-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ou8HSmdyk4sA/xg1D6oUt7cTkHVIIr1QxJ6e7fQElbt//XHtAmIsd9Okr7noI2sK t82EUJYfpBMgnTxUELwiRw== 0000912057-00-014977.txt : 20000331 0000912057-00-014977.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-014977 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHOICETEL COMMUNICATIONS INC /MN/ CENTRAL INDEX KEY: 0001031927 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 411649949 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-23017 FILM NUMBER: 587040 BUSINESS ADDRESS: STREET 1: 9724 10TH AVE NORTH CITY: PLYMOUTH STATE: MN ZIP: 55441 BUSINESS PHONE: 6125441260 MAIL ADDRESS: STREET 1: 9724 10TH AVE NORTH CITY: PLYMOUTH STATE: MN ZIP: 55441 FORMER COMPANY: FORMER CONFORMED NAME: INTELLIPHONE INC DATE OF NAME CHANGE: 19970625 10KSB40 1 FORM 10-KSB405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-230 17 CHOICETEL COMMUNICATIONS, INC. (Name of small business issuer in its charter) MINNESOTA 41-1649949 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 9724 10TH AVENUE NORTH, PLYMOUTH, MN 55441 (Address of principal executive offices) Issuer's telephone number: (612) 544-1260 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Title of each class: Name of each exchange on which registered: COMMON STOCK, $.01 PAR VALUE THE NASDAQ SMALLCAP MARKET REDEEMABLE WARRANT THE NASDAQ SMALLCAP MARKET Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. /X/ The revenues for ChoiceTel Communications, Inc. for the fiscal year ended December 31, 1999 were $10,215,000. The aggregate market value of the voting and non-voting common equity held by non-affiliates as of March 20, 2000, based on the closing sale price of the Common Stock on such date as reported on the NASDAQ SmallCap Market, was $6,204,650. 1 On March 20, 2000, the Company had outstanding 2,926,906 shares of Common Stock, par value $.01 per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Form SB-2, Registration Number 333-29969, are incorporated by reference into Part II of this Form 10-KSB. Transitional Small Business Disclosure Format (Check one): Yes ; No X --- --- 2 TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. DESCRIPTION OF BUSINESS............................................. 04 ITEM 2. DESCRIPTION OF PROPERTY............................................. 09 ITEM 3. LEGAL PROCEEDINGS................................................... 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 10 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............ 11 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........... 11 ITEM 7. FINANCIAL STATEMENTS................................................... ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................... PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT........... 15 ITEM 10. EXECUTIVE COMPENSATION............................................... 16 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................................... 17 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 19 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K..................................... 20 SIGNATURES........................................................... 21 FINANCIAL STATEMENTS................................................. INDEX TO EXHIBITS.................................................... 22
3 PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL ChoiceTel Communications, Inc. (the "Company") was formed as a Minnesota corporation in 1989. The Company installed its first payphones in early 1990 and as of December 31, 1999, had an installed phone base of approximately 1,950 payphones in four states and Puerto Rico. The Company has grown its business through the installation of pay telephones in new areas and through strategic asset acquisitions of payphone routes and related assets, including 270 payphones located in Minnesota acquired from American Amusement Arcade in 1993; 85 payphones acquired in Nevada from Telco West in 1995; an additional 1,020 payphones acquired from Telco West in 1997 in Oregon, Idaho, Colorado, Washington and Wyoming; 586 payphones located in Minnesota and Wisconsin acquired from Computer Assisted Technologies, Inc. ("CAT") in 1997, and 965 phones in Pennsylvania, New Jersey and Delaware from Edward Steven Corporation and Drake Telephone Company in 1998. During 1999 the Company sold approximately 3,000 phones located primarily Minnesota, Oregon, Idaho, Wisconsin and Nevada. In 1999 the pay telephone industry generally, and the Company specifically, continued to experience a significant and continuing decline in revenues from the operation of public payphones. Management believed that the decline was attributable primarily to the proliferation of wireless communication devices, in particular cell phones. The Board of directors concluded that the pay telephone industry was no longer a growth industry and in order to successfully compete in the business, a provider must be significantly larger than the Company was in order to take advantage of economies of scale. Management determined that the Company lacked the resources to achieve the size necessary to improve its economies of scale. In 1999 the Board of Directors considered various strategic alternatives for the Company that would maximize stockholder value. These alternatives included the sales and/or retention of the Company's operating businesses in various combinations. Ultimately, The Board of Directors authorized management to sell its payphone assets. Accordingly, by December 31, 1999 the Company completed sales of approximately 3,000 of its 5,000 payphones. In February 2000 the Company completed the sale of an additional 900 phones leaving 1,100 phones located in Puerto Rico, which the Company intends to divest during 2000, although there can be no assurances that an acceptable transaction will be completed in 2000. The sales resulted in Cash on hand at December 31, 1999 and March 21, 2000 of $2.4 million and $4.2 million respectively. The Company's strategic goal is to continue to develop a profitable model for employing internet access terminals through its majority owned subsidiary Advants, Inc. Accordingly, the Company's payphone business is reflected as "discontinued operations" throughout this annual report. INDUSTRY OVERVIEW In 1996, calls made from pay telephones were estimated at $7 billion in annual revenues to the United States telecommunications industry. Pay telephones may be "public," meaning they are owned by local exchange carriers ("LECs"), or "independent," meaning they are owned and operated by companies independent of the LECs, such as the Company. Of the approximately 2 million pay telephones operating in the United States in 1996, it is estimated that approximately 350,000 were independent. Today's telecommunications marketplace was principally shaped by the 1985 AT&T divestiture of the 22 regional Bell operating companies ("RBOCs"), which provided local telephone services within their areas of operation. The AT&T divestiture and the many regulatory changes adopted by the FCC and state regulatory authorities in response to the AT&T divestiture resulted in the creation of new business segments in the telecommunications industry. 4 As part of the AT&T divestiture, the United States was divided into geographic areas known as local access transport areas or "LATAs." Telephone service that both originates and terminates within the same LATA ("intraLATA") is priced based on tariffs filed with and approved by state regulatory authorities. LECs provide intraLATA telephone service to, among others, independent pay telephone companies. LECs are generally prohibited from offering or deriving revenues or income from services between LATAs ("interLATA"). In addition, most state regulatory authorities require LECs to provide local access line service to independent pay telephone companies. See "Business - Government Regulation." Long-distance carriers provide interLATA service and, in some circumstances, may also provide long-distance service within LATAs. An interLATA long-distance pay telephone call begins with an originating LEC transmitting the call from the pay telephone that originates the call to a point of connection with a long-distance carrier. The long-distance carrier, through its owned or leased switching and transmission facilities, transmits the call across its long-distance network to the LEC serving the local area in which the recipient of the call is located. This terminating LEC then delivers the call to the recipient. Independent PSPs contract with one or more long-distance carriers to provide long-distance service to their pay telephones. BUSINESS STRATEGY The Company has focused on identifying payphone sites that have the potential to achieve a high return on investment ("ROI") after depreciating the equipment over the life of the phone lease. Although others in the industry have used shorter leases, the Company's analysis indicated that a long-term lease was necessary in order to achieve the Company's ROI objective and to offer a competitive commission to location owners ("Site Providers"). Therefore, most of the Company's pay telephones are placed with Site Providers under leases having terms of five years or more. During 1998, the Company researched the Puerto Rican payphone market and determined that if and when the full benefits of the Telecommunications Act of 1996 are reflected in the Puerto Rican payphone market, Puerto Rico would be an attractive market for ChoiceTel to operate payphones. Whereas revenues have fallen at most of the Company's payphone located outside of Puerto Rico, payphones located within Puerto Rico have continued to generate above average revenues. Although the Company intends to divest its payphones in Puerto Rico during 2000, in order to maximize the value of the route it continues to contract for and install additional phones at acceptable locations. OPERATIONS During 1999 the Company operated, serviced and maintained a system of approximately 5,000 pay telephones, with approximately 89% of payphones located in Minnesota, Pennsylvania, Oregon, and Puerto Rico. All of the Company's pay telephones accept coins as payment for local or long-distance calls and can also be used to place local or long-distance cashless calls. COIN CALLS The Company's pay telephones generate coin revenue primarily from local calls. Until October 1997, the public utilities commissions of the states in which the Company operated regulated the cost of local coin calls, at that time, rates were deregulated. Management believes it can maximize payphone coin revenues by matching the cost of a local call to the market conditions at the phone. The amount charged for a local call ranges from $0.25 to $0.35. 5 Long-distance coin calls are carried by long-distance carriers that have agreed to provide long-distance service to the Company's telephones. The majority of the Company's phones sell coin long-distance for a rate of $0.25 per minute, with a two-minute minimum. Management believes that its $0.25 per minute long-distance rate results in considerable goodwill and is a point of differentiation between its phones and its local exchange carrier ("LEC") competitors. NON-COIN CALLS The Company also receives revenue from non-coin, or cashless, calls made from its pay telephones, including credit card calls, calling card calls, collect calls and third party billed calls. These calls are processed by the Company's designated operator service provider ("OSP"). DIAL-AROUND CALLS A Dial-Around call originates from a payphone when the user dials a non-billable access number such as, for example, 1-800-Collect, 1-800-CallATT or 10-10-333, and thereby dials around the Company's long-distance carrier in order to reach another long-distance carrier. The user deposits no money for the call and, prior to 1992, the long-distance provider carrying the call paid no commission to the payphone owner. Since 1992, payphone owners have been compensated by long-distance carriers for Dial-Around calls. See "Government Regulation - Dial-Around Compensation." COMPUTER NETWORK AND EQUIPMENT. The Company focused its early efforts on building a computer processing network that automated many of the operations of managing a pay telephone enterprise. Specialized software was designed and written when it was not available from industry suppliers. The Company's smart phones are part of a centralized network that links all of the Company's phones in the field with central processors. The system allows the Company to monitor phone call volume, identify malfunctioning equipment, dispatch repair service, schedule efficient coin collections, calculate commissions, print checks to Site Providers, and generate necessary reports that analyze and monitor profitability of the phones. The Company installs pay telephones which it believes incorporate the latest technology. The equipment makes use of microprocessors to provide voice synthesized calling instructions in English or Spanish, detect and count coins deposited during each call, inform the caller at certain intervals of the time remaining on each call, and identify the need for and the amount of an additional deposit. The pay telephones can be programmed and reprogrammed from the Company's central computer facilities to update rate information or to direct different kinds of calls to particular carriers. The Company's pay telephones can distinguish coins by size and weight, report to a remote location the total coinage in the coin box, perform self-diagnosis and automatically report problems to a pre-programmed service number, and immediately report attempts of vandalism or theft. Some of the telephones also operate on power available from the telephone lines, thereby avoiding the need for and reliance upon an additional power source at the installation location. The telephones are designed to have a user-friendly appearance and manner of operation similar to LEC-owned pay telephones. PLACEMENT OF PAY TELEPHONES. As of December 31, 1999, the Company's pay telephone system consisted of approximately 1,950 telephones located in 4 states and Puerto Rico. The following table sets forth certain information as of the dates indicated concerning the number and location of pay telephones operated by the Company: 6 NUMBER OF PAY TELEPHONES
