<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
COMMISSION FILE NUMBER 0-230 17
CHOICETEL CORPORATION
---------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1649949
--------- ----------
(STATE OF JURISDICTION OR IRS EMPLOYER ID NO.
INCORPORATION OF ORGANIZATION)
9724 10TH AVE. NORTH, PLYMOUTH, MN 55441
---------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 612-544-4876
------------
N/A
---
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED FROM LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
AS OF DATE OF FILING, THE COMPANY HAS 3,545,699 SHARES OUTSTANDING.
<PAGE>
CHOICETEL COMMUNICATIONS, INC.
FORM 10-QSB INDEX
AUGUST 14, 2000
Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
December 31, 1999 and June 30, 2000
Consolidated Statements of Operations -
Three months ended June 30, 1999 and 2000
Six months ended June 30, 1999 and 2000
Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and 2000
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis
Part II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports
(a) Financial Data Schedule
(b) Reports on 8-K
<PAGE>
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 the
undersigned thereunto duly authorized.
CHOICETEL COMMUNICATIONS, INC.
Date: August 14, 2000 By: /s/ Jack S. Kohler
---------------------------------
Jack S. Kohler
Vice President and Chief Financial Officer
<PAGE>
CONDENSED CONSOLIDATED
CHOICETEL COMMUNICATIONS, INC. BALANCE SHEETS
AND SUBSIDIARIES
================================================================================
<TABLE>
<CAPTION>
(Unaudited)
12/31/1999 6/30/2000
-------------------- ---------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 2,323,344 $ 4,442,988
Receivables 1,241,952 517,358
Prepaid and other assets 319,492 65,269
Refundable income taxes 300,000
Deferred taxes 302,000 100,245
-------------------- ---------------
Total current assets 4,186,788 5,425,860
Property and equipment, net 113,302 1,398,124
Goodwill on investment in subsidiary, net 940,790
Net assets of discontinued operations 4,849,926 2,597,095
-------------------- ---------------
$ 9,150,016 $ 10,361,869
==================== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Notes payable $ 350,000 $ 602,756
Current portion of long-term debt 383,190
Accounts payable 157,808 508,429
Accrued expenses 1,835,251 387,314
Income tax payable 221,000
-------------------- ---------------
Total current liabilities 2,947,249 1,498,499
Long-term liabilities, net of current portion 4,285 0
Minority interest 23,611 813,865
Shareholders' equity 6,174,871 8,049,505
-------------------- ---------------
$ 9,150,016 $ 10,361,869
==================== ===============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED
CHOICETEL COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS
AND SUBSIDIARIES THREE MONTHS ENDED JUNE 30
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
2000 1999
---------------- ---------------
<S> <C> <C>
Revenue $ 7,015 $ 27
Cost of sales 5,249 338
---------------- ---------------
Gross margin 1,766 (311)
Selling, general and administrative expenses 452,023
---------------- ---------------
Loss from continuing operations before income tax benefit (450,257) (311)
Minority interest 114,197
---------------- ---------------
Loss from continuing operations (336,060) (311)
Income (loss) from discontinued operations (net of income
tax of $32,667 for 1999) 39,926
---------------- ---------------
Net income (loss) $ (336,060) $ 39,926
================ ===============
Earnings (loss) per share:
Continuing operations, basic and diluted $ (0.10) $ (0.00)
=============== ==============
Discontinued operations, basic and diluted $ 0.00 $ 0.01
=============== ==============
Net income (loss), basic and diluted $ (0.10) $ 0.01
=============== ==============
Weighted average number of shares outstanding:
Basic 3,489,254 2,915,006
=============== ==============
Diluted 3,489,254 2,915,006
================ ==============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED
CHOICETEL COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS
AND SUBSIDIARIES SIX MONTHS ENDED JUNE 30
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
2000 1999
---------------- ---------------
<S> <C> <C>
Revenue $ 96,876 $ 438
Cost of sales 74,402 954
---------------- ---------------
Gross margin 22,474 (516)
Selling, general and administrative expenses 738,752
Loss from continuing operations before income tax benefit (716,278) (516)
Minority interest 220,605
Loss from continuing operations (495,673) (516)
Income (loss) from discontinued operations (net of income
tax credit of $48,296 for 1999) (58,512)
---------------- ----------------
Net income (loss) $ (495,673) $ (59,028)
================ ================
Earnings (loss) per share:
Continuing operations, basic and diluted $ (0.15) $ (0.00)
================ ================
Discontinued operations, basic and diluted $ 0.00 $ (0.02)
================ ================
Net income (loss), basic and diluted $ (0.15) $ (0.02)
================ ================
Weighted average number of shares outstanding:
Basic 3,213,075 2,915,006
================ ================
Diluted 3,213,075 2,915,006
