10QSB 1 a10qsb.txt FORM 10-QSB 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. 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 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 CONDENSED CONSOLIDATED CHOICETEL COMMUNICATIONS, INC. BALANCE SHEETS AND SUBSIDIARIES ================================================================================
(Unaudited) 12/31/1999 6/30/2000 -------------------- --------------- 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 ==================== ===============
See notes to condensed consolidated financial statements. CONDENSED CONSOLIDATED CHOICETEL COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS AND SUBSIDIARIES THREE MONTHS ENDED JUNE 30 (Unaudited) ================================================================================
2000 1999 ---------------- --------------- 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 ================ ==============
See notes to condensed consolidated financial statements. CONDENSED CONSOLIDATED CHOICETEL COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS AND SUBSIDIARIES SIX MONTHS ENDED JUNE 30 (Unaudited) ================================================================================
2000 1999 ---------------- --------------- 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 ================ ================
See notes to condensed consolidated financial statements. CONDENSED CONSOLIDATED CHOICETEL COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS AND SUBSIDIARIES SIX MONTHS ENDED JUNE 30 (UNAUDITED) ================================================================================
2000 1999 ---------------- --------------- 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 ================
See notes to condensed consolidated financial statements. 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. The net assets of the discontinued operations consist of the following:
12/31/1999 6/30/2000 ---------- --------- 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 =============== ===============
2. Property and equipment:
12/31/1999 6/30/2000 ---------- --------- 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 ============== ==============
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 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. 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. 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. 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:
Nominee For Against ------- --- ------- 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
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:
For Against Abstain Broker Non-Vote --- ------- ------- --------------- 1,851,498 125,341 600 0
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:
For Against Abstain Broker Non-Vote --- ------- ------- --------------- 653,107 1,324,032 300 0
Item 6. Exhibits and Reports (a) 27 - Financial Data Schedule (b) Reports