<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 SEPTEMBER 30, 2000
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COMMISSION FILE NUMBER 0-230 17
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CHOICETEL CORPORATION
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(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1649949
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(STATE OF JURISDICTION OR IRS EMPLOYER ID NO.
INCORPORATION OF ORGANIZATION)
9724 10TH AVE. NORTH, PLYMOUTH, MN 55441
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 612-544-4876
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N/A
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(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
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AS OF DATE OF FILING, THE COMPANY HAS 3,541,499 SHARES OUTSTANDING.
<PAGE>
CHOICETEL COMMUNICATIONS, INC.
FORM 10-QSB INDEX
NOVEMBER 14, 2000
Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
December 31, 1999 and September 30, 2000
Consolidated Statements of Operations -
Three months ended September 30, 1999 and 2000
Nine months ended September 30, 1999 and 2000
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 2000
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis
Part II: Other Information
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: November 14, 2000 By: /s/ Jack S. Kohler
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Jack S. Kohler
Vice President and Chief Financial Officer
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
CHOICETEL COMMUNICATIONS, INC. BALANCE SHEETS
AND SUBSIDIARIES
--------------------------------------------------------------------------------
(Unaudited)
9/30/2000 12/31/1999
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<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 937,496 $2,328,344
Receivables 152,624 1,241,952
Prepaid and other assets 117,897 319,492
Deferred taxes 219,208 302,000
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Total current assets 1,427,255 4,186,788
Property and equipment, net 2,648,493 113,302
Goodwill on investment in subsidiary, net 1,021,870
Investments 2,027,532
Net assets of discontinued operations 2,276,452 4,849,926
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$9,401,572 $9,150,016
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Notes payable $ $ 350,000
Current portion of long-term debt 383,190
Accounts payable 933,921 157,808
Accrued expenses 360,002 1,835,251
Income tax payable 221,100
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Total current liabilities 1,293,923 2,947,249
Long-term liabilities, net of current portion 4,285
Minority interest 402,100 23,611
Shareholders' equity 7,705,549 6,174,871
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$9,401,572 $9,150,016
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
CHOICETEL COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS
AND SUBSIDIARIES THREE MONTHS ENDED SEPTEMBER 30
(Unaudited)
--------------------------------------------------------------------------------
2000 1999
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<S> <C> <C>
Revenue $ 26,177 $ 1,536
Cost of sales 32,627 325
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Gross margin (6,450) 1,211
Selling, general and administrative expenses 590,609 126,965
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Loss from continuing operations before minority interest (597,059) (125,754)
Minority interest 168,949
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Loss from continuing operations (428,110) (125,754)
Income (loss) from discontinued operations (net of income
tax of $21,617 for 1999) 152,174
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Net income (loss) $ (428,110) $ 26,420
=========== ===========
Earnings (loss) per share:
Continuing operations, basic and diluted $ (0.12) $ (0.04)
=========== ===========
Discontinued operations, basic and diluted $ 0.00 $ 0.05
=========== ===========
Net income (loss), basic and diluted $ (0.12) $ 0.01
=========== ===========
Weighted average number of shares outstanding:
Basic 3,535,899 2,915,006
=========== ===========
Diluted 3,535,899 2,915,006
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
CHOICETEL COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS
AND SUBSIDIARIES NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
--------------------------------------------------------------------------------
2000 1999
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<S> <C> <C>
Revenue $ 123,053 $ 1,974
Cost of sales 107,029 1,279
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Gross margin 16,024 695
Selling, general and administrative expenses 1,329,361 126,965
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Loss from continuing operations before minority interest (1,313,337) (126,270)
Minority interest 389,554
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Loss from continuing operations (923,783) (126,270)
Income (loss) from discontinued operations (net of income
tax credit of $26,679 for 1999) 93,662
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Net income (loss) $ (923,783) $ (32,608)
================ ================
Earnings (loss) per share:
Continuing operations, basic and diluted $ (0.28) $ (0.04)
=============== ==============
Discontinued operations, basic and diluted $ 0.00 $ 0.03
=============== ==============
Net income (loss), basic and diluted $ (0.28) $ (0.01)
=============== ===============
Weighted average number of shares outstanding:
Basic 3,322,310 2,915,006
================ ==============
Diluted 3,322,310 2,915,006
================ ==============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
CHOICETEL COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS
AND SUBSIDIARIES NINE MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
--------------------------------------------------------------------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(923,783) $ (32,608)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Deferred taxes 82,792 (26,679)
Depreciation and amortization 278,237 1,053,109
Minority interest loss (389,554)
Unrealized gain on investments (27,532)
Changes in operating assets and liabilities:
Receivables 1,089,328 (176,070)
Prepaid expenses 201,595 364,632
Accounts payable 601,113 (204,495)
Deferred loss (555,571)
Accrued expenses (637,490) 279,379
Income tax payable (221,000)
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Net cash provided (used) by operating activities (501,865) 1,257,268
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Cash flows from investing activities:
Purchase of equipment (2,794,705) (958,537)
Investments (2,000,000)
Proceeds from sale of equipment and rental contracts 2,091,889 750,000
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Net cash provided by (used in) investing activities (2,702,816) (208,537)
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Cash flows from financing activities:
Collection of subscription receivable 275,000 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 (815,231) (1,366,767)
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Net cash provided by (used in) financing activities 1,818,833 (906,767)
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Net increase (decrease) in cash and cash equivalents $(1,385,848) $ 141,964
Cash and cash equivalents, beginning 2,323,344 363,239
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Cash and cash equivalents, ending $ 937,495 $ 505,203
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 5,042 $ 367,794
=========== ===========
Cash paid for income taxes $ 320,000
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Common stock issued for accrued expenses $ 93,121
===========
Goodwill in additional subsidiary stock acquired $ 1,061,677
===========
</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 nine month periods ended September 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 September 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 included
in the Company Form 10-K annual report for 1999 filed with the Securities
and Exchange Commission.
