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**SECURITIESAND EXCHANGE COMMISSION****Washington, DC 20549**

**FORM10-QSB**

**          QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended June30, 2001**

**Commission file number 0-23017**

| **CHOICETEL COMMUNICATIONS,  INC.**                    |
|--------------------------------------------------------|
| ****                                                   |
| (Exact name of registrant as specified in its charter) |

 

| **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)                                                                      |   |
|                                                     |                                                                            |   |
|                                                     | **952-249-1802**                                                                |
|                                                     | ****                                                                            |
|                                                     | Registrant’s telephone number, including area code                         |
|                                                     |                                                                            |
|                                                     | **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)                |
|                                                     |                                                                            |
|                                                     | **N/A******                                                                     |
|                                                     | Registrant's former telephone number, including area code                       |
|                                                          |                                                                                 |        |  |

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.                           Yes    ý            No   o

As of date offiling, the Company has 3,277,981 shares outstanding.

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**CHOICETEL COMMUNICATIONS, INC.**

**Form 10-QSB IndexAugust 20, 2001**

| Part  I:     Financial Information                          |                                                                             |
|---------------------------------------------------------------------------------|----------------------------------------------------------------------------------|
|                                                                            |                                                                             |
| Item  1.    Financial Statements                                 |                                                                             |
|                                                                            |                                                                             |
|                                                                            | Consolidated Balance  Sheet -December 31, 2000  and June 30, 2001                |   |
|                                                                            |                                                                             |   |
|                                                                            |                                                                             |
|                                                                            | Consolidated  Statements of Operations -                                         |   |
|                                                                            | Three months ended June 30,  2000 and 2001                                       |   |
|                                                                            | Six  months ended June 30, 2000 and 2001                                         |   |
|                                                                            |                                                                             |
|                                                                            | Consolidated  Statements of Cash Flows -Six months ended June 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  4.    Submission of Matters to a Vote  of Security Holders |                                                                             |
|                                                                            |                                                                             |
| Item  6.     Exhibits and Reports on Form  8-K              |                                                                             |
|                                                                            |                                                                             |
|                                                                                 |                                                                                  |  |  |

 

Signature

Pursuantto the 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:  August 20, 2001 |   | By:                                         | /s/  Jack S. Kohler |
|                   |   |                                        |  |
|                   |   |                                        | Jack  S. Kohler |
|                   |   | Vice President and Chief Financial  Officer |

 

|                               | CONDENSED  CONSOLIDATED |
|------------------------------------|-------------------------|
| **CHOICETEL COMMUNICATIONS, INC.** | BALANCE SHEETS          |
| **AND SUBSIDIARIES**               |                    |

----

|                                        | (Unaudited)                            |         |       |         |
|---------------------------------------------|----------------------------------------|--------------|------------|--------------|
|                                        | 6/30/2001                              |         | 12/31/2000 |         |
|                                        | ******                                 | *** *** | ******     | *** *** |
| ***Assets:***                               |                                   | *** *** |       | *** *** |
|                                        | Current  assets:                       |         |       |         |   |
|                                        | Cash  and cash equivalents             | $            | 383,949    |         | $ | 495,312 |   |
|                                        | Investments                            | 2,344,161    |       | 2,203,306    |   |
|                                        | Receivables                            | 467,262      |       | 521,072      |   |
|                                        | Prepaid  and other assets              | 64,761       |       | 88,167       |   |
|                                        | Deferred  taxes                        | 1,147,945    |       | 1,873,000    |   |
|                                        |                                        |         |            |         |
|                                        |                                   |         |       |         |
|                                        | Total  current assets                  | 4,408,078    |       | 5,180,857    |   |
|                                        |                                   |         |       |         |
|                                        | Property  and equipment, net           |         |       | 239,500      |   |
|                                        |                                   |         |       |         |
|                                        | Net  assets of discontinued operations | 2,051,871    |       | 1,943,228    |   |
|                                        |                                        |         |            |         |
|                                        | $                                      | 6,459,949    |       | $            | 7,363,585 |   |
|                                        |                                        |         |            |         |
|                                        |                                   |         |       |         |
| ***Liabilities and shareholders' equity:*** |                                   | *** *** |       | *** *** |
|                                        | Current liabilities:                   |         |       |         |   |
|                                        | Accounts  payable                      | $            | 21,844     |         | $ | 1,788,235 |   |
|                                        | Accrued  expenses                      | 138,208      |       | 207,841      |   |
|                                        | Notes  payable                         |         |       |         |   |
|                                        |                                        |         |            |         |
|                                        | Total  current liabilities             | 160,052      |       | 1,996,076    |   |
|                                        |                                   |         |       |         |
|                                        | Shareholders'  equity                  | 6,299,897    |       | 5,367,509    |   |
|                                        |                                        |         |            |         |
|                                        |                                   |         |       |         |
|                                        | $                                      | 6,459,949    |       | $            | 7,363,585 |   |
|                                        |                                        |         |            |         |
|                                             |                                        |              |            |              |  |  |  |  |  |

