** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

**FORM 10-QSB**
| **(Mark One)**                                     |
|----------------------------------------------------|
| ** **                                         | ** ** |
| **x**                                              | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
| ** **                                         | ** ** |
| **For the  quarterly period ended March 31, 2007** |
| ** **                                         | ** ** |
| **o**                                              | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934** |
|                                                    |  |  |

**For the transition periodfrom                to**

**Commission file number 000-50712**

**PAYPHONE WIND DOWN CORPORATION**

(Exact name of small business issuer as specified inits charter)
| **Delaware**                              |   | **58-2131736**                        |
|-------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)           |   |                                  |
|                                      |   |                                  |
| **P.O.  Box 143209, Fayetteville, GA**    |   | **30214**                             |
| (Address of principal  executive offices) |   | (Zip Code)                            |

**(770) 631-3489**

(Issuer’s telephone number)

Check whetherthe issuer (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.Yes  o    No  x

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes  x    No  o

**APPLICABLE ONLY TO ISSUERS INVOLVEDIN BANKRUPTCY**

**PROCEEDINGS DURING THE PRECEDING FIVEYEARS**

Checkwhether the registrant filed all documents and reports required to be filed bySection 12, 13 or 15(d) of the Exchange Act after the distribution ofsecurities under a plan confirmed by a court. Yes  x    No  o

TransitionalSmall Business Disclosure Format. Yes  x    No  o

As ofFebruary 14, 2007, there were outstanding 4,987,624 shares of the Issuer’scommon stock $.0001 par value.

 

 

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**PAYPHONE WIND DOWN CORPORATION**

**INDEX TO FORM 10-QSB**

**MARCH 31, 2007**

Part I.Financial Information

 
| Item  1.                         |   | Financial  Statements                                                                                               |   |
|----------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|--------|
|                             |   | Statement of Net Assets in Liquidation March 31, 2007  (Unaudited)                                                  |   |
|                             |   | Statements of  Changes in Net Assets in Liquidation for the three months ended March 31,  2007 and 2006 (Unaudited) |   |
|                             |   | Notes to  Financial Statements (Unaudited)                                                                          |   |
| Item 2.                          |   | Plan of Operation                                                                                                   |   |
| Item 3.                          |   | Controls and  Procedures                                                                                            |   |
|                             |   |                                                                                                                |   |
| Part II.  Other Information |   |
| Item 1.                          |   | Legal Proceedings                                                                                                   |   |
| Item 5.                          |   | Other Information                                                                                                   |   |
| Item 6.                          |   | Exhibits                                                                                                            |   |
| Signatures                       |   |                                                                                                                |

 

 

 

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**PART I.FINANCIAL INFORMATION**

**Item 1.Financial Statements**

**PAYPHONE WIND DOWN CORPORATION**

**STATEMENT OF NET ASSETS INLIQUIDATION**

**MARCH 31, 2007**

**(Unaudited)**
| **ASSETS**                                         | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|------------|------------|
| Cash                                               |       | $          | 2,288,746  |   |
| Cash, restricted                                   |       | 83,575     |       |
| Accounts  receivable                               |       | 5,488,616  |       |
| Deposits                                           |       | 5,207      |       |
| Total assets                                       |       | 7,866,144  |       |
|                                               |       |       |       |
| **LIABILITIES**                                    | ** ** | ** ** | ** ** |
| Estimated costs  to be incurred during liquidation |       | 1,896,989  |       |
| Accounts payable                                   |       | 1,396,474  |       |
| Accrued expenses                                   |       | 3,765,949  |       |
| Accrued  property, excise and sales taxes          |       | 66,032     |       |
| Total liabilities                                  |       | 7,125,444  |       |
|                                               |       |       |       |
| **Net  assets in liquidation**                     |       | $          | 740,700    |   |

 

 

The accompanying notes are an integral part ofthese financial statements.

 

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**PAYPHONE WIND DOWN CORPORATION**

**STATEMENTS OF CHANGES IN NET ASSETSIN LIQUIDATION**

**FOR THE THREE MONTHS ENDED MARCH 31,2007 AND 2006**

**(Unaudited)**

 

 
| ** **                                                     | ** ** | ** ** | ** ** | **For the three months ended March 31,** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|------------------------------------------|------------|
| ** **                                                     | ** ** | ** ** | ** ** | **2007**                                 | ** ** | **2006** | ** ** |
| PRE-LIQUIDATION  OPERATIONS                                    |       |       |       |                                     |       |   |   |
| Coin calls                                                     |       |       |       | $                                        | 601,243    |   | $ | 1,898,977 |   |
| Non-coin calls                                                 |       |       |       | 288,032                                  |       | 1,039,083 |   |
| Other payphone  revenues                                       |       |       |       | 38,689                                   |       | 343,839 |   |
| Total revenues                                                 |       |       |       | 927,964                                  |       | 3,281,899 |   |
|                                                           |       |       |       |                                     |       |   |   |
| Direct cost of  payphone operations                            |       |       |       | 917,884                                  |       | 3,142,664 |   |
| Selling, general  and administrative                           |       |       |       | 150,379                                  |       | 823,513 |   |
| Depreciation                                                   |       |       |       | —                                   |       | 120,104 |   |
| Total operating  expenses                                      |       |       |       | 1,068,263                                |       | 4,086,281 |   |
|                                                           |       |       |       |                                     |       |   |   |
| Loss from  operations                                          |       |       |       | (140,299                                 | )          | (804,382 | ) |
|                                                           |       |       |       |                                     |       |   |   |
| Other income                                                   |       |       |       | 518,642                                  |       | 69,443 |   |
|                                                           |       |       |       |                                     |       |   |   |
| Income (loss)  from pre-liquidation operations                 |       |       |       | 378,343                                  |       | (734,939 | ) |
|                                                           |       |       |       |                                     |       |   |   |
| LIQUIDATION  ACTIVITIES                                        |       |       |       |                                     |       |   |   |
| Administrative  expenses incurred after entering liquidation   |       |       |       | 100,000                                  |       | (2,468,148 | ) |
| Net realized  gain on sale of assets and liabilities           |       |       |       | 2,578,009                                |       | — |   |
| Net unrealized  gain on revaluations of assets and liabilities |       |       |       | —                                   |       | 1,001,314 |   |
| Net income  (loss) in liquidation                              |       |       |       | 2,678,009                                |       | (1,466,834 | ) |
|                                                           |       |       |       |                                     |       |   |   |
| Net increase  (decrease) in net assets                         |       |       |       | 3,056,352                                |       | (2,201,773 | )  |
|                                                           |       |       |       |                                     |       |   |   |
| Shareholders’  equity (deficiency) at beginning of period |       |       |       | (2,315,652                               | )          | 2,563,189 |   |
| Net assets in  liquidation at March 31, 2007 and 2006          |       |       |       | $                                        | 740,700    |   | $ | 361,416 |   |
|                                                           |       |       |       |                                     |       |   |   |

