Edgar Filing: CHOICETEL COMMUNICATIONS INC /MN/

CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARIES

General

FORM 10-QSB

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2002

Commission file number 0-230 17

CHOICETEL COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

Minnesota		41-1649949
(State of jurisdiction or		IRS Employer ID No.
incorporation of organization)

15500 Wayzata Blvd., #1029 Wayzata, Minnesota		55391
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code 952-249-1801

N/A

(Former name, former address and former fiscal year if changed from last report)

N/A

(Former address of principal executive offices) (Zip Code)

Registrant’s former telephone number, including area code N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

As of date of filing, the Company has 3,035,735 shares outstanding.

CHOICETEL COMMUNICATIONS, INC.

Form 10-QSB Index

May 15, 2002

Part I: Financial Information

Item 1. Financial Statements

Consolidated Balance Sheet -

December 31, 2001 and March 31, 2002

Consolidated Statements of Operations -

Three months ended March 31, 2001 and 2002

Consolidated Statements of Cash Flows -

Three months ended March 31, 2001 and 2002

Notes to Consolidated Financial Statements

Item 2. Management’s Discussion and Analysis

Part II: Other Information

Item 1. Legal Proceedings

Item 6. Exhibits and Reports on Form 8-K

		CONDENSED CONSOLIDATED
CHOICETEL COMMUNICATIONS, INC.		BALANCE SHEETS
AND SUBSIDIARIES

	(Unaudited)
	3/31/2002		12/31/2001
*Assets:*
Current assets:
Cash and cash equivalents	$	2,755,450	$	751,059
Investments			2,454,084
Receivables	287,956		278,066
Prepaid and other assets	157,174		325,354
Deferred taxes	455,000		493,000

Total current assets	3,655,580		4,301,563

Property and equipment, net	1,783,298		1,843,101
Restricted cash	800,000
Other Assets	61,571		67,292
	$	6,300,450	$	6,211,956

*Liabilities and shareholders’ equity:*
Current liabilities:
Accounts payable	$	109,813	$	15,468
Accrued expenses	176,908		241,920
Total current liabilities	286,721		257,388

Shareholders’ equity	6,013,729		5,954,568

	$	6,300,450	$	6,211,956

See notes to condensed consolidated financial statements.

		CONDENSED CONSOLIDATED
CHOICETEL COMMUNICATIONS, INC.		STATEMENTS OF OPERATIONS
AND SUBSIDIARIES		THREE MONTHS ENDED MARCH 31
		(Unaudited)

	2002		2001

Service revenue	$	763,699	$	999,099
Cost of service	294,272		396,274

Gross margin	469,427		602,825

Selling, general and administrative expenses	382,900		707,604

Operating income	86,527		(104,779		)

Other income (expense)
Investment income			102,017
Interest income, net	10,633		5,512

Income (loss) before income tax (benefit)	97,160		2,750

Provision for income tax (benefit)	38,000		(8,243		)

Net income (loss)	$	59,160	$	10,993

Earnings (loss) per share:
Net income, basic	$	0.02	$	0.00

Net income, diluted	$	0.02	$	0.00

Weighted average number of shares outstanding:
Basic	3,035,795		3,375,935

Diluted	3,054,685		3,375,935

See notes to condensed consolidated financial statements.

		CONDENSED CONSOLIDATED
CHOICETEL COMMUNICATIONS, INC.		STATEMENTS OF CASH FLOWS
AND SUBSIDIARIES		THREE MONTHS ENDED MARCH 31
		(UNAUDITED)

	2002			2001
Cash flows from operating activities:
Net income (loss)	$	59,160		$	10,993
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred taxes	38,000			2,664
Depreciation and amortization	76,521			66,361
Unrealized gain on investments				(102,017		)
Changes in operating assets and liabilities:
Receivables	(9,890		)	(125,866		)
Cash in phones				3,850
Prepaids	168,180			33,674
Accounts payable	94,345			(130,439		)
Accrued expenses	(65,011		)	231,340
Net cash provided by (used in) operating activities	361,305			(9,440		)

Cash flows from investing activities:
Purchase of equipment	(10,998		)	(111,863		)
Proceeds from sale of investment	2,454,084
Restricted cash	(800,000		)
Proceeds from sale of equipment				19,514
Net cash provided by (used in) investing activities	1,643,086			(92,349		)

Cash flows from financing activities:
Issuance of short-term debt				104,000
Repurchase of common stock				(137,774		)
Net cash provided by (used in) financing activities				(33,774		)

Net increase (decrease) in cash and cash equivalents	$	2,004,391		$	(135,563	)
Cash and cash equivalents, beginning	751,059			495,312
Cash and cash equivalents, ending	$	2,755,450		$	359,749

Supplemental disclosure of cash flow information:
Cash paid for interest	$			$	843

See notes to condensed consolidated financial statements.

