**FORM 10-QSB**

 

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

 

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**Forthe quarterly period ended September 30, 2001**

** **

**Commissionfile number 0-230 17**

 

 

**CHOICETELCOMMUNICATIONS, INC.**

(Exact name of registrant as specified in itscharter)

 
| **Minnesota**                                             | **41-1649949**      |
|-----------------------------------------------------------|---------------------|
| (State of jurisdiction or  incorporation of organization) | IRS Employer ID No. |
|                                                      |                |
| **15500 Wayzata Blvd., #1029 Wayzata, Minnesota**         | **55391**           |
| (Address of principal executive  offices)                 | (Zip Code)          |

 

Registrant’stelephone number, including area code  **952-249-1801**

 
| **N/A**                                          |       |
|--------------------------------------------------|------------|
| (Former name, former address  and former fiscal  |       |
|  year if changed from last report)          |       |
|                                             |       |
| **N/A**                                          |       |
| (Former address of principal  executive offices) | (Zip Code) |

 

 

Registrant’sformer telephone number, including area code **N/A**

 

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý No o

 

As of date of filing, the Company has3,036,735 shares outstanding.

 

 

 

**CHOICETELCOMMUNICATIONS, INC.**

 

**Form10-QSB Index**

**November  14, 2001**

 

 

Part I:  Financial Information

 

Item 1.  Financial Statements

 

Consolidated Balance Sheet -

December 31, 2000 and September 30, 2001

 

Consolidated Statements of Operations -

Three months ended September 30, 2000 and2001

Nine months ended September 30, 2000 and 2001

 

Consolidated Statements of Cash Flows -

Nine months ended September 30, 2000 and 2001

 

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 onForm 8-K

 

 

Signature

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                     |   | CHOICETEL COMMUNICATIONS, INC.              |
|--------------------------|--------|---------------------------------------------|
|                     |   |                                        |
|                     |   |                                        |
| Date:  November 14, 2001 | By:    | /s/ Jack S.  Kohler                         |
|                     |   | Jack S.  Kohler                             |
|                     |   | Vice  President and Chief Financial Officer |

 

 

 

**CHOICETELCOMMUNICATIONS, INC.**

**AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED**

** BALANCESHEETS**

 
|                                         |   |           |      | **(Unaudited)** |   |
|----------------------------------------------|--------|----------------|-----------|-----------------|--------|
|                                         |   | **12/31/2000** |      | **9/30/2001**   |   |
| ***Assets:***                                |   |           |      |            |   |
| Current assets:                              |   |           |      |            |   |
| Cash and cash equivalents                    |   | $              | 495,312   |            | $      | 343,026 |   |
| Investments                                  |   | 2,203,306      |      | 2,398,982       |   |
| Receivables                                  |   | 521,072        |      | 464,755         |   |
| Prepaid and other assets                     |   | 88,167         |      | 8,316           |   |
| Deferred taxes                               |   | 1,873,000      |      | 1,031,694       |   |
|                                         |   |           |      |            |   |
| Total current assets                         |   | 5,180,857      |      | 4,246,773       |   |
|                                         |   |           |      |            |   |
| Property and equipment, net                  |   | 239,500        |      |            |   |
|                                         |   |           |      |            |   |
| Net assets of discontinued operations        |   | 1,943,228      |      | 2,197,491       |   |
|                                         |   | $              | 7,363,585 |            | $      | 6,444,264 |   |
|                                         |   |           |      |            |   |
|                                         |   |           |      |            |   |
| ***Liabilities and  shareholders' equity:*** |   |           |      |            |   |
| Current liabilities:                         |   |           |      |            |   |
| Accounts payable                             |   | $              | 1,788,235 |            | $      | 37,153 |   |
| Accrued expenses                             |   | 207,841        |      | 154,270         |   |
| Total current liabilities                    |   | 1,996,076      |      | 191,423         |   |
|                                         |   |           |      |            |   |
| Shareholders' equity                         |   | 5,367,509      |      | 6,252,841       |   |
|                                         |   |           |      |            |   |
|                                         |   | $              | 7,363,585 |            | $      | 6,444,264 |   |
|                                              |        |                |           |                 |        |  |  |  |

 

See notes to condensed consolidated financialstatements.

