-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G9Tvqg7YCswQhdowBKWFFuFcLwUcQ/7tYjheLMptJNHPUM0YFXd4RJwNJ/tMqR0S LI53SGqPpEvsHR6qt2bLmw== 0000912057-00-024776.txt : 20000516 0000912057-00-024776.hdr.sgml : 20000516 ACCESSION NUMBER: 0000912057-00-024776 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHOICETEL COMMUNICATIONS INC /MN/ CENTRAL INDEX KEY: 0001031927 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 411649949 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-23017 FILM NUMBER: 634918 BUSINESS ADDRESS: STREET 1: 9724 10TH AVE NORTH CITY: PLYMOUTH STATE: MN ZIP: 55441 BUSINESS PHONE: 6125441260 MAIL ADDRESS: STREET 1: 9724 10TH AVE NORTH CITY: PLYMOUTH STATE: MN ZIP: 55441 FORMER COMPANY: FORMER CONFORMED NAME: INTELLIPHONE INC DATE OF NAME CHANGE: 19970625 10QSB 1 10QSB 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. 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 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 CHOICETEL COMMUNICATIONS, INC. CONDENSED CONSOLIDATED AND SUBSIDIARIES BALANCE SHEETS ===============================================================================
(Unaudited) 12/31/1999 3/31/2000 -------------------- -------------- 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 ================== ==============
See notes to condensed consolidated financial statements. CONDENSED CONSOLIDATED CHOICETEL COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS AND SUBSIDIARIES THREE MONTHS ENDED MARCH 31 (UNAUDITED) ----------- ==============================================================================
2000 1999 ---------------- --------------- 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 ================ ===============
See notes to condensed consolidated financial statements. CONDENSED CONSOLIDATED CHOICETEL COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS AND SUBSIDIARIES THREE MONTHS ENDED MARCH 31 (UNAUDITED) ===============================================================================
2000 1999 ----------------- --------------- 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 ================
See notes to condensed consolidated financial statements. 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:
1999 ------------------ 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 ====================
The net assets of the discontinued operations consist of the following:
12/31/1999 3/31/2000 ------------------- ------------------ 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 ================== ==================
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 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:
1999 2000 ----------- ------------- 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 =========== =============
4. Note payable:
1999 2000 ---------------- --------------- 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 ================ ===============
5. Long-term debt:
1999 ---------------- 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 ================
(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 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: Prepaid expenses $ 302,142 Accrued expenses (93,121) Note payable (350,000) --------------- Net liability $ (140,979) ===============
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:
As Reported Proforma -------------------- ------------------- Net income (loss) $ (16,916) $ (93,728) ==================== =================== Earnings per share $ (0.01) $ (0.03) =================== ===================
Assumptions used to estimate the fair value of options issued to employees in 1999 using the Black Scholes model are as follows: Estimated risk free interest rate 5.85% Estimated life 2 years Estimated volatility 140.00% Estimated dividends 0.00%
Information with respect to options outstanding is summarized as follows:
12/31/1999 3/31/2000 ----------------------------------- ----------------------------------- Weighted- Weighted- average average exercise exercise Shares price Shares price -------------- -------------- -------------- -------------- 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
The Company has the following outstanding warrants:
Weighted average exercise price 1999 2000 --------- ---------- 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
8. Income taxes: A reconciliation between the statutory federal and state income tax to the Company's effective tax benefit rate is as follows:
1999 --------------- Provisions calculated at statutory rates: Deferred: Federal $ (101,000) State (18,000) --------------- (119,000) Valuation allowance 53,000 --------------- $ (66,000) ===============
The deferred tax asset and deferred tax liability consist of the following at December 31:
1999 ------------- 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 =============
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. 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 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. 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 EX-27 2 EXHIBIT 27
5 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. 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 3,977 0 561 0 0 5,545 421 0 8,447 2,170 0 0 0 30 6,240 8,447 90 90 69 69 287 0 0 (160) 0 (160) 0 0 0 (160) (.05) (.05)
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