STATE DECEMBER 31, DECEMBER 31, - ----- 1998 1999 ----- ----- Puerto Rico.......................................................... 300 995 Pennsylvania......................................................... 960 920 Minnesota............................................................ 1,930 Oregon............................................................... 665 Idaho................................................................ 285 Nevada............................................................... 95 Additional phones (9 states in 1998; 3 states in 1999) .............. 265 35 ----- ----- Total 4,500 1,950
The Company's ROI focus has enabled it to profile locations based on the likely profitability of a location. While this methodology is proprietary, as are the specific locations under contract, the Company's locations include a wide variety of establishments, such as restaurants, shopping malls, convenience stores, grocery stores, and gas stations. The Company's pay telephone lease mix includes indoor phones, walk-up outdoor phones and drive-up payphones. While the Company had a single Site Provider which accounted for more than 5% of its pay telephones and revenue in the years ended December 31, 1995 and 1996, no single Site Provider accounted for more than 5% of its pay telephones and revenues in either of the years ended December 31, 1997, 1998 and 1999. Agreements with Site Providers to install the Company's pay telephones (the "Site Agreements") provide for revenue sharing with Site Providers, typically a commission based on a negotiated percentage of revenue from the pay telephone. The Site Agreements give the Company the exclusive right to install pay telephones at that location and are generally of a five-year or greater term with automatic renewal provisions. The Company's Site Agreements normally give the Company the right to remove poor performing phones. Further, the Company can typically terminate a Site Agreement on 30 days notice to the Site Provider. Site Providers do not generally have the right to terminate a Site Agreement. PHONE LINE RATES. The Company pays local line charges for each of its installed payphones. These line charges cover basic service to the telephone as well as the transport of local calls. Line charges are regulated by state public utilities commissions ("PUCs"). MARKETING. The Company engages independent contractors to locate new sites for payphone installations in Puerto Rico. Management believes a successful contracting program requires identifying good locations, selling Site Providers on the benefits of the Company's payphones, and negotiating favorable Site Agreement terms. Identifying good locations for payphones is the most important aspect of the Company's marketing program, which includes an evaluation of population density, calling patterns and neighborhood socio-economic factors. The Company concentrates its efforts towards high traffic locations, lower income neighborhoods, and venues where people expect to find payphones. The Company promotes its payphone program to Site Providers by emphasizing service and maintenance. Site Providers generally view the payphone as a customer service rather than a profit center. Providing repair and collection services during evenings and on weekends and providing live call placement assistance sometimes is more important in securing the Site Agreement than the amount of commission paid to the Site Provider. 7 SERVICE AND MAINTENANCE. The Company believes it offers many of its Site Providers a higher level of service than is provided by the LEC competitors, who typically offer low or no commissions and do not monitor payphone performance. The Company monitors its payphones electronically and offers evening and weekend repair service. The Company uses full- and part-time field service technicians who collect money, clean phones and respond to trouble calls made by either a consumer or by the telephone itself as part of its internal diagnostic procedures. Some technicians are also responsible for the installation of new telephones. Due to the ability of the field service technicians to perform multiple service and maintenance functions, the Company is able to limit the frequency of trips to each pay telephone as well as the number of employees needed to service the pay telephones. COMPETITION The Company competes for pay telephone locations with LECs and other independent pay telephone operators. Most LECs against which the Company competes and some independent pay telephone companies have substantially greater financial, marketing and other resources than the Company. In addition, many LECs, faced with competition from the Company and other independent pay telephone companies, have increased their compensation arrangements with Site Providers to offer more favorable commission schedules. The Company believes the principal competitive factors in the pay telephone business are (i) responsiveness to customer service needs, (ii) the amount of commission payments to a Site Provider, (iii) the quality of service and the availability of specialized services provided to a Site Provider and telephone users, and (iv) the ability to serve accounts with locations in several LATAs or states. Commencing in the 1998 fourth quarter, the Company began to experience a negative impact on its revenues, which management believes results from increased usage of wireless devices, which appear to be reducing consumers' reliance on payphones. This trend continued throughout 1999, though was not detected in Puerto Rico. This negative impact on revenue is the primary determinant of the Company's decision to divest its payphone assets. GOVERNMENT REGULATION In January 1996, Congress passed the Telecom Act, a comprehensive telecommunications bill that, in part, dealt with several concerns of the independent pay telephone industry. Congress stated that its intent was to create a "pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technologies and services to all Americans by opening all telecommunications markets to competition." The Telecom Act, among other things, requires local telephone companies to eliminate subsidies of their pay telephone services and to treat their own and independent payphones in a nondiscriminatory manner. Of particular importance to the Company, the Telecom Act addressed the inherently unfair disadvantage independent pay telephone companies have in competing with regulated monopolies, the compensation of independent pay telephone companies for calls made from their equipment that previously offered no compensation, and the issue of price regulation of local calls by the various state PUCs. COMPETITION WITH RBOCS. Under the Telecom Act, the RBOCs must operate their payphone divisions with separate profit and loss statements. The Company believes that this will likely result in the Company's RBOC competitors being less aggressive in bidding for locations. It also may result in the RBOCs removing many low volume pay telephones that collectively compete with the Company's pay telephones. 8 DIAL-AROUND COMPENSATION. Pay telephones are required by the FCC to provide equal Dial-Around access to all long-distance carriers, either by access code (such as "10-10-333") or by 800 service. Prior to November 1996, the Company received $6 per payphone per month from long-distance carriers for providing this Dial-Around service. The Telecom Act recognized that it is a burden to payphone companies to provide such access and that the compensation paid to payphone companies for this access should be greater. Because the infrastructure to track and compensate for these calls did not exist at that time, the FCC's 1996 order raised the flat rate of compensation for the Dial-Around service to approximately $45 per payphone per month, based on $0.35 per call times the national average of 131 monthly Dial-Around calls placed per payphone. The FCC's 1996 order implementing the increased Dial-Around compensation was appealed, with the intent of decreasing the amount of Dial-Around compensation mandated by the order. In July 1997, the Court remanded the matter to the FCC for reconsideration of the rate of Dial-Around compensation. The Court found that the per call charge of $0.35 was inappropriate because the FCC did not consider evidence of the differences in the cost of coin calls and Dial-Around calls. The long-distance carriers then petitioned the Court to clarify the effect of the Court's July decision and to vacate the portion of the FCC's 1996 order setting the rate of Dial-Around compensation pending the FCC's re-examination of the Dial-Around rate. Further, in a letter to the FCC dated August 15, 1997, AT&T challenged the FCC's authority to order the long-distance carriers to make any payments during the pendency of the rate determination. The Court agreed with the long-distance carriers. In a decision dated September 16, 1997, the Court vacated the portion of the FCC's 1996 order setting the rate of Dial-Around compensation pending a new FCC order on remand. Accordingly, the long-distance carriers were not required to make Dial-Around payments to payphone service providers until the FCC issued a new order setting the Dial- Around rate. On October 9, 1997, the FCC issued an order establishing the Dial-Around rate as of October 7, 1997 at $0.284 per call ($0.35 minus an offset of $0.066 for expenses unique to coin calls) for the two years beginning October 7, 1997. On May 15, 1998 the Court again remanded the dial-around rate back to the FCC for further justification of the $0.35 starting point. On February 4, 1999 the FCC issued an order reducing the dial around rate to $0.24 retroactive to October 7, 1997 and going forward until at least January 31, 2002. Further, the FCC indicated that it planned to address Dial-Around compensation for the period from November 7, 1996 through October 6, 1997 in a subsequent order and tentatively concluded that the $0.24 per call rate adopted on a going forward basis should also govern compensation during the period from November 7, 1996 through October 6, 1997, though it has not yet issued an order as such. There can be no assurance that Dial-Around compensation will not be based on a rate that is less than what was previously collected by the Company. Such a rate could have an adverse effect on the results of operations and financial condition of the Company, which could be material. EMPLOYEES As of December 31, 1999, the Company had 28 full-time employees. No employees are covered by a collective bargaining agreement. The Company believes that its relationships with employees are good. ITEM 2. DESCRIPTION OF PROPERTY The Company's corporate offices are located in approximately 1,000 square feet of leased space in Plymouth, Minnesota. The lease for this property expires in May 2000 and the Company has two successive options to extend the lease for additional one-year periods. The Company also leases approximately 2,000 square feet of office space in San Juan Puerto Rico. The lease for this property expires in April 2000 and the Company holds three successive options to extend the lease for additional one-year periods. The Company also leases 2,000 square feet of warehouse space in Conshohocken, Pennsylvania. The Company believes that its current facilities are sufficient for its needs for the foreseeable future. 9 ITEM 3. LEGAL PROCEEDINGS MINNESOTA SALES TAX. Based on its analysis of the published regulations of the Minnesota Department of Revenue the Company has not remitted any sales tax payments to the State of Minnesota. In 1996, the Company learned that the opinion of the Department was that coin-operated payphone receipts were subject to state sales tax. Despite the Department's position, management is still of the view that the Company is not subject to sales tax, and the Company is challenging the imposition of the tax. The Company retained special tax counsel to contest the Department's position that coin-operated payphone receipts are subject to sales tax. Nonetheless, the Company has established a reserve of $1,550,000 as of December 31, 1999, to provide for the potential sales tax liability and will continue to reserve on a monthly basis until a definitive ruling is obtained. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A special meeting of the shareholders was held in Dec. 1999 for the purpose of obtaining shareholder approval of management's proposed sale of substantially all of its pay telephone asset. The requisite majority of shareholders voted in favor of Management's proposal to sell such assets. 10 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock and Redeemable Warrants have been quoted on the NASDAQ SmallCap Market under the symbol "PHON" and "PHONW", respectively, since November 10, 1997 . The following table sets forth, for the periods indicated, the range of high and low prices for the Company's Common Stock and Redeemable Warrants as reported on the NASDAQ SmallCap Market.