 

 

**CONDENSED CONSOLIDATED**

**STATEMENTS OF OPERATIONS**

**THREE MONTHS ENDED SEPTEMBER 30**

**(Unaudited)**

 
|                                                                     |   | **2000**  |     | **2001**  |   |
|--------------------------------------------------------------------------|--------|-----------|----------|-----------|--------|
|                                                                     |   |      |     |      |   |
| Revenue                                                                  |   | $         | 26,177   |      | $      |   |
| Cost of sales                                                            |   | 32,627    |     |      |   |
|                                                                     |   |      |     |      |   |
| Gross margin                                                             |   | (6,450    | )        |      |   |
|                                                                     |   |      |     |      |   |
| Selling, general and administrative  expenses                            |   | 590,609   |     |      |   |
|                                                                     |   |      |     |      |   |
| Operating loss                                                           |   | (597,059  | )        |      |   |
|                                                                     |   |      |     |      |   |
| Other income                                                             |   |      |     |      |   |
| Investment income                                                        |   | 27,532    |     | 54,820    |   |
| Interest income, net                                                     |   | 11,068    |     | 3,359     |   |
|                                                                     |   |      |     |      |   |
| Income (loss) from continuing operations  before income tax benefit      |   | (558,459  | )        | 58,179    |   |
|                                                                     |   |      |     |      |   |
| Minority interest                                                        |   | 168,949   |     |      |   |
|                                                                     |   |      |     |      |   |
| Income tax expense                                                       |   |      |     | 23,272    |   |
|                                                                     |   |      |     |      |   |
| Income (loss) from continuing operations                                 |   | (389,510  | )        | 34,907    |   |
|                                                                     |   |      |     |      |   |
| Income from discontinued operations (net of  $92,979 income tax in 2001) |   |      |     | 139,468   |   |
|                                                                     |   |      |     |      |   |
| Net income (loss)                                                        |   | $         | (389,510 | )         | $      | 174,375 |   |
|                                                                     |   |      |     |      |   |
| Earnings (loss) per share:                                               |   |      |     |      |   |
| Continuing operations, basic and diluted                                 |   | $         | (0.11    | )         | $      | 0.01 |   |
|                                                                     |   |      |     |      |   |
| Discontinued operations, basic and diluted                               |   | $         | (0.00    | )         | $      | 0.04 |   |
|                                                                     |   |      |     |      |   |
| Net income (loss), basic and diluted                                     |   | $         | (0.11    | )         | $      | 0.05 |   |
|                                                                     |   |      |     |      |   |
| Weighted average number of shares  outstanding:                          |   |      |     |      |   |
| Basic                                                                    |   | 3,535,899 |     | 3,219,187 |   |
|                                                                     |   |      |     |      |   |
| Diluted                                                                  |   | 3,535,899 |     | 3,219,187 |   |

 

See notes to condensed consolidated financialstatements.

 

 

