** **

** **

** **

**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  Period Ended June 30, 2002** |                                |
|                                              |                                |                                                    |   |
| **o**                                             |                                | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15 (d)** |   |
|                                              |                                | **OF THE SECURITIES EXCHANGE ACT OF 1934**              |   |
|                                              |                                |                                                    |   |
|                                              | **Commission  File Number 0-27024** |                                                    |

 

 

 

**METRO ONE TELECOMMUNICATIONS, INC.**

(Exactname of registrant as specified in its charter)

 

 
| **OREGON**                                                      |   | **93-0995165**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer Identification No.) |
|                                                            |   |                                 |
| **11200  Murray Scholls Place, Beaverton, Oregon   97007** |
| (Address of principal executive offices) (zip code)             |
|                                                            |   |                                 |
| **(503) 643-9500**                                              |
| (Registrant’s telephone number, including area code)       |

 

###### ****

 

**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 August 6, 2002: 24,590,244 shares,no par value per share.**

 

 

 

----

 

**METRO ONE TELECOMMUNICATIONS, INC.**

 

**INDEXTO FORM 10 - Q**

 

 

 
| Part I   | Financial Information                                |
|----------|------------------------------------------------------|
|     |                                                 |
| Item 1.  | Financial Statements (Unaudited)                     |
|     |                                                 |
|     | Condensed  Statements of Income for the three        |
|     | and six  months ended June 30, 2002 and 2001         |
|     |                                                 |
|     | Condensed  Balance Sheets as of                      |
|     | June  30, 2002 and December 31, 2001                 |
|     |                                                 |
|     | Condensed  Statements of Cash Flows for              |
|     | the  six months ended June 30, 2002 and 2001         |
|     |                                                 |
|     | Notes  to Condensed Financial Statements             |
|     |                                                 |
| Item  2. | Management’s  Discussion and Analysis of        |
|     | Financial  Condition and Results of Operations       |
|     |                                                 |
| Item  3. | Quantitative  and Qualitative Disclosures            |
|     | About  Market Risk                                   |
|     |                                                 |
| Part II  | Other Information                                    |
|     |                                                 |
| Item  4. | Submission  of Matters to a Vote of Security Holders |
|     |                                                 |
| Item 6.  | Exhibits and  Reports on Form 8-K                    |
|     |                                                 |
|     | Signature                                            |
|     |                                                 |

 

 

----

###  

 

** **
| **METRO  ONE TELECOMMUNICATIONS, INC.**         |
|-------------------------------------------------|
| **Condensed  Statements of Income (Unaudited)** |

 

 
|                                       |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|--------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **(In  thousands, except per share data)** |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
| Revenues                                   |   | $                                | 67,853 |                           | $      | 59,162 |   | $ | 129,618 |   | $ | 109,378 |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Costs and  expenses:                       |   |                             |   |                           |   |   |   |   |   |
| Direct operating                           |   | 37,518                           |   | 32,875                         |   | 72,768 |   | 61,652 |   |
| General and  administrative                |   | 18,482                           |   | 16,761                         |   | 36,491 |   | 31,235 |   |
|                                       |   | 56,000                           |   | 49,636                         |   | 109,259 |   | 92,887 |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Income from  operations                    |   | 11,853                           |   | 9,526                          |   | 20,359 |   | 16,491 |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Other income,  net                         |   | 198                              |   | 317                            |   | 461 |   | 734 |   |
| Interest expense  and loan fees            |   | (1                               | )      | (9                             | )      | (10 | ) | (862 | ) |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Income before  income taxes                |   | 12,050                           |   | 9,834                          |   | 20,810 |   | 16,363 |   |
| Income tax  expense                        |   | 4,579                            |   | 2,074                          |   | 7,908 |   | 3,600 |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Net income                                 |   | $                                | 7,471  |                           | $      | 7,760 |   | $ | 12,902 |   | $ | 12,763 |   |
|                                       |   |                             |   |                           |   |   |   |   |   |
| Earnings per  share:                       |   |                             |   |                           |   |   |   |   |   |
| Basic                                      |   | $                                | .30    |                           | $      | .32 |   | $ | .53 |   | $ | .56 |   |
| Diluted                                    |   | $                                | .30    |                           | $      | .31 |   | $ | .51 |   | $ | .53 |   |

