<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 MARCH 31, 2000
COMMISSION FILE NUMBER 0-230 17
CHOICETEL CORPORATION
(EXACT NAME OF REGISTRANT 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 612-544-1260
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
MAY 15, 2000
Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
December 31, 1999 and March 31, 2000
Consolidated Statements of Operations -
Three months ended March 31, 1999 and 2000
Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and 2000
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis
Part II: Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
(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: May 15, 2000 By: /s/ Jack S. Kohler
---------------------------------
Jack S. Kohler
Vice President and Chief Financial Officer
<PAGE>
CHOICETEL COMMUNICATIONS, INC. CONDENSED CONSOLIDATED
AND SUBSIDIARIES BALANCE SHEETS
===============================================================================
<TABLE>
<CAPTION>
(Unaudited)
12/31/1999 3/31/2000
-------------------- --------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 2,323,344 $ 3,977,349
Receivables 1,241,952 560,599
Prepaid and other assets 319,492 444,083
Refundable income taxes 300,000
Deferred taxes 302,000 262,552
-------------------- --------------
Total current assets 4,186,788 5,544,583
Property and equipment, net 113,302 421,326
Net assets of discontinued operations 4,849,926 2,480,958
-------------------- --------------
$ 9,150,016 $ 8,446,867
==================== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Notes payable $ 350,000 $ 350,000
Current portion of long-term debt 383,190
Accounts payable 157,808 349,221
Accrued expenses 1,835,251 1,470,689
Income tax payable 221,000
-------------------- --------------
Total current liabilities 2,947,249 2,169,910
Long-term liabilities, net of current portion 4,285 0
Minority interest 23,611 7,204
Shareholders' equity 6,174,871 6,269,753
------------------- --------------
$ 9,150,016 $ 8,446,867
================== ==============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED
CHOICETEL COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS
AND SUBSIDIARIES THREE MONTHS ENDED MARCH 31
(UNAUDITED)
-----------
==============================================================================
<TABLE>
<CAPTION>
2000 1999
---------------- ---------------
<S> <C> <C>
Revenue $ 89,861 $ 27
Cost of sales 69,153 338
---------------- ---------------
Gross margin 20,708 (311)
Selling, general and administrative expenses 286,729
---------------- ---------------
Loss from continuing operations before minority interest (266,021) (311)
Minority interest 106,408
---------------- ---------------
Loss from continuing operations (159,613) (311)
Income (loss) from discontinued operations (net of income
tax credit of $80,963 for 1999) (98,643)
---------------- ---------------
Net income (loss) $ (159,613) $ (98,954)
================ ===============
Earnings (loss) per share:
Continuing operations, basic and diluted $ (0.05) $ (0.00)
=============== ===============
Discontinued operations, basic and diluted $ 0.00 $ (0.03)
=============== ===============
Net income (loss), basic and diluted $ (0.05) $ (0.03)
=============== ===============
Weighted average number of shares outstanding:
Basic 2,973,466 2,915,006
=============== ================
Diluted 2,973,466 2,915,006
================ ===============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED
CHOICETEL COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS
AND SUBSIDIARIES THREE MONTHS ENDED MARCH 31
(UNAUDITED)
===============================================================================
<TABLE>
<CAPTION>
2000 1999
----------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (159,613) $ (98,954)
Adjustments to reconcile net income (loss)to net
cash provided by operating activities:
Deferred taxes 39,448 (80,963)
Depreciation and amortization 1,663 348,252
Minority interest loss (106,408)
Changes in operating assets and liabilities:
Receivables 681,353 (139,340)
Prepaid expenses (124,591) 166,756
Accounts payable 191,413 24,049
Refundable income taxes (300,000)
Assets of discontinued operations 435,165
Accrued expenses (271,439) 31,363
Income tax payable (221,000)
----------------- ---------------
Net cash provided by operating activities 165,991 251,747
---------------- ---------------
Cash flows from investing activities:
Purchase of equipment and rental contracts (309,687) (395,437)
Proceeds from sale of equipment and rental contracts 1,960,176
---------------- ---------------
Net cash provided by (used in) investing activities 1,650,489 (395,437)
---------------- ---------------
Cash flows from financing activities:
Collection of subscription receivable 225,000 10,000
Issuance of long-term debt 450,000
Principal payments on long-term debt (387,475) (293,645)
----------------- ----------------
Net cash provided by (used in) financing activities (162,475) 166,355
---------------- ---------------
Net increase (decrease) in cash and cash equivalents $ 1,654,005 $ 22,081
Cash and cash equivalents, beginning 2,323,344 363,239
---------------- ---------------
Cash and cash equivalents, ending $ 3,977,349 $ 385,320
================ ===============
Cash paid for income taxes $ 320,000
================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 845 $ 38,663
================ ===============
Common stock issued for accrued expenses $ 93,121
================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==============================================================================
1. Basis of presentation:
The condensed consolidated financial statements of the Company for the
three-month period ended March 31, 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 March 31, 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 three month period ended March 31,
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 60% 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 not recorded a loss 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.