**CONDENSED CONSOLIDATED**

**STATEMENTS OF OPERATIONS**

**NINE MONTHS ENDED SEPTEMBER 30**

**(Unaudited)**

 
|                                                                               |   | **2000**   |     | **2001**  |   |
|------------------------------------------------------------------------------------|--------|------------|----------|-----------|--------|
|                                                                               |   |       |     |      |   |
| Revenue                                                                            |   | $          | 123,053  |      | $      | 19,544 |   |
| Cost of sales                                                                      |   | 107,029    |     | 75,110    |   |
|                                                                               |   |       |     |      |   |
| Gross margin                                                                       |   | 16,024     |     | (55,566   | )      |
|                                                                               |   |       |     |      |   |
| Selling, general and administrative  expenses                                      |   | 1,329,361  |     | 391,710   |   |
|                                                                               |   |       |     |      |   |
| Operating loss                                                                     |   | (1,313,337 | )        | (447,276  | )      |
|                                                                               |   |       |     |      |   |
| Other income                                                                       |   |       |     |      |   |
| Investment income                                                                  |   | 27,532     |     | 195,675   |   |
| Interest income, net                                                               |   | 99,657     |     | 12,496    |   |
|                                                                               |   |       |     |      |   |
| Loss from continuing operations before  income tax benefit                         |   | (1,186,148 | )        | (239,105  | )      |
|                                                                               |   |       |     |      |   |
| Minority interest                                                                  |   | 389,554    |     |      |   |
|                                                                               |   |       |     |      |   |
| Income tax (benefit)                                                               |   |       |     | (95,642   | )      |
|                                                                               |   |       |     |      |   |
| Loss from continuing operations                                                    |   | (796,594   | )        | (143,463  | )      |
|                                                                               |   |       |     |      |   |
| Gain on disposal of subsidiary (net of  $752,797 income tax expense in 2001)       |   |       |     | 1,129,196 |   |
|                                                                               |   |       |     |      |   |
| Income (loss) before discontinued  operations                                      |   | (796,594   | )        | 985,733   |   |
|                                                                               |   |       |     |      |   |
| Income from discontinued operations (net of  $ 172,885 income tax expense in 2001) |   |       |     | 283,225   |   |
|                                                                               |   |       |     |      |   |
| Net income (loss)                                                                  |   | $          | (796,594 | )         | $      | 1,268,958 |   |
|                                                                               |   |       |     |      |   |
| Earnings (loss) per share:                                                         |   |       |     |      |   |
| Continuing operations, basic and diluted                                           |   | $          | (0.24    | )         | $      | 0.30 |   |
|                                                                               |   |       |     |      |   |
| Discontinued operations, basic and diluted                                         |   | $          | (0.00    | )         | $      | 0.09 |   |
|                                                                               |   |       |     |      |   |
| Net income (loss), basic and diluted                                               |   | $          | (0.24    | )         | $      | 0.39 |   |
|                                                                               |   |       |     |      |   |
| Weighted average number of shares  outstanding:                                    |   |       |     |      |   |
| Basic                                                                              |   | 3,322,310  |     | 3,282,883 |   |
|                                                                               |   |       |     |      |   |
| Diluted                                                                            |   | 3,322,310  |     | 3,282,883 |   |

 

See notes to condensed consolidated financialstatements

 

 

**CONDENSED CONSOLIDATED**

**STATEMENTS OF CASH FLOWS**

**NINE MONTHS ENDED SEPTEMBER 30**

**(UNAUDITED)**

** **
|                                                                                                |   | **2000**   |           | **2001**   |           |
|-----------------------------------------------------------------------------------------------------|--------|------------|----------------|------------|----------------|
| Cash flows from operating activities:                                                               |   |       |           |       |           |
| Net income (loss)                                                                                   |   | $          | (796,594       | )          | $              | 1,268,958 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |   |       |      |       |      |
| Deferred taxes                                                                                      |   | 82,792     |           | 88,509     |           |
| Depreciation and amortization                                                                       |   | 278,237    |           | 216,102    |           |
| Stock based compensation issued                                                                     |   |       |           | 21,000     |           |
| Unrealized gain on investments                                                                      |   | (27,532    | )              | (195,676   | )              |
| Minority interest loss                                                                              |   | (389,554   | )              |       |           |
| Accounting gain on consolidation                                                                    |   |       |           | (1,129,196 | )              |
| Changes in operating assets and  liabilities:                                                       |   |       |           |       |           |
| Receivables                                                                                         |   | 1,089,328  |           | 56,182     |           |
| Cash in phones                                                                                      |   |       |           | 3,583      |           |
| Prepaids and other assets                                                                           |   | 201,595    |           | 9,380      |           |
| Accounts payable                                                                                    |   | 601,113    |           | (56,477    | )              |
| Deferred loss                                                                                       |   | (682,760   | )              |       |           |
| Accrued expenses                                                                                    |   | (637,490   | )              | (1,732     | )              |
| Income tax payable                                                                                  |   | (221,000   | )              |       |           |
| Net cash provided by (used in) operating activities                                                 |   | (501,865   | )              | 280,633    |           |
|                                                                                                |   |       |           |       |           |
| Cash flows from investing activities:                                                               |   |       |           |       |           |
| Purchase of equipment                                                                               |   | (2,794,705 | )              | (140,759   | )              |
| Investments                                                                                         |   | (2,000,000 | )              |       |           |
| Sale of intercompany notes                                                                          |   |       |           | 20,000     |           |
| Sale of stock of subsidiary                                                                         |   |       |           | 500        |           |
| Proceeds from sale of equipment and rental contracts                                                |   | 2,091,889  |           | 19,514     |           |
| Net cash (used in) investing activities                                                             |   | (2,702,816 | )              | (100,745   | )              |
|                                                                                                |   |       |           |       |           |
| Cash flows from financing activities:                                                               |   |       |           |       |           |
| Collection of subscription receivable                                                               |   | 275,000    |           |       |           |
| Issuance of common stock                                                                            |   | 2,106,308  |           |       |           |
| Issuance of notes payable                                                                           |   | 252,756    |           | 104,000    |           |
| Repurchase of common stock                                                                          |   |       |           | (436,174   | )              |
| Principal payments on long-term debt                                                                |   | (815,231   | )              |       |           |
| Net cash provided by (used in) financing activities                                                 |   | 1,818,833  |           | (332,174   | )              |
|                                                                                                |   |       |           |       |           |
|                                                                                                |   |       |           |       |           |
| Net (decrease) in cash and cash equivalents                                                         |   | $          | (1,385,848     | )          | $              | (152,286 | ) |
| Cash and cash equivalents, beginning                                                                |   | 2,323,344  |           | 495,312    |           |
| Cash and cash equivalents, ending                                                                   |   | $          | 937,495        |       | $              | 343,026 |   |
| Supplemental disclosure of cash flow  information:                                                  |   |       |           |       |           |
| Cash paid for interest                                                                              |   | $          | 5,042          |       | $              | 843 |   |
| Cash paid for income taxes                                                                          |   | $          | 320,000        |       | $              |   |
| Common stock issued for accrued expenses                                                            |   | $          | 93,121         |       | $              |   |
| Goodwill in subsidiary acquired                                                                     |   | $          | 1,061,677      |       | $              |   |
| Stock issued under options                                                                          |   | $          |           |       | $              | 20,000 |   |
|                                                                                                     |   |       |           |       |           |
| The consolidation change adjustment includes the elimination of the  following items:               |   |       |           |       |           |
|                                                                                                |   |       |           |       |           |
| Accounts payable                                                                                    |   |       |           | 1,694,605  |           |
| Deferred tax                                                                                        |   |       |           | (752,797   | )              |
| Accrued expenses                                                                                    |   |       |           | 303,009    |           |
| Sale of equipment                                                                                   |   |       |           | (219,986   | )              |
| Issuance of notes payable                                                                           |   |       |           | 104,000    |           |
| Receivables                                                                                         |   |       |           | (135       | )              |
|                                                                                                |   |       |           | 1,128,696  |           |

