** **

**UnitedStates**

**Securitiesand Exchange Commission**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

 

**ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)**

**OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For theQuarterly Period Ended March 31, 2002**

 

**o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)**

**OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**Commission File Number 0-27024**

 

 

**METRO ONE TELECOMMUNICATIONS, INC.**

(Exactname of registrant as specified in its charter)

 

 

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

 

 

###### **11200 Murray Scholls Place, Beaverton, Oregon  97007**

(Addressof principal executive offices) (zip code)

 

 

**(503) 643-9500**

(Registrant’stelephone number, including area code)

 

 

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

 

 

**Numberof shares of common stock outstanding as of April 30, 2002: 24,520,233 shares,no par value per share.**

 

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**METRO ONE TELECOMMUNICATIONS, INC.**

 

 

**INDEXTO FORM 10 - Q**

 

 

 
| Part I   | Financial Information                                                                       |   |
|----------|---------------------------------------------------------------------------------------------|--------|
|     |                                                                                        |   |
| Item 1.  | Financial Statements (Unaudited)                                                            |   |
|     |                                                                                        |   |
|     | Condensed Statements of Income  for the three months ended March 31, 2002 and 2001          |   |
|     |                                                                                        |   |
|     | Condensed Balance Sheets as of March 31,  2002 and December 31, 2001                        |   |
|     |                                                                                        |   |
|     | Condensed  Statements of Cash Flows for the three months ended March 31, 2002 and 2001      |   |
|     |                                                                                        |   |
|     | Notes to Condensed Financial  Statements                                                    |   |
|     |                                                                                        |   |
| Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|     |                                                                                        |   |
| Item  3. | Quantitative  and Qualitative Disclosures About Market Risk                                 |   |
|     |                                                                                        |   |
| Part II  | Other Information                                                                           |   |
|     |                                                                                        |   |
| Item  6. | Exhibits  and Reports on Form 8-K                                                           |   |
|     |                                                                                        |   |
|     | Signature                                                                                   |   |

 

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**Metro One Telecommunications, Inc.**

** **

**CondensedStatements of Income (Unaudited)**

** **
|                                       |   | **Three  Months Ended March 31,** |   |
|--------------------------------------------|--------|-----------------------------------|--------|
| **(In  thousands, except per share data)** |   | **2002**                          |   | **2001** |   |
| Revenues                                   |   | $                                 | 61,765 |   | $ | 50,216 |   |
|                                       |   |                              |   |   |   |
| Costs and  expenses:                       |   |                              |   |   |   |
| Direct operating                           |   | 35,250                            |   | 28,778 |   |
| General and  administrative                |   | 18,008                            |   | 14,474 |   |
|                                       |   | 53,258                            |   | 43,252 |   |
|                                       |   |                              |   |   |   |
| Income from  operations                    |   | 8,507                             |   | 6,964 |   |
|                                       |   |                              |   |   |   |
| Other income,  net                         |   | 263                               |   | 417 |   |
| Interest expense  and loan fees            |   | (9                                | )      | (852 | ) |
|                                       |   |                              |   |   |   |
| Income before  income taxes                |   | 8,761                             |   | 6,529 |   |
| Income tax  expense                        |   | 3,329                             |   | 1,526 |   |
|                                       |   |                              |   |   |   |
| Net income                                 |   | $                                 | 5,432  |   | $ | 5,003 |   |
|                                       |   |                              |   |   |   |
| Net income per  common share:              |   |                              |   |   |   |
| Basic                                      |   | $                                 | .22    |   | $ | .23 |   |
| Diluted                                    |   | $                                 | .22    |   | $ | .22 |   |

 

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

 

1

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**Metro One Telecommunications, Inc.**

 