 

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

 

1

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** **
| **METRO  ONE TELECOMMUNICATIONS, INC.**   |
|-------------------------------------------|
| **Condensed Balance Sheets  (Unaudited)** |

** **

** **
|                                                                                                                                                        |   | **June 30,** |       | **December  31,** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|------------|-------------------|------------|
| **(In  thousands)**                                                                                                                                         |   | **2002**     |       | **2001**          |       |
| **Assets**                                                                                                                                                  |   |         | ** ** |              | ** ** |
|                                                                                                                                                        |   |         |       |              |       |
| Current assets:                                                                                                                                             |   |         |       |              |       |
| Cash and cash equivalents                                                                                                                                   |   | $            | 46,375     |              | $          | 53,692 |   |
| Restricted cash                                                                                                                                             |   | 3,348        |       | 900               |       |
| Accounts receivable                                                                                                                                         |   | 48,401       |       | 32,794            |       |
| Prepaid costs and other current assets                                                                                                                      |   | 4,664        |       | 4,907             |       |
|                                                                                                                                                        |   |         |       |              |       |
| Total current assets                                                                                                                                        |   | 102,788      |       | 92,293            |       |
|                                                                                                                                                        |   |         |       |              |       |
| Furniture, fixtures and equipment, net                                                                                                                      |   | 72,088       |       | 69,066            |       |
| Goodwill                                                                                                                                                    |   | 4,432        |       | 4,432             |       |
| Other assets                                                                                                                                                |   | 4,271        |       | 3,968             |       |
|                                                                                                                                                        |   |         |       |              |       |
| Total assets                                                                                                                                                |   | $            | 183,579    |              | $          | 169,759 |   |
|                                                                                                                                                        |   |         |       |              |       |
| **Liabilities and Shareholders’  Equity**                                                                                                              |   |         |       |              |       |
|                                                                                                                                                        |   |         |       |              |       |
| Current liabilities:                                                                                                                                        |   |         |       |              |       |
| Accounts payable                                                                                                                                            |   | $            | 3,311      |              | $          | 1,276 |   |
| Accrued liabilities                                                                                                                                         |   | 3,751        |       | 6,180             |       |
| Accrued payroll and related costs                                                                                                                           |   | 9,532        |       | 11,090            |       |
|                                                                                                                                                        |   |         |       |              |       |
| Total current liabilities                                                                                                                                   |   | 16,594       |       | 18,546            |       |
|                                                                                                                                                        |   |         |       |              |       |
| Other long-term liabilities                                                                                                                                 |   | 5,263        |       | 3,844             |       |
|                                                                                                                                                        |   |         |       |              |       |
| Total liabilities                                                                                                                                           |   | 21,857       |       | 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, 24,579 and 24,463  shares issued and outstanding at June 30, 2002 and December 31, 2001  respectively |   | 118,985      |       | 117,534           |       |
| Retained earnings                                                                                                                                           |   | 42,737       |       | 29,835            |       |
|                                                                                                                                                        |   |         |       |              |       |
| Total shareholders’ equity                                                                                                                             |   | 161,722      |       | 147,369           |       |
|                                                                                                                                                        |   |         |       |              |       |
| Total liabilities and shareholders’ equity                                                                                                             |   | $            | 183,579    |              | $          | 169,759 |   |

 

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

 

2

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| **METRO  ONE TELECOMMUNICATIONS, INC.**            |
|----------------------------------------------------|
| **Condensed Statement of Cash Flows  (Unaudited)** |