REDEEMABLE COMMON STOCK WARRANTS -------------- ------------- High Low High Low 1998: First Quarter................................. $4.00 $3.25 $0.75 $0.50 Second Quarter................................ $4.38 $3.50 $0.63 $0.50 Third Quarter................................. $5.13 $3.00 $0.56 $0.25 Fourth Quarter................................ $4.25 $2.50 $0.25 $0.06 1999: First Quarter................................. $3.25 $2.50 $0.13 $0.06 Second Quarter................................ $3.63 $1.50 $0.56 $0.13 Third Quarter................................. $3.00 $1.88 $0.31 $0.19 Fourth Quarter................................ $2.94 $1.75 $0.44 $0.13
As of March 20, 2000 there were 665 shareholders of the Company's Common Stock. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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 THE "RISK FACTORS" ENTITLED "RISKS ASSOCIATED WITH EXPANSION STRATEGY," "COMPETITION," "PENDING DETERMINATION OF DIAL-AROUND COMPENSATION RATE," "OTHER REGULATORY FACTORS," "TECHNOLOGICAL CHANGE AND NEW SERVICES," "DEPENDENCE UPON THIRD-PARTY PROVIDERS," "SERVICE INTERRUPTIONS; EQUIPMENT FAILURES," "RELIANCE ON SINGLE BRAND OF PAYPHONES," "SEASONALITY" 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. GENERAL 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 11 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. RESULTS OF DISCONTINUED OPERATIONS The following table presents certain items in the combined statements of discontinued operations as a percentage of revenue for the years ended December 31, 1998 and 1999.
STATEMENT OF OPERATIONS DATA: 1998 1999 ---- ---- REVENUE: Coin revenue............................ 72.7% 70.2% Non-coin revenue......................... 12.0 13.5 Dial-around revenue...................... 15.3 16.3 Total Revenue............................ 100% 100% SERVICE COSTS AND EXPENSES: Telephone line charges................... 26.1% 30.3% Commissions.............................. 17.1 16.3 Total cost of service.................... 43.2% 46.6% Gross margin............................. 56.8% 53.4% Selling, general and admin. ............. 37.1 33.2 Interest................................. 3.4 4.6 Depreciation and amortization............ 14.5 13.7 Net income (loss) before income tax provision................................ 1.8% 1.9% Average phones in service................ 3,800 4,500
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31 1998. The after tax loss on continuing operations (Advants, Inc. - subsidiary), for the year ended December 31, 1999 was $178,000 compared to a loss of $1,000 in the year ended December 31, 1998. The loss resulted from SG&A spending to develop, fund and begin implementing the Company's stratgey for public internet access terminals. The after tax income from discontinued operations for the year ended December 31, 1999 was $161,000 compared to $116,000 in 1998. The Company operated an average of 4,500 payphones during 1999, compared to 3,800 in 1998. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31 1997. The loss on continuing operations for the year ended December 31, 1998 was $1,000. There were no continuing operations in 1997. The after tax income from discontinued operations for the year ended December 31, 1998 was $115,000 compared to an after tax loss of $134,000 in 1997. The Company operated 3,800 payphones in 1998 compared to 3,000 in 1997. SUBSIDIARY ACTIVITIES IN PUBLIC INTERNET ACCESS TERMINALS - ADVANTS, INC. During 1998, the Company began test marketing public internet access terminals, which allow a customer to access the internet while away from their home or office computer. Customers have the option 12 of paying the charges, currently $1.00 for 5 minutes, using cash or a credit card. In 1999, the Company engaged consultants to devise a strategy to develop the market more quickly by bringing into the business joint venture partners who might benefit in owning part of a network of public internet terminals. Subsequently, these activities were transferred to a newly formed subsidiary, Advants, Inc., and several consultants were engaged as full-time management employees and senior executives of Advants. In November 1999 Advants completed a private placement of common stock raising approximately $500,000 to implement the strategy. Subsequent to the private placement, and the issuance of shares to the initial management team at Advants, Inc., Choicetel's equity position in Advants, Inc. stood at 60%. The Company anticipates providing additional funding in 2000 of approximately $3 million and thereby increasing its equity position to approximately 80%. SALES TAX CONTINGENCY The Company, based on its analysis of the published regulations of the Minnesota Department of Revenue, has not remitted any sales tax payments to the State of Minnesota. In 1996, the Company learned that the opinion of the Department was that calls from payphones were subject to state sales tax. Management is of the view that the payphone service it provides is not subject to sales tax and the Company is challenging the imposition of the tax. Nonetheless, on December 31, 1996, the Company established a reserve of $865,000 for the years prior thereto and has reserved an additional $243,000, $254,000 and $213,500 for the year ended December 31, 1997, 1998 and 1999 respectively. ENTRY INTO PUERTO RICO PAYPHONE MARKET During 1998, the Company began researching the Puerto Rico payphone market. It was determined that although the Puerto Rico Regulatory Board (PRRB) had not required the Puerto Rico Telephone Company (PRTC) to provide "competition neutral" service to independent payphone providers at a "cost-based rate", the Company was confident that the Telecom Act would eventually correct this situation. In March 1998, the Company began contracting with local businesses to provide payphone service. In April 1998 the Company received its first payphone lines from the PRTC and installed its first payphones. As of December 31, 1999 the Company had installed 995 payphones. In March of 1998, the Company received verbal assurances from the PRTC, that payphone lines would be made available, and the charge would be a flat rate of $50.00 per month per line. However, when actually invoiced the bills included additional charges ranging from $0.13 to $0.26 per call. At that time, the PRTC and the Company agreed that until a final decision was reached on a rate case before the PRRB, the Company would not pay the per call charges. On May 27, 1998 the PRRB ruled on that rate case and instructed the PRTC to reduce the per call charges to between $0.01 and $0.03 per call, depending upon the routing of the call. The PRTC appealed the ruling to the Court of Appeals, which upheld the ruling in December 1998. The PRTC then appealed that ruling to the Puerto Rico Supreme Court, which on January 28, 1999 agreed to hear the case and issued a stay of execution until the court renders a decision on the appeal. During 1998 and 1999 the Company accrued line charges at the rate of $0.06 per call. If the Puerto Rico Supreme Court reverses the Court of Appeals, and reinstates the old rates, then the Company estimates it would have unrecorded liabilities at December 31, 1998, and December 31, 1999 of $45,000 and $430,000 respectively. If the Puerto Rico Supreme Court upholds the Court of Appeals decision, then the Company would have overestimated expenses by $300,000 as of December 31, 1999. 13 LIQUIDITY AND CAPITAL RESOURCES For the year ended December 31, 1998, the Company's operating activites provided $1,763,000, the proceeds from sales of phones and rental agreements were $6,035,000, and the proceeds from issuing stock and collecting subscription receivables generated an additional $160,000. Payments of long-term debt and notes used $4,720,000 and investments in equipment used $1,064,000, resulting in a $2,167,000 increase in cash balances. In December the Company completed the sale of approximately 2,050 phones located in the Midwest, and received $4.3 million. Proceeds were used to repay bank debt and leasing debt in full, resulting in cash on hand of $2.4 million at year end. During 1999, the Company sold approximately 1,000 payphones located in the Pacific Northwest. Proceeds of approximately $2.5 million were used to reduce bank debt and to install payphones in Puerto Rico. ITEM 7. FINANCIAL STATEMENTS The following financial information of the Company is included as follows:
PAGE ---- Report of Independent Auditors................................................................... Consolidated Financial Statements: Consolidated Balance Sheets for Years Ended December 31, 1999 and 1998.................. Consolidated Statements of Operations for Years Ended December 31, 1999 and 1998............................................................................... Consolidated Statements of Shareholders' Equity for Years Ended December 31, 1999 and 1998............................................................................... Consolidated Statements of Cash Flows for Years Ended December 31, 1999 and 1998................................................................................ Notes to Consolidated Financial Statements..............................................
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 14 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT DIRECTORS The following discussion sets forth certain information concerning the directors of the Company. GARY S. KOHLER is a founder of the Company and since its inception in 1989 has served as Chairman of the Board of Directors. Mr. Kohler is a partner and portfolio manager for Whitebox Advisors, which he joined in October 1999. Prior to that he served as a managing director of Second Avenue Capital Management, a money management company, from December 1998 through September 1999. Prior to that he served as President of Kohler Capital Management from October 1997 through November 1998. From July to October 1997, Mr. Kohler was a partner in Tarmachan Holdings, Inc. From 1984 through June 1997, Mr. Kohler was Vice President and Portfolio Manager at Okabena Company. Mr. Kohler serves on the Boards of Destron Fearing, Inc., a publicly traded identification products company, and a number of private companies, including Emerald First Financial, Northwest Mortgage Services, Made in the Shades, Inc., and Health EZ, Inc. Mr. Kohler has an M.B.A. degree from Cornell University and a B.A. degree from the University of Minnesota. Mr. Kohler is the brother of Jack S. Kohler. JEFFREY R. PALETZ is a founder of the Company, has been a director since its inception and has been President since 1991, overseeing all operations of the Company. Prior to founding the Company in 1989, Mr. Paletz was employed for 13 years at Sportsman's Guide, a mail order retailer, where he oversaw the computer data operations. Mr. Paletz has a B.S. degree in Business from the University of Minnesota. MELVIN GRAF is a founder of the Company, has been a director since its inception and has been Executive Vice President and Secretary since 1991, overseeing all marketing and leasing activities. Mr. Graf served as President of the Company until 1991. Prior to founding the Company in 1989, Mr. Graf was President of Network Travel, a Minneapolis travel agency, for five years. Mr. Graf has a B.S. degree in Business from the University of Minnesota. ROBERT A. HEGSTROM became a director of the Company in June 1997. In January 1997, Mr. Hegstrom joined Northwest Services, Inc. as Chairman, President and Chief Executive Officer. Prior to that, he was a private investor for two years and, from October 1979 to January 1995, he was Executive Vice President of Green Tree Financial Corporation. Mr. Hegstrom is also a director of Beacon Bank. MICHAEL WIGLEY became a director of the Company in January 1998. Since 1989 Mr. Wigley has been President and Chief Executive Officer of Great Plains Companies, Inc., a diversified holding company. Mr. Wigley has an M.B.A. from Harvard Business School, a M.S. from Stanford University and a B.S. degree from the University of Minnesota. Mr. Wigley serves on the Board of Intelefilm, Inc. and is a regent of Luther College. GREG JOHNSON became a director of the Company in March 1999 and since November 1999 has served as CEO of the Company's subsidiary Advants, Inc. Prior to that Mr. Johnson served as President of Global Corporation from 1997 to 1999 and has worked for Global since 1990. Prior to that, Mr. Johnson was President and Chief Financial Officer of Simitar Entertainment, Inc. Mr. Johnson has a B.A. degree from the University of Saint Thomas. 15 BOARD COMMITTEES AND ACTIONS During calendar year 1999, the Board of Directors met 4 times and each director attended all meetings. The Board of Directors has two standing committees, a Compensation Committee and an Audit Committee which were appointed in January, 1998. Each committee met once during 1999. The Compensation Committee reviews and make recommendations to the Board of Directors regarding salaries, compensation and benefits of executive officers of the Company and administers the Company's 1997 Long-Term Incentive and Stock Option Plan. The Committee members are Robert A. Hegstrom, Gary S. Kohler and Jeffrey R. Paletz. The Audit Committee is responsible for recommending the appointment of a firm of independent public accountants to audit the books and records of the Company and its subsidiaries, reviews the internal and external financial reporting of the Company and the scope of the independent audit. The Committee members are Michael Wigley, Robert A. Hegstrom and Gary S. Kohler. The Board of Directors acts as the nominating committee. See "Information Concerning directors and Nominees - Nomination of Directors" DIRECTOR COMPENSATION No cash compensation is paid to the Company's directors. Independent, non-employee directors (Mr. Hegstrom and Mr. Wigley) upon reelection receive an option to purchase $75,000 of Common Stock, valued as of the annual shareholders meeting. The options are pursuant to the Company's 1997 Long-Term Incentive and Stock Option Plan, are exercisable upon grant and have five-year term and an exercise price equal to the fair market value of the Common Stock as of the date of grant. No options will be issued to employee directors for their service as directors. NOMINATION OF DIRECTORS The Board of Directors acts as the nominating committee for selecting the Board's nominees for election as directors. The Board does not intend to consider nominees recommended by shareholders. Directors of the Company are elected annually to serve until the next annual meeting of shareholders or until their successors are duly elected. The Company knows of no arrangements or understandings between a director or nominee and any other person pursuant to which he has been selected as a director or nominee. The only family relationship between any of the nominees, directors or executive officers of the Company is between Gary S. Kohler and Jack S. Kohler, who are brothers. EXECUTIVE OFFICERS The following discussion sets forth information about the executive officers of the Company who are not directors. JACK S. KOHLER has been Vice President and Chief Financial Officer of the Company since 1993. Prior to joining the Company, Mr. Kohler was employed for 13 years in various management and accounting positions at Cargill, Inc. Mr. Kohler has a B.S. degree in Accounting from the University of Minnesota. Mr. Kohler is the brother of Gary S. Kohler. ITEM 10. EXECUTIVE COMPENSATION 16 The following table and accompanying footnotes set forth certain summary information, relating to the three years ended December 31, 1997-99, with respect to the Company's Chief Executive Officer.