 

 

The accompanying notes are an integral part ofthese financial statements.

 

 

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**PAYPHONEWIND DOWN CORPORATION**

**NOTES TO FINANCIAL STATEMENTS (UNAUDITED)**

**MARCH31, 2007**

**NOTE A—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

***Summary Information***

The accompanyingunaudited financial statements have been prepared pursuant to therules and regulations of the Securities and Exchange Commission (“SEC”)for interim financial information and the general instructions toForm 10-QSB. Certain information and footnote disclosures, normallyincluded in annual financial statements, have been condensed or omittedpursuant to such SEC rules and regulations. These interim financialstatements should be read in conjunction with our audited financial statementsand notes thereto included in our Annual Report on Form 10-KSB for the fiscalyear ended December 31, 2006.

***The Company***

Payphone Wind DownCorporation (“we,” “us,” “our,” or the “Company”), formerly ETS Payphones, Inc.(“ETS”), is a Delaware corporation that operated, serviced, and maintained asystem of payphones, concentrated primarily in the Eastern and Southern UnitedStates (other than Florida), as well as the District of Columbia and PuertoRico. The Company also provided other telecommunications products to certain ofits clients. Pursuant to the Annual Meeting of Stockholders held on February15, 2006, the stockholders of the Company approved, among other things, thewinding down of our operations following the sale of substantially all of ourassets to Empire Payphones, Inc. (“Empire”), pursuant to an Asset SaleAgreement dated November 1, 2005 (the “Asset Sale Agreement”). The Board ofDirectors of the Company (the “Board of Directors”) approved the dissolution onOctober 31, 2005 subject to stockholder approval and consummation of the AssetSale Agreement. On February 9, 2007, pursuant to the First Amendment to theAsset Sale Agreement, dated as of February 9, 2007 (the “First Amendment”), theparties finalized the Asset Sale Agreement and agreed that the closing datewould be deemed effective as of December 31, 2006 (the “Closing Date”).However, for financial reporting purposes, the Company has deemed the sale dateto be concurrent with the closing, February 9, 2007, and accordingly, hasrecorded the sale of the assets on that date. On February 12, 2007, the Companyamended the Certificate of Incorporation of the Company to change the name ofthe Company to “Payphone Wind Down Corporation” from ETS Payphones, Inc. Inorder to accomplish the liquidation and dissolution, on February 14, 2007, theBoard of Directors filed a Certificate of Dissolution of the Company (“Certificateof Dissolution”) with the Delaware Secretary of State to dissolve the Company.Since February 9, 2007, the Company’s activities have been limited solely tothose incidental to effecting its dissolution, including the investment of anyfunds being held in reserve and the distribution of its remaining assets to itsstockholders.

 

Upon the filing of theCertificate of Dissolution with the State of Delaware, the Company ordered thetransfer agent to close the stock transfer books to discontinue recordingtransfers of the Company’s common stock at the close of business on the ClosingDate (the “Final Record Date”). As a result of the approval by the Company’sstockholders of the sale of substantially all of the assets of the Company andapproval of the liquidation and dissolution of the Company following theclosing of the sale, the Company changed its basis of accounting to theliquidation basis of accounting as of January 1, 2006. If the Company electedto continue to use the going concern basis of accounting to present itsoperations for the period January 1, 2006 through February 14, 2006, the effectwould be immaterial.

 

***Basisof Accounting***

As a result of ourshareholders’ approval of the sale of substantially all of the Company’s assetsand the imminent nature of the liquidation of our Company, the Company adoptedthe liquidation basis of accounting effective January 1, 2006. The liquidationbasis of accounting is considered appropriate when, among other things, liquidationof a company is probable and the net realizable values of assets are reasonablydeterminable. Under this basis of accounting, assets are valued at theirestimated net realizable values and liabilities are stated at their estimatedsettlement amounts. For financial statement presentation purposes, liquidatingactivities are limited to those relating to the revaluation and disposition ofassets and liabilities as well as costs incurred or expected to be incurredspecifically as a result of liquidation.

Interim results are notnecessarily indicative of results to be expected for the entire year. Thepreparation of financial statements requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses. Actual results could differ from those estimates. In the opinionof management, all adjustments (consisting of normal recurring adjustments)considered necessary for a fair presentation have been included. With regard tothe liquidating activities, the amounts ultimately realizable from thedisposition of the remaining assets, including costs to be incurred inconnection with the liquidation, or the amounts that creditors will agree toaccept in settlement of the obligations due them, may differ materiallyfrom the estimated or other amounts shown in the accompanying financialstatements, and the estimates are subject to material change in the near term.

 

5

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***EstimatedCosts to be Incurred During Liquidation***

Under the liquidationbasis of accounting, we accrue for the remaining costs to be incurred duringliquidation, including compensation and severance for the remaining employees,board fees, fees of professional service providers, and miscellaneous othercosts. Such costs were estimated at $1,896,989 as of March 31, 2007. Ourestimates are based on assumptions regarding our ability to settle outstandingobligations to creditors, resolve outstanding litigation, and the timing ofdistributions to shareholders. If there are delays, or we are not successful,in achieving these objectives, actual costs incurred may increase,reducing net assets available in liquidation.