================ ================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED
CHOICETEL COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS
AND SUBSIDIARIES SIX MONTHS ENDED JUNE 30
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
2000 1999
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (495,673) $ (59,028)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Deferred taxes 201,755 (48,000)
Depreciation and amortization 133,946 708,154
Minority interest loss (220,605)
Changes in operating assets and liabilities:
Receivables 724,594 (136,085)
Prepaid expenses 254,223 263,636
Accounts payable 350,621 75,604
Refundable income tax (300,000)
Deferred loss 292,655
Accrued expenses (1,354,815) (23,294)
Income tax payable (221,000)
----------------- ---------------
Net cash provided by operating activities (634,299) 780,987
----------------- ---------------
Cash flows from investing activities:
Purchase of equipment (1,402,822) (742,021)
Deposit received on sale of assets 325,000
Proceeds from sale of equipment and rental contracts 1,960,176
---------------- ---------------
Net cash provided by (used in) investing activities 557,354 (417,021)
---------------- ---------------
Cash flows from financing activities:
Collection of subscription receivable 225,000 10,000
Issuance of common stock 2,106,308
Issuance of long-term debt 450,000
Issuance of notes payable 252,756
Principal payments on long-term debt (387,475) (585,177)
----------------- ----------------
Net cash provided by (used in) financing activities 2,196,589 (125,177)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents $ 2,119,644 $ 238,789
Cash and cash equivalents, beginning 2,323,344 363,239
---------------- ---------------
Cash and cash equivalents, ending $ 4,442,988 $ 602,028
================ ===============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 845 $ 235,099
================ ===============
Cash paid for income taxes $ 320,000
================
Common stock issued for accrued expenses $ 93,121
================
Goodwill in additional subsidiary stock acquired $ 956,785
================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. Basis of presentation , nature of business and discontinued operations:
Basis of Presentation:
The condensed consolidated financial statements of the Company for the
three month and six month periods ended June 30, 2000 and 1999 have been
prepared by the Company without audit by the Company's independent
auditors. In the opinion of the Company's management, all adjustments
necessary to present fairly the financial position, results of operations,
and cash flows of the Company as of June 30, 2000 and for the periods then
ended have been made. Those adjustments consist only of normal and
recurring adjustments. The condensed consolidated balance sheet of the
Company as of December 31, 1999 has been derived from the audited
consolidated balance sheet of the Company as of that date.
Certain information and note disclosures normally included in the
Company's annual financial statements have been condensed or omitted.
These condensed consolidated financial statements should be read in
conjunction with a reading of the financial statements and notes thereto
included in the Company Form 10-K annual report for 1999 filed with the
Securities and Exchange Commission.
The results of operations for the six month period ended June 30, 2000 are
not necessarily indicative of the results to be expected in a full year.
Nature of business:
ChoiceTel Communications, Inc., and Subsidiaries (the Company) includes a
wholly owned subsidiary, ChoiceTel, Inc., and a 68.5% owned subsidiary,
Advants, Inc. (formerly Public Internet Access Holdings Corporation). The
Company was in the business of providing pay phone services in several
states and Puerto Rico. In December 1999 pursuant to a shareholders'
meeting, the Company decided to sell its pay phone operations. The Company
is currently focusing on Advants, Inc., (Advants) which is operating and
rapidly expanding a network of public internet access terminals (kiosks).
As part of this strategy, Advants raised additional equity outside of
ChoiceTel Communications, Inc., through a private placement memorandum to
fund this expansion.
Discontinued operations:
The Company decided to discontinue its pay phone operations in December
1999 (measurement date). The Company has estimated it will realize an
overall gain on the disposal of discontinued operations and accordingly,
has deferred losses from the measurement date. In 1999, the Company sold
all of its phones in two territories (the Northwest and Midwest) in
separate transactions totaling approximately $6.4 million. The Northwest
sale occurred prior to the measurement date and a gain of approximately
$32,000 is included in income from discontinued operations in 1999.
Additionally, the Company entered into an agreement with the Midwest
purchaser to sell 100% of the outstanding stock of ChoiceTel, Inc., the
Company's Local Exchange Carrier (LEC) subsidiary, for $100,000 subject to
approval by the public utilities commission. In March 2000, the Company
sold its operations in the Eastern United States for approximately
$2,000,000.