The results of discontinued operations up to the measurement date are as
follows:
<TABLE>
<CAPTION>
1999
------------------
<S> <C>
Revenue $ 10,376,055
Cost of service 4,885,419
--------------------
Gross margin 5,490,636
Selling, general and administrative 4,811,306
Change to sales tax contingency
Interest expense 476,440
-------------------
Income before taxes 202,890
Income taxes 42,000
--------------------
Income from discontinued operations $ 160,890
====================
</TABLE>
<PAGE>
The net assets of the discontinued operations consist of the following:
<TABLE>
<CAPTION>
12/31/1999 3/31/2000
------------------- ------------------
<S> <C> <C>
Cash $ 98,455 $ 112,752
Accounts receivable 41,753 40,805
Prepaid expenses 176,960 162,502
Property and equipment, net 2,828,458 1,708,246
Rental contracts, net 2,150,527
Deferred loss 66,280 970,211
Accrued expenses (512,507) (513,558)
------------------ ------------------
$ 4,849,926 $ 2,480,958
================== ==================
</TABLE>
2. Summary of significant accounting policies:
Principles of consolidation:
The consolidated financial statements for 1999 and 2000 include the
accounts of ChoiceTel Communications, Inc. and its wholly owned
subsidiary, ChoiceTel, Inc. and its 60% owned subsidiary, Advants, Inc.
All material intercompany balances have been eliminated.
Concentration of credit risk:
The Company maintains its cash in bank deposit accounts at financial
institutions where balances, at times, may exceed federally insured
limits. It is management's opinion that the risk of loss is minimal.
Property and equipment and depreciation methods:
Property and equipment is recorded at cost. Depreciation is being provided
by the straight-line method over the estimated useful lives, principally,
seven years, of the related assets.
Capitalization of computer software development costs:
The company capitalizes certain costs incurred in the development of
software, including external direct material and service costs, once
technical feasibility is reached.
Income taxes:
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes. Deferred taxes are recognized from differences between the tax
basis of assets and liabilities and their reported amounts in the
financial statements. The deferred tax assets and liabilities represent
the future tax expense of those differences.
The Companies file a consolidated tax return that includes ChoiceTel
Communications, Inc. and ChoiceTel, Inc. Advants, Inc. files a separate
tax return.
Stock-based compensation:
The Company accounts for its stock options in accordance with the
provisions of Accounting Principles Board Opinion No. 25 (APB No. 25),
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. As
such, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
The Company has also adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION (SFAS No. 123), which permits entities to recognize the
expense over the vesting period the fair value of all stock-based awards
on the date of grant. Alternatively, SFAS No. 123 allows entities to
continue to apply the provisions of APB No. 25 and provide pro forma net
income disclosures for employee stock option grants as if
<PAGE>
the fair-value based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
Earnings per share:
The Company adopted SFAS Statement No. 128, EARNINGS PER SHARE. Basic
earnings per common share are based on the weighted average number of
common shares outstanding in each year. Diluted earnings per common share
assume that outstanding common shares were increased by shares issuable
upon exercise of stock options and warrants for which market price exceeds
exercise price, less shares which could have been purchased by the Company
with related proceeds. This calculation added 10,248 and 77,604 shares to
the diluted weighted average shares outstanding for 1999 and 2000,
respectively.