**CondensedBalance Sheets (Unaudited)**

 
|                                                                                                                                                         |   | **March 31,** |    | **December  31,** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|---------|-------------------|------------|
| **(In  thousands)**                                                                                                                                          |   | **2002**      |    | **2001**          |       |
| **Assets**                                                                                                                                                   |   |          |    |              | ** ** |
|                                                                                                                                                         |   |          |    |              |       |
| Current assets:                                                                                                                                              |   |          |    |              |       |
| Cash and cash equivalents                                                                                                                                    |   | $             | 46,421  |              | $          | 54,592 |   |
| Accounts receivable                                                                                                                                          |   | 39,813        |    | 32,794            |       |
| Prepaid costs and other current assets                                                                                                                       |   | 6,289         |    | 4,907             |       |
|                                                                                                                                                         |   |          |    |              |       |
| Total current assets                                                                                                                                         |   | 92,523        |    | 92,293            |       |
|                                                                                                                                                         |   |          |    |              |       |
| Furniture, fixtures and equipment, net                                                                                                                       |   | 70,977        |    | 69,066            |       |
| Other assets                                                                                                                                                 |   | 8,569         |    | 8,400             |       |
|                                                                                                                                                         |   |          |    |              |       |
| Total assets                                                                                                                                                 |   | $             | 172,069 |              | $          | 169,759 |   |
|                                                                                                                                                         |   |          |    |              |       |
| **Liabilities  and Shareholders’ Equity**                                                                                                               |   |          |    |              |       |
|                                                                                                                                                         |   |          |    |              |       |
| Current liabilities:                                                                                                                                         |   |          |    |              |       |
| Accounts payable                                                                                                                                             |   | $             | 2,539   |              | $          | 1,276 |   |
| Accrued liabilities                                                                                                                                          |   | 5,209         |    | 6,180             |       |
| Accrued payroll and related costs                                                                                                                            |   | 7,036         |    | 11,090            |       |
|                                                                                                                                                         |   |          |    |              |       |
| Total current liabilities                                                                                                                                    |   | 14,784        |    | 18,546            |       |
|                                                                                                                                                         |   |          |    |              |       |
| Other long-term liabilities                                                                                                                                  |   | 3,913         |    | 3,844             |       |
|                                                                                                                                                         |   |          |    |              |       |
| Total liabilities                                                                                                                                            |   | 18,697        |    | 22,390            |       |
|                                                                                                                                                         |   |          |    |              |       |
| Commitments and contingencies                                                                                                                                |   | —        |    | —            |       |
|                                                                                                                                                         |   |          |    |              |       |
| Shareholders’ equity:                                                                                                                                   |   |          |    |              |       |
| Preferred stock, no par value; 10,000 shares authorized, no shares  issued or outstanding                                                                    |   | —        |    | —            |       |
| Common stock, no par value; 50,000 shares authorized, 24,511 and 24,463  shares issued and outstanding at March 31, 2002 and December 31, 2001  respectively |   | 118,105       |    | 117,534           |       |
| Retained earnings                                                                                                                                            |   | 35,267        |    | 29,835            |       |
|                                                                                                                                                         |   |          |    |              |       |
| Shareholders’ equity                                                                                                                                    |   | 153,372       |    | 147,369           |       |
|                                                                                                                                                         |   |          |    |              |       |
| Total liabilities and shareholders’ equity                                                                                                              |   | $             | 172,069 |              | $          | 169,759 |   |

 

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

 

2

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**Metro One Telecommunications, Inc.**

 