 

 
|                                                                               |   | **Six Months  Ended June 30,** |   |
|------------------------------------------------------------------------------------|--------|--------------------------------|--------|
| **(In  thousands)**                                                                |   | **2002**                       |   | **2001** |   |
| Cash flows from operating activities:                                              |   |                           |   |   |   |
| Net income                                                                         |   | $                              | 12,902 |   | $ | 12,763 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                           |   |   |   |
| Depreciation and amortization                                                      |   | 8,926                          |   | 7,349 |   |
| Loss on disposal of fixed assets                                                   |   | 26                             |   | 122 |   |
| Tax benefit from stock option plans                                                |   | 467                            |   | — |   |
| Changes in certain assets and liabilities:                                         |   |                           |   |   |   |
| Accounts receivable                                                                |   | (15,607                        | )      | (7,397 | ) |
| Prepaid expenses and other assets                                                  |   | 1,059                          |   | 951 |   |
| Accounts payable and other liabilities                                             |   | (1,832                         | )      | 938 |   |
|                                                                               |   |                           |   |   |   |
| Net cash provided by operating activities                                          |   | 5,941                          |   | 14,726 |   |
|                                                                               |   |                           |   |   |   |
| Cash flows from investing activities:                                              |   |                           |   |   |   |
| Capital expenditures                                                               |   | (11,803                        | )      | (13,769 | ) |
| Acquisition of business                                                            |   | —                         |   | (3,639 | ) |
| Proceeds from sale of assets                                                       |   | 8                              |   | 195 |   |
|                                                                               |   |                           |   |   |   |
| Net cash used in investing activities                                              |   | (11,795                        | )      | (17,213 | ) |
|                                                                               |   |                           |   |   |   |
| Cash flows from financing activities:                                              |   |                           |   |   |   |
| Restricted cash to secure letter of credit                                         |   | (2,448                         | )      | — |   |
| Net repayment of line of credit                                                    |   | —                         |   | (4,750 | ) |
| Repayment of debt                                                                  |   | —                         |   | (34,241 | ) |
| Proceeds from issuance of common stock, net                                        |   | —                         |   | 64,670 |   |
| Proceeds from exercise of stock options and employee stock purchases               |   | 985                            |   | 1,526 |   |
|                                                                               |   |                           |   |   |   |
| Net cash (used in) provided by financing activities                                |   | (1,463                         | )      | 27,205 |   |
|                                                                               |   |                           |   |   |   |
| Net (decrease) increase in cash and cash equivalents                               |   | (7,317                         | )      | 24,718 |   |
|                                                                               |   |                           |   |   |   |
| Cash and cash equivalents, beginning of period                                     |   | 53,692                         |   | 6,463 |   |
|                                                                               |   |                           |   |   |   |
| Cash and cash equivalents, end of period                                           |   | $                              | 46,375 |   | $ | 31,181 |   |
|                                                                               |   |                           |   |   |   |
|                                                                               |   |                           |   |   |   |
| 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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**METROONE TELECOMMUNICATIONS, INC.**

**Notes to Condensed FinancialStatements (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.  Certainbalances in the prior period financial statements have been reclassified tocurrent period presentations.  Suchreclassifications had no effect on reported net income.

 

 

**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 per sharefor all periods.

 

The calculation of weighted average outstanding shares is as follows:

 
|                                                |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|-----------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
|                                                |   | **(in  thousands)**              |   |
| Weighted average  shares outstanding — Basic   |   | 24,555                           |   | 24,035                         |   | 24,521 |   | 22,872 |   |
| Dilutive effect  of stock options                   |   | 560                              |   | 1,242                          |   | 624 |   | 1,113 |   |
|                                                |   |                             |   |                           |   |   |   |   |   |
| Weighted average  shares outstanding — Diluted |   | 25,115                           |   | 25,277                         |   | 25,145 |   | 23,985 |   |

 

For the threemonths ended June 30, 2002, 935,000 shares of common stock issuable upon theexercise of outstanding stock options have been excluded from the calculationof diluted net income per share since their effect would have beenanti-dilutive.  For the six months endedJune 30, 2002, 897,000 shares of common stock issuable upon the exercise ofoutstanding stock options have been excluded from the calculation of dilutednet income per share for the same reason. There were no shares excluded from the calculation of diluted net incomeper share for the three or six months ended June 30, 2001.