***Sale of the Company; Winding Down of Operations***

 

As reported in the Form8-K filed November 7, 2005 (the “November 7 Form 8-K”) and the Definitive ProxyStatement, filed on January 4, 2006 (the “Definitive Proxy Statement”), theCompany entered into the Asset Sale Agreement and related agreements includinga security agreement and a promissory note to sell substantially all of itsoperating assets to Empire. The assets sold to Empire included, subject tocertain exclusions, the Company’s payphones and related equipment,miscellaneous equipment, furniture, fixtures, general supplies, computers,software, promotional materials, customer lists, tools and spare partsinventory used in the operation of the business (the “Sale Assets”), contractsrelated to the Sale Assets, all of the Company’s interest in and to certain paytelephone numbers, trade names, trademarks and other intellectual property. Inaddition, as reported in the November 7 Form 8-K and in the Definitive ProxyStatement, the Company also entered into a Management Services Agreementeffective November 1, 2005 (“Management Services Agreement”), with Empirepursuant to which Empire provided management services and funded theoperational losses of the Company pending consummation of the sale transaction.As of December 31, 2006, the Company had not accrued any receivables for anyunfunded operational losses.

 

As reported in the Form8-K filed February 15, 2007 (the “February 15, 2007 Form 8-K”), on February 9,2007, the Asset Sale Agreement was amended pursuant to the First Amendment. TheFirst Amendment amended the Asset Sale Agreement to, among other things,specify that the remaining purchase price to be paid to the Company pursuant tothe Asset Sale Agreement was $1,827,966 (the “Remaining Purchase Price”). TheFirst Amendment provided that the Remaining Purchase Price was in full andfinal satisfaction of the remaining unpaid amount of (i) the Purchase Price (asdefined in the Asset Sale Agreement) remaining under the Asset Sale Agreementthrough December 31, 2006 and (ii) any Shortfall Advances (as defined in theManagement Services Agreement) accrued through December 31, 2006 pursuant tothe Management Services Agreement. Pursuant to the First Amendment, the Companyand Empire agreed that for purposes of the Asset Sale Agreement, the ClosingDate would be deemed to be effective as of December 31, 2006.

 

Pursuant to the terms ofthe Asset Sale Agreement, as amended by the First Amendment, the Companyreceived $802,966 in cash on February 9, 2007, and a secured Promissory Note,dated as of December 31, 2006, from Empire in the principal amount of$1,025,000.

 

The Promissory Noteprovided that the principal amount will be paid to the Company in monthlyinstallments beginning on the Closing Date with the last payment occurring onAugust 31, 2007. The Promissory Note contained a guaranty by ManhattanTelecommunications Corporation of certain obligations of Empire under thePromissory Note. On August 29, 2007, Empire paid the Promissory Note in full.

 

The aggregateconsideration received by the Company in connection with the transaction wasapproximately $4.5 million.

 

The description above ismore fully explained in the November 7 Form 8-K, the February 15, 2007 Form8-K, the Form 10-KSB for the fiscal year ended December 31, 2006, and theDefinitive Proxy Statement filed January 4, 2006 and to the exhibits therein,which are incorporated herein by reference.

 

***Stockholder Approval***

 

Pursuant to the AnnualMeeting of Stockholders held February 15, 2006, the stockholders of the Companyapproved, among other things, the sale of substantially all of our assets toEmpire pursuant to the Asset Sale Agreement and the winding down of ouroperations following the sale of substantially all of our assets toEmpire.  In order to accomplish theliquidation and dissolution of the Company, in accordance with Delaware GeneralCorporation Law, the Board of Directors adopted a plan of dissolution. Pursuantto the plan of dissolution, on February 14, 2007, the Company filed aCertificate of Dissolution with the Delaware Secretary of State to dissolve theCompany.

 

 

6

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Once a corporation isdissolved under Delaware law, its existence is automatically continued for aterm of three years, or for such longer period as the Delaware Court ofChancery directs, solely for the purpose of winding down its business. Theprocess of winding down includes: (1) the prosecution and defense of lawsuits,if any; (2) the settling and closing of any business; (3) the disposition andconveyance of any property; (4) the discharge of any liabilities; and (5) thedistribution of any remaining assets to the stockholders.

 

Pursuant to Delaware law,the Company will continue in existence until at least February 14, 2010. SinceFebruary 9, 2007, the Company’s activities have been limited solely to thoseincidental to effecting its dissolution, including the investment of any fundsbeing held in reserve and the distribution of its remaining assets to itsstockholders. After the consummation of the Asset Sale Agreement, the remainingassets and properties of the Company consist primarily of cash and certainreceivables. Pursuant to the Asset Sale Agreement, the Company reduced itsnumber of employees significantly, with most employees being hired by Empireand other employees being terminated. As of December 31, 2006, only threedirectors and four employees (two of which are directors) remained; as of March31, 2007, the employee count was further reduced to three. The remaining staffwill be principally engaged in dealing with the winding down and dissolution ofthe Company.

 

As part of thedissolution of our Company, the Board of Directors may at any time delegate thewind down and management of our Company to a third party, including possibly aliquidating trust, to complete the liquidation of our remaining assets anddistribute the proceeds to the stockholders. In addition to the employmentagreements with our existing employees, we may pay our officers, directors,employees or agents additional compensation for services rendered in thedissolution.

 

The Company cannotpredict with certainty the precise amount of the liquidation distribution tostockholders. The Company has not established a firm timetable fordistributions to its stockholders. However, the Board of Directors intends,subject to contingencies inherent in winding down the Company’s business, tomake such distributions as promptly as practicable. The timing of anydistribution will depend on and could be delayed by, among other things,obstacles with claim settlements with creditors. Any delays could substantiallydiminish amounts available for distribution to our stockholders.