 

See notes to condensed consolidated financialstatements.

 

CHOICETELCOMMUNICATIONS, INC. AND SUBSIDIARIES

**Notes to Condensed Consolidated FinancialStatements**

 

1.       Basis of presentation, nature of businessand discontinued operations:

 

Basis of Presentation:

The condensed consolidated financialstatements of the Company for the three and nine month periods ended September30, 2001 and 2000 have been prepared by the Company without audit by theCompany’s independent auditors.  In theopinion of the Company’s management, all adjustments necessary to presentfairly the financial position, results of operations, and cash flows of theCompany as of September 30, 2001 and for the periods then ended have beenmade.  Those adjustments consist only ofnormal and recurring adjustments.  Thecondensed consolidated balance sheet of the Company as of December 31, 2000 hasbeen derived from the audited consolidated balance sheet of the Company as ofthat date.

 

Certain information and note disclosuresnormally included in the Company’s annual financial statements have beencondensed or omitted. These condensed consolidated financial statements shouldbe read in conjunction with a reading of the financial statements and notesthereto included in the Company’s Form 10-KSB annual report for 2000 filed withthe Securities and Exchange Commission.

 

The results of operations for the nine monthperiod ended September 30, 2001 are not necessarily indicative of the resultsto be expected in a full year.

 

Nature of business:

ChoiceTel Communications, Inc., andSubsidiaries (the Company) included an 80% owned subsidiary, Advants, Inc.(formerly Public Internet Access Holdings Corporation) until May 8, 2001.  The Company was in the business of providingpay phone services in several states and Puerto Rico. In December 1999 theCompany decided to sell its pay phone operations.  Advants was formed to provide public internet access throughkiosks located in high traffic areas such as gas stations and supermarkets.  Advants had minimal revenue and incurredlarge expenses for hardware and software development.  In February 2001, the Company decided to cease funding Advantsand liquidate its investment.

 

On May 8, 2001, the Company sold itsinvestment in Advants to an unrelated party recording a gain of$1,129,000.  For tax purposes thecompany intends to make an election, with the concurrence of the purchaser,under Internal Revenue Code Section 338 that allows it to utilize certain losscarry-forwards and tax benefits from the former subsidiary.  If such an election is not made, deferredtax assets of approximately $1,332,000 would be charged to the statement ofoperations.