Notes to Condensed Consolidated Financial Statements

1. Basis of presentation, nature of business:

Basis of Presentation:

The condensed consolidated financial statements of the Company for the three month periods ended March 31, 2002 and 2001 have been prepared by the Company without audit by the Company’s independent auditors. In the opinion of the Company’s management, all adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company as of March 31, 2002 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, 2001 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 2001 filed with the Securities and Exchange Commission.

The results of operations for the three month period ended March 31, 2002 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 had minimal revenue since inception and incurred large expenses for hardware and software development. In February 2001, the Company decided to cease funding 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.

During 2001, the Company’s financial statements classified the results of its payphone operations as results of discontinued operations, this practice was discontinued as of December 31, 2001 and consequently, the Company has reclassified items which were reported in 2000 as discontinued operations as continuing.

On February 28, 2002, the Company announced that it had entered into an Agreement and Plan of Reorganization, dated as of February 27, 2002, with Sontra Medical, Inc., a Delaware corporation. Pursuant to the Merger Agreement, the Company’s recently

incorporated, wholly-owned subsidiary, CC Merger Corp., a Delaware corporation, will merge with and into Sontra Medical. Sontra Medical will be the surviving corporation and become a wholly-owned subsidiary of ChoiceTel. On the closing date of the Merger, the outstanding shares of Sontra Medical’s stock will be converted into the right to receive newly-issued shares of ChoiceTel common stock based on an exchange ratio of 0.2347 shares of ChoiceTel common stock for each share of Sontra Medical stock. The exchange ratio is subject to adjustment in certain circumstances as set forth in the Merger Agreement. After completion of the transaction, the shareholders of Sontra Medical will own approximately 71% of ChoiceTel and ChoiceTel shareholders will own approximately 29% of ChoiceTel. Outstanding rights to purchase stock of Sontra Medical will also be converted into the right to purchase ChoiceTel common stock at the same exchange ratio.

On May 1, 2002 the Company sold its Puerto Rico Assets, see note 5 below

2. Property and equipment as of:

	March 31, 2002		December 31, 2001
Office equipment	97,868		97,868
Telephones and equipment	2,340,872		2,335,739
Accumulated Depreciation	(655,442	)	(590,506	)
Total	1,783,298		1,843,101

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 and Wayzata, Minnesota under a lease which is month-to-month. Rent expense was $44,132 for the year ended 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 July 2001 to the present.

4. Legal Proceedings

Tomato Land Display Systems, Inc. filed a suit against the Company and its former subsidiary, Advants, Inc. on April 3, 2001 in Ramsey County, Minnesota District Court seeking damages in excess of $50,000 from Advants for alleged services provided. While the Company was not a party to the transaction, the plaintiff was seeking to hold the Company liable for the alleged debt of Advants. Tomato Land subsequently agreed to dismiss this action and pursue its claims in the Leaf Industries claim, discussed below.

Leaf Industries, Inc. filed a claim on June 4, 2001 in Hennepin County, Minnesota District Court against the Company and Advants, seeking damages in excess of $50,000 from Advants based on a corporate guarantee whereby Advants allegedly guaranteed amounts owed by Tomato Land to Leaf Industries. Leaf also is seeking to pierce the corporate veil and hold the Company responsible for Advants' debts. Tomato Land is also a defendant in this action and has filed cross claims against Company identical to its claims in the Ramsey County action, discussed above. The Company is defending the action. In May 2002, the Court denied the Company's Motion for Summary Judgment, and a trial in this matter is anticipated to commence in September 2002. The Company has not accrued any amounts related to these items, since in management's view, an unfavorable outcome is unlikely.

5. Subsequent Events:

On May 1, 2002 the Company sold its Puerto Rico assets to Choicetel Acquisitions, Inc. (an unrelated third party) for $2,173,500, of which $2,123,500 was paid in cash with a $50,000 accounts receivable due 60 days from closing. As a result of this transaction, the Company recorded a gain before tax of approximately $330,000 and after tax income of approximately $190,000 or $0.07 per share.

The following proforma table shows the effect on the March 31, 2002 financial statements as if the sale of the Puerto Rico assets had occurred on March 31, 2001.

	3/31/02		Proforma adjustments		Adjusted 3/31/02
Cash	$	2,755,450	$	2,123,470	$	4,878,920
Receivables	287,956		50,000		337,956
Prepaid expenses	157,174				157,174
Deferred Taxes	455,000		-131,000		324,000
Property, equipment, and other assets	1,844,869		-1,844,869		0
Restricted cash	800,000				800,000
Total Assets	$	6,300,450	$	197,601	$	6,498,050

Current liabilities	286,721				286,721
Shareholder Equity	6,013,729		197,601		6,211,330
Total	$	6,300,450	$	197,601	$	6,498,050

Operating income	$	86,527			$	86,527
Other income	10,633		328,601		339,234
Income before income tax	97,160		328,601		425,761
Provision for income tax	38,000		131,000		169,000
Net income	59,160		197,601		256,761
EPS, basic	$	0.02	$	0.07	$	0.08
EPS, diluted	$	0.02	$	0.06	$	0.08

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

CHOICETEL COMMUNICATIONS, INC.