 

As a result of futureexpenses that will be incurred, both anticipated and not anticipated,dissolution and liquidation may not provide value to the Company’s stockholdersor result in any remaining capital for distribution to its stockholders. Inaddition, claims, liabilities and expenses during the winding down of theCompany will continue to be incurred which will reduce the amount of assetsavailable for distribution. Any distributions made by the Company shall be madesolely to the stockholders of record at the close of business on the FinalRecord Date except as may be necessary to reflect subsequent transfers recordedon our books as a result of assignments by will, intestate succession oroperation of law.

 

***Close of Stock Transfer Books***

 

Upon the filing of aCertificate of Dissolution with the State of Delaware, the Company ordered thetransfer agent to close the stock transfer books to discontinue recordingtransfers of the Company’s common stock at the close of business on the FinalRecord Date. As such, no transfers of the Company’s common stock will berecorded except transfers as a result of assignments by will, intestatesuccession or operation of law.

 

***Revenue Recognition***

The Company derives itsrevenues from two principal sources: coin calls and non-coin calls. Coin callsrepresent calls paid for by callers with coins deposited into the payphone.Coin call revenues are recorded in the amount of coins deposited in thepayphones and in the period deposited. We also receive revenues from non-coincalls made from our payphones. These non-coin calls include credit card,calling card, prepaid calling card, collect and third-party billed calls wherethe caller dials “0” plus the number or simply dials “0” for an operator.Non-coin calls often require a number of services, including automated or liveoperators to answer the call, verifying billing information, validating callingcards and credit cards, routing and transmitting the call to its destination,monitoring the call’s duration and determining the charge for the call, andbilling and collecting the applicable charge. We have contracted with a limitednumber of operator service providers to handle these calls and perform allassociated functions, while paying us a commission on the revenues generatedthereby.

 

7

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**NOTE B—OTHER INCOME**

Other income for thethree months ended March 31, 2007 and 2006 consists of the following:
| **2007**                                   | ** ** | **Q1** | ** ** |
|--------------------------------------------|------------|--------|------------|
|                                       |       |   |       |
| WPTA settlement                            |       | $      | 466,710    |   |
| Loss recovery  and other legal settlements |       | 16,655 |       |
| Interest income                            |       | 16,908 |       |
| Other  miscellaneous income items          |       | 18,369 |       |
|                                       |       | $      | 518,642    |   |

 

 
| **2006**                                                          | ** ** | **Q1**  | ** ** |
|-------------------------------------------------------------------|------------|---------|------------|
|                                                              |       |    |       |
| Dial around  true-up receipts for prior years’ operations    |       | $       | 90,027     |   |
| Local exchange  carrier credits from prior years’ operations |       | 12,372  |       |
| Loss recovery                                                     |       | 1,196   |       |
| Reorganization  expense                                           |       | (43,985 | )          |
| Interest income                                                   |       | 9,571   |       |
| Other  miscellaneous income items                                 |       | 262     |       |
|                                                              |       | $       | 69,443     |   |
|                                                                   |            |         |            |  |  |

 

 

***NOTE C - VALUATION OF ASSETS AND LIABILITIES***

***Due to the Company changing to the liquidationbasis of accounting, the valuation of assets and liabilities has been adjustedto reflect the amounts expected in liquidation. The valuation of assets attheir net realizable value and liabilities at their anticipated settlementamounts requires many estimates and assumptions. In addition, there aresubstantial risks and uncertainties associated with carrying out theliquidation of the Company’s existing operations. The carrying amountspresented in the accompanying Statement of Net Assets in Liquidation representestimates, based on present facts and circumstances, of the net realizablevalues of assets and costs associated with carrying out the dissolution andliquidation plan. The actual values and costs may differ from the amounts shownherein and could be greater or lesser than the amounts recorded. Accordingly,it is not possible to predict the aggregate amount, if any, that willultimately be distributable to shareholders.***

***NOTE D — SALE OF PAYPHONE ASSETS***

***Inaccordance with the terms set forth in the Asset Sale Agreement and FirstAmendment, the Company has recorded the gain on sale of assets and liabilitiesto Empire. The gain on sale of assets and liabilities is calculated as followsand is included in net realized gain on sale of assets and liabilities on theStatement of Changes in Net Assets in Liquidation:***

 
| Total sale price, $250,000 cash; $2,092,252  receivable; $2,254,745 liabilities assumed |   | $                               | 4,596,997 |       |
|-----------------------------------------------------------------------------------------|--------|---------------------------------|-----------|------------|
| Adjustments:                                                                            |   | Accounts receivable             |      | (1,110,532 | ) |
|                                                                                    |   | Fixed assets                    |      | (3,773,155 | ) |
|                                                                                    |   | Inventory                       |      | (402,440   | ) |
|                                                                                    |   | Other assets                    |      | (95,105    | ) |
|                                                                                    |   | Additional liabilities assumed: |      |       |   |
|                                                                                    |   | Accounts payable                |      | 1,337,589  |   |
|                                                                                    |   | Management fees                 |      | 828,000    |   |
|                                                                                    |   | Commissions and bonuses         |      | 1,097,172  |   |
|                                                                                    |   | Other liabilities               |      | 99,483     |   |
| Gain on sale of assets and liabilities                                                  |   | $                               | 2,578,009 |       |

 

 

8

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***NOTE E — ACCOUNTS RECEIVABLE***

***               ***As shown in the table below,the accounts receivable balance consists of the remaining amount due on thePromissory Note from Empire (see Note A) and liabilities which were assumed byEmpire pursuant to the Sale Agreement and First Amendment that are accountedfor pursuant to guidelines set forth in SFAS 140 —Accounting for Transfers and Servicing of Financial Assets and Extinguishmentof Liabilities.  We have recorded these itemsas accounts receivable and corresponding liabilities are also reflected on theStatement of Net Assets in Liquidation.  
| **Item**                                             | ** ** | **3/31/07** | ** ** |
|------------------------------------------------------|------------|-------------|------------|
| Note receivable  Empire                              |       | $           | 747,975    |   |
| Liabilities  assumed by Empire but not derecognized: |       |        |       |
| Commissions and  bonuses                             |       | 3,351,917   |       |
| Accounts payable                                     |       | 1,337,589   |       |
| Other                                                |       | 51,135      |       |
| Total accounts  receivable                           |       | $           | 5,488,616  |   |