<PAGE>
The net assets of the discontinued operations consist of the following:
<TABLE>
<CAPTION>
12/31/1999 6/30/2000
---------- ---------
<S> <C> <C>
Cash $ 98,455 $ 95,051
Accounts receivable 41,753 50,225
Prepaid expenses 176,960 135,622
Property and equipment, net 2,828,458 1,887,393
Rental contracts, net 2,150,527
Deferred loss 66,280 933,159
Accrued expenses (512,507) (504,355)
--------- ---------
$ 4,849,926 $ 2,597,095
=============== ===============
</TABLE>
2. Property and equipment:
<TABLE>
<CAPTION>
12/31/1999 6/30/2000
---------- ---------
<S> <C> <C>
Office equipment $ 20,658 $ 112,938
Kiosks 54,682 919,327
Accumulated depreciation (10,738) (15,789)
In process software 48,700 381,648
-------- -------
$ 113,302 $ 1,398,124
============== ==============
</TABLE>
3. Common stock:
In April 2000, the Company issued 572,233 shares of common stock and
warrants to purchase an additional 629,457 shares of common stock at an
average price of $4.95 per share. The net proceeds were approximately
$2,125,000.
4. Contingencies:
Puerto Rico line charges:
In March 1998, the Company received verbal assurances from the Puerto
Rican Telephone Company (PRTC) that pay phone lines would be made
available and the charge would be a flat rate of $50.00 per month per
line. However, when phone bills were received in the Company's offices,
they included additional charges ranging from $0.13 to $0.26 per call. At
that time, the PRTC and the Company agreed that until a final decision was
reached on a rate case before the Puerto Rican Regulatory Board (PRRB),
the Company would not pay the per call charges. On May 27, 1998 the PRRB
ruled on that rate case and instructed the PRTC to reduce the per call
charges to between $.01 and $.03 per call, depending upon the routing of
the call. The PRTC appealed the ruling to the Court of Appeals, which
upheld the ruling. PRTC then appealed the ruling to the Puerto Rico
Supreme Court. From April through September 1998, the Company accrued
unpaid line charges at the rate of $0.15 per call. In October 1998, the
Company reduced the rate it was accruing line charges to $0.06 per call.
Since January 1, 1999, the Company has paid the PRTC $0.03 per call.
On June 15, 2000 the Supreme Court upheld the Court of Appeals ruling,
though a final determination of the date at which the new tariff became
effective is pending. The Company has made no change to accrued line
charges for the period prior to June 2000 pending a determination of the
effective date for the new tariff. The Company accrued $356,000 at
December 31, 1999 and $416,000 at June 30, 2000, related to this matter.
The actual liability will be determined once the Supreme Court issues an
effective date of the tariff.
Dial around Compensation:
The Company receives compensation for dial around activity related to its
pay phones. The rates are set by the Federal Committees Commission and are
subject to change both prospectively and retroactively. The financial
statements include a provision for $80,000 as an estimated liability for
amounts that may require repayment.
Computer Assisted Technologies (CAT):
The Company's financial statements include Notes payable of $350,000
related to a 1997 purchase from CAT of a route of pay telephones. The
purchase agreement included some contingent
<PAGE>
payments with which the Company and CAT have a disagreement and as a
result, the note has not been settled. In December 1999, a principal of
CAT filed a suit against the Company alleging that CAT is entitled to
additional shares and cash. During March 2000, the Company issued stock to
satisfy $93,121 in previously accrued expenses. Management believes it has
made adequate provision to cover any additional liability.
Sales Tax:
In May 2000 the Company settled a dispute with the Minnesota Department of
Revenue regarding all disputed sales tax issues between each party. As a
result of the settlement the financial statements reflect a $500,000
reduction in the deferred loss of discontinued operations.
5. Subsequent Event:
In July 2000 the Company invested $2,000,000 in Whitebox Statistical
Arbitrage Fund L.P. which seeks to earn superior short-term, risk-adjusted
returns through the use of a statistical arbitrage trading strategy. The
Company owns approximately 15% of the partnership.
<PAGE>
5. ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
EXCEPT FOR HISTORICAL INFORMATION CONTAINED IN THIS REPORT, INFORMATION
CONTAINED IN THIS FORM 10-KSB CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH CAN BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY", "WILL",
"EXPECT", "PLAN", "ESTIMATE", OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER
VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THERE ARE CERTAIN IMPORTANT
FACTORS THAT COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED BY
SOME OF THESE FORWARD-LOOKING STATEMENTS, INCLUDING WITHOUT LIMITATION, THE
EFFECTS OF CHANGES IN ECONOMIC CONDITIONS, REGULATORY CHANGES, TECHNOLOGICAL
CHANGES, COMPETITION IN THE INTERNET KIOSK BUSINESS, AND THE IMPACT IN THE EVENT
THE BUSINESS MODEL FOR THE INTERNET KIOSK BUSINESS IS NOT SUCCESSFUL. INVESTORS
ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS INVOLVE RISK AND UNCERTAINTY.