Date: May 14, 2002

/s/ Jack S. Kohler

Jack S. Kohler

Vice President and Chief Financial Officer

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

The principal costs related to ongoing operation of the Company’s payphones include telephone line charges, consisting of payments made by the Company to telephone companies and long-distance carriers for access charges and use of their networks; commission payments 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 credit card at the kiosk, and sponsorship revenues from affiliates, sponsors and advertisers. All revenue is recognized as received, net of processing charges. The principal costs related to ongoing operation include telephone line charges, connectivity charges for internet access and commission payments to site providers. In February 2001, the Company decided to cease funding Advants and to liquidate its investment, and on May 8, 2001, the Company sold its stock in Advants for a nominal amount and ceased consolidating Advants operating results as of that date.

Three months ended March 31, 2002 compared to March 31 2001.

The after tax income for the three months ended March 31, 2002 was $59,000 compared to $11,000 in the period ended March 31, 2001. This includes the effect of consolidating Advants Inc.’s operations with the Company’s payphone activities until May 2001, when the Company sold its stock holdings to a third party.

Revenue

Total revenues for the period ended March 31, 2002 were $764,000 compared to $999,000 in the period ended March 31, 2001. During the 2002 period, the company operated an average of 1,450 payphones compared to an average of 1,500 payphones in the 2001 period.

Advants’ revenue in 2001 was $15,000.

Coin revenues in 2002 were $485,000 compared to $517,000 a decrease of $32,000 or 6.3%. Non-coin revenues were $156,000 compared to $208,000 a decrease of $53,000 or 25.2%, and dial around revenues were $123,000 compared to $259,000 a decrease of $136,000 or 52.4%.

Direct Expenses

Total direct expenses for the period ended March 31, 20021 were $294,000 compared to $396,000 in the period ended March 31, 2001. Direct expenses for Advants were $65,000 in 2001.

Telephone line charges were $232,000 in 2002 compared to $261,000 in 2001 a decrease of $30,000 or 11.3%. Commissions to site providers were $63,000 in 2002 compared to $70,000 in 2001 a decrease of $7,000 or 10.5%.

Sales General and Admin Expenses

Total sales, general and admin expenses (SG&A) for the period ended March 31, 2002 were $383,000 compared to $708,000 in 2001. SG&A expenses for Advants were $285,000 in 2001.

Service and collection expenses were $101,000 in 2002 compared to $122,000 in 2001 a decrease of $22,000 or 17.6%. Marketing expenses were $6,000 in 2002 compared to $18,000 in 2001 a decrease of $13,000 or 68.2%. Admin office and overhead expenses were $73,000 in 2002 compared to $63,000 in 2001 an increase of $10,000 or 15.9%.

Corporate SG&A includes the cost of Corporate officers, the Corporate offices, and other recurring expenses related to maintaining the corporate entity, such as directors’ compensation, shareholder services, and audit and reporting expenses. Corporate SG&A in 2002 was $127,000 compared to $153,000 in 2001, a decrease of $26,000 or 16.9%. Depreciation and amortization totaled $77,000 in 2002 compared to $66,000 in 2001.

Other Income and Expense

During 2002, other income and expense includes $11,000 interest earned from investing excess cash balances in money market accounts

During 2001, other income and expense includes $102,000 earned by Choicetel on its investment in Whitebox Arbitrage Trading LLP, and $6,000 interest earned by Choicetel from investing excess cash balances in money market accounts

Liquidity and Capital Resources

For the three months ended March 31, 2002 the Company’s operating activities provided $361,000 and the proceeds from sales of investments provided $2,454,000. The Company used $11,000 to purchase equipment and $800,000 was put into escrow as required by the Sontra Merger agreement. This resulted in a $2,004,000 increase in cash balances.

Item 1. Legal Proceedings

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

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

The Company has not accrued any amounts relating to these items, since in management’s view, an unfavorable outcome is unlikely.

Item 6. Reports on Form 8-K

On March 5, 2002, the Company reported that it had entered into an Agreement and Plan of Reorganization, dated as of February 27, 2002, with Sontra Medical, Inc. Pursuant to the Merger Agreement, the Company will merge with and into Sontra Medical, with Sontra Medical as the surviving corporation. On the closing date of the Merger, the outstanding shares of Sontra Medical’s stock will be converted into the right to receive newly-issued shares of ChoiceTel common stock based on an exchange ratio of 0.2347 shares of ChoiceTel common stock for each share of Sontra Medical stock, which exchange ratio is subject to adjustment in certain circumstances as set forth in the Merger Agreement. After completion of the transaction, the shareholders of Sontra Medical will own approximately 71% of ChoiceTel and ChoiceTel shareholders will own approximately 29% of ChoiceTel. Outstanding rights to purchase stock of Sontra Medical will also be converted into the right to purchase ChoiceTel common stock at the same exchange ratio.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.