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------------------------------ --------------- SECURITIES NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS/SARS(#) COMPENSATIONS - ---------------------- ------------------------------------------------- --------------- --------------- Jeffrey R. Paletz, 1999 $108,375 $ 0 ------ ------ ------ President 1998 86,398 0 ------ ------ ------ 1997 77,350 15,476 ------ ------ ------
AGREEMENTS WITH EXECUTIVES At December 31, 1999 the Company had employment agreements with Jeffrey R. Paletz, Melvin Graf and Jack S. Kohler. The agreements provide for an annual base salary and the right to receive additional compensation in the form of salary, bonus and other benefits as the Board of Directors shall determines in its sole discretion. The agreements prohibit each officer from competing against the Company for a period of one year after employment ceases and from communicating with a Site Provider until six months following expiration of the Site Agreement. In the event of termination of the officer's employment, except a termination for cause, the terminated officer is entitled to receive full compensation and benefits for a six-month period. In light of the Company's efforts to dispose of its payphone assets, the Company has determined to not renew its employment agreements beyond April 15, 2000. BONUS PROGRAMS In 1997, the Company implemented its Incentive Compensation Plan to provide an opportunity for executive officers and other Company employees to receive a bonus based on individual and Company performance. Under this program no bonuses were granted or paid in 1999. In 1999, the Board of Directors authorized potential bonuses to senior management to be triggered by the completion of the sale of assets. Under this plan no bonuses were granted or paid in 1999. The bonus opportunity for other Company employees is discretionary and not subject to specific criteria. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of December 31, 1999, regarding the beneficial ownership of shares of Common Stock of the Company by each director and executive officer of the Company, by all directors and executive officers of the Company as a group, and by each shareholder known by the Company to own beneficially more than five percent (5%) of the outstanding shares of the Company's Common Stock. Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to such shares.
NUMBER OF SHARES PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) OUTSTANDING SHARES (2) - ------------------------------------ -------------------------- ------------------------- 170,000 5.8% 17 Perkins Capital Management, Inc. (3) 730 East Lake Street Wayzata, MN 55391-1769 DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS: Gary S. Kohler (4)(6)................................ 1,032,784 35.3% Jeffrey R. Paletz................................... 347,358 11.9% Melvin Graf (5).................................... 213,334 7.3% Jack S. Kohler (6)(7)................................ 347,500 11.6% Robert A. Hegstrom(8)................................ 60,294 2.0% Michael Wigley(8).................................... 65,294 2.2% Greg Johnson........................................ ------ ---- All directors, nominees and executive officers as a group (7 persons) 1,866,564 60.1%
(1) Each person has sole voting power and sole dispositive power with respect to all outstanding shares, except as otherwise noted or disclosed by the beneficial owners in the Schedule 13G filing described at footnote 3 below. (2) Based on 2,926,906 shares outstanding at March 21, 2000. Such amount does not include 264,588 shares of common stock issuable upon exercise of stock options. Each figure showing the percentage of outstanding shares owned beneficially has been calculated by treating as outstanding and owned the shares which could be purchased by the indicated person(s) within 60 days upon the exercise of existing stock options or warrants. (3) Reflects information included on Schedule 13G dated February 2, 2000 filed with the Securities and Exchange Commission. (4) Includes 40,000 shares held by Gary S. Kohler as custodian for the benefit of his children. Mr. Kohler disclaims beneficial ownership of such shares. (5) Included 13,334 shares held by Mr. Graf's spouse. Mr. Graf disclaims beneficial ownership of such shares. (6) Includes 200,000 shares currently owned by Gary S. Kohler, who has granted Jack S. Kohler an option to purchase such shares. (7) Includes options to acquire 70,000 shares from the Company. (8) Includes options to acquire 55,294 shares from the Company. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE The Company's directors, executive officers and any persons holding more than 10% of the outstanding Common Stock of the Company are required to file with the Securities and Exchange Commission reports concerning their initial ownership of Common Stock and any subsequent changes in such ownership. The Company believes that during 1997 the filing requirements were satisfied on a timely basis by all such persons. In making this disclosure, the Company has relied solely on written representations of its directors, officers and beneficial owners of more than 10% of the Common Stock and copies of the reports they have filed with the Securities and Exchange Commission and furnished to the Company. 18 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information concerning certain relationships and related transaction is set forth in the Proxy Statement under the heading "Certain Transactions", which information is incorporated herein by reference. The Company has an arrangement with Gary S. Kohler, the Company's Chairman of the Board, pursuant to which Mr. Kohler advises the Company's management on an as-needed basis. The consulting fees paid to Mr. Kohler for rendering this service for the year ended December 31, 1999, totaled $28,800. 19 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. SEE "EXHIBIT INDEX" ON PAGE FOLLOWING SIGNATURES. (b) REPORTS ON FORM 8-K The Company filed reports on Form 8-K on November 15, 1999 reporting the Company's financial results for the third quarter ended September 30, 1999 and reporting the sale of its Midwest assets. On December 23, 1999 the Company reported the sale of its Pennsylvania assets. 20 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHOICETEL COMMUNICATIONS, INC. Date: March 30, 2000 By /s/ Gary S. Kohler -------------- Gary S. Kohler Chairman of the Board of Directors In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Power of Attorney Each person whose signature appears below constitutes and appoints JEFFREY R. PALETZ and JACK S. KOHLER as his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-KSB and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
SIGNATURE TITLE DATE /s/ Gary S. Kohler Director March 30, 1999 - ------------------------------------------------ Gary S. Kohler /s/ Jeffrey R. Paletz President and Director March 30, 1999 - ------------------------------------------------ Jeffrey R. Paletz /s/ Melvin Graf Executive Vice President and March 30, 1999 - ------------------------------------------------ Director Melvin Graf /s/ Jack S. Kohler Vice President and Chief Financial March 30, 1999 - ------------------------------------------------ Officer Jack S. Kohler /s/ Dustin Elder Vice President March 30, 1999 - ------------------------------------------------ Dustin Elder /s/ Robert A. Hegstrom Director March 30, 1999 - ------------------------------------------------ Robert A. Hegstrom /s/ Michael Wigley Director March 30, 1999 - ------------------------------------------------ Michael Wigley
21 INDEPENDENT AUDITORS' REPORT Board of Directors ChoiceTel Communications, Inc. Minneapolis, Minnesota We have audited the accompanying consolidated balance sheets of ChoiceTel Communications, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ChoiceTel Communications, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Schechter Dokken Kanter Andrews & Selcer Ltd Minneapolis, Minnesota March 23, 2000 CONSOLIDATED CHOICETEL COMMUNICATIONS, INC. BALANCE SHEETS AND SUBSIDIARIES DECEMBER 31 - ------------------------------------------------------------------------------
1999 1998 ---------------- --------------- ASSETS: Current assets: Cash and cash equivalents $ 2,323,344 $ 155,907 Receivables 1,241,952 932,905 Prepaid and other assets 319,492 309,301 Deferred taxes 302,000 57,000 ---------------- --------------- Total current assets 4,186,788 1,455,113 Property and equipment, net 113,302 37,628 Net assets of discontinued operations 4,849,926 12,162,767 Deferred financing, net of accumulated amortization of $3,000 in 1998 27,000 ---------------- --------------- $ 9,150,016 $ 13,682,508 ================ =============== LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Checks outstanding in excess of bank balance $ 74,604 Notes payable $ 350,000 350,000 Current portion of long-term debt 383,190 1,222,559 Accounts payable 157,808 238,944 Accrued expenses 1,835,251 1,918,550 Income tax payable 221,000 ---------------- --------------- Total current liabilities 2,947,249 3,804,657 Long-term liabilities, net of current portion 4,285 3,891,732 Minority interest 23,611 Shareholders' equity 6,174,871 5,986,119 ---------------- --------------- $ 9,150,016 $ 13,682,508 ================ ===============
See notes to consolidated financial statements. 2 CONSOLIDATED CHOICETEL COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS AND SUBSIDIARIES YEARS ENDED DECEMBER 31 - ------------------------------------------------------------------------------
1999 1998 ---------------- --------------- Service revenue $ 5,031 $ 106 Cost of service 9,940 1,350 ---------------- --------------- Gross margin (4,909) (1,244) Selling, general and administrative expenses 292,235 ---------------- --------------- Loss from continuing operations before income tax benefit (297,144) (1,244) Provision for income tax benefit 66,000 ---------------- --------------- Loss from continuing operations before minority interest (231,144) (1,244) Minority interest 53,338 ---------------- --------------- Loss from continuing operations (177,806) (1,244) Income from discontinued operations (net of income tax expense of $42,000 and $95,000 for 1999 and 1998, respectively) 160,890 116,312 ---------------- --------------- Net income (loss) $ (16,916) $ 115,068 ================ =============== Earnings (loss) per share: Continuing operations, basic and diluted $ (0.06) $ (0.00) ================ ============== Discontinued operations, basic and diluted $ 0.05 $ 0.04 ================ =============== Net income (loss), basic and diluted $ (0.01) $ 0.04 ================ =============== Weighted average number of shares outstanding: Basic $ 2,915,528 $ 2,915,006 ================ =============== Diluted $ 2,925,776 $ 2,916,457 ================ =============
See notes to consolidated financial statements. 3 CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------
15,000,000 shares authorized, $.01 par ------------------------------- Shares Amount --------------- -------------- Balance, January 1, 1998 2,915,006 $ 29,150 Issuance of stock warrants for services Issuance of stock options for services Collection of subscription receivable Net income --------------- -------------- Balance, December 31, 1998 2,915,006 29,150 Issuance of minority shares of subsidiary Issuance of stock options for services Issuance of common stock 11,900 119 Collection of subscription receivable Net loss --------------- -------------- Balance, December 31, 1999 2,926,906 $ 29,269 =============== ==============
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999 AND 1998 - ------------------------------------------------------------------------------