ChoiceTel Communications, Inc. (the "Company") was formed as a
Minnesota corporation in 1989. The Company installed its first payphones in
early 1990 and as of December 31, 1999, had an installed phone base of
approximately 1,950 payphones in four states and Puerto Rico. The Company has
grown its business through the installation of pay telephones in new areas and
through strategic asset acquisitions of payphone routes and related assets.
During 1999 the Company sold approximately 3,000 phones located primarily
Minnesota, Oregon, Idaho, Wisconsin and Nevada.
In 1999 the pay telephone industry generally, and the Company
specifically, continued to experience a significant and continuing decline in
revenues from the operation of public payphones. Management believed that the
decline was attributable primarily to the proliferation of wireless
communication devices, in particular cell phones. The Board of directors
concluded that the pay telephone industry was no longer a growth industry and in
order to successfully compete in the business, a provider must be significantly
larger than the Company was in order to take advantage of economies of scale.
Management determined that the Company lacked the resources to achieve the size
necessary to improve its economies of scale.
In 1999 the Board of Directors considered various strategic
alternatives for the Company that would maximize stockholder value. Ultimately,
The Board of Directors authorized management to sell its payphone assets.
Accordingly, by December 31, 1999 the Company completed sales of approximately
3,000 of its 5,000 payphones. In February 2000 the Company completed the sale of
an additional 900 phones leaving 1,300 phones located in Puerto Rico, which the
Company intends to divest during 2000, although there can be no assurances that
an acceptable transaction will be completed in 2000. The Company's strategic
goal is to continue to develop a profitable model for employing internet access
terminals through its majority owned subsidiary Advants, Inc. Accordingly, the
Company's payphone business is reflected as "discontinued operations" in the
financial statements.
The Company's internet subsidiary (Advants, Inc.) derives revenue from
three principal sources: sales of kiosks to third-party venders, user fees
collected in cash or credit card at the kiosk, and sponsorship revenues from
affiliates, sponsors and advertisers. All revenue is recognized as received, net
of processing charges. The principal costs related to ongoing operation include
telephone line charges, connectivity charges for internet access and commission
payments to site providers.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30 1999.
Total revenue for the six months ended June 30, 2000, were $97,000 compared
to virtually no activity in the 1999 period. This revenue was composed of
approximately $86,000 in equipment sales to third-party venders and
approximately $11,000 in user fees at the company's kiosks.
The cost of sales for the six months ended June 30, 2000 were $74,000
representing $60,000 in cost of goods sold and $14,000 in line charges, internet
service fees and site provider commissions. Selling, general and administrative
("SG&A") expenses were $739,000 and were spent to begin implementing the
Company's strategy for public internet access terminals.
<PAGE>
Discontinued operations earned $310,000 in the 2000 period compared to a
loss of $59,000 in the 1999 period. Because management estimates that the final
disposal of all payphone assets will be a gain, the loss on the discontinued
operations is being deferred until final disposal has been completed.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2000, the Company's operating activities
used $634,300. Investments in equipment used $1,403,000 and principal payments
on long-term debt used $387,000. Activities were funded with a $1,960,000 sale
of payphones, collection of $225,000 of subscription receivable, a $2,125,000
issuance of common stock, issuance of notes payable totalling $253,000 resulting
in a $2,120,000 increase in cash balances.
In April 2000 the Company issued 572,233 shares of common stock and
warrants to purchase an additional 629,457 shares of common stock at an average
price of $4.95 per share. The stock and warrants were issued in return for
$2,125,000 net of expenses. The Company also issued a convertible note to a
Director for $253,000. The note is convertible into 60,000 shares of common
stock and warrants to purchase 60,000 shares of common stock at a price of $4.95
per share if approved by the Company's shareholders at its annual meeting. On
July 26, 2000 the Company's shareholders did not approve the transaction.
<PAGE>
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
a. An annual meeting of shareholders was held on July 26, 2000.
b. The meeting resulted in the reelection of the following individuals as
follows:
<TABLE>
<CAPTION>
Nominee For Against
------- --- -------
<S> <C> <C>
Gary S. Kohler 1,772,239 205,200
Jeffrey R. Paletz 1,772,239 205,200
Robert A. Hegstrom 1,772,139 205,300
Mike Wigley 1,772,239 205,200
</TABLE>
c. Voting to approve an amendment to the 1997 Long-term Incentive and
Stock Option Plan to increase the number of shares reserved for
issuance under the plan as follows:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
<S> <C> <C> <C>
1,851,498 125,341 600 0
</TABLE>
d. Voting to consent to allow Michael Wigley to convert the Convertible
Promissory Note into shares of the Company's Common Stock and warrants
to purchase shares of the Company's Common Stock as follows:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
<S> <C> <C> <C>
653,107 1,324,032 300 0
</TABLE>
Item 6. Exhibits and Reports
(a) 27 - Financial Data Schedule
(b) Reports