The results of operations for the period ended September 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
Advants, Inc. an 80% owned subsidiary (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's majority owned subsidiary, Advants, Inc.,
(Advants) 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 9/30/2000
<S> <C> <C>
Cash $ 98,455 $ 104,532
Accounts receivable 41,753 557,264
Prepaid expenses 176,960 134,202
Property and equipment, net 2,828,458 1,943,289
Rental contracts, net 2,150,527
Deferred loss 66,280 81,172
Accrued expenses (512,507) (544,007)
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$ 4,849,926 $ 2,276,452
=============== ============
</TABLE>
2. Property and equipment:
<TABLE>
<CAPTION>
12/31/1999 9/30/2000
<S> <C> <C>
Office equipment $ 20,658 $ 107,436
Kiosks 54,682 1,882,444
Accumulated depreciation (10,738) (36,465)
In process software 48,700 695,078
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$ 113,302 $ 2,648,493
============== ============
</TABLE>
3. 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 Telecommunications Review
Board (TRB), the Company would not pay the per call charges. On May 27,
1998 the TRB 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 TRB ruling. The 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 has accrued liabilities for
unpaid line charges of $356,000 at December 31, 1999 and $416,000 at
September 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 Communications Commission and
are subject to change both prospectively and retroactively. The financial
statements include a provision for $155,000 as an estimated liability for
amounts that may require repayment and uncollectable receivables.
Sales Tax:
<PAGE>
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 accrued liabilities. The income is included in the deferred
loss of discontinued operations.
4. Investments:
The September 30 balance sheet reflects $2,000,000 (plus accumulated
undistributed earnings) invested in Whitebox Statistical Arbitrage Fund
L.P. (Whitebox). Whitebox 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 limited partnership
and has classified its investment as available for sale.
<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 1,400 phones located in Puerto Rico, which the
Company intends to divest. 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, commission
payments to site providers, and servicing expenses.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30
1999.
<PAGE>
Total revenue for the nine months ended September 30, 2000, were
approximately $123,000 compared to virtually no activity in the 1999 period.
This revenue includes approximately $76,000 in equipment sales to third-party
venders and approximately $19,000 in user fees at the company's kiosks.
The cost of sales for the nine months ended September 30, 2000 were
$107,000 representing $70,000 in cost of goods sold and $37,000 in line
charges, internet service fees and site provider commissions, and servicing
expenses. Selling, general and administrative ("SG&A") expenses were
$1,329,000 and were spent to begin implementing the Company's strategy for
public internet access terminals.
Discontinued operations earned $671,000 in the 2000 period compared to a
loss of $59,000 in the 1999 period. In addition, the Company recorded before
tax losses totaling $1,030,000 on sales of payphone assets. Because
management estimates that the final disposal of all payphone assets will be a
gain, the net loss on the discontinued operations is being deferred until
final disposal has been completed.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30 1999.
Total revenue for the three months ended September 30, 2000, were
approximately $26,000 compared to virtually no activity in the 1999 period. This
revenue was composed of user fees at the company's kiosks.
The cost of sales for the three months ended September 30, 2000 were
$33,000 representing line charges, internet service fees and site provider
commissions, and servicing expenses. Selling, general and administrative
("SG&A") expenses were $591,000 and were spent to begin implementing the
Company's strategy for public internet access terminals.
Discontinued operations earned $361,000 in the 2000 period compared to
$26,000 in the 1999 period. In addition, the Company recorded before tax
gains totaling $340,000 on sales of payphone assets. Because management
estimates that the final disposal of all payphone assets will be a gain, the
net losses on the discontinued operations since December 1999 are being
deferred until final disposal has been completed.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2000, the Company's operating
activities used $501,000. Investments in equipment and software development used
$2,795,000, investments in investments used $2,000,000, and principal payments
on long-term debt used $815,000. Activities were funded with $2,092,000 sales of
payphones, collection of $275,000 of subscription receivable, a $2,106,000
issuance of common stock, issuance of notes payable totaling $253,000 resulting
in a $1,386,000 decrease 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 was 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 voted to not approve the transaction,
and the note was repaid with interest in August 2000.
On September 30, 2000, Advants' share of the cash balance was approximately
$355,000. It is anticipated that Advants will require additional capital in 2000
and 2001 to continue implementing their strategy. Advants is considering various
means by which its capital requirements can be met.