**CondensedStatements of Cash Flows (Unaudited)**

 
|                                                                                         |   | **Three  Months Ended March 31,** |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
| **(In  thousands)**                                                                          |   | **2002**                          |   | **2001** |   |
| Cash flows from operating activities:                                                        |   |                              |   |   |   |
| Net income                                                                                   |   | $                                 | 5,432  |   | $ | 5,003 |   |
| Adjustments to reconcile net income to net cash (used in) provided by  operating activities: |   |                              |   |   |   |
| Depreciation and amortization                                                                |   | 4,324                             |   | 3,504 |   |
| Loss on disposal of fixed assets                                                             |   | 5                                 |   | 16 |   |
| Tax benefit from stock option plans                                                          |   | 304                               |   | — |   |
| Changes in certain assets and liabilities:                                                   |   |                              |   |   |   |
| Accounts receivable                                                                          |   | (7,019                            | )      | 1,790 |   |
| Prepaid expenses and other assets                                                            |   | (1,641                            | )      | 875 |   |
| Accounts payable and other liabilities                                                       |   | (3,692                            | )      | (1,019 | ) |
|                                                                                         |   |                              |   |   |   |
| Net cash (used in) provided by operating activities                                          |   | (2,287                            | )      | 10,169 |   |
|                                                                                         |   |                              |   |   |   |
| Cash flows from investing activities:                                                        |   |                              |   |   |   |
| Capital expenditures                                                                         |   | (6,151                            | )      | (4,173 | ) |
| Acquisition of business                                                                      |   | —                            |   | (3,638 | ) |
|                                                                                         |   |                              |   |   |   |
| Net cash used in investing activities                                                        |   | (6,151                            | )      | (7,811 | ) |
|                                                                                         |   |                              |   |   |   |
| Cash flows from financing activities:                                                        |   |                              |   |   |   |
| Net repayment of line of credit                                                              |   | —                            |   | (4,750 | ) |
| Repayment of debt                                                                            |   | —                            |   | (34,241 | ) |
| Proceeds from issuance of common stock, net                                                  |   | —                            |   | 64,695 |   |
| Proceeds from exercise of stock options and employee stock purchases                         |   | 267                               |   | 254 |   |
|                                                                                         |   |                              |   |   |   |
| Net cash provided by financing activities                                                    |   | 267                               |   | 25,958 |   |
|                                                                                         |   |                              |   |   |   |
| Net (decrease) increase in cash and cash equivalents                                         |   | (8,171                            | )      | 28,316 |   |
|                                                                                         |   |                              |   |   |   |
| Cash and cash equivalents, beginning of period                                               |   | 54,592                            |   | 6,463 |   |
|                                                                                         |   |                              |   |   |   |
| Cash and cash equivalents, end of period                                                     |   | $                                 | 46,421 |   | $ | 34,779 |   |
|                                                                                         |   |                              |   |   |   |
| Summary of non-cash investing and financing activities:                                      |   |                              |   |   |   |
|                                                                                         |   |                              |   |   |   |
| Issuance of 155 shares of common stock in business combination                               |   | —                            |   | $ | 3,200 |   |

 

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

 

3

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**Metro One Telecommunications, Inc.**

** **

**Notesto Condensed****Financial Statements (Unaudited)**

 

**1.     Basisof Presentation**

The accompanyinginterim condensed financial statements have been prepared by Metro OneTelecommunications, Inc. without audit and in conformity with accountingprinciples generally accepted in the United States of America for interimfinancial information.  Accordingly,certain financial information and footnotes have been omitted orcondensed.  In the opinion ofmanagement, the condensed financial statements include all adjustments,consisting only of normal recurring adjustments, necessary for a fair statementof the results for the interim periods. These condensed financial statements and notes thereto should be read inconjunction with our audited financial statements included in our Annual Reporton Form 10-K for the year ended December 31, 2001.  The results of operations for the interim period shown in thisreport are not necessarily indicative of results for any future interim periodor the entire fiscal year.

 

 

**2.     NetIncome Per Share**

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

 

The calculation of weighted average outstanding shares is as follows:

 
|                                                                                       |   | **Three  Months Ended March 31,** |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                       |   | **2002**                          |   | **2001** |   |
|                                                                                       |   | **(in  thousands)**               |   |
| Weighted average  common shares outstanding used in computing Basic net income per share   |   | 24,487                            |   | 21,684 |   |
| Common stock  equivalents                                                                  |   | 708                               |   | 982 |   |
| Weighted average  common shares outstanding used in computing Diluted net income per share |   | 25,195                            |   | 22,666 |   |

 

For the threemonths ended March 31, 2002 and 2001, respectively, 286,000 and 357,000 sharesof common stock issuable upon the exercise of outstanding stock options havebeen excluded from the calculation of diluted net income per share since theireffect would have been anti-dilutive

 

On May 16, 2001,our Board of Directors approved a three-for-two stock split in the form of a50% stock dividend, distributing approximately 8,100,000 shares on June 29,2001.  All share and per share datapresented in the accompanying financial statements and notes thereto have beenrestated for the stock split.