*** ***

*** ***

***9***

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*** ***

 

 

 

**Item 2. Plan of Operation**

** **

OUR STATEMENTS CONTAINEDIN THIS REPORT THAT ARE NOT HISTORICAL FACTS ARE, OR MAY BE DEEMED TO BE,FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIESEXCHANGE ACT OF 1934, AS AMENDED.  IMPORTANTFACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSEDISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS (“CAUTIONARY STATEMENTS”) INCLUDEBUT ARE NOT LIMITED TO OUR ABILITY TO ACCURATELY ESTIMATE THE EXPENSESASSOCIATED WITH EXECUTING OUR PLAN OF DISSOLUTION AND ANY STATEMENTS REGARDINGLIQUIDATING DISTRIBUTIONS, IF ANY, TO OUR STOCKHOLDERS.  ALL SUBSEQUENT WRITTEN AND ORALFORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ONBEHALF OF THE COMPANY ARE EXPRESSLY QUALIFIED BY SUCH CAUTIONARYSTATEMENTS.  WE ARE UNDER NO DUTY TOUPDATE ANY OF THE FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TOCONFORM SUCH STATEMENTS TO ACTUAL RESULTS OR TO CHANGES IN OUR EXPECTATIONS.

 

Payphone Wind DownCorporation (“we,” “us,” “our,” or the “Company”), formerly ETS Payphones, Inc.(“ETS”), is a Delaware corporation that operated, serviced, and maintained asystem of payphones, concentrated primarily in the Eastern and Southern UnitedStates (other than Florida), as well as the District of Columbia and PuertoRico. The Company also provided other telecommunications products to certain ofits clients. Pursuant to the Annual Meeting of Stockholders held on February15, 2006, the stockholders of the Company approved, among other things, thewinding down of our operations following the sale of substantially all of ourassets to Empire Payphones, Inc., (“Empire”) pursuant to an Asset SaleAgreement dated November 1, 2005 (the “Asset Sale Agreement”). The Board ofDirectors of the Company (the “Board of Directors”) approved the dissolution onOctober 31, 2005 subject to stockholder approval and consummation of the AssetSale Agreement. On February 9, 2007, pursuant to the First Amendment to theAsset Sale Agreement, dated as of February 9, 2007 (the “First Amendment”), theparties finalized the Asset Sale Agreement and agreed that the closing datewould be deemed effective as of December 31, 2006 (the “Closing Date”).However, for financial reporting purposes, the Company has deemed the sale dateto be concurrent with the closing, February 9, 2007, and accordingly, hasrecorded the sale of the assets on that date. On February 12, 2007, the Companyamended the certificate of incorporation of the Company to change the name ofthe Company to “Payphone Wind Down Corporation” from ETS Payphones, Inc. Inorder to accomplish the liquidation and dissolution, on February 14, 2007, theBoard of Directors filed a certificate of dissolution of the Company (“Certificateof Dissolution”) with the Delaware Secretary of State to dissolve the Company.Since February 9, 2007, the Company’s activities have been limited solely tothose incidental to effecting its dissolution, including the investment of anyfunds being held in reserve and preparation for the distribution of itsremaining assets to its stockholders.

 

Upon the filing of theCertificate of Dissolution with the State of Delaware, the Company ordered thetransfer agent to close the stock transfer books to discontinue recordingtransfers of the Company’s common stock at the close of business on the ClosingDate (the “Final Record Date”). As a result of the approval by the Company’sstockholders of the sale of substantially all of the assets of the Company andapproval of the liquidation and dissolution of the Company following theclosing of the sale, the Company changed its basis of accounting to theliquidation basis of accounting as of January 1, 2006. If the Company electedto continue to use the going concern basis of accounting to present itsoperations for the period January 1, 2006 through February 14, 2006, the effectwould be immaterial.

 

***Sale of theCompany; Winding Down of Operations***

 

As reported in the Form8-K filed November 7, 2005 (the “November 7 Form 8-K”) and the Definitive ProxyStatement, filed on January 4, 2006 (the “Definitive Proxy Statement”), theCompany entered into the Asset Sale Agreement and related agreements includinga security agreement and a promissory note to sell substantially all of itsoperating assets to Empire. The assets sold to Empire included, subject tocertain exclusions, the Company’s payphones and related equipment,miscellaneous equipment, furniture, fixtures, general supplies, computers,software, promotional materials, customer lists, tools and spare parts inventoryused in the operation of the business (the “Sale Assets”), contracts related tothe Sale Assets, all of the Company’s interest in and to certain pay telephonenumbers, trade names, trademarks and other intellectual property. In addition,as reported in the November 7 Form 8-K and in the Definitive Proxy Statement,the Company also entered into a Management Services Agreement effectiveNovember 1, 2005 (“Management Services Agreement”), with Empire pursuant towhich Empire provided management services and funded the operational losses ofthe Company pending consummation of the sale transaction.

 

 

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As reported in the Form8-K filed February 15, 2007 (the “February 15, 2007 Form 8-K”), on February 9,2007, the Asset Sale Agreement was amended pursuant to the First Amendment. TheFirst Amendment amended the Asset Sale Agreement to, among other things,specify that the remaining purchase price to be paid to the Company pursuant tothe Asset Sale Agreement was $1,827,966 (the “Remaining Purchase Price”). TheFirst Amendment provided that the Remaining Purchase Price was in full andfinal satisfaction of the remaining unpaid amount of (i) the Purchase Price (asdefined in the Asset Sale Agreement) remaining under the Asset Sale Agreementthrough December 31, 2006 and (ii) any Shortfall Advances (as defined in theManagement Services Agreement) accrued through December 31, 2006 pursuant tothe Management Services Agreement. Pursuant to the First Amendment, the Companyand Empire agreed that, for purposes of the Asset Sale Agreement, the ClosingDate would be deemed to be effective as of December 31, 2006.

