcentrated in relatively few of these wholesale customers, a significantchange in the liquidity or financial position of any one of them couldadversely impact collection of our accounts receivable and therefore have amaterial adverse effect on our financial position and future operatingresults.  In addition, with the launch ofour Infone service, we generate receivables from retail customers andbusinesses that may expose us to greater risk of uncollectible receivables thanwe have experienced in the past.

 

*Long-livedassets. *We evaluatethe remaining life and recoverability of equipment and other assets, includingpatents and trademarks and internally developed software, whenever events orchanges in circumstances indicate that the carrying amount of the assets maynot be recoverable.  At such time, weestimate the future cash flows expected from use of such assets and their eventualdisposition and, if lower than the carrying amounts, adjust the carrying amountof the assets to their estimated fair value. Because of our changing business conditions, including lower wholesaleprices and dependence on a relatively small number of customers for asignificant portion of our revenues, our estimates of future cash flows to begenerated from our operations could change materially, resulting in the needfor us to record additional impairment charges. In addition, as a result of our changing business conditions, we expectto adjust personnel, call centers and network capacities.  If any of these activities result in certainof our assets no longer being used in operations, we may need to record anadditional impairment charge.  As a resultof certain of the circumstances noted above, we evaluated our fixed assets forimpairment in accordance with

 

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Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” as of December 31,2004.  We determined that the value ofour fixed assets was impaired; thus, in the fourth quarter of 2004, we recordeda $32.2 million write-down of those assets to their estimated fair market value.

 

*Self-insurance reserves*.  Weself-insure a portion of our workers’ compensation and employee medicalinsurance programs.  We purchase stop loss coverage at varying levels inorder to mitigate our potential future losses.  The nature of theseliabilities, which may not fully manifest themselves for several years,requires significant judgment.  We evaluate pending workers’ compensationand medical claims periodically to determine the reasonableness of the reserveswe have recorded for such claims.  Our evaluationincludes estimates of potential incurred-but-unreported claims as well asfactors that may cause original estimates of such claims to increase over time,such as available claims data and historical trends and experience, as well asfuture projections of ultimate losses, expenses, premiums and administrativecosts.  We adjust these reserves if events or changes in circumstancesindicate that ultimate payments related to the claims will differ significantlyfrom the recorded reserves.  At March 31,2005, we have reserved approximately $6.8 and $1.3 million related to ourworkers’ compensation and medical programs, respectively.  While we believe that the amounts reservedfor these obligations are sufficient, any significant increase in the number ofclaims and costs associated with claims made under these plans could have amaterial effect on our financial position, results of operations or cash flows.

 

*Incometaxes*  Accounting for income taxes requires us toestimate our income taxes in each jurisdiction in which we operate.  Dueto differences in the recognition of items included in income for accountingand tax purposes, temporary differences arise which are recorded as deferredtax assets or liabilities.  We estimate the likelihood of recovery of theseassets, which is dependent on future levels of profitability and enacted taxrates.  Should any amounts be determined not to be recoverable, orassumptions change, we would be required to take a charge, which could have amaterial effect on our financial position, results of operations or cash flows.

 

### **Recent AccountingPronouncements**

 

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

 

#### **ITEM 3**.                  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

 

Substantially all of our liquid resources are invested in money marketinstruments and short-term debt securities, and therefore, the fair marketvalue of these investments is affected by changes in market interestrates.  However, these funds were investedin overnight money market instruments or debt securities with short-termeffective maturities at March 31, 2005 and were redeemable on a daily ormonthly basis.  All of the underlyinginvestments in the money market fund had maturities of three months orless.  The short-term investmentsconsisted of auction rate securities, of which the underlying securities, whilehaving long-term actual maturities, effectively reset as to interest rate,based on auction results, on terms typically between 7 and 49 days.  As a result, we believe the market riskarising from our holdings of financial instruments is minimal.  A hypothetical 1% fluctuation in interestrates would not have a material effect on our financial position, results ofoperations or cash flows.

 

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

 

Under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, we conductedan evaluation of our disclosure controls and procedures (as such term isdefined under Rule 13a-15(e) promulgated under the Securities Exchange Act of1934, as amended (the “Exchange Act”)) at the end of the period covered by thisquarterly report.  Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of the end of theperiod covered by this quarterly report.

 

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There has not been any change in our internal control over financialreporting, that occurred during the fiscal quarter covered by this report, thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

### **PARTII**.                OTHER INFORMATION

 

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

 

(a)          Exhibits

 

**10.1***                    Master Services Agreement for Directory AssistanceServices, by and between Metro One Telecommunications, Inc. and NextelOperations, Inc., dated as of January 1, 2005.

 

**31.1**                           Certification of Principal Executive Officerpursuant to Securities and Exchange Commission Rule 13a-14(a).

 

**31.2**                           Certification of Principal Financial Officerpursuant to Securities and Exchange Commission Rule 13a-14(a).

 

**32.1**                           Certification of Principal Executive Officer andPrincipal Financial Officer Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act Of 2002.

 

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*****                 Confidential treatment requested as to certainportions of this exhibit.

 

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SIGNATURES

 

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   | Date:    May  10, 2005 |                                          |
|--------|--------------------------------------------|-----------------------------------------------|
|   |                                       | METRO ONE  TELECOMMUNICATIONS, INC.           |
|   |                                       |                                          |
|   |                                       | By:                                           | /s/ Duane C. Fromhart |   |
|   |                                       | Duane C. Fromhart                             |
|   |                                       | Senior Vice President,                        |
|   |                                       | Chief Financial Officer                       |
|   |                                       | (Principal Financial  and Accounting Officer) |

 

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