 

 

**3.     Commitmentsand 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, 2002, we had one letter of credit outstanding in the amountof $900,000 related to our workers’ compensation program.  The letter of credit is secured by acertificate of deposit for the same amount. This commitment expired on April 1, 2002 and was replaced with a letterof credit in the amount of $3,300,000 expiring on April 1, 2003 for the samepurpose.

 

4

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**4.     SupplementalCash Flow Information**
|                        |   | **Three  Months Ended March 31,** |   |
|-----------------------------|--------|-----------------------------------|--------|
|                        |   | **2002**                          |   | **2001** |   |
|                        |   | **(in  thousands)**               |   |
| Cash paid for  interest     |   | $                                 | 9      |   | $ | 950 |   |
| Cash paid for  income taxes |   | $                                 | 845    |   | $ | 86 |   |

 

**5.     SignificantTransactions**

On January 31, 2001, our shareholders approved the issuance and sale toSonera Media Holding B.V. of 6,000,000 shares of our common stock for a netamount of approximately $64,600,000, which represented approximately 25.5% ofour outstanding common stock after the issuance.  Sonera Media Holding B.V. is a wholly owned subsidiary of SoneraCorporation, a publicly traded telecommunications company organized in Finland.  This transaction was completed in February2001.  During February and March 2001,we paid all outstanding debt with a portion of the proceeds from thistransaction.

 

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

 

 

**6.****             ****Recent Accounting Pronouncements**

 

In June 2001, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.”This new statement addresses financial accounting and reporting for goodwilland other intangible assets.  Under thisnew standard, goodwill and other intangible assets that are deemed to have anindefinite life will no longer be amortized. However, goodwill and other intangible assets will be tested forimpairment on an annual basis by applying a fair value based test.  We adopted SFAS No. 142 as of January 1,2002.  Other than the cessation ofamortization of goodwill, the adoption of SFAS No. 142 had no impact on ourresults of operations or cash flows for the three months ended March 31, 2002.   Goodwill amortization for the three monthsended March 31, 2001 totalled $52,000. As part of the adoption of SFAS No. 142, we are required to complete animpairment test on existing goodwill by June 30, 2002.  We have not yet completed this impairmenttest.  However, we do not believe theimpact of adoption will have a material impact on our financial position orresults of operations.

 

In August 2001, the FASB issued SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144establishes a single accounting model for long-lived assets to be disposed ofand replaces SFAS No. 121 “Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed of,” and Accounting Principles BoardOpinion No. 30, “Reporting Results of Operations — Reporting the Effects ofDisposal of A Segment of Business.” We adopted SFAS No. 144 effective January1, 2002.  The adoption of SFAS No. 144had no impact on our financial position or results of operations.

 

5

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**ITEM 2.****                                                    ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

                All statements andtrend analyses contained in this item and elsewhere in this report on Form 10-Qrelative to the future constitute “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are subjectto the business and economic risks faced by us and our actual results ofoperations may differ materially from those contained in the forward lookingstatements.  Readers are cautioned notto place undue reliance on these forward-looking statements, which speak onlyas of the date hereof.  We undertake noobligation to publicly release any revisions to these forward-looking statementsto reflect events or circumstances after the date hereof or to reflect theoccurrence of unanticipated events.