 

Discontinuedoperations:

The Company decided to discontinue its payphone operations in December 1999.  TheCompany has estimated it will realize an overall gain on the disposal ofdiscontinued operations and accordingly, has not recorded a loss from themeasurement date.

 

The net assets of the discontinued operations consist of the followingas of September 30, 2001 (unaudited) and December 31, 2000:

 
|                        |   | **2001**  |      | **2000**  |   |
|-----------------------------|--------|-----------|-----------|-----------|--------|
| Cash                        |   | $         | 82,031    |      | $      | 85,614 |   |
| Prepaids and other assets   |   | 210,358   |      | 170,478   |   |
| Property and equipment, net |   | 2,034,978 |      | 2,068,183 |   |
| Accrued expenses            |   | (129,876  | )         | (381,047  | )      |
|                        |   | $         | 2,197,491 |      | $      | 1,943,228 |   |

 

2.       Propertyand equipment as of December 31, 2000:

 
| Office equipment    |   | $       | 35,000  |
|---------------------|--------|---------|---------|
| Kiosks              |   | 154,500 |
|                |   |    |
|                |   | 189,500 |
| In process software |   | 50,000  |
|                |   | $       | 239,500 |

 

3.       Commitmentsand contingencies:

 

Phone locations:

The Company rents phone locations frommerchants and property owners under varying lease terms, usually ten years,generally cancelable by the Company upon 30 days notice.

 

Leases:

The Company leases its offices in Puerto Ricounder operating leases expiring in April 2002 and has a renewal option. TheCompany leases its corporate offices in Wayzata, Minnesota under a leaseexpiring in April 2002.  Rent expensewas $40,360 for the year ended December 31, 2000.  The future minimum lease payment is $48,420 for the year endingDecember 31, 2001.

 

Contingencies:

Puerto Rico line charges:

The Company has an ongoing dispute with thePuerto Rican Telephone Company (PRTC) related to the period March 1998 to thepresent.  At December 31, 2000 theCompany had accrued a $250,000 liability to resolve this matter.  As a result of progress in directnegotiations with the PRTC, at September 30 the accrued liability waseliminated.

 

4      Restatementof 2000 statement of operations:

The unauditedstatement of operations for the nine months ended September 30, 2000 hasbeen changed to reflect $127,189 of other income which had previously beenincluded in deferred loss on sale of discontinued operations. The effect onearnings per share was to decrease the loss per share from $0.28 to $0.24.

 

The unaudited statement of operations for thethree months ended September 30, 2000 has been changed to reflect $38,600 ofother income which had previously been included in deferred loss on sale ofdiscontinued operations.  The effect onearnings per share was to decrease the loss per share from $0.12 to $0.11.

 

5.       LegalProceedings

 

In November2000, a suit was commenced in Hennepin County, Minnesota District Court by TKIConsulting against Advants, Inc. and the Company. TKI was a software providerto Advants and sued, for breach of contract, for approximately $750,000.  While the Company was not a party to thecontract, the plaintiff was seeking to hold the Company liable for the allegeddebt of Advants.  On August 31, 2001 theCompany received a summary judgement ruling in its favor on TKI’s claims topierce the corporate veil. Parties subsequently settled TKI’s promissoryestoppel claim.

 

An additional suit was filed on April 3,2001in Ramsey County, Minnesota District Court by Tomato Land Displays seekingdamages in excess of $50,000 from Advants for alleged services provided.  While the Company was not a party to thetransaction, the plaintiff was seeking to hold the Company liable for thealleged debt of Advants.  Tomato Landsubsequently agreed to dismiss this action and pursue its claims in the LeafIndustries claim, discussed below.

 

An additionalsuit was filed on June 4, 2001in Hennepin County, Minnesota District Court byLeaf Industries, seeking to pierce the corporate veil, hold Choicetelresponsible for Advants’ debts, and seeking damages in excess of $50,000 fromAdvants for alleged services provided. Tomato Land Displays is also a defendant in this action and has filedcross claims against Choicetel in this action. The Company is defending theaction.

 

The Company has not accrued any amountsrelating to these items, since in management’s view, an unfavorable outcome isunlikely.