 

Seenotes to condensed consolidated financial statements.

 

|                                | CONDENSED CONSOLIDATED      |
|-------------------------------------|-----------------------------|
| **CHOICETEL  COMMUNICATIONS, INC.** | STATEMENTS OF  OPERATIONS   |
| **AND  SUBSIDIARIES**               | THREE  MONTHS ENDED JUNE 30 |
|                                | (Unaudited)                 |

----

|                                                                          | 2001                                        |      | 2000     |      |
|-------------------------------------------------------------------------------|---------------------------------------------|-----------|----------|-----------|
|                                                                          |                                             |      |          |      |
|                                                                          |                                        |      |     |      |
| Revenue                                                                       | $                                           | 4,886     |     | $         | 7,015 |   |
| Cost  of sales                                                                | 10,000                                      |      | 5,249    |      |
|                                                                          |                                             |      |          |      |
|                                                                          |                                        |      |     |      |
| Gross  margin                                                                 | (5,114                                      | )         | 1,766    |      |
|                                                                          |                                        |      |     |      |
| Selling,  general and administrative expenses                                 | 106,705                                     |      | 452,023  |      |
|                                                                          |                                             |      |          |      |
|                                                                          |                                        |      |     |      |
| Operating  loss                                                               | (111,819                                    | )         | (450,257 | )         |
|                                                                          |                                        |      |     |      |
| Other  income                                                                 |                                        |      |     |      |
|                                                                          | Investment  income                          | 38,838    |     |      |   |
|                                                                          | Interest  income, net                       | 3,625     |     | 59,730    |   |
|                                                                          |                                             |      |          |      |
|                                                                          |                                        |      |     |      |
| Loss  from continuing operations before income tax benefit                    | (69,356                                     | )         | (354,039 | )         |
|                                                                          |                                        |      |     |      |
| Minority  interest                                                            |                                        |      | 114,197  |      |
|                                                                          |                                        |      |     |      |
| Income  tax expense (benefit)                                                 | (27,599                                     | )         |     |      |
|                                                                          |                                             |      |          |      |
|                                                                          |                                        |      |     |      |
| Loss  from continuing operations                                              | (41,757                                     | )         | (239,842 | )         |
|                                                                          |                                        |      |     |      |
| Gain  on disposal of subsidiary (net of $752,797 income tax expense in 2001)  | 1,129,196                                   |      |     |      |
|                                                                          |                                             |      |     |      |
|                                                                          |                                        |      |     |      |
| Income  before discontinued operations                                        | 1,087,439                                   |      |     |      |
|                                                                          |                                        |      |     |      |
| Loss  from discontinued operations (net of $2,807 income tax benefit in 2001) | (4,209                                      | )         |     |      |
|                                                                          |                                             |      |          |      |
|                                                                          |                                        |      |     |      |
| Net  income (loss)                                                            | $                                           | 1,083,230 |     | $         | (239,842 | ) |
|                                                                          |                                             |      |          |      |
| Earnings  (loss) per share:                                                   |                                        |      |     |      |
|                                                                          | Continuing  operations, basic and diluted   | $         | (0.33    | )         | $ | (0.08 | ) |
|                                                                          |                                        |           |     |           |   |
|                                                                          | Discontinued  operations, basic and diluted | $         | 0.00     |      | $ | (0.00 | ) |
|                                                                          |                                        |           |     |           |   |
|                                                                          | Net  income (loss), basic and diluted       | $         | 0.33     |      | $ | (0.08 | ) |
|                                                                          |                                             |      |          |      |
| Weighted  average number of shares outstanding:                               |                                        |      |     |      |
|                                                                          | Basic                                       | 3,290,574 |     | 2,973,466 |   |
|                                                                          |                                        |           |     |           |   |
|                                                                          | Diluted                                     | 3,290,574 |     | 2,973,466 |   |
|                                                                          |                                             |      |          |      |
|                                                                               |                                             |           |          |           |  |  |  |  |