 

Pursuant to the terms ofthe Asset Sale Agreement, as amended by the First Amendment, the Company received$802,966 in cash on February 9, 2007, and a secured Promissory Note, dated asof December 31, 2006, from Empire in the principal amount of $1,025,000.

 

The Promissory Noteprovided that the principal amount will be paid to the Company in monthlyinstallments beginning on the Closing Date with the last payment occurring onAugust 31, 2007. The Promissory Note contained a guaranty by ManhattanTelecommunications Corporation of certain obligations of Empire under thePromissory Note. The Promissory Note was paid in full by Empire on August 29,2007.

 

The aggregateconsideration received by the Company in connection with the transaction wasapproximately $4.5 million.

 

The description above isqualified in its entirety by the more detailed description in the November 7Form 8-K, the February 15, 2007 Form 8-K, the Form 10-KSB for the fiscal yearended December 31, 2006, and the Definitive Proxy Statement filed January 4,2006 and to the exhibits therein, which are incorporated herein by reference.

 

***Stockholder Approval***

 

Pursuant to the AnnualMeeting of Stockholders held February 15, 2006, the stockholders of the Companyapproved, among other things, the sale of substantially all of our assets toEmpire pursuant to the Asset Sale Agreement and the winding down of ouroperations following the sale of substantially all of our assets to Empire. Inorder to accomplish the liquidation and dissolution of the Company, inaccordance with Delaware General Corporation Law, the Board of Directorsadopted a plan of dissolution. Pursuant to the plan of dissolution, on February14, 2007, the Company filed a Certificate of Dissolution with the DelawareSecretary of State to dissolve the Company.

 

Once a corporation isdissolved under Delaware law, its existence is automatically continued for aterm of three years, or for such longer period as the Delaware Court ofChancery directs, solely for the purpose of winding down its business. Theprocess of winding down includes: (1) the prosecution and defense of lawsuits,if any; (2) the settling and closing of any business; (3) the disposition andconveyance of any property; (4) the discharge of any liabilities; and (5) thedistribution of any remaining assets to the stockholders.

 

Pursuant to Delaware law,the Company will continue in existence until at least February 14, 2010. TheCompany’s activities are limited solely to those incidental to effecting itsdissolution, including the investment of any funds being held in reserve andthe distribution of its remaining assets to its stockholders. After theconsummation of the Asset Sale Agreement, the remaining assets and propertiesof the Company consist primarily of cash and certain receivables. Pursuant tothe Asset Sale Agreement, the Company reduced its number of employees significantly,with most employees being hired by Empire and other employees being terminated.Currently, only three directors and three employees (two of which aredirectors) remain. The remaining staff will be principally engaged in dealingwith the winding down and dissolution of the Company.

 

As part of thedissolution of our Company, the Board of Directors may at any time delegate thewind down and management of our Company to a third party, including possibly aliquidating trust, to complete the liquidation of any remaining assets,satisfaction of any remaining liabilities and distribute any remaining proceedsto the stockholders. In addition to the employment agreements with our existingemployees, we may pay our officers, directors, employees or agents additionalcompensation for services rendered in the dissolution.

 

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The Company cannotpredict with certainty the precise amount of the liquidation distribution tostockholders. The Company has not established a firm timetable fordistributions to its stockholders. However, the Board of Directors intends,subject to contingencies inherent in winding down the Company’s business, tomake such distributions as promptly as practicable. The timing of anydistribution will depend on and could be delayed by, among other things,obstacles with claim settlements with creditors. Any delays could substantiallydiminish amounts available for distribution to our stockholders.

 

As a result offuture expenses that will be incurred, both anticipated and not anticipated,dissolution and liquidation may not provide value to the Company’s stockholdersor result in any remaining capital for distribution to its stockholders. Inaddition, claims, liabilities and expenses during the winding down of theCompany will continue to be incurred which will reduce the amount of assetsavailable for distribution. Any distributions made by the Company shall be madesolely to the stockholders of record at the close of business on the FinalRecord Date, except as may be necessary to reflect subsequent transfersrecorded on our books as a result of assignments by will, intestate successionor operation of law.

 

***Close of Stock Transfer Books***

 

Upon the filing of aCertificate of Dissolution with the State of Delaware, the Company ordered thetransfer agent to close the stock transfer books to discontinue recordingtransfers of the Company’s common stock at the close of business on the FinalRecord Date. As such, no transfers of the Company’s common stock will berecorded except transfers as a result of assignments by will, intestatesuccession or operation of law.

 

***Liquidation Basis of Accounting***

The condensedfinancial statements for the three months ending March 31, 2007 and 2006 wereprepared on the liquidation basis of accounting. Under the liquidation basis ofaccounting, assets are stated at their estimated net realizable values andliabilities are stated at their estimated settlement amounts. Estimates areperiodically reviewed and adjusted. Since the Company is in liquidation, theneed to present future quarterly Statements of Operations and Statements ofCash Flows is eliminated.

***The valuation of assets at their net realizable value and liabilitiesat their anticipated settlement amounts requires many estimates andassumptions. In addition, there are substantial risks and uncertaintiesassociated with carrying out the dissolution and liquidation plan. The carryingamounts presented in the accompanying Statements of Changes in Net Assets inLiquidation represent estimates, based on present facts and circumstances, ofthe net realizable values of assets and costs associated with carrying out thedissolution and liquidation plan based on the assumptions set forth below. Theactual values and costs are expected to differ from the amounts shown hereinand could be greater or lesser than the amounts recorded. Accordingly, it isnot possible to predict the aggregate amount, if any, that will ultimately bedistributable to shareholders.***

***Factors to Consider***

# The followingcharacteristics of our status as a non-operating company may have a materialimpact upon our future financial condition.