 

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 June 30, 2002, we had one letter of credit outstanding in the amountof $3,348,000 related to our workers’ compensation program.  The letter of credit is secured by acertificate of deposit for the same amount and is recorded as restrictedcash.  This commitment expires on April1, 2003, however, it is likely to be renewed for as long as we maintain apartially self-insured workers’ compensation program.

 

4

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**4.     SupplementalCash Flow Information**
|                        |   | **Six Months  Ended June 30,** |   |
|-----------------------------|--------|--------------------------------|--------|
|                        |   | **2002**                       |   | **2001** |   |
|                        |   | **(in  thousands)**            |   |
| Cash paid for  interest     |   | $                              | 10     |   | $ | 959 |   |
| Cash paid for  income taxes |   | $                              | 3,530  |   | $ | 1,887 |   |

 

 

**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 then-outstanding common stock after the issuance.  Sonera Media Holding B.V. is a wholly owned subsidiary of SoneraCorporation, a publicly traded telecommunications company organized inFinland.  This transaction was completedin February 2001.  By March 2001, wepaid all then-outstanding debt with a portion of the proceeds from thistransaction.

 

In February 2001,we purchased a company involved in developing web-based data extraction andprocessing technology.  The transactionwas recorded using the purchase method of accounting.  The purchase price was allocated to the assets acquired, whichconsisted primarily of proprietary technology and goodwill and other intangibleassets.  Pro forma financial informationis not presented, as the impact on 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 or six month periods ended June2002.   Goodwill amortization for thethree and six month periods ended June 30, 2001 totaled $103,000 and $155,000,respectively.  As part of the adoptionof SFAS No. 142, we completed an initial impairment test on existing goodwill.The adoption of this standard and the impairment assessment did not have amaterial impact on our financial position or results 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.

 

In July 2002, the FASB issued SFAS No. 146 “Accounting for CostsAssociated with Exit or Disposal Activities.” The statement requires that a liability for a cost associated with anexit or disposal activity be recognized when the liability is incurred.  Under previous guidance, a liability for anexit cost was recognized at the date of an entity’s commitment to an exitplan.  The provisions of the statementare effective for exit or disposal activities that are initiated after December31, 2002.

 

5

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**ITEM 2.                  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL**

#### **                                CONDITION AND RESULTS OF OPERATIONS**

 

                All statementscontained in this item and elsewhere in this report on Form 10-Q relative tothe future constitute “forward-looking statements” within the meaning of thePrivate Securities Litigation Reform Act of 1995.  These forward-looking statements are subject to the business andeconomic risks faced by us and our actual results of operations may differmaterially from those contained in the forward-looking statements.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datehereof.  We undertake no obligation topublicly release any revisions to these forward-looking statements to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events.

 

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

 

 

#### **Overview**

 

                We are the leading developer and provider of EnhancedDirectory Assistance® and other enhanced telecom services.  We primarily contract with wireless carriersto provide our services to their subscribers.

 

                Under our contracts, the carriers agree to route someor all of their directory assistance and/or alphanumeric messaging calls tous.  We also offer our services tomultiple carriers within the same market. When a carrier’s subscribers dial a 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&TWireless Connect,” or “Sprint PCS.”

 

                Each carrier establishes its own directory assistancefee structure for its subscribers. Generally, wireless subscribers pay fees to carriers ranging from $0.75to $1.40 plus airtime charges for our services.  We bear no subscriber collection risk.