Seenotes to condensed consolidated financial statements. CONDENSED CONSOLIDATED**CHOICETEL  COMMUNICATIONS, INC.**STATEMENTS OF  OPERATIONS**AND  SUBSIDIARIES**SIX  MONTHS ENDED JUNE 30 (Unaudited) 2001 2000    Revenue$19,544 $96,876 Cost  of sales75,110 74,402         Gross  margin(55,566)22,474      Selling,  general and administrative expenses391,711 738,752         Operating  loss(447,277)(716,278)     Other  income     Investment  income140,855    Interest  income, net9,137 96,218         Loss  from continuing operations before income tax benefit(297,285)(620,060)     Minority  interest  220,605      Income  tax expense (benefit)(118,914)          Loss  from continuing operations(178,371)(399,455)     Gain  on disposal of subsidiary (net of $752,797 income tax expense in 2001)1,129,196            Income  before discontinued operations950,825        Income  from discontinued operations (net of $79,906 income tax expense in 2001)143,757           Net  income (loss)$1,094,582 $(399,455)   Earnings  (loss) per share:     Continuing  operations, basic and diluted$0.29 $(0.12)     Discontinued  operations, basic and diluted$0.04 $(0.00)     Net  income (loss), basic and diluted$0.33 $(0.12)   Weighted  average number of shares outstanding:     Basic3,333,019 3,213,075      Diluted3,333,019 3,213,075    
Seenotes to condensed consolidated financial statements

 
 CONDENSED CONSOLIDATED**CHOICETEL  COMMUNICATIONS, INC.**STATEMENTS  OF CASH FLOWS**AND  SUBSIDIARIES**SIX MONTHS ENDED JUNE  30 (UNAUDITED) 2001 2000    Cash  flows from operating activities:     Net  income (loss)$1,094,582 $(495,673) Adjustments  to reconcile net income (loss) to net cash provided by operating activities:     Deferred  taxes(27,742)201,755  Depreciation  and amortization145,915 15,946  Unrealized  gain on investments(140,855)   Minority  interest loss  (220,605) Gain  on disposal of subsidiary(1,129,196)   Changes  in operating assets and liabilities:     Receivables53,675 724,594  Cash  in phones2,103    Prepaid  and other assets(63,810)254,223  Accounts  payable(71,786)350,621  Refundable  income tax  (300,000) Deferred  loss  292,655  Accrued  expenses203,100 (1,354,815) Income  tax payable  (221,000)    Net  cash provided by (used in) operating activities65,986 (752,299)        Cash  flows from investing activities:     Purchase  of equipment(136,123)(1,284,822) Proceeds  from sale of equipment19,514    Sale  of intercompany notes20,000    Sale  of subsidiary500    Proceeds  from sale of equipment and rental contracts  1,960,176      Net  cash provided by (used in) investing activities(96,109)675,354         Cash  flows from financing activities:     Collection  of subscription receivable  225,000  Issuance  of common stock  2,106,308  Issuance  of notes payable104,000 252,756  Repurchase  of common stock(185,240)   Principal  payments on long-term debt  (387,475)     Net  cash provided by (used in) financing activities(81,240)2,196,589         Net  increase (decrease) in cash and cash equivalents$(111,363)$2,119,644 Cash  and cash equivalents, beginning495,312 2,323,344    Cash  and cash equivalents, ending$383,949 $4,442,988    
 