Additional paid-in Accumulated Subscriptions capital deficit receivable Total - -------------------------- ----------------- ------------------- ------------------ $ 5,956,680 $ (134,171) $ (18,581) $ 5,833,078 9,000 9,000 20,392 20,392 8,581 8,581 115,068 115,068 - -------------------------- ----------------- ------------------- ------------------ 5,986,072 (19,103) (10,000) 5,986,119 73,050 73,050 99,562 99,562 22,937 23,056 10,000 10,000 (16,916) (16,916) - -------------------------- ----------------- ------------------- ------------------ $ 6,181,621 $ (36,019) $ 0 $ 6,174,871 ========================== ================= =================== ==================
4 CONSOLIDATED CHOICETEL COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS AND SUBSIDIARIES YEARS ENDED DECEMBER 31 - ------------------------------------------------------------------------------
1999 1998 ---------------- --------------- Cash flows from operating activities: Net income (loss) $ (16,916) $ 115,068 Adjustments to reconcile net income (loss)to net cash provided by operating activities: Deferred taxes (245,000) 95,000 Depreciation 873,911 893,129 Amortization 510,214 423,922 Stock based compensation issued 122,618 29,392 Minority interest loss (53,338) Loss on disposal (14,621) Changes in operating assets and liabilities: Coin in phone 108,877 (61,106) Receivables 162,898 (505,481) Prepaid expenses 241,107 (93,513) Checks outstanding in excess of bank balance (74,604) (64,635) Accounts payable (81,136) 190,944 Accrued expenses 7,953 223,663 Income tax payable 221,000 ---------------- --------------- Net cash provided by operating activities 1,762,963 1,246,383 ---------------- --------------- Cash flows from investing activities: Purchase of: Equipment (1,063,710) (1,116,263) Rental contracts (296,506) Redemption of short-term investments 1,151,215 Payments for acquisitions (205,987) Proceeds from sale of equipment and rental contracts 6,035,000 ---------------- --------------- Net cash provided by (used in) investing activities 4,971,290 (467,541) ---------------- --------------- Cash flows from financing activities: Proceeds from issuance of common stock in subsidiary 150,000 Collection of subscription receivable 10,000 8,581 Principal payments on long-term debt (4,726,816) (1,148,995) Increase in notes payable 350,000 Loan origination fees (30,000) ---------------- --------------- Net cash used in financing activities (4,566,816) (820,414) ---------------- ---------------
See notes to consolidated financial statements. 5 CONSOLIDATED CHOICETEL COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS AND SUBSIDIARIES YEARS ENDED DECEMBER 31 - ------------------------------------------------------------------------------
1999 1998 ---------------- --------------- Net increase (decrease) in cash and cash equivalents $ 2,167,437 $ (41,572) Cash and cash equivalents, beginning 155,907 197,479 ---------------- --------------- Cash and cash equivalents, ending $ 2,323,344 $ 155,907 ================ =============== Supplemental disclosure of cash flow information: Cash paid for interest $ 509,060 $ 340,012 ================ =============== Supplemental cash flows information: Details of acquisition: Fair value of assets $ 4,005,987 Issuance of note 3,800,000 --------------- Cash paid for assets $ 205,987 =============== Non cash investing activities: Receivable from sale of assets $ 365,810 ================
See notes to consolidated financial statements. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHOICETEL COMMUNICATIONS, INC. YEARS ENDED AND SUBSIDIARIES DECEMBER 31, 1999 AND 1998 - -------------------------------------------------------------------------------- 1. Nature of business and discontinued operations: - ------------------------------------------------------------------------------- Nature of business: ChoiceTel Communications, Inc., and Subsidiaries (the Company) includes a wholly owned subsidiary, ChoiceTel, Inc., and a 60% owned subsidiary, Advants, Inc. (formerly Public Internet Access Holdings Corporation). The Company was in the business of providing pay phone services in several states and Puerto Rico. In December 1999 pursuant to a shareholders' meeting, the Company decided to sell its pay phone operations. The Company is currently focusing on Advants, Inc., (Advants) which is operating and rapidly expanding a network of public internet access terminals (kiosks). As part of this strategy, Advants raised additional equity outside of ChoiceTel Communications, Inc., through a private placement memorandum to fund this expansion. Discontinued operations: The Company decided to discontinue its pay phone operations in December 1999 (measurement date). The Company has estimated it will realize an overall gain on the disposal of discontinued operations and accordingly, has not recorded a loss from the measurement date. In 1999, the Company sold all of its phones in two territories (the Northwest and Midwest) in separate transactions totaling approximately $6.4 million. The Northwest sale occurred prior to the measurement date and a gain of approximately $32,000 is included in income from discontinued operations in 1999. Additionally, the Company entered into an agreement with the Midwest purchaser to sell 100% of the outstanding stock of ChoiceTel, Inc., the Company's Local Exchange Carrier (LEC) subsidiary, for $100,000 subject to approval by the public utilities commission. The Midwest purchaser has also agreed to have 100 kiosks installed by January 21, 2000 for an additional $400,000. The $400,000 price on the kiosks will be decreased by $4,000 times the number of kiosks not installed by that date. In March 2000, the Company sold its operations in the Eastern United States for approximately $2,000,000. The results of discontinued operations are follows:
1999 1998 --------------- ---------------- Revenue $ 10,376,055 $ 9,344,140 Cost of service 4,885,419 4,230,661 --------------- ---------------- Gross margin 5,490,636 5,113,479 Selling, general and administrative 4,811,306 4,563,469 Interest expense 476,440 338,698 --------------- ---------------- Income before taxes 202,890 211,312 Income taxes 42,000 95,000 --------------- ---------------- Income from discon- tinued operations $ 160,890 $ 116,312 =============== ================
The net assets of the discontinued operations consist of the following as of December 31:
1999 1998 -------------- --------------- Cash $ 98,455 $ 207,332 Accounts receivable 41,753 147,889 Prepaid expenses 176,960 428,257 Property and equipment, net 2,828,458 6,298,773 Rental contracts, net 2,150,527 5,501,771 Deferred loss 66,280 Accrued expenses (512,507) (421,255) -------------- --------------- $ 4,849,926 $ 12,162,767 ============== ===============
The 1998 financial statements have been reclassified for the discontinued operations. 2. Summary of significant accounting policies: Principles of consolidation: The consolidated financial statements for 1999 and 1998 include the accounts of ChoiceTel Communications, Inc. and its wholly owned subsidiary, 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHOICETEL COMMUNICATIONS, INC. YEARS ENDED AND SUBSIDIARIES DECEMBER 31, 1999 AND 1998 - -------------------------------------------------------------------------------- 2. Summary of significant accounting policies (continued): - ------------------------------------------------------------------------------- ChoiceTel, Inc. and its 60% owned subsidiary, Advants, Inc. All material intercompany balances have been eliminated. Concentration of credit risk: The Company maintains its cash in bank deposit accounts at financial institutions where balances, at times, may exceed federally insured limits. It is management's opinion that the risk of loss is minimal. Property and equipment and depreciation methods: Property and equipment is recorded at cost. Depreciation is being provided by the straight-line method over the estimated useful lives, principally, seven years, of the related assets. Capitalization of computer software development costs: The company capitalizes certain costs incurred in the development of software, including external direct material and service costs, once technical feasibility is reached. Deferred financing: Deferred financing costs were being amortized over the life of the related notes on a straight-line basis. The related note was paid off during 1999. Income taxes: Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes. Deferred taxes are recognized from differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The deferred tax assets and liabilities represent the future tax expense of those differences. The Companies file a consolidated tax return that includes ChoiceTel Communications, Inc. and ChoiceTel, Inc. Advants, Inc. files a separate tax return. Stock-based compensation: The Company accounts for its stock options in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB No. 25), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company has also adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS No. 123), which permits entities to recognize the expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB No. 25 and provide pro forma net income disclosures for employee stock option grants as if the fair-value based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. Earnings per share: The Company adopted SFAS Statement No. 128, EARNINGS PER SHARE. Basic earnings per common share are based on the weighted average number of common shares outstanding in each year. Diluted earnings per common share assume that outstanding common shares were increased by shares issuable upon exercise of stock options and warrants for which market price exceeds exercise price, less shares 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHOICETEL COMMUNICATIONS, INC. YEARS ENDED AND SUBSIDIARIES DECEMBER 31, 1999 AND 1998 - -------------------------------------------------------------------------------- 2. Nature of business and summary of significant accounting policies (continued): - -------------------------------------------------------------------- which could have been purchased by the Company with related proceeds. This calculation added 10,248 and 1,451 shares to the diluted weighted average shares outstanding for 1999 and 1998, respectively. Stock options and warrants of 1,226,000 and 1,225,000, for December 31, 1999 and 1998, respectively, were not used in the calculation of diluted earnings per share because they were antidilutive. Cash equivalents: The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, the actual amounts could differ from those estimates. Any adjustments applied to estimated amounts are recognized in the year in which such adjustments are determined. Estimates that are susceptible to significant change are disclosed in notes 1 and 7. 3. Acquisition: - ------------------------------------------------------------------------------- On June 30, 1998, the Company purchased a route of pay phones in Philadelphia, Pennsylvania along with the trade name Jay Telephone Vending from Edward Steven Corporation and Drake Telephone Company. The total cost for the acquired assets was $4,005,987, and was financed by the bank with a $3,800,000 note payable. An additional amount, up to $500,000, was due based upon the performance of acquired phones during the twelve months ending June 30, 1999. No further amounts were due based upon the performance. 4. Property and equipment: - -------------------------------------------------------------------------------
1999 1998 -------------- --------------- Office equipment $ 20,658 Kiosks 54,682 $ 40,212 Accumulated depreciation (10,738) (2,584) -------------- --------------- 64,602 37,628 In process software 48,700 -------------- --------------- $ 113,302 $ 37,628 ============== ===============
9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHOICETEL COMMUNICATIONS, INC. YEARS ENDED AND SUBSIDIARIES DECEMBER 31, 1999 AND 1998 - -------------------------------------------------------------------------------- 5. Note payable: - ---------------------------------------------