 

                Results ofoperations for the periods discussed below should not be considered indicativeof the results to be expected in any future period and fluctuations inoperating results may also result in fluctuations in the market price of ourcommon stock.  Our quarterly and annualoperating results have in the past and may in the future vary significantlydepending on factors such as changes in the telecommunications market, the additionor expiration of customer contracts, increased competition, changes in pricingpolicies by us or our competitors, lengthy sales cycles, lack of marketacceptance or delays in the introduction of new versions of our products orfeatures, the timing of the initiation of wireless services or their acceptancein new market areas by telecommunications customers, the timing and expense ofthe expansion of our national call center network, the general employmentenvironment, general economic conditions, significant world events and otherfactors, including but not limited to, factors detailed in our annual report onForm 10-K filed with the Securities and Exchange Commission.

 

 

**Overview**

 

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

 

                Under our contracts, the carriers agree to route someor all of their directory assistance and/or alphanumeric messaging calls tous.  We also offer our services tomultiple carriers within the same market. When a carrier’s subscribers dial a typical directory assistance number,such as “411,” “555–1212” or “00,” the calls are answered by our operatorsidentifying the service by that carrier’s brand name, such as “AT&TConnect,” or “Sprint PCS Directory Assistance.”

 

                Each carrier establishes its own directory assistancefee structure for its subscribers. Wireless subscribers typically pay fees ranging from $0.75 to $1.40 plusairtime charges for our services.  Webear no subscriber collection risk.

 

                We charge our carriers directly on a per call basis,with prices varying in some cases based on call volume.  In order to encourage our customers to routemore of their calls to us, our long-term strategy has been based in part onreducing the price we charge our customers. Our average revenue per call decreased in 2001 as call volume increased.  We expect a decrease in average revenue percall to continue in 2002, although at a lower rate than that of prior years, aswe believe this reduced pricing better positions us to retain and expandservice with existing carrier customers, to attract new wireless and landlinecarriers, and to achieve greater operating margins over time.

 

                In 2002, we expect to continue our call center andnetwork expansion to prepare for anticipated growth.  This growth is expected to come from existing customers in theform of new markets acquired, as well as from increased usage within geographicmarkets currently being served.  We willalso continue to opportunistically pursue additional significant newbusiness.  Our call center and networkexpansion efforts will increase our local service coverage and our capacity toprocess additional call volume.

 

                Our growth plan involves both capital expendituresand operating expenses, as we build infrastructure and recruit and trainqualified personnel.  To better serveour customers and strengthen our relationships, we attempt to match theoperating readiness of our call centers to the timing of when our customerstransition call volume to us. At times, our customers have experienced delays,and may experience some additional delays in the future, in the timing ofdelivery of call volume to us.  Thesedelays can increase our ongoing operating expenses with no correspondingincrease in revenues.  The result underthese conditions has been, and will likely continue to be, near-term reportedearnings that vary widely.  However, weintend to continue to pursue and prepare for significant additional call volumein order to seek to achieve greater earnings over the long run.

 

6

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

 

                In February 2001, we completedthe purchase of a company involved in developing web-based data extraction andprocessing technology.  The transactionhas been recorded using the purchase method of accounting.   The purchase price has been allocated tothe assets acquired, which consisted primarily of proprietary technology andintangibles and goodwill.  Pro formafinancial information is not presented, as the impact on our results ofoperations was not material.

 

**Resultsof Operations**

 

                Thefollowing table shows selected items of our statements of income data expressedas a percentage of revenues:

 
|                                 |   | **Three  Months Ended March 31,** |   |
|--------------------------------------|--------|-----------------------------------|--------|
|                                 |   | **2002**                          |   | **2001** |   |
| Revenues                             |   | 100.0                             | %      | 100.0 | % |
| Direct operating  expenses           |   | 57.1                              |   | 57.3 |   |
| General and  administrative expenses |   | 29.1                              |   | 28.8 |   |
| Income from operations               |   | 13.8                              |   | 13.9 |   |
| Other income,  net                   |   | 0.4                               |   | 0.8 |   |
| Interest and  loan fees              |   | 0.0                               |   | (1.7 | ) |
| Income before income taxes           |   | 14.2                              |   | 13.0 |   |
| Income tax  expense                  |   | 5.4                               |   | 3.0 |   |
| Net income                           |   | 8.8                               | %      | 10.0 | % |