Stock options and warrants of 1,226,000 for December 31, 1999 and March
31, 2000, respectively, were not used in the calculation of diluted
earnings per share because they were antidilutive.
Cash equivalents:
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, the actual amounts could differ from those estimates. Any
adjustments applied to estimated amounts are recognized in the year in
which such adjustments are determined. Estimates that are susceptible to
significant change are disclosed in notes 1 and 6.
3. Property and equipment:
<TABLE>
<CAPTION>
1999 2000
----------- -------------
<S> <C> <C>
Office equipment $ 20,658 $ 28,427
Kiosks 54,682 348,724
Accumulated depreciation (10,738) (12,402)
----------- -------------
64,602 364,749
In process software 48,700 56,577
----------- -------------
$ 113,302 $ 421,326
=========== =============
</TABLE>
4. Note payable:
<TABLE>
<CAPTION>
1999 2000
---------------- ---------------
<S> <C> <C>
Note payable, Computer Assisted Technology, Inc. (CAT), interest only at 8.5%
through February 7, 1998, at which time the principal is due. Convertible to
shares of common stock at $6.75 plus adjustment based on IPO price of stock. The
note has not been settled due to a dispute between the Company and CAT. See Note 6. $ 350,000 $ 350,000
================ ===============
</TABLE>
<PAGE>
5. Long-term debt:
<TABLE>
<CAPTION>
1999
----------------
<S> <C>
Note payable, Telco, due in monthly installments of $21,342 including interest
at 10% through July 2001, secured by equipment, subordinated to notes payable,
bank. (A) $ 378,061
Notes payable, vehicles, due in monthly installments of $480 including
interest at 8.95% through December 2001. (A) 9,414
----------------
387,475
Less current portion 383,190
----------------
$ 4,285
================
</TABLE>
(A) Paid off during 2000.
6. Commitments and contingencies:
Phone locations:
The Company rents phone locations from merchants and property owners
under varying lease terms, usually ten years, generally cancelable by
the Company upon 30 days notice.
Consulting agreement:
The Company paid a director/shareholder $28,800 and $7,200 for certain
consulting services in 1999 and 2000, respectively.
Leases:
The Company leases its offices in Minnesota and Puerto Rico under
operating leases expiring in May 2000. The Company also leases office
space in Pennsylvania on a month-to-month basis. The leases have
renewal options and require the Company to pay certain common area
costs and real estate taxes. Rent expense under the leases was $129,641
and $101,737 for the years ended December 31, 1999 and 1998,
respectively.
The Company has a sublease agreement to receive a prorated portion of
the future rent applicable to the Minnesota location for approximately
$14,000.
The future minimum lease payment is $26,795 for the year ending December
31, 2000.
Contingencies:
Sales tax:
The Minnesota Department of Revenue has asserted sales taxes are due on
telephone receipts. The Company does not agree with this assessment and
has appealed it to the Minnesota Tax Court. Total assessments including
taxes, penalties and interest are estimated to be $2.1 million. The
Company has accrued $1,549,685 related to this contingency. During
April 2000, the Company and the Department of Revenue reached a
settlement agreement and the contingency was reduced accordingly by
$500,000.
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 has since appealed
the ruling to the Puerto Rico
<PAGE>
Supreme Court, which has agreed to hear the case and has issued a stay
of execution until the court renders a decision on the appeal. 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 based upon progress
of this case. Since January 1, 1999, the Company has paid the PRTC
$0.03 per call and is continuing to accrue $0.06 per call. The Company
has accrued $356,000 at December 31, 1999 and $416,000 at March 31,
2000, related to this matter.
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 1999 financial statements included the following amounts
related to a 1997 purchase from CAT of a route of pay telephones:
<TABLE>
<S> <C>
Prepaid expenses $ 302,142
Accrued expenses (93,121)
Note payable (350,000)
---------------
Net liability $ (140,979)
===============
</TABLE>
The purchase agreement includes some contingent payments with which the
Company and CAT have a disagreement. As a result, the above have 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 the $93,121
accrued exspense.