1999 1998 ---------------- --------------- Note payable, Computer Assisted Technology, Inc. (CAT), interest only at 8.5% through February 7, 1998, at which time the principal is due. Convertible to shares of common stock at $6.75 plus adjustment based on IPO price of stock. The note has not been settled due to a dispute between the Company and CAT. See Note 7. $ 350,000 $ 350,000 ================ =============== 6. Long-term debt: - --------------------------------------------- 1999 1998 ---------------- --------------- Note payable, bank, due in increasing monthly principal installments starting at $50,667, increasing up to $70,000 at July 2002 plus interest at a floating rate through June 2003. The interest rate at December 31, 1998 was 8.75%. (A) (B) (C) $ 3,495,998 Note payable, bank, revolving credit facility up to $1,000,000, due in increasing monthly principal installments beginning October 1999 determined as a percent of the amount outstanding on September 30, 1999. Installments are due beginning October 1999 through June 2003, plus interest at a floating rate. (B) (C) 350,000 Note payable, Telco, due in monthly installments of $21,342 including interest at 10% through July 2001, secured by equipment, subordinated to notes payable, bank, paid off in January 2000. $ 378,061 564,874 Note payable, Telecapital, due in monthly installments of $4,452 including interest at 14.5% through April 2002, secured by equipment. (C) 138,159 Capital leases, interest at 9.5%. (C) 551,156 Notes payable, vehicles, due in monthly installments of $480 including interest at 8.95% through December 2001. 9,414 14,104 ---------------- --------------- 387,475 5,114,291 Less current portion 383,190 1,222,559 ---------------- --------------- $ 4,285 $ 3,891,732 ================ ===============
10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHOICETEL COMMUNICATIONS, INC. YEARS ENDED AND SUBSIDIARIES DECEMBER 31, 1999 AND 1998 - -------------------------------------------------------------------------------- 6. Long-term debt (continued): - -------------------------------------------------------------------------------- Future maturities of long-term debt are as follows:
Year ending December 31, Amount ------------------------ ------ 2000 $ 383,190 2001 4,285 ------------- $ 387,475 =============
(A) This note includes some mandatory prepayments based on cash flow and penalties for other prepayments. (B) These notes are secured by receivables, equipment, deposit accounts and an insurance policy and are partially guaranteed by certain officers. The Company is required to maintain certain financial ratios and the notes have certain other restrictive covenants regarding transactions of the Company. (C) Note paid off during 1999. 7. 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. Consulting agreement: The Company paid a director/shareholder $28,800 and $34,800 for certain consulting services in 1999 and 1998, respectively. Leases: The Company leases its offices in Minnesota and Puerto Rico under operating leases expiring in May 2000. The Company also leases office space in Pennsylvania on a month-to-month basis. The leases have renewal options and require the Company to pay certain common area costs and real estate taxes. Rent expense under the leases was $129,641 and $101,737 for the years ended December 31, 1999 and 1998, respectively. The Company has a sublease agreement to receive a prorated portion of the future rent applicable to the Minnesota location for approximately $14,000. The future minimum lease payment is $26,795 for the year ending December 31, 2000. Contingencies: Sales tax: The Minnesota Department of Revenue has asserted sales taxes are due on telephone receipts. The Company does not agree with this assessment and has appealed it to the Minnesota Tax Court. Total assessments including taxes, penalties and interest are estimated to be $2.1 million. The Company has accrued $1,549,685 at December 31, 1999 and $1,367,732, at December 31, 1998 related to this contingency. Puerto Rico line charges: In March 1998, the Company received verbal assurances from the Puerto Rican Telephone Company (PRTC) that pay phone lines would be made available and the charge would be a flat rate of $50.00 per month per line. However, when phone bills were received in the Company's offices, they included additional charges ranging from $0.13 to $0.26 per call. At that time, the PRTC and the Company agreed that until a final decision was reached on a rate case 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHOICETEL COMMUNICATIONS, INC. YEARS ENDED AND SUBSIDIARIES DECEMBER 31, 1999 AND 1998 - -------------------------------------------------------------------------------- 7. Commitments and contingencies (continued): - -------------------------------------------------------------------------------- before the Puerto Rican Regulatory Board (PRRB), the Company would not pay the per call charges. On May 27, 1998 the PRRB ruled on that rate case and instructed the PRTC to reduce the per call charges to between $.01 and $.03 per call, depending upon the routing of the call. The PRTC appealed the ruling to the Court of Appeals, which upheld the ruling. PRTC has since appealed the ruling to the Puerto Rico Supreme Court, which has agreed to hear the case and has issued a stay of execution until the court renders a decision on the appeal. From April through September 1998, the Company accrued unpaid line charges at the rate of $0.15 per call. In October 1998, the Company reduced the rate it was accruing line charges to $0.06 per call based upon progress of this case. Since January 1, 1999, the Company has paid the PRTC $0.03 per call and is continuing to accrue $0.06 per call. The Company has accrued $356,000 at December 31, 1999 and $57,000 at December 31, 1998 related to this matter. Dial around Compensation: The Company receives compensation for dial around activity related to its pay phones. The rates are set by the Federal Committees Commission and are subject to change both prospectively and retroactively. The financial statements include a provision for $80,000 as an estimated liability for amounts that may require repayment. Computer Assisted Technologies (CAT): The Company's 1999 and 1998 financial statements included the following amounts related to a 1997 purchase from CAT of a route of pay telephones: Prepaid expenses $ 302,142 Accrued expenses (93,121) Note payable (350,000) --------------- Net liability $ (140,979) ===============
The purchase agreement includes some contingent payments with which the Company and CAT have a disagreement. As a result, the above have not been settled. In December 1999, a principal of CAT filed a suit against the Company alleging that CAT is entitled to additional shares and cash. The outcome of this contingency is not known and no further amounts have been recorded in the financial statements. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHOICETEL COMMUNICATIONS, INC. YEARS ENDED AND SUBSIDIARIES DECEMBER 31, 1999 AND 1998 8. Stock options and warrants: - ----------------------------------------------- On April 11, 1997, the Company's Board of Directors adopted the 1997 Long-Term Incentive and Stock Option Plan (the "Plan"). The Plan provides for the issuance of incentive stock options and non-qualified stock options to key employees and directors of the Company. The total number of shares of common stock authorized and reserved for issuance under the Plan is 100,000 shares. The exercise price for each incentive stock option granted under the Plan may not be less than the fair market value of the common stock on the date of the grant, unless, in the case of incentive stock options, the optionee owns greater than 10% of the total combined voting power of all classes of capital stock of the Company, in which case the exercise price may not be less than 110% of the fair market value of the common stock on the date of the grant. The exercise price for each non-qualified option may not be less than 85% of the fair market value of the common stock on the date of grant. Unless otherwise determined by the Board, incentive options granted under the Plan have a maximum duration of 10 years, non-qualified options and awards have a maximum duration of 15 years. Vesting is based on such terms and conditions as the Board shall determine. Utilizing the Black Scholes option pricing model, the Company determined that the fair value of options granted during 1998 would not have affected net income (loss) or income (loss) per share as reported, and accordingly, the Company has not provided pro forma income and earnings per share information. In 1999, the proforma effects of options issued to employees are as follows:
As reported Proforma --------------------- -------------------- Net income (loss) $ (16,916) $ (93,728) ===================== ==================== Earnings per share $ (0.01) $ (0.03) ==================== =======================
Assumptions used to estimate the fair value of employee options issued in 1999 using the Black Scholes model are as follows: Risk free interest rate 5.85% Estimated life 2 years Estimated volatility 140% Estimated dividends 0%
Information with respect to options outstanding as of December 31 is summarized as follows:
1999 1998 ------------------------------------- ------------------------------------- WEIGHTED- Weighted- AVERAGE Average EXERCISE Exercise SHARES PRICE Shares Price --------------- ------------ ------------- -------------- Outstanding at beginning of year 130,000 $ 4.34 122,500 $ 3.37 Granted 136,666 2.25 70,000 4.06 Exercised Forfeited 14,000 3.62 62,500 2.00 --------------- ------------- Outstanding at end of year 252,666 $ 3.21 130,000 $ 4.34 =============== ============ ============= ============== Range of exercise prices of options outstanding at December 31 $2.25 - $6.75 $3.38 to $6.75 Options exercisable at year end 245,999 80,000 Weighted average remaining life 2.9 YEARS 3.4 years
13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHOICETEL COMMUNICATIONS, INC. YEARS ENDED AND SUBSIDIARIES DECEMBER 31, 1999 AND 1998 8. Stock options and warrants (continued): - -------------------------------------------------------------------------------- During 1998 the Company issued 150,000 warrants to purchase at any time one share of common stock; 50,000 of the warrants have an exercise price of $5.00 expiring August 2000, and 50,000 of the warrants have an exercise price of $6.00 expiring in August 2001. The remaining 50,000 have an exercise price of $7.00 expiring in August 2002. At December 31, the Company has outstanding the following warrants:
Weighted average exercise 1999 1998 price ------------ ----------- ------------- Issued as part of units in public offering 800,000 800,000 $ 9.50 Granted to underwriter in public offering 160,000 160,000 8.95 Granted to investment relations company 150,000 150,000 6.00 ------------ ----------- Outstanding at end of year 1,110,000 1,110,000 $ 9.40 ========= =========== ========= Warrants exercisable at year end 1,110,000 1,110,000 Weighted average remaining life 2.8 YEARS 3.8 years
9. Income taxes: - -------------------------------------------------------------------------------- A reconciliation between the statutory federal and state income tax to the Company's effective tax benefit rate is as follows:
1999 -------------- Provisions calculated At statutory rates: Deferred: Federal $ (101,000) State (18,000) -------------- (119,000) Valuation allowance 53,000 -------------- $ (66,000) ==============
14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHOICETEL COMMUNICATIONS, INC. YEARS ENDED AND SUBSIDIARIES DECEMBER 31, 1999 AND 1998 - -------------------------------------------------------------------------------- 9. Income taxes (continued): - -------------------------------------------------------------------------------- The deferred tax asset and deferred tax liability consist of the following at December 31:
1999 1998 ------------- -------------- Deferred tax asset (liability): Sales tax contingency $ 620,000 $ 545,000 Accrued expenses 27,000 25,000 Accrued dial-around compensation 32,000 140,000 Depreciation (395,000) (839,000) Amortization 45,000 31,000 Net operating loss carryforward 53,000 155,000 Deferred loss on disposal (27,000) ------------- -------------- 355,000 57,000 Valuation allowance (53,000) ------------- -------------- $ 302,000 $ 57,000 ============= ==============