#  

# ***Dissolution; Winding Down and Liquidation, Closing of StockRecord Book.***

#  

Pursuant to the AnnualMeeting of Stockholders held February 15, 2006, the stockholders of the Companyapproved, among other things, the sale of substantially all of our assets toEmpire pursuant to the Asset Sale Agreement and the winding down of ouroperations following the sale of substantially all of our assets to Empire. Theconsummation of the Asset Sale Agreement occurred as of December 31, 2006 andas a result, our activities are limited to collecting proceeds from assets notincluded in the sale, paying off creditors, satisfying requirements under applicablelaw and distributing any remaining proceeds to stockholders of record. As aresult of future expenses that will be incurred, both anticipated and notanticipated, dissolution and liquidation may not provide value to ourstockholders or result in any remaining capital for distribution to ourstockholders. In addition, claims, liabilities and expenses during the windingdown of our company will continue to be incurred which will reduce the amountof assets available for distribution. The stock transfer books of the Companyhave been closed and a Certificate of Dissolution has been filed with theDelaware Secretary of State. Any distributions made by us shall be made solelyto the stockholders of record at the close of business on the Final Record Date,except as may be necessary to reflect subsequent transfers recorded on ourbooks as a result of assignments by will, intestate succession or operation oflaw. We cannot assure the stockholders of the amount, if any, or timing of anydistribution to our stockholders as a result of the dissolution.

 

 

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# ***We will continue to incur claims, liabilities and expensesthat will reduce the amount available for distribution out of the liquidationto stockholders.***

#  

Claims, liabilities andexpenses incurred during the wind down process, such as payroll, legal,accounting and consulting fees and miscellaneous office expenses, will reducethe amount of assets available for future distribution out of the liquidationto stockholders. If available cash and amounts received on the sale of non-cashassets are not adequate to provide for our obligations, liabilities, expensesand claims, we may not be able to distribute out of the liquidation any cash atall, to our stockholders.

 

We filed a Certificate ofDissolution with the Secretary of State of the State of Delaware effectiveFebruary 14, 2007. Pursuant to Delaware General Corporation Law, we willcontinue to exist for three years after the Certificate of Dissolution is filedor for such longer period as the Delaware Court of Chancery shall direct, forthe purpose of prosecuting and defending suits against us and enabling us togradually close our business, to dispose of our property, to discharge ourliabilities and to distribute to our stockholders any remaining assets. UnderDelaware General Corporation Law, in the event we fail to create during thisthree-year period an adequate contingency reserve for payment of our expensesand liabilities, each stockholder could be held liable for payment to ourcreditors of such stockholder’s pro rata share of amounts owed to creditors inexcess of the contingency reserve, up to the amount actually distributed tosuch stockholder. Although the liability of any stockholder is limited to theamounts previously received by such stockholder from us (and from anyliquidating trust or trusts that may be established in connection with thedissolution) in the dissolution, this means that a stockholder could berequired to return all distributions previously made to such stockholder andreceive nothing from us under the plan of dissolution. Moreover, in the event astockholder has paid taxes on amounts previously received, a repayment of allor a portion of such amount could result in a stockholder incurring a net taxcost if the stockholder’s repayment of an amount previously distributed doesnot cause a commensurate reduction in taxes payable. While we will endeavor tomake adequate reserves for all known, contingent, and unknown liabilities, thereis no guarantee that the reserves established by us will be adequate to coverall such expenses and liabilities.

 

# ***We will continue to incur the expenses of complying withpublic company reporting requirements.***

#  

We have an obligation tocontinue to comply with the applicable reporting requirements of the SecuritiesExchange Act of 1934, as amended, referred to as the “Exchange Act,” eventhough compliance with such reporting requirements is economically burdensome.We have sought and will continue to attempt to seek relief from the Securitiesand Exchange Commission from the reporting requirements under the Exchange Act,but to date we have not been successful in obtaining relief. We anticipatethat, if such relief were granted, we would continue to file current reports onForm 8-K to disclose material events relating to our liquidation anddissolution along with any other reports that the Securities and ExchangeCommission might require. However, the Securities and Exchange Commission hasnot granted, and may not in the future agree to grant, any such relief.

 

# ***Our Board of Directors may at any time turn management ofthe liquidation of the Company over to a third party, and some or all of ourdirectors may resign from our board at that time.***

#  

Our Board of Directorsmay at any time turn our management over to a third party to complete theliquidation of any remaining assets, satisfaction of any remaining liabilitiesand distribute any available proceeds to our stockholders, and some or all ofour directors may resign from our board at that time. Our Board of Directorscurrently consists of Guy A. Longobardo, our Chief Executive Officer andChairman of the Board, Michael H. McClellan, our Executive Vice President,Chief Financial Officer and Treasurer and Michael H. Buck. If management isturned over to a third party and all of our directors resign from our board,the third party would have sole control over the liquidation process, includingthe sale or distribution of any remaining assets.

 

# ***If we are deemed to be an investment company, we may besubject to substantial regulation that would cause us to incur additionalexpenses and reduce the amount of assets available for distribution.***

#  

If we invest our cashand/or cash equivalents in investment securities, we may be subject toregulation under the Investment Company Act of 1940. If we are deemed to be aninvestment company under the Investment Company Act because of our investmentsecurities holdings, we must register as an investment company under the InvestmentCompany Act. As a registered investment company, we would be subject to thefurther regulatory oversight of the Division of Investment Management of theSecurities and Exchange Commission, and our activities would be subject tosubstantial regulation under the Investment Company Act. Compliance with theseregulations would cause us to incur additional expenses, which would reduce theamount of assets available for distribution to our stockholders. To avoid thesecompliance costs, we intend to invest our cash proceeds in money market fundsand government securities, which are exempt from the Investment Company Act butwhich currently provide a very modest return.