7. Stock options and warrants:
On April 11, 1997, the Company's Board of Directors adopted the 1997
Long-Term Incentive and Stock Option Plan (the "Plan"). The Plan provides for
the issuance of incentive stock options and non-qualified stock options to
key employees and directors of the Company. The total number of shares of
common stock authorized and reserved for issuance under the Plan is 100,000
shares. The exercise price for each incentive stock option granted under the
Plan may not be less than the fair market value of the common stock on the
date of the grant, unless, in the case of incentive stock options, the
optionee owns greater than 10% of the total combined voting power of all
classes of capital stock of the Company, in which case the exercise price may
not be less than 110% of the fair market value of the common stock on the
date of the grant. The exercise price for each non-qualified option may not
be less than 85% of the fair market value of the common stock on the date of
grant. Unless otherwise determined by the Board, incentive options granted
under the Plan have a maximum duration of 10 years, non-qualified options and
awards have a maximum duration of 15 years. Vesting is based on such terms
and conditions as the Board shall determine.
Utilizing the Black Scholes option pricing model, the Company determined that
the fair value of options granted during 1998 would not have affected net
income (loss) or income (loss) per share as reported, and accordingly, the
Company has not provided pro forma income and earnings per share information.
In 1999, the proforma effects of options issued to employees are as follows:
<PAGE>
<TABLE>
<CAPTION>
As Reported Proforma
-------------------- -------------------
<S> <C> <C>
Net income (loss) $ (16,916) $ (93,728)
==================== ===================
Earnings per share $ (0.01) $ (0.03)
=================== ===================
</TABLE>
Assumptions used to estimate the fair value of options issued to employees in
1999 using the Black Scholes model are as follows:
<TABLE>
<S> <C>
Estimated risk free interest rate 5.85%
Estimated life 2 years
Estimated volatility 140.00%
Estimated dividends 0.00%
</TABLE>
Information with respect to options outstanding is summarized as follows:
<TABLE>
<CAPTION>
12/31/1999 3/31/2000
----------------------------------- -----------------------------------
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 130,000 $ 4.34 252,666 $ 3.21
Granted 136,666 2.25
Exercised
Forfeited 14,000 3.62
-------------- --------------
Outstanding at end of period 252,666 $ 3.21 252,666 $ 3.21
============== ============== ============== ==============
Range of exercise prices of options
outstanding at December 31 $2.25 - $6.75 $2.25 to $6.75
Options exercisable at period end 245,999 245,999
Weighted average remaining life 2.9 years 2.6 years
</TABLE>
The Company has the following outstanding warrants:
<TABLE>
<CAPTION>
Weighted average
exercise price
1999 2000
--------- ----------
<S> <C> <C> <C>
Issued as part of units in public offering 800,000 800,000 $ 9.50
Granted to underwriter in public offering 160,000 160,000 8.95
Granted to investment relations company 150,000 150,000 6.00
------- -------
Outstanding at end of year 1,110,000 1,110,000 $ 9.40
========= =========== ==========
Warrants exercisable at year end 1,110,000 1,110,000
Weighted average remaining life 2.8 years 2.5 years
</TABLE>
8. Income taxes:
<PAGE>
A reconciliation between the statutory federal and state income tax to the
Company's effective tax benefit rate is as follows:
<TABLE>
<CAPTION>
1999
---------------
<S> <C>
Provisions calculated at statutory rates:
Deferred:
Federal $ (101,000)
State (18,000)
---------------
(119,000)
Valuation allowance 53,000
---------------
$ (66,000)
===============
</TABLE>
The deferred tax asset and deferred tax liability consist of the following at
December 31:
<TABLE>
<CAPTION>
1999
-------------
<S> <C>
Deferred tax asset
(liability):
Sales tax contingency $ 620,000
Accrued expenses 27,000
Accrued dial-around compensation 32,000
Depreciation (395,000)
Amortization 45,000
Net operating loss carryforward 53,000
Deferred loss on disposal (27,000)
-------------
355,000
Valuation allowance (53,000)
-------------
$ 302,000
=============
</TABLE>
At December 31, 1999 Advants, Inc. has federal and state net operation loss
carryforwards of $133,000 expiring in 2014.