Advants, Inc. has federal and state net operation loss carryforwards of $133,000 expiring in 2014. Utilization of the deferred tax asset of $302,000 disclosed above is dependent on future taxable profits in excess of profits arising from existing taxable temporary differences. Assets have been recognized based on management's estimate of future taxable income which includes a valuation allowance related to Advants, Inc., which has no operating history to determine future use of the net operating loss carryforward. 10. Financial instruments: - -------------------------------------------------------------------------------- The Company's financial instruments recorded on the balance sheet include cash, accounts receivable, notes and accounts payable and debt. Because of their short maturity, the carrying amount of cash, accounts receivable and notes and accounts payable approximates fair value. Fair value of long-term debt approximates recorded value based on rates available to the Company for similar terms and maturities. 15 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. EXHIBIT INDEX TO FORM 10-KSB OF CHOICETEL COMMUNICATIONS, INC. For the Fiscal Year Ended December 31, 1999 Commission File Number: 0-230 17
EXHIBIT NO. DESCRIPTION ------- ----------- 3.1 Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 3.2 Bylaws (incorporated by reference to Exhibit 3.2 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 4.1 Specimen Certificate representing the Common Stock (incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 4.2 Form of Redeemable Warrant Agreement with Norwest Bank Minnesota, National Association, including certificate representing the Redeemable Warrants (incorporated by reference to Exhibit 4.2 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.1* 1997 Long-Term Incentive and Stock Option Plan (incorporated by reference to Exhibit 10.1 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.2 Lease Agreement (incorporated by reference to Exhibit 10.2 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.3* Bonus Program (incorporated by reference to Exhibit 10.3 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.4 Amended and Restated Loan Agreement with National City Bank, dated as of January 2, 1997 (incorporated by reference to Exhibit 10.4 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.5 Promissory Note payable to Serence Paletz, dated April 10, 1995 (incorporated by reference to Exhibit 10.5 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.6 Promissory Note payable to William Opsahl, dated April 18, 1995 (incorporated by reference to Exhibit 10.6 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 22 10.7 Promissory Note payable to Miriam Graf, dated November 3, 1995 (incorporated by reference to Exhibit 10.7 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.8 Promissory Note payable to William Opsahl, dated December 2, 1995 (incorporated by reference to Exhibit 10.8 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.9 Promissory Note payable to Ronald M. Gross and Elaine Weitzman, dated December 7, 1995 (incorporated by reference to Exhibit 10.9 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.10 Promissory Note payable to William B. Topp and Norma Topp, dated July 7, 1996 (incorporated by reference to Exhibit 10.10 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.11 Promissory Note payable to The Topp Family Trust, dated July 27, 1996 (incorporated by reference to Exhibit 10.11 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.12 Agreement for Sale and Purchase of Business Assets with Telco West, Inc. ("Telco"), dated January 2, 1997 (incorporated by reference to Exhibit 10.12 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.13 Installment Collateral Note payable to Telco, dated January 2, 1997 (incorporated by reference to Exhibit 10.13 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.14 Installment Collateral Note payable to Telco, dated January 2, 1997 (incorporated by reference to Exhibit 10.14 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.15 Agreement for Sale and Purchase of Assets with Computer Assisted Technologies, Inc. ("CAT"), dated as of March 14, 1997 (incorporated by reference to Exhibit 10.15 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.16 Route Service Agreement with CAT, dated as of February 1, 1997 (incorporated by reference to Exhibit 10.16 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.17* Employment Agreement with Jeffrey R. Paletz, dated as of April 15, 1997 (incorporated by reference to Exhibit 10.17 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.18* Employment Agreement with Melvin Graf, dated as of April 15, 1997 (incorporated by reference to Exhibit 10.18 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.19* Employment Agreement with Jack S. Kohler, dated as of April 15, 1997 (incorporated by reference to Exhibit 10.19 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.20* Employment Agreement with Dustin Elder, dated as of August 14, 1997 10.21 Agreement for Service Resale with U.S. West Communications, Inc., undated (incorporated by reference to Exhibit 10.21 of the Registrant's Registration Statement on Form SB-2; Registration No. 333-29969) 10.22 Agreement for Sale and Purchase of Business Assets with Edward Steven Corporation and Drake Telephone Company, dated May 7, 1998 10.23 Credit Agreement with Norwest Bank Minnesota, dated as of June 30, 1998 10.24 First Amendment to the Credit Agreement with Norwest Bank Minnesota, dated as of December 16, 1998 10.25 Agreement for Sale and Purchase of Business Assets with Alpha Telcom Inc., dated February 16, 1999. ** 10.26 Agreement for Sale and Purchase of Business Assets with Access Anywhere, LLC, dated November 15, 1999** 21 Subsidiary of ChoiceTel Communications, Inc. ** 24 Power of Attorney (included on the signature page of this Form 10-KSB)
------------- * Management contract or compensatory plan or arrangement. ** Filed herewith. EX-10.25 2 EXHIBIT 10.25 AGREEMENT FOR THE SALE OF PAY TELEPHONE ROUTE This AGREEMENT is made and entered into by and between Alpha Telecom, Inc., an Oregon Corporation, or its designee, hereinafter referred to as "Buyer," and Choicetel Communications, Inc., Minnesota Corporation, hereinafter referred to as "Seller," and is made with reference to the following facts: 1. Seller owns 1121 pay telephone locations, more or less, located in the States of Oregon, Colorado, Washington, Idaho, Montana, Wyoming, and Nevada, under the Trade Name of "Telco Northwest," more particularly described on Exhibit "A," which is attached hereto and incorporated herein by this reference, and desires to sell the same to Buyer pursuant to the terms set forth herein; and, 2. Buyer is in the business of owning, maintaining, and servicing pay telephones in Oregon and elsewhere; and, 3. Buyer desires to purchase from Seller, upon the terms and conditions contained herein, the installed pay telephones and associated locations and contracts memorialized by Exhibit A. NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS: 1. Upon closing, Seller sells and transfers all of its right, title, and in-terest in and to the 1121 telephones and locations, more or less, together with all associated site or location contracts, for the agreed price of $2,940,000.00. 2. In addition, upon closing, Seller sells and transfers all of its right, title, and interest in and to the name "Telco Northwest," "Telco NW," "Telco Northwest, Inc.," or any variation thereof. 1 3. The terms of this sale are as follows: a. $75,000.00 to be paid to the seller upon execution of this agreement by both parties. b. The balance due Seller, $2,865,000.00 shall be all cash to Seller upon Closing. 4. DUE DILIGENCE INSPECTION. Buyer shall be entitled to conduct a complete and thorough Due Diligence Inspection, to be completed on or before March 31, 1999. In this regard, Seller shall provide Buyer with everything necessary to complete its inquiry concerning the financial condition of Seller and the identified sites and locations and shall make available to Buyer all of the contracts associated with the locations identified on Exhibit A. Buyer shall also be entitled to make a physical inspection of the site locations. All of the foregoing shall be to Buyer's satisfaction and shall be completed no later than March 31, 1999. On that date, unless Buyer notifies Seller otherwise, this condition shall be deemed to have been removed, and the $75,000.00 paid to seller pursuant hereto shall then forthwith be deemed to be non-refundable. If Buyer completes its Due Diligence Inspection and notifies Seller of any deficiencies caused by a material misrepresentation on the part of Seller then Seller shall have the right for thirty (30) days after notice to cure any such deficiency. Unless cured by Seller or otherwise waived by Buyer, Buyer shall have the right to void this Agreement and receive a full refund of the $75,000.00 deposit. 2 5. The parties reiterate and confirm the Confidentiality Agreement entered into between the parties on December 16, 1998, as amended February 11, 1999, and agree that the information divulged by Seller during the course of Seller's Due Diligence contemplated hereby is "Confidential Information" as that term is defined in said Agreement and is attached hereto as Exhibit D. 6. In the event that Buyer shall fail to closing as agreed after having completed its Due Diligence Inspection with no material deficiencies, then Buyer and Seller agree that damages to Seller for said breach will be difficult or impossible to ascertain, and Buyer and Seller agree that $75,000.00 is a reasonable amount for liquidated damages for such breach. 7. The parties agree that this transaction shall close on or before April 15, 1999, unless the parties otherwise agree in writing to a different time and location. 8. PRO-RATIONS. The parties agree that the following will be prorated as of close of escrow: a. Any and all accounts receivable of Seller. b. Any and all accounts payable by Seller. c. Any and all "coin in the box" of Seller. d. Any and all operating expenses due by Seller. e. Any and all site commissions payable or pre-paid by Seller. f. Any and all dial-a-round revenue due Seller. g. Any and all Federal, State, and Local income taxes due to be paid by Seller for the current tax year. 3 h. Any and all other taxes, including personal property taxes due to be paid by Seller for the current year. i. Any and all miscellaneous revenue or obligations of Seller. 9. Seller agrees not to compete in the payphone business with buyer in the states of Oregon, Colorado, Washington, Idaho, Montana, Wyoming, and Nevada for a period of five years. 10. Upon close of this Transaction, Seller shall deliver to Buyer free and clear title to all pay telephones and related equipment. In this regard, Seller agrees to execute a Bill of Sale for all of the telephone sites, equipment, and related contracts currently owned by Seller in the for of Exhibit B, attached hereto. 11. In addition, upon closing, Seller shall assign to Buyer complete and absolute right to use the names "Telco Northwest," "Telco NW," "Telco Northwest, Inc.," or any variation thereof in the form of the assignment attached hereto as Exhibit C. 12. Seller represents that it is authorized to enter into this Agreement and that, at Close of Escrow, it will have Board of Directors written authorization and approval for completion of the transaction contemplated hereby. In this regard, Seller will provide Buyer with written authorization for the completion of this transaction, specifically authorizing Seller to complete this transaction and authorizing an appropriate Officer to sign all necessary documents on behalf of Seller. 13. Upon close of this Transaction, Seller agrees not to solicit any existing account set forth on Exhibit A, for a period of five (5) years. Buyer and Seller 4 recognize that each entity is in the pay telephone business and acknowledges that each may be competing with each other for other accounts. 14. The parties hereto agree to cooperate with one another to complete this transaction and to execute any and all documents as may be required to complete this transaction. 15. The terms and conditions of this Agreement shall inure to the benefit of and shall be binding upon the heirs, assigns, successors, and transferees of each of the parties. 16. If any particular provision of this Agreement shall be determined to be unenforceable for any reason, then the remainder of this Agreement shall, nonetheless, be enforceable. 17. If any litigation shall be initiated to enforce any provision of this Agreement or for the breach of any provision of this Agreement, then the prevailing party in that litigation shall be entitled, in addition to any other remedy available, to the reasonable costs and attorney's fees incurred in connection with that litigation. SIGNATURES FOLLOW ON FINAL PAGE 5 DATED: 2/16/99 ------------ Alpha Telecom, Inc. /s/ Renee C. Sinclair ------------------------------------- by: Renee Sinclair, Secretary/Treasurer DATED: 2/16/99 ------------ ChoiceTel Communications, Inc. /s/ Jeffrey Paletz ------------------------------------- by: Jeffrey Paletz, President 6 EX-10.26 3 EXHIBIT 10.26 DRAFT 11/13/99 ASSET PURCHASE AGREEMENT BETWEEN ACCESS ANYWHERE LLC ("BUYER") CHOICETEL COMMUNICATIONS INC. ("SELLER") DATED AS OF NOVEMBER 15, 1999 DRAFT 11/13/99 SCHEDULES