 

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**Item 3. Controls and Procedures**

Our Chief ExecutiveOfficer and Chief Financial Officer (collectively, the “Certifying Officers”)are responsible for establishing and maintaining disclosure controls andprocedures for the Company. Based upon such officers’ evaluation of thesecontrols and procedures as of the end of the period covered by this report, andsubject to the limitations noted hereinafter, the Certifying Officers haveconcluded that our disclosure controls and procedures are effective to ensurethat information required to be disclosed by us in this Quarterly Report isaccumulated and communicated to management, including our principal officers asappropriate, to allow timely decisions regarding required disclosure.

Pursuant to theManagement Services Agreement with Empire, through February 9, 2007, we hadgradually transitioned the responsibility for accounting, billing, records andcollection services relating to payphone operations to Empire.  During the period from January 1, 2007through February 9, 2007, in connection with the transition to Empire wesubstantially changed our internal controls over financial reporting and Empirewas primarily responsible for the accounting, billing, and collection of allpayphone operations related revenue of ETS and the remittance of all related paymentsand obligations.  During this period, wehad oversight of Empire’s performance of its duties under the ManagementServices Agreement and regularly received information from Empire on theforegoing.  We do not believe thetransition and change in personnel had a significant impact on theeffectiveness of the design and operation of the Company’s disclosure andcontrols procedures.   The summary of theservices provided by Empire as described herein is qualified in its entirety bythe more detailed description in the Current Report on Form 8-K filed onNovember 7, 2005, the Definitive Proxy Statement filed on January 4,2006, the Form 8-K filed on February 15, 2007, and the Form 10-KSB for thefiscal year ended December 31, 2006, filed on October 9, 2007, and to theexhibits therein.

Both prior to andfollowing the transition to Empire, we assessed the effectiveness of ourinternal controls over financial reporting and found such controls, both beforeand after the transition to Empire, to be effective based upon the criteria setforth by the Certifying Officers.

Except as noted in thepreceding paragraph, there were no changes in our internal controls overfinancial reporting that occurred during the three months ended March 31, 2007,that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting. Our management, including each of the Certifying Officers, does notexpect that our disclosure controls or our internal controls will prevent allerror and fraud. A control system, no matter how well conceived and operated,can provide only reasonable, not absolute, assurance that the objectives of thecontrol system are met. In addition, the design of a control system mustreflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs. Because of the inherentlimitations on all control systems, no evaluation of controls can provideabsolute assurance that all controls issues and instances of fraud, if any,within a company have been detected. These inherent limitations include therealities that judgments in decision-making can be faulty, and that breakdownscan occur because of simple error or mistake. Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two ormore people or by management override of the control. The design of any systemof controls also is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.Over time, control may become inadequate because of changes in conditions,or the degree of compliance with the policies or procedures may deteriorate.Because of these inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and not be detected.

 

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**PART II. OTHER INFORMATION**

**Item1.  Legal Proceedings**

The Company is involvedfrom time to time in lawsuits that arise in the ordinary course of ourbusiness. In March 2006 Commercial Payphones, Inc., a Florida corporation,initiated a lawsuit against the Company in state court in Dade County, Floridafor an alleged violation of a non-compete agreement alleging damages in excessof $15,000. We do not believe the allegations have legal merit and arevigorously defending the action and have filed a motion to quash service or, inthe alternative, to dismiss the complaint for lack of jurisdiction. However, wecannot predict with certainty the outcome or effect of this litigation. In 2005Clipper Telecommunications, Inc., Comchoice, Inc. and Coinlink, L.L.C. (the “Plaintiffs”)initiated a lawsuit against the Company and APCC Services, Inc. (a collector ofdial around compensation for the payphones industry) in the United StatesDistrict Court for the Western District of Texas. The complaint alleged damagesin excess of $75,000 relating to dial around compensation collected by APCCServices, Inc. and held in the Company’s accounts with APCC. The Company wassuccessful in obtaining a dismissal of the action. In December of 2006, thePlaintiffs filed a substantially similar complaint against the Company and APCCServices, Inc. in the state court of Texas. We do not believe the allegationshave legal merit and are vigorously defending the action. However, we cannotpredict with certainty the outcome or effect of this or other litigation inwhich the Company is or may become involved. On March 13, 2006, three formeremployees from the Puerto Rico branch filed a lawsuit against the Company inthe Commonwealth of Puerto Rico, Court of First Instance, Manati Courthousesubsequent to their termination that had occurred while Empire was managing theCompany pursuant to the Management Services Agreement. The lawsuit allegeddamages in excess of $300,000. The Company reached a settlement with the formeremployees on September 18, 2007. At March 31, 2007, adequate provision was madein the financial statements for losses relating to this matter.

 

**Item5. Other Information**

***None***

**Item6. Exhibits**
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION**                                                                      | ** ** |
|---------------------|------------|--------------------------------------------------------------------------------------|------------|
| 3.1                 |       | Certificate of Incorporation of ETS Payphones, Inc.,  dated November 8, 2002 (1)     |       |
| 3.2                 |       | By-Laws of ETS Payphones, Inc. (1)                                                   |       |
| 31.1                |       | Certification of CEO pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |       |
| 31.2                |       | Certification of CFO pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |       |
| 32.1                |       | Certification of CEO pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 |       |
| 32.2                |       | Certification of CFO pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 |       |

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(1) Incorporated byreference from the Company’s Registration Statement on Form 10-SB (File No.000-50712)

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                    | PAYPHONE WIND DOWN CORPORATION |
|-------------------------|--------------------------------|
|                    |                           |   |
| Date: November 13, 2007 | By:                            | /s/ GUY A. LONGOBARDO |   |
|                    |                           | Guy A. Longobardo |
|                    |                           | President and Chief Executive Officer |
|                    |                           |   |
|                    | By:                            | /s/ MICHAEL H. MCCLELLAN |   |
|                    |                           | Michael H. McClellan |
|                    |                           | Executive Vice President, |
|                    |                           | Chief Financial Officer and Treasurer |

 

 

 

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