Supplemental disclosure of cash flowinformation:
 Cash  paid for interest$843 $845      Cash  paid for income taxes$  $320,000      Common  stock issued for accrued expenses$  $93,121      Goodwill  in subsidiary acquired  $956,785     Stock  issued under options$20,000 $      
 

Thegain on disposal of subsidiary includes the elimination of the following items:
Accounts  payable1,694,605 Deferred  tax752,797 Accrued  expenses(303,009)Sale  of equipment(219,986)Issuance  of notes payable104,000 Receivables(135)   1,128,696   
 

Seenotes 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 and six month periods ended June 30,  2001 and 2000 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, 2001 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, 2000 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-KSB annual report for 2000 filed with the Securities and  Exchange Commission.  The results of operations for the six  month period ended June 30, 2001 are not necessarily indicative of the  results to be expected in a full year.  Nature of business: ChoiceTel Communications, Inc., and Subsidiary  (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  providing pay phone services in several states and Puerto Rico. In December  1999, the Company decided to sell its pay phone operations.  Advants was formed to provide public  internet access through kiosks located in high traffic areas such as gas  stations and supermarkets.  Advants  has had minimal revenue since inception and has incurred large expenses for  hardware and software development. In February 2001, the Company determined  to cease funding of Advants and liquidate its investment.    On May 8, 2001, the Company sold its  investment in Advants to an unrelated party recording a gain of  $1,129,000.  For tax purposes the  Company intends to make an election, with the concurrence of the purchaser,  under Internal Revenue Code Section 338 that allow it to utilize certain loss  carry-forwards and tax benefits from the former subsidiary.  If such an election is not made, deferred  tax assets of approximately $1,332,000 would be charged to the statement of  operations.  Discontinued operations: The Company decided to discontinue its  pay phone operations in December 1999.   The Company has estimated it will realize an overall gain on the  disposal of discontinued operations and accordingly, has not recorded a  reserve.
Thenet assets of the discontinued operations consist of the following as of June30, 2001 (unaudited) and December 31, 2000:
 2001 2000    Cash$83,511 $85,614 Prepaid  expenses and other assets227,102 139,887 Property  and equipment, net2,092,028 2,068,183 Accrued  expenses(350,770)(381,047)    $2,051,871 $1,943,228    
 

 

2.          Property and equipment as of December31, 2000:
   Office  equipment$35,000 Kiosks154,500    189,500 In  process software50,000    $239,500   
 
3.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. Leases: The Company leases its offices in  Puerto Rico under operating leases expiring in May 2002 and has a renewal  option. The Company leases its corporate offices in Wayzata, Minnesota under  a lease expiring in April 2002.  Rent  expense was $40,360 for the year ended December 31, 2000.  The future minimum lease payment is  $48,420 for the year ending December 31, 2001. Contingencies: Puerto  Rico line charges: The  Company has an ongoing dispute with the Puerto Rican Telephone Company (PRTC)  related to the period March 1998 to the present.  The PRTC claims the Company owes $519,000.  The Company’s analysis indicates that the  PRTC owes the Company $180,000.  At  December 31, 2000 and at June 30, 2001 (unaudited) the Company has accrued a  $250,000 liability, which it believes is adequate to resolve this matter. 4Restatement of 2000 statement of operations: The unaudited statement of operations  for the six months ended June 30, 2000 has been changed to reflect $96,218 of  interest income which had previously been included in deferred loss on sale  of discontinued operations.  The  effect on earnings per share was to decrease the loss per share from $0.21 to  $0.17.   The unaudited statement of operations  for the three months ended June 30, 2000 has been changed to reflect $59,730  of interest income which had previously been included in deferred loss on  sale of discontinued operations.  The  effect on earnings per share was to decrease the loss per share from $0.15 to  $0.13.
 