 

6.     SubsequentEvents:

On November 5, 2001 the Company and the PRTCsigned a negotiated settlement whereby the PRTC acknowledged that the Companyhad paid all line charges through June 30, 2001.  The settlement also acknowledged that Choicetel was owed a refundrelated to various rate reductions ordered by the Puerto RicoTelecommunications Regulatory Board and was also owed a refund related tovarious overcharges paid by Choicetel. The total refund settled upon was$325,000, which will be recognized when received.

 

 

**Item2.**

**MANAGEMENT'SDISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

*Except for historical information contained in this Report,information contained in this Form 10-KSB contains “forward–lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, which can be identified by the use of forward-looking terminology suchas “may”, “will”, “expect”, “plan”, “estimate”, or “continue” or the negativethereof or other variations thereon or comparable terminology.  There are certain important factors thatcould cause results to differ materially from those anticipated by some ofthese forward-looking statements, including without limitation, the effects ofchanges in economic conditions and certain of the “Risk Factors” entitled“Competition,” “Other Regulatory Factors,” “Technological Change and NewServices,” “Dependence Upon Third-Party Providers,” “Service Interruptions;Equipment Failures,” “Reliance on Single Brand of Payphones,” and “Reliance onKey Personnel” contained in the Company’s Prospectus dated November 10, 1997included in the Registration Statement on Form SB-2 filed with the Securitiesand Exchange Commission (Registration No. 333-29969).  Such “Risk Factors” are incorporated herein by reference.  Investors are cautioned  that all forward-looking statements involverisk and uncertainty.*

 

### **General**

 

The Companyderives revenue from three principal sources: coin calls, non-coin calls anddial-around calls.  Coin calls representcalls paid for with coins deposited in the telephone.  The Company recognizes coin revenue in the amount deposited.  Non-coin calls are calls charged to acustomer credit card or billed to the called party (collect calls). These callsare routed to and processed by an operator service provider (“OSP”).Compensation for Dial-Around calls is paid by long-distance carriers whenconsumers access a long-distance carrier directly by dialing an access number,or by dialing an 800 number, or by using a non-billable calling card.

The principalcosts related to ongoing operation of the Company’s payphones include telephoneline charges, consisting of payments made by the Company to telephone companiesand long-distance carriers for access charges and use of their networks;commission payments to Site Providers; and service, repair and maintenancecosts.

The Company’s formerly 80% owned subsidiary (Advants, Inc.) derivedrevenue from three principal sources: sales of kiosks to third-party venders,user fees collected in cash or credit card at the kiosk, and sponsorshiprevenues from affiliates, sponsors and advertisers.  All revenue was recognized as received, net of processingcharges.  The principal costs related toongoing operation included telephone line charges, connectivity charges forinternet access and commission payments to site providers.  In February 2001, the Company decided tocease funding Advants and to liquidate its investment, and on May 8, 2001, theCompany sold its stock in Advants for a nominal amount and ceased consolidatingAdvants operating results as of that date.

 

**Nine months ended September 30, 2001 comparedto nine months ended September 30, 2000.**

 

**Continuing Operations**

 

                The after tax loss on continuing operations,for the nine months ended September 30, 2001 was $143,000 compared to a loss of$797,000 for the nine months ended September 30, 2000.  Continuing operations includes the effect ofconsolidating Advants Inc.’s operations up until May 8, 2001 with the Company’sother investing activities. All payphone related activity is reported asdiscontinued operations.

 

                Advants’ revenues for the period endedSeptember 30, 2001 were $20,000 compared to $123,000 for the period endedSeptember 30, 2000.  User fees were$20,000 in 2001, compared to $37,000 in 2000. Revenue in the 2000 period also included $86,000 in equipment sales to athird party vendor. The cost of service in the 2001 period was $75,000 comparedto $107,000 in 2000, which included $65,000 cost of equipment sold.

 

                Advants’ SG&A expenses in the 2001 periodwere $392,000 compared to $1,329,000 in 2000. Expenses were incurred to develop, deploy and support a national networkof public access internet terminals.

 

                During the 2001 period, other income andexpense includes $196,000 earned by Choicetel on investments and $12,000interest earned in money market accounts.

 

The Companyrecognized an after-tax $1,129,000 accounting gain as a result of selling itsshares in Advants and no longer consolidating Advants’ balance sheet.