 

*Comparison of First Quarter 2002 toFirst Quarter 2001*

 

                Revenues increased 23.0% to $61.8 million in thefirst quarter of 2002 from $50.2 million in the first quarter of 2001.  Call volume grew to approximately 129million calls in the first quarter of 2002 from approximately 99 million callsduring the first quarter of 2001.  Theseincreases resulted primarily from increased call volume under existingcontracts.

 

                Direct operating costs increased 22.5% to $35.3million in the first quarter of 2002 from $28.8 million in the first quarter of2001.  This increase was primarily dueto increased staffing costs associated with increased call volumes.  As a percentage of revenues, directoperating costs decreased to 57.1% in the first quarter of 2002 from 57.3% inthe first quarter of 2001.  This decreasewas due primarily to improved operating efficiencies and lower listings datacosts.

 

                General and administrative costs increased 24.4% to$18.0 million in the first quarter of 2002 from $14.5 million in the firstquarter of 2001.  This increase resultedprimarily from additional costs necessary to support our increased call volumesand related infrastructure.  As apercentage of revenues, general and administrative costs increased to 29.1% inthe first quarter of 2002 from 28.8% in the first quarter of 2001.  This increase resulted primarily fromadditional costs related to product development activities. Depreciation andamortization increased by 24.1% to $4.2 million in the first quarter of 2002from $3.4 million in the first quarter of 2001 due primarily to depreciationexpense on equipment purchased for new call centers, upgrades of existing callcenters and product development activities.

 

7

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                Other income, net for the threemonths ended March 31, 2002 was $263,000 consisting primarily of interestincome partially offset by loss on disposal of assets.  Other income, net for the three months endedMarch 31, 2001 was $417,000 and consisted primarily of interest incomepartially offset by loss on disposal of assets.  A decrease in interest income during the first quarter of 2002compared to the first quarter of 2001 resulted from a lower average interestrate received on cash equivalents invested in money market instruments.

 

                Interest expense and loan fees decreased98.9% to $9,000 in the first quarter of 2002 from $852,000 in the first quarterof 2001.  This decrease was primarilyattributable to a decrease in average outstanding debt.  All debt was paid in full as of March 31,2001.

 

                Income tax expense for the threemonths ended March 31, 2002 was $3.3 million, for an effective tax rate ofapproximately 38.0% reflecting the approximate combined net federal and statestatutory income tax rate.  Income taxexpense for the three months ended March 31, 2001 was $1.5 million, for aneffective tax rate of approximately 23.4%. The increase in effective tax rate in 2002 resulted from the use of netoperating loss carryforwards in the prior year.

 

 

**Liquidity and Capital Resources**

 

**               **Our cash and cash equivalents arerecorded at cost, which approximates fair market value.  As of March 31, 2002, we had $46.4 millionin cash and cash equivalents compared to $54.6 million at December 31,2001.  The net decrease of $8.2 millionresulted primarily from cash used in operations, mainly due to the timing ofpayments received from customers, and capital expenditures partially offset bycash received from the exercise of common stock options.

 

                Working capital was $77.7million at March 31, 2002, compared to $73.7 million at December 31, 2001.  This increase is due primarily to workingcapital provided by operations.

 

*                CashFlow from Operations. *Net cash used in operations was $2.3million for the three months ended March 31, 2002 resulting primarily fromincreases in accounts receivable and prepaid expenses and decreases in accountspayable.  This was partially offset bynet income adjusted for the effect of non-cash depreciation.