**Item 2.**

**MANAGEMENT'SDISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*Except for historicalinformation contained in this Report, information contained in this Form 10-KSBcontains “forward–looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995, which can be identified by the use offorward-looking terminology such as “may”, “will”, “expect”, “plan”,“estimate”, or “continue” or the negative thereof or other variations thereonor comparable terminology.  There arecertain important factors that could cause results to differ materially fromthose anticipated by some of these forward-looking statements, includingwithout limitation, the effects of changes in economic conditions and certainof the “Risk Factors” entitled “Competition,” “Other Regulatory Factors,”“Technological Change and New Services,” “Dependence Upon Third-PartyProviders,” “Service Interruptions; Equipment Failures,” “Reliance on SingleBrand of Payphones,” and “Reliance on Key Personnel” contained in the Company’sProspectus dated November 10, 1997 included in the Registration Statement onForm SB-2 filed with the Securities and Exchange Commission (Registration No.333-29969).  Such “Risk Factors” areincorporated herein by reference. Investors are cautioned  that allforward-looking statements involve risk and uncertainty.*

**General**

             TheCompany derives revenue from three principal sources: coin calls, non-coincalls and dial-around calls.  Coin callsrepresent calls paid for with coins deposited in the telephone.  The Company recognizes coin revenue in theamount deposited.  Non-coin calls arecalls charged to a customer credit card or billed to the called party (collectcalls). These calls are routed to and processed by an operator service provider(“OSP”). Compensation for Dial-Around calls is paid by long-distance carrierswhen consumers access a long-distance carrier directly by dialing an accessnumber, or by dialing an 800 number, or by using a non-billable calling card.             The principal costs relatedto ongoing operation of the Company’s payphones include telephone line charges,consisting of payments made by the Company to telephone companies andlong-distance carriers for access charges and use of their networks; commissionpayments to Site Providers; and service, repair and maintenance costs.             The Company’s formerly 80%owned subsidiary (Advants, Inc.) derived revenue from three principal sources:sales of kiosks to third-party venders, user fees collected in cash or creditcard at the kiosk, and sponsorship revenues from affiliates, sponsors andadvertisers.  All revenue is recognizedas received, net of processing charges. The principal costs related to ongoing operation include telephone linecharges, connectivity charges for internet access and commission payments tosite providers.  The Company determinedto cease funding Advants and liquidate its investment, and on May 8, 2001, theCompany sold its stock in Advants and ceased consolidating Advants operatingresults as of that date.

**Six months ended June 30, 2001 compared to six months endedJune  30, 2000.**

**Continuing Operations**             Theafter tax loss on continuing operations, for the six months ended June 30, 2001was $178,000 compared to a loss of $513,500 for the six months ended June 30,2000.  Continuing operations includesthe effect of consolidating Advants Inc.’s operations up until May 8, 2001 withthe Company’s other investing activities. All payphone related activity is reported as discontinued operations.

             Advants’revenues for the period ended June 30, 2001 were $19,500 compared to $97,000for the period ended June 30, 2000. User fees were $20,000 in 2001, compared to $11,000 in 2000.  Revenue in the 2000 period also included$86,000 in equipment sales to a third party vender. The cost of service in the2001 period was $65,000 compared to $69,000 in 2000, which included $65,000cost of equipment sold.

             Advants’sSG&A expenses in the 2001 period were $392,000 compared to $739,000 in2000.  Expenses were incurred todevelop, deploy and support a national network of public access internetterminals.
             Duringthe 2001 period, other income and expense includes $141,000 of investmentincome earned by Choicetel, and $9,000 interest earned by Choicetel frominvesting excess cash balances in money market accounts.