 

**Discontinued Operations**

                The after tax gain from discontinuedoperations for the nine months ended September 30, 2001 was $283,000 compared todeferred loss of $40,000 in the 2000 period. Total Revenue for 2001 was $2,483,000 compared to $3,021,000 in 2000.The Company operated an average of 1,500 payphones during 2001in Puerto Rico.  This compares to 1,300 phones in 2000,located primarily in Puerto Rico and Pennsylvania.  Revenue on routes disposed of by September 30, 2001 was $64,000in 2001 compared to $289,000 in 2000.

During the 2001 period the Company operated an average of 1,500 phonesin Puerto Rico compared to 1,250 for the 2000 period.  Revenue from the Puerto Rico route in 2001 was $2,419,000compared to $2,732,000 in 2000. Puerto Rico coin revenue in the 2001 period was$1,517,000 compared to $1,512,000 in 2000, a decrease of $5,000 or 0.3%.  Though the decrease is small, in 2001 thephones did not match, on a per phone basis, the coin revenue of the previousyear’s period.  Noncoin commissionrevenue from operator service providers was $554,000 in 2001 compared to$683,000 in 2000, a decrease of $129,000 or 18.8%.  Dial around compensation in 2001 was $347,000 compared to 537,000in 2000, a decrease of $190,000 or 35.4%.

Cost of service for the Company was $656,000 in 2001 compared to$1,045,000 in 2000.  Cost of service forroutes disposed of by September 30, 2001 was $8,000 in 2001 and $136,000 in2000

Cost of service for the Puerto Rico route was $649,000 in 2001,compared to $909,000 in 2000.  Cost ofservice in 2001 includes telephone line charges of $456,000 compared to$687,000 in 2000.  During 2001, theCompany reduced accrued line charge expense by $215,000 to reflect progress inits ongoing dispute with PRTC.  Thisgain was charged against telephone line charges.  Without the effect of this gain, telephone line charges in PuertoRico decreased by $16,000.  Cost ofservice also includes commission to location site providers of $193,000compared to $222,000 in 2000.

SG&A was $1,153,000in 2001 compared to $1,491,000 in 2000. SG&A in 2001 includes $574,000 (49.8%) related to the Puerto Ricoroute, and $579,000 (50.2%) related to Corporate Overhead.

Puerto Rico SG&A in 2001 was $574,000 compared to $547,000 in 2000,an increase of $20,000 or 3.6%.

Corporate SG&A includes the cost of corporate officers, thecorporate offices, and other recurring expenses related to maintaining thecorporate entity, such as directors’ compensation, shareholder services, andaudit and reporting expenses.  CorporateSG&A in 2001 was $579,000 compared to $783,000 in 2000.

EBITDA was $672,000 in 2001 compared to $717,000 in 2000.  EBITDA from the Puerto Rico route was$981,000 in 2001 compared to $1,275,000 in 2000.

Depreciation and amortization totaled $216,000 in 2001 compared to$253,000 in 2000.  During 2000 theCompany recognized a $500,000 gain related to settling its sales tax disputewith the Minnesota Department of Revenue.

 

**Three months ended September 30, 2001compared to three months ended September 30, 2000.**

 

**Continuing Operations**

                The after tax gain on continuing operations,for the three months ended September 30, 2001 was $35,000 compared to a loss of$390,000 for the three months ended September 30, 2000.  Continuing operations includes the effect ofconsolidating Advants Inc.’s operations up until May 8, 2001,with the Company’sother investing activities.

                During the 2001 period, other income andexpense includes investment income $55,000 earned by Choicetel on itsinvestments, and $3,000 interest earned by Choicetel from investing excess cashbalances in money market accounts.

 

**Discontinued Operations**

                The after tax gain from discontinuedoperations for the three months ended September 30, 2001 was $139,000 comparedto deferred gain of $100,000 in the 2000 period.  Total Revenue for 2001 was $793,000 compared to $1,110,000 in2000. The Company operated an average of 1,500 payphones during 2001in PuertoRico.  This compares to 1,350 phones in2000.  Cost of service for the Companywas $25,000 in 2001 compared to $274,000 in 2000.  During 2001, the Company reduced accrued line charge expense by$215,000 to reflect progress in its ongoing dispute with PRTC.  This gain was charged against telephone linecharges.  Without the effect of thisgain, cost of service decreased by $24,000.

                Sales, General, and Admin (SG&A) was$453,000 in 2001 compared to $422,000 in 2000. SG&A in 2001 includes $198,000 (43.7%) related to the Puerto Ricoroute, and $255,000 (56.3%) related to Corporate Overhead.  Depreciation and amortization totaled$70,000 in 2001 compared to $98,000 in 2000.