 

                We charge our carrier customers directly on a percall 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 volumeincreased.  We expect a decrease inaverage revenue per call to continue in 2002, although at a lower rate thanthat of prior years, as we believe this reduced pricing better positions us toretain and expand service with existing carrier customers, to attract newwireless and landline carriers, and to achieve greater operating margins overtime.

 

                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.

 

6

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                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 with them, we attempt to matchthe operating readiness of our call centers to the time scheduled for ourcustomers to transition additional call volume to us.  At times, our customers have experienced delays, and mayexperience some additional delays in the future, in the timing of delivery ofcall volume to us.  These delays canincrease our ongoing operating expenses with no corresponding increase inrevenues.  The result under theseconditions has been, and will likely continue to be, reported earnings thatvary widely from one period to another. However, we intend to continue to pursue and prepare for significantadditional call volume in order to seek to achieve greater earnings over thelong run.

 

                On January 31, 2001, our shareholders approved the issuanceand sale to Sonera Media Holding B.V. of 6,000,000 shares of our common stockfor a net amount of approximately $64,600,000, which represented approximately25.5% of our then-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.  By March2001, we paid all then-outstanding debt with a portion of the proceeds from thistransaction.

 

                In February 2001, we purchased acompany involved in developing web-based data extraction and processingtechnology.  The transaction wasrecorded using the purchase method of accounting.   The purchase price was allocated to the assets acquired, whichconsisted primarily of proprietary technology and goodwill and other intangibleassets.  Pro forma financial informationis not presented, as the impact on our results of operations was not material.

 

**Resultsof Operations**

 

                Thefollowing table shows selected income statement data expressed as a percentageof revenues:

                        
|                              |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|-----------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                              |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
| Revenues                          |   | 100.0                            | %      | 100.0                          | %      | 100.0 | % | 100.0 | % |
| Direct operating  costs           |   | 55.3                             |   | 55.6                           |   | 56.1 |   | 56.4 |   |
| General and  administrative costs |   | 27.2                             |   | 28.3                           |   | 28.2 |   | 28.6 |   |
| Income from operations            |   | 17.5                             |   | 16.1                           |   | 15.7 |   | 15.1 |   |
| Other income,  net                |   | 0.3                              |   | 0.5                            |   | 0.4 |   | 0.7 |   |
| Interest expense  and loan fees   |   | (0.0                             | )      | (0.0                           | )      | (0.0 | ) | (0.8 | ) |
| Income before income taxes        |   | 17.8                             |   | 16.6                           |   | 16.1 |   | 15.0 |   |
| Income tax  expense               |   | 6.8                              |   | 3.5                            |   | 6.1 |   | 3.3 |   |
| Net income                        |   | 11.0                             | %      | 13.1                           | %      | 10.0 | % | 11.7 | % |

 

*Comparison of Second Quarter 2002 toSecond Quarter 2001*

 

                Revenues increased 14.7% to $67.9 million in thesecond quarter of 2002 from $59.2 million in the second quarter of 2001.  Call volume grew to approximately 142million calls from approximately 119 million calls.  These increases resulted primarily from increased call volumeunder existing contracts.

 

                Direct operating costs increased 14.1% to $37.5million from $32.9 million.  Thisincrease was primarily due to increased staffing costs associated withincreased call volumes.  As a percentageof revenues, direct operating costs decreased to 55.3% from 55.6%.  This decrease was due primarily to improvedoperating efficiencies and lower costs of accessing information content.

 

7

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                General and administrative costs increased 10.3% to$18.5 million from $16.8 million.  Thisincrease resulted primarily from additional costs necessary to support ourincreased call volumes and related infrastructure.  As a percentage of revenues, general and administrative costsdecreased to 27.2% from 28.3%.  Thisdecrease resulted primarily from efficiencies associated with the expansion ofour national network of call centers. Depreciation and amortization increased by 20.7% to $4.4 million from$3.7 million due primarily to depreciation expense on equipment purchased fornew call centers, upgrades of existing call centers and product developmentactivities.