             TheCompany recognized a $1,129,000 accounting gain primarily as a result of nolonger consolidating Advants’ balance sheet.

**Discontinued Operations**             Theafter tax gain from discontinued operations for the six months ended June 30,2001 was $144,000 compared to deferred gain of $214,000 in the 2000period.  Total Revenue for 2001 was $1,690,000compared to $1,911,000 in 2000. The Company operated an average of 1,550payphones during 2001in Puerto Rico. This compares to 1,200 phones in 2000, located primarily in Puerto Ricoand Pennsylvania.             During the 2001 period theCompany operated an average of 1,550 phones in Puerto Rico compared to 1,200for the 2000 period.  Revenue from thePuerto Rico route in 2001 was $1,629,000 compared to $1,650,000 in 2000.  Puerto Rico coin revenue in the 2001 periodwas $1,013,000 compared to $1,006,000 in 2000, an increase of $7,000 or0.7%.  This increase was due to thegreater number of phones in service; however, the phones did not match, on aper phone basis, the coin revenue of the previous year’s period.  Noncoin commission revenue from operatorservice providers was $388,000 in 2001 compared to $421,000 in 2000, a decreaseof $33,000 or 7.8%. Dial around compensation in 2001 was $229,000 compared to223,000 in 2000, a decrease of $6,000 or 2.7%.             Cost of service for theCompany was $632,000 in 2001 compared to $771,000 in 2000.  Cost of service for routes disposed of byJune 30, 2001 was $96,000 in 2000.             Cost of service for thePuerto Rico route was $632,000 in 2001, compared to $675,000 in 2000.  Cost of service in 2001 includes telephoneline charges of $494,000 compared to $521,500 in 2000.  Cost of service also includes commission tolocation site providers of $137,000 compared to $153,000 in 2000.             Sales, General, and Admin(SG&A) was $700,000 in 2001 compared to $1,069,000 in 2000.  SG&A in 2001 includes $376,000 (53.7%)related to the Puerto Rico route, and $326,000 (46.3%) related to CorporateOverhead.             Puerto Rico SG&A in 2001was $376,000 compared to $370,000 in 2000, an increase of $6,000 or 1.6%.             Corporate SG&A includesthe cost of corporate officers, the corporate offices, and other recurringexpenses related to maintaining the corporate entity, such as directors’compensation, shareholder services, and audit and reporting expenses.  Corporate SG&A in 2001 was $326,000compared to $584,000 in 2000.             EBITDA was $297,000 in 2001compared to $71,000 in 2000.  EBITDAfrom the Puerto Rico route was $621,000 in 2001 compared to $604,000 in 2000.             Depreciation and amortizationtotaled $146,000 in 2001 compared to $155,000 in 2000.  During 2000 the Company recognized a$500,000 gain related to settling its sales tax dispute with the MinnesotaDepartment of Revenue.

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

**Continuing Operations            **The after tax loss on continuing operations, for thethree months ended June 30, 2001 was $42,000 compared  to a loss of $240,000 for the three months ended June 30,2000.  Continuing operations includesthe effect of consolidating Advants Inc.'s operations up until May 8, 2001,with the Company's other investing activities.             Advants' revenues for theperiod ended June 30, 2001 were $5,000 compared to $7,000 for the period endedJune 30, 2000.  The cost of service inthe 2001 period was $10,000 compared to $5,000 in 2000.  Advants' SG&A spending in the 2001period was $106,000 compared to $452,000 in 2000.  Spending was incurred to develop, deploy and support a nationalnetwork of public access internet terminals.             During the 2001 period, otherincome and expense includes $39,000 Choicetel earned on its investments, and$3,500 interest earned by Choicetel from investing excess cash balances inmoney market accounts.             The Company recognized a$1,129,000 accounting gain as a result of no longer consolidating Advants'balance sheet.