 

                *Cash Flow from InvestingActivities. *Cash used ininvesting activities was $6.2 million for the three months ended March 31, 2002resulting primarily from capital expenditures for equipment purchased for newcall centers, upgrades of existing call centers and product developmentactivities.

 

                *Cash Flow from FinancingActivities. *Net cashprovided by financing activities was $267,000 for the three months ended March31, 2002 resulting primarily from proceeds from the exercise of common stockoptions.

 

                *Future Capital Needs andResources. *The primary usesof our capital in the near future are expected to be the development oracquisition of technologies, features and content complementary to our businessand to expand our call center and network capacity to serve existing andpotential new customers and for general corporate purposes, including possibleacquisitions and other corporate development activities and workingcapital.  We anticipate that our capitalexpenditures will be approximately $25 to $30 million in 2002, resultingprimarily from projected call center expansions, increased network capacity andproduct development activities.

 

                We believe our existing cash andcash equivalents and cash from operations will be sufficient to fund ouroperations for the next twelve months.

 

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                *Recent Accounting Pronouncements. *In June 2001, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” This newstatement addresses financial accounting and reporting for goodwill and otherintangible assets.  Under this newstandard, goodwill and other intangible assets that are deemed to have anindefinite life will no longer be amortized. However, goodwill and other intangible assets will be tested forimpairment on an annual basis by applying a fair value based test.  We adopted SFAS No. 142 as of January 1,2002.  Other than the cessation ofamortization of goodwill, the adoption of SFAS No. 142 had no impact on ourresults of operations or cash flows for the three months ended March 31,2002.  Goodwill amortization for thethree months ended March 31, 2001 totalled $52,000.  As part of the adoption of SFAS No. 142, we are required to completean impairment test on existing goodwill by June 30, 2002.  We have not yet completed this impairmenttest.  However, we do not believe theimpact of adoption will have a material impact on our financial position orresults of operations.

 

                In August 2001, the FASB issuedSFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.”SFAS No. 144 establishes a single accounting model for long-lived assets to bedisposed of and replaces SFAS No. 121 “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed of,” and AccountingPrinciples Board Opinion No. 30, “Reporting Results of Operations — Reportingthe Effects of Disposal of A Segment of Business.” We adopted SFAS No. 144effective January 1, 2002.  The adoptionof SFAS No. 144 had no impact on our financial position or results ofoperations.

 

 

**ITEM3.****  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

                Substantially all of our liquidinvestments are invested in money market instruments, and therefore the fairmarket value of these instruments is affected by changes in market interestrates.  However, all of our investmentsat March 31, 2002 were invested in overnight money market instruments and wereredeemable on a daily basis.  All of theunderlying investments in the money market fund had maturities of three months orless.  As a result, we believe themarket risk arising from our holdings of financial instruments is minimal.  In addition, we may be exposed to interestrate risk primarily through use of short-term and long-term borrowings tofinance operations.  A hypothetical 1%fluctuation in interest rates would not have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

 

**PARTII.****                OTHERINFORMATION**

 

**ITEM6.****  EXHIBITS AND REPORTSON FORM 8-K**

 

                (a) Exhibits

 

                None

 

                (b) Reports filed on Form 8-K

 

                None

 

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SIGNATURE

 

 

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

 

 
|   |         | Metro One Telecommunications, Inc. |   |
|--------|--------------|------------------------------------|--------|
|   |         | Registrant                         |   |
|   |         |                               |   |
| Date:  | May 14, 2002 |                               |   |
|   |         |                               |   |
|   |         | /s/  Dale N.  Wahl            |   |
|   |         | Dale N. Wahl                       |   |
|   |         | Senior Vice President,             |   |
|   |         | Chief Financial Officer            |   |
|   |         | (Principal Financial Officer)      |   |
|   |         |                               |   |
|   |         | /s/ Duane C. Fromhart              |   |
|   |         | Duane C. Fromhart                  |   |
|   |         | Vice President, Finance            |   |
|   |         | (Principal Accounting Officer)     |   |

 

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