Utilization of the deferred tax asset of $302,000 disclosed above is
dependent on future taxable profits in excess of profits arising from
existing taxable temporary differences. Assets have been recognized based on
management's estimate of future taxable income which includes a valuation
allowance related to Advants, Inc., which has no operating history to
determine future use of the net operating loss carryforward.
9. Financial instruments:
The Company's financial instruments recorded on the balance sheet include cash,
accounts receivable, notes and accounts payable and debt. Because of their short
maturity, the carrying amount of cash, accounts receivable and notes and
accounts payable approximates fair value. Fair value of long-term debt
approximates recorded value based on rates available to the Company for similar
terms and maturities.
<PAGE>
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 AND THE "RISK FACTORS" ENTITLED "RISKS ASSOCIATED WITH EXPANSION
STRATEGY," "COMPETITION," "PENDING DETERMINATION OF DIAL-AROUND COMPENSATION
RATE," "OTHER REGULATORY FACTORS," "TECHNOLOGICAL CHANGE AND NEW SERVICES,"
"DEPENDENCE UPON THIRD-PARTY PROVIDERS," "SERVICE INTERRUPTIONS; EQUIPMENT
FAILURES," "RELIANCE ON SINGLE BRAND OF PAYPHONES," "SEASONALITY" AND
"RELIANCE ON KEY PERSONNEL" CONTAINED IN THE COMPANY'S PROSPECTUS DATED
NOVEMBER 10, 1997 INCLUDED IN THE REGISTRATION STATEMENT ON FORM SB-2 FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION (REGISTRATION NO. 333-29969).
SUCH "RISK FACTORS" ARE INCORPORATED HEREIN BY REFERENCE. 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.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31 1999.
Total revenue for the three months ended March 31, 2000, were $90,000
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 $4,000 in user fees at the company's 6 kiosks.
The cost of sales for the three months ended March 31, 2000 were $64,000
representing $60,000 in cost of goods sold and $3,000 in line charges, internet
service fees and site provider commissions. Selling, general
<PAGE>
and administrative ("SG&A") expenses were $326,000 and were spent to begin
implementing the Company's strategy for public internet access terminals.
Discontinued operations earned $175,000 in the 2000 period compared to a
loss of $99,000 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.
SALES TAX CONTINGENCY.
The Company, based on its analysis of the published regulations of the
Minnesota Department, of Revenue, has not remitted any sales tax payments to
the State of Minnesota. In 1996, the Company learned that the position of the
Department of Revenue was that calls from payphones were subject to state
sales tax. Management is of the view that the payphone service it provides is
not subject to sales tax and the Company is challenging the imposition of the
tax. Nonetheless, the Company has established a reserve of $1.5 million to
cover the potential of an unsuccessful resolution of this matter.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1999, the Company's operating
activities provided $112,000. Investments in equipment and rental agreements
used $310,000 and principal payments on long-term debt used $387,000.
Activities were funded with a $1,960,000 sale of payphones, and collection of
$275,000 of subscription receivable, resulting in a $1,654,000 increase in
cash balances.
On February 29, 2000 the Company sold approximately 900 payphones in an
all cash transaction. Proceeds have been used to reduce debt and increase
cash balances.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings - None
Item 6. Exhibits and Reports on Form 8-K
(a) 27 - Financial Data Schedule
(b) Reports
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF CHOICETEL COMMUNICATIONS, INC AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,977
<SECURITIES> 0
<RECEIVABLES> 561
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,545
<PP&E> 421
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,447
<CURRENT-LIABILITIES> 2,170
<BONDS> 0
0
0
<COMMON> 30
<OTHER-SE> 6,240
<TOTAL-LIABILITY-AND-EQUITY> 8,447
<SALES> 90
<TOTAL-REVENUES> 90
<CGS> 69
<TOTAL-COSTS> 69
<OTHER-EXPENSES> 287
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (160)
<INCOME-TAX> 0
<INCOME-CONTINUING> (160)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (160)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