**Discontinued Operations**             The after tax loss fromdiscontinued operations for the three months ended June 30, 2001 was $4,000compared to deferred gain of $75,500 in the 2000 period.  Total Revenue for 2001 was $699,000 comparedto $851,000 in 2000.  The Companyoperated an average of 1,550 payphones during 2001 in Puerto Rico. Thiscompares to 1,250 phones in 2000.  Costof service for the Company was $298,000 in 2001 compared to $327,000 in 2000.             Sales, General, and Admin(SG&A) was $340,000 in 2001 compared to $332,000 in 2000.  SG&A in 2001 includes $169,000 (49.7%)related to the Puerto Rico route, and $173,000 (50.3%) related to CorporateOverhead.  Depreciation and amortizationtotaled $80,000 in 2001 compared to $58,000 in 2000.

**Six months ended June 30, 2000 compared to six months endedJune 30 1999.            **Totalrevenue for the six months ended June 30, 2000, was $97,000 compared tovirtually no activity in the 1999 period. This revenue was composed of approximately $86,000 in equipment sales tothird-party venders and approximately $11,000 in user fees at the company’skiosks.             The cost of sales for the sixmonths ended June 30, 2000 were $74,000 representing $60,000 in cost of goodssold and $14,000 in line charges, internet service fees and site providercommissions.  Selling, general andadministrative ("SG&A") expenses were $739,000 and were spent tobegin implementing the Company’s strategy for public internet access terminals.             Discontinued operations earned $310,000 in the 2000 period compared to aloss of $59,000 in the 1999 period. Because management estimates that the finaldisposal of all payphone assets will be a gain, the loss on the discontinuedoperations is being deferred until final disposal has been completed.

**LIQUIDITY AND CAPITAL RESOURCES**             Forthe six months ended June 30, 2001, the Company's operating activities provided$66,000.  Equipment purchases cost$136,000.  In addition the Companyexpended $185,000 to repurchase its common stock.  Activities were funded with a $19,000 sale of equipment and theissuance of short-term debt (by Advants) of $104,000, the sale of the Company’sstock in Advants provided $500 and the sale of intercompany debts provided$20,000, resulting in a $111,000 decrease in cash balances.

             OnJuly 26, 2000 the Board of Directors authorized the Company to repurchase up to5% of the outstanding common stock of the Company at market rates, and onJanuary 26, 2001 the Board of Directors authorized the Company to repurchase anadditional 10% of the outstanding common stock.  Through August 10, 2001, the company purchased 267,918 shares for$443,700.
PartII  - Other Information

Item1. Legal Proceedings

In November 2000, a suit was commenced inHennepin County, Minnesota District Court by TKI Consulting against Advants,Inc. and the Company.  TKI was asoftware provider to Advants and seeks recovery of approximately $750,000 foralleged breach of contract.  While theCompany is not a party to the contract, the plaintiff is seeking to hold theCompany liable for the alleged debt of Advants. The Company is defending theaction.

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 is not a party to thetransaction, the plaintiff is seeking to hold the Company liable for thealleged debt of Advants. The Company is defending the action.

An additional suit was filed on June 4,2001in Hennepin County, Minnesota District Court by Leaf Industries,  seeking damages in excess of $50,000 fromAdvants for alleged services provided. While the Company is not a party to the transaction, the plaintiff isseeking to hold the Company liable for the alleged debt of Advants. The Companyis defending the action.

The Company has not accrued any amountsrelating to these items, since in management's view, the likelyhood of anunfavorable outcome in any of these matters is remote.
Item  4.Submission  of Matters to a Vote of Security Holders
 
a.An  annual meeting of shareholders was held on July 23, 2001.  There were 3,278,081 shares of common  stock entitled to vote at the meeting and a total of 2,316,288 shares or  70.66% were represented at the meeting.b.The  meeting resulted in the reelection of the following directors as follows:
 
 NomineeForAgainst  Gary S. Kohler2,311,3884,900 Jeffrey R. Paletz2,311,3884,900 Robert A. Hegstrom2,280,68835,600 Mike Wigley2,280,68835,600
 
Item 6.Reports  on Form 8-K  
None**