 

                Other income, net for the threemonths ended June 30, 2002 and 2001 was $198,000 and $317,000, respectively,and consisted primarily of interest income partially offset by losses ondisposal of assets in both periods.  Adecrease in interest income during the second quarter of 2002 compared to thesecond quarter of 2001 resulted from a lower average interest rate received oncash equivalents invested in money market instruments.

 

                Income tax expense for the threemonths ended June 30, 2002 was $4.6 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 June 30, 2001 was $2.1 million, for aneffective tax rate of approximately 21.1%. The increase in income tax expense and the effective tax rate in 2002resulted from the use of significant net operating loss carryforwards in theprior year.

 

*Comparison of the First Six Months of2002 to the First Six Months of 2001*

 

                Revenues increased 18.5% to $129.6 million in thefirst six months of 2002 from $109.4 million in the first six months of 2001.Call volume grew to approximately 270 million calls from approximately 218million calls. These increases resulted primarily from the addition of newsubscribers and new markets from existing customers, as well as increased usageof our services by existing subscribers.

 

                Direct operating costs increased 18.0% to $72.8million from $61.7 million. This increase was primarily due to increasedstaffing costs associated with increased call volumes. As a percentage ofrevenues, direct operating costs decreased to 56.1% from 56.4%. This decreasewas due primarily to operating efficiencies and lower costs of accessinginformation content.

 

                General and administrative costs increased 16.8% to$36.5 million from $31.2 million. This increase resulted primarily fromadditional costs necessary to support our larger base of call centers andincreased call volumes. As a percentage of revenues, general and administrativecosts decreased to 28.2% from 28.6%. This decrease resulted primarily fromefficiencies associated with the growth of our business.  Depreciation and amortization increased by21.5% to $8.9 million from $7.3 million due primarily to equipment purchasedfor new call centers, upgrades of existing call centers and product developmentactivities.

 

                Other income, net for the sixmonths ended June 30, 2002 and 2001 was $461,000 and $734,000, respectively,and consisted primarily of interest income partially offset by losses ondisposal of assets.

 

                Interest expense and loan feesdecreased 98.8% to $10,000 in the first six months of 2002 from $862,000 in thefirst six months of 2001. This decrease was attributable to a decrease inaverage outstanding debt.  Allthen-outstanding debt was paid in full as of March 31, 2001.

 

                Income tax expense for the sixmonths ended June 30, 2002 was $7.9 million, for an effective tax rate ofapproximately 38.0%. Income tax expense for the six months ended June 30, 2001was $3.6 million, for an effective tax rate of approximately 22.0%.  The increase in income tax expense and theeffective tax rate in 2002 resulted from the use of significant net operatingloss carryforwards in 2001.

 

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

 

**               **Our cash and cash equivalents arerecorded at cost, which approximates fair market value.  As of June 30, 2002, we had $46.4 million incash and cash equivalents compared to $53.7 million at December 31, 2001.  The net decrease of $7.3 million resultedprimarily from cash used in operations, mainly due to the timing of paymentsreceived from customers, capital expenditures and cash restricted as securityfor a letter of credit, partially offset by cash received from the exercise ofcommon stock options.

 

                Working capital was $86.2million at June 30, 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 provided by operations was $5.9million for the six months ended June 30, 2002 resulting primarily from netincome adjusted for the effect of non-cash depreciation, partially offset byincreases in accounts receivable.

 

                *Cash Flow from InvestingActivities. *Cash used ininvesting activities was $11.8 million for the six months ended June 30, 2002resulting primarily from capital expenditures for equipment purchased for newcall centers, upgrades of existing call centers and product developmentactivities.