 

**Ninemonths ended September 30, 2000 compared to nine months ended September 30,1999.**

                Total revenue for the nine months endedSeptember 30, 2000, were $123,000 compared to virtually no activity in the 1999period.  This revenue includesapproximately $76,000 in equipment sales to third-party venders andapproximately $19,000 in user fees at the company's kiosks.

                The cost of sales for the nine months endedSeptember 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 andwere spent to begin implementing the Company's strategy for public internetaccess terminals.

                Discontinued operations earned $671,000 inthe 2000 period compared to a loss of $59,000 in the 1999 period.  In addition, the Company recorded before taxlosses totaling $1,030,000 on sales of payphone assets.  Because management estimates that the finaldisposal of all payphone assets will be a gain, the net loss on the discontinuedoperations is being deferred until final disposal has been completed.

 

**Threemonths ended September 30, 2000 compared to three months ended September 30,1999.**

                Total revenue for the three months endedSeptember 30, 2000, were approximately $26,000 compared to virtually noactivity in the 1999 period.  Thisrevenue was composed of user fees at the company's kiosks.

                The cost of sales for the three months endedSeptember 30, 2000 were $33,000 representing line charges, internet servicefees and site provider commissions, and servicing expenses.  Selling, general and administrative("SG&A") expenses were $591,000 and were spent to beginimplementing the Company's strategy for public internet access terminals.

                Discontinued operations earned $361,000 in the2000 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 payphoneassets will be a gain, the net losses on the discontinued operations sinceDecember 1999 are being deferred until final disposal has been completed.

 

 

**LIQUIDITY AND CAPITAL RESOURCES**

                For the nine months ended September 30, 2001,the Company's operating activities provided $281,000.  Equipment purchases cost $141,000.  In addition the Company expended $436,000 to repurchase itscommon stock.  Activities were fundedwith a $19,000 sale of equipment and the issuance of short-term debt (byAdvants) of $104,000, the sale of the Company’s stock in Advants provided $500and the sale of intercompany debts provided $20,000, resulting in a $152,000decrease in cash balances.

 

                On July 262000, the Board of Directors authorized the Company to repurchase up to 5% ofthe outstanding common stock of the Company at market rates, on January 26,2001 the Board of Directors authorized the Company to repurchase an additional10% of the outstanding common stock, and on September 25, 2001 the Board ofDirectors authorized the Company to repurchase an additional 5% of theoutstanding common stock.  ThroughOctober 14, 2001, the company purchased 519,000 shares for $695,000.  Part II - Other Information

 

Item 1. LegalProceedings

 

In November 2000, a suit wascommenced in Hennepin County, Minnesota District Court by TKI Consultingagainst Advants, Inc. and the Company. TKI was a software provider to Advants and sued, for breach of contract,for approximately $750,000.  While theCompany was not a party to the contract, the plaintiff was seeking to hold theCompany liable for the alleged debt of Advants.  On August 31, 2001 the Company received a summary judgementruling in its favor on TKI’s claims to pierce the corporate veil.  Parties subsequently settled TKI’spromissory estoppel claim.

 

An additional suit was filed onApril 3, 2001in Ramsey County, Minnesota District Court by Tomato Land Displaysseeking damages in excess of $50,000 from Advants for alleged servicesprovided.  While the Company was not aparty to the transaction, the plaintiff was seeking to hold the Company liablefor the alleged debt of Advants.  TomatoLand subsequently agreed to dismiss this action and pursue its claims in theLeaf Industries claim, discussed below.

 

An additional suit was filed on June 4,2001in Hennepin County, Minnesota District Court by Leaf Industries, seeking topierce the corporate veil, hold Choicetel responsible for Advants’ debts, andseeking damages in excess of $50,000 from Advants for alleged servicesprovided.  Tomato Land Displays is alsoa defendant in this action and has filed cross claims against Choicetel in thisaction. The Company is defending the action.

 

The Company has not accrued anyamounts relating to these items, since in management’s view, an unfavorableoutcome is unlikely.

 

 

Item 6. Reports on Form 8-K

 

On August 15, 2001 the Company announced theNASDAQ notified the Company that its common stock had failed to maintain therequired $1,000,000 minimum market value of public float.  The Company also announced it had filed withthe SEC for a 5-day extension to file its second quarter 10-Q.