 

                *Cash Flow from FinancingActivities. *Net cash used infinancing activities was $1.5 million for the six months ended June 30, 2002resulting primarily from cash used to secure a letter of credit partiallyoffset by proceeds from the exercise of common stock options.

 

                *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 possibleadvertising and promotion, acquisitions and other corporate development activitiesand working capital.  We anticipate thatour capital expenditures will be approximately $25 to $30 million in 2002,resulting primarily from projected call center expansions, increased networkcapacity and product development activities.

 

                We believe our existing cash andcash equivalents, cash from operations and borrowing capacity will besufficient to fund our operations for the next twelve months.

 

### **SignificantAccounting Policies**

 

            Weprepare our financial statements in conformity with accounting principlesgenerally accepted in the United States of America.  As such, we are required to make certain estimates, judgments andassumptions that we believe are reasonable based upon the informationavailable.  These estimates andassumptions affect the reported amounts of assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the periods presented. Management believes that of our significant accounting policies, thosegoverning accounts receivable and the lives and recoverability of the carryingamount of equipment and other long-lived assets, such as existing intangibles,internally developed software and goodwill, may involve a higher degree ofjudgment, estimation and uncertainty.

 

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

 

                We evaluate the remaining lifeand recoverability of equipment and other assets, including patents andtrademarks and internally developed software, whenever events or changes incircumstances indicate that the carrying amount of the asset may not berecoverable.  At such time, we estimatethe future cash flows expected upon eventual disposition and, if lower than thecarrying amount, adjust the carrying amount of the asset to its estimated fairvalue.

 

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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 June 30, 2002.  Goodwill amortization for the three monthsended June 30, 2001 totaled $52,000.  Aspart of the adoption of SFAS No. 142, we completed an initial impairment teston existing goodwill.  The adoption ofthis standard and the impairment assessment did not have a material impact onour financial position or results of operations.

 

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

 

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

 

#### ** **

#### **ITEM 3.                  QUANTITATIVE AND QUALITATIVEDISCLOSURES 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 June 30, 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 monthsor less.  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.

 

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

 

 

### **ITEM 4.                  SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

The following is adescription of matters submitted to a vote of our stockholders at an annualmeeting of stockholders held on May 29, 2002:

 
| A. |   | A. Jean de  Grandpré and Timothy A. Timmins were elected as directors to hold office  until the 2005 annual meeting and until their successors are elected and  qualified.  Votes cast for and votes  withheld with respect to each nominee were as follows: |   |
|----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

 
|                     |   | **Votes For** |   | **Votes  Withheld** |   |
|--------------------------|--------|---------------|--------|---------------------|--------|
| A. Jean de Grandpré |   | 22,049,500    |   | 236,592             |   |
| Timothy A. Timmins       |   | 22,050,610    |   | 235,532             |   |

 

 
| B. |   | A brief  description of each other matter voted upon at the annual meeting and the  votes cast for, votes cast against and votes withheld as to each such matter  is as follows: |   |
|----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

 
|                                                                                                                                         |   | **Votes For** |   | **Votes  Against** |   | **Votes  Withheld** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|--------|--------------------|--------|---------------------|--------|
| Proposal to approve an amendment of our 1994 Stock  Incentive Plan to increase the number of shares of common stock authorized  for issuance |   | 17,152,944    |   | 5,089,082          |   | 44,116              |   |
| Proposal to ratify the selection of Deloitte &  Touche LLP as our independent auditors for the year ending December 31, 2002             |   | 22,220,636    |   | 54,229             |   | 11,277              |   |

#### ** **

#### ** **

### **ITEM 6.                  EXHIBITS AND REPORTS ON FORM8-K**

 
| (a)      |   | Exhibits                                                                                                                     |       |
|----------|--------|------------------------------------------------------------------------------------------------------------------------------|------------|
|     |   |                                                                                                                         | ** ** |
| **99.1** |   | **Certifications Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002** | ** ** |
|     |   |                                                                                                                         |       |
| (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:  | August 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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