SCHEDULE TOPIC 1.1(a) Equipment and Other Tangible Assets 1.1(b) Site Contracts 1.2 Excluded Assets 1.3 Assumed Liabilities by Buyer 4.0 Schedule of Exceptions 4.1 Jurisdictions of Seller's Business 4.4(a) Seller's Audited Financials 4.4(b) Seller's Interim Financials 6.8(a) Allocation of Purchase Price 8.1 Documents Delivered by Buyer to Seller
EXHIBITS
EXHIBIT TOPIC 3.1 Advants, Inc. Subscription Agreement 3.2 Kiosk Term Sheet 3.3 Shareholder's Agreement 3.4 Consulting Agreement 3.5 Sublease Agreement 6.5 Non-Competition Agreement 6.10 CLEC Resale Agreement 7.9 Opinion of Counsel to Seller 8.6 Opinion of Counsel to Buyer
-i- DRAFT 11/13/99 ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT ("AGREEMENT") is made on November 15, 1999 between ACCESS ANYWHERE LLC, a Minnesota limited liability company with principal offices at 510 Marquette Avenue South, Minneapolis, Minnesota 55402 ("BUYER"), and CHOICETEL COMMUNICATIONS INC., a Minnesota corporation with principal offices located at 9724 - 10th Avenue, Plymouth, Minnesota 55441 ("SELLER"). RECITAL A. Seller operates a business that provides and services public pay telephones located at various sites in Minnesota, Wisconsin, New York, Iowa and North Dakota, and owns various pay telephones, pay telephone equipment, site contract rights, leasehold interests, tools, inventories, supplies, account receivables, operating accounts, advertising and sales materials, computer hardware and software, and miscellaneous assets used in connection with the operation of the business, including all the stock of ChoiceTel, Inc., a competitive local exchange carrier (collectively, the "BUSINESS"). B. Seller desires to sell to Buyer certain assets of the Business, and Buyer desires to purchase such assets from Seller, on the terms and conditions set forth in this Agreement. AGREEMENT NOW, THEREFORE, the parties agree as follows: ARTICLE I. THE TRANSACTION 1.1 SALE AND PURCHASE OF ASSETS. At the Closing, as defined in Section 1.4 below, Seller shall sell, transfer, convey and deliver to Buyer, and Buyer shall purchase and accept from Seller, all assets owned or controlled by Seller which are used in the operation of the Business, including Seller's business as a going concern, goodwill and assets of every kind, nature and description existing on the Closing Date, as defined in Section 1.4 below, and which are used in the operation of the Business, wherever such assets are located in the States of Minnesota, Wisconsin, New York, Iowa and North Dakota, and whether real, personal or mixed, tangible or intangible, and whether or not any of such assets have any value for accounting purposes or are carried or reflected on or specifically referred to in the Seller's books or financial statements, except those assets specifically excluded pursuant to Section 1.2 of this Agreement, free and clear of any and all liens, security interests, claims, charges and encumbrances ("ENCUMBRANCES"). The properties, business, goodwill and assets to be transferred hereunder (collectively, the "PURCHASED ASSETS") include, but are not limited to, the following: (a) EQUIPMENT AND OTHER TANGIBLE ASSETS. All pay telephones, and all furniture, fixtures, equipment, machines and other tangible assets which are owned by Seller and used in connection with the Business as of the Closing Date, including but not limited to the tangible assets set forth on SCHEDULE 1.1(a). (b) SITE PROVIDER CONTRACTS. All contracts relating to the Business ("SITE CONTRACTS") pertaining to the provision of pay telephones placed or to be placed into operation at particular sites pursuant to an agreement with site owners or operators ("SITE PROVIDERS"), together with the Seller's right to provide pay telephone services to the Site Providers, including the Site Contracts identified on SCHEDULE 1.1(b). (c) TRADE INFORMATION. The names, addresses and other pertinent information of all Site Providers, Seller's customer lists, if any, (together with the right to solicit and service said customers), manuals, forms, computer programs, business plans or like data respecting the Business or the conduct thereof, whether existing or created as of the date of this Agreement or as of the date of Closing. (d) NAME AND PROPRIETARY INFORMATION. All rights relating to exclusive use of the names "Intelliphone" and "AAA Telephone Systems" or any similar or derivative name, all goodwill relating thereto, and the right to free use of any proprietary information respecting the Business or the conduct thereof. (e) CASH AND ACCOUNTS RECEIVABLE. As of the Closing Date the cash in all the pay telephones identified on SCHEDULE 1.1(a), all account receivables relating to the Business, including dial-around compensations and other payments or compensations due, but not yet paid, to Seller, and all prepaid expenses relating to the Business (collectively, "CURRENT ASSETS"). (f) CHOICETEL, INC. CAPITAL STOCK. All of the outstanding capital stock of ChoiceTel, Inc., a wholly-owned subsidiary of the Seller ("CLEC SUBSIDIARY"). 1.2 EXCLUDED ASSETS. Seller shall retain, and the Purchased Assets shall not include, the assets identified on SCHEDULE 1.2. 1.3 ASSUMPTION OF LIABILITIES. Except for liabilities identified on SCHEDULE 1.3 ("ASSUMED LIABILITIES"), Buyer does not assume and shall not assume or in any way undertake to pay, perform, satisfy or discharge any other liability of Seller, whether existing on, before or after the Closing Date or arising out of any transactions entered into, or any state of facts existing on, prior to or after the Closing Date. 1.4 CLOSING. The consummation of the purchase and sale of the Purchased Assets, the assumption of the Assumed Liabilities and the consummation of the other transactions contemplated hereby (the "CLOSING") shall take place at the offices of Gray, Plant, Mooty, Mooty & Bennett, P.A., 33 South Sixth Street, Minneapolis, Minnesota 55402, commencing at 9:00 a.m. local time on the second business day following the satisfaction or waiver of all conditions to the obligations of the parties to consummate the transactions contemplated hereby (other than conditions with respect to the actions the respective parties will take at the Closing itself), or at such other time, date or place as the parties may mutually agree (the "CLOSING DATE"). 2 1.5 RISK OF LOSS. The risk of loss, damage, theft or destruction to any of the Purchased Assets or other property to be conveyed to Buyer under this Agreement shall be borne by Seller to the time of Closing. In the event of such loss, damage, theft or destruction, Seller shall replace or repair the lost, stolen, damaged or destroyed property to its condition prior to the loss, theft, damage or destruction. If the replacement or repair is not completed prior to Closing, then the Purchase Price (as defined below) will be adjusted by an amount that will be required to complete the replacement or repair after Closing. ARTICLE II. PURCHASE PRICE; PAYMENT 2.1 PURCHASE PRICE. The purchase price ("PURCHASE PRICE") for the Purchased Assets shall be $4,300,000, plus the Price Adjustment ("PRICE ADJUSTMENT") and minus the Phone Adjustment ("PHONE ADJUSTMENT"). The Price Adjustment shall equal the difference between the dollar value of Current Assets of Seller transferred to Buyer at Closing LESS the dollar value of all Assumed Liabilities assumed by Buyer at Closing. A resulting positive Price Adjustment will constitute an increase to the Purchase Price, and a resulting negative Price Adjustment will constitute a decrease to the Purchase Price, on a dollar-for-dollar basis. The Price Adjustment and Phone Adjustment will be subject to post-closing reconciliation based on Seller's Post-Closing financial statements ("POST-CLOSING FINANCIALS") as described in Section 2.3 below. The Phone Adjustment shall equal the dollar amount resulting from multiplying (i) $2,000 times (ii) the difference of (a) the number, if any, resulting from subtracting from 2,031 (b) the number of active pay telephones on the Closing Date. The Phone Adjustment shall not be less than zero. For determining the amount to be paid at Closing, the Phone Adjustment will be estimated in good faith by Buyer and Seller. 2.2 PAYMENT OF PURCHASE PRICE. Buyer shall pay the Purchase Price as follows: (a) At closing, Buyer shall pay to Seller an initial amount ("INITIAL PAYMENT") by cash, certified check or by wire transfer in an amount equal to the Purchase Price LESS (i) $575,000 ("HOLDBACK AMOUNT"), and (ii) if Buyer is subject to Minnesota Statutes Section 270.102 regarding the effect of a lien for unpaid sales tax, the amount required to be withheld under Section 270.102. For the purpose of calculating the Initial Payment, the Price Adjustment shall be based upon estimated financial statements of the Business as of the Closing Date, prepared by the Seller consistent with its historical accounting practices (the "ESTIMATED CLOSING FINANCIALS"). (b) On the date six months after the Closing Date, Buyer shall pay Seller an amount ("FINAL PAYMENT") equal to the Holdback Amount: (i) reduced for any indemnification claims Buyer may have against Seller; (ii) reduced by $1,000 for each Site Contract that is canceled or terminated by a Site Provider within 12 months after the Closing Date for which a valid contract does not exist; (iii) reduced by the Post-Closing Phone Adjustment ("POST-CLOSING PHONE ADJUSTMENT"); (iv) reduced by any other liabilities incurred by Seller prior to the Closing Date and paid on behalf of Seller by 3 Buyer in the ordinary course of business; and (v) reduced or increased for any Post-Closing Price Adjustment ("POST-CLOSING PRICE ADJUSTMENT"). The Post-Closing Price Adjustment shall equal the difference between the Price Adjustment based on the Post-Closing Financials, as defined in Section 2.3, and the Price Adjustment based on the Estimated Closing Financials. A positive Post-Closing Price Adjustment will increase the Final Payment and a negative Post-Closing Price Adjustment will decrease the Final Payment, on a dollar-for-dollar basis. The Post-Closing Phone Adjustment shall equal the difference between the Phone Adjustment determined by the Buyer after Closing and the Phone Adjustment estimated for Closing purposes. A positive Post-Closing Phone Adjustment will increase the Final Payment and a negative Post-Closing Phone Adjustment will decrease the Final Payment, on a dollar-for-dollar basis. In addition, if the number of Site Contracts that do not meet all the provisions of Section 4.10(f)(i) - (iv) of this Agreement ("KEY SITE CONTRACT PROVISIONS") as of the Closing Date, exceeds ten percent (10%) of the total number of Site Contracts as of the Closing Date ("THRESHOLD AMOUNT"), the Holdback Amount will be reduced by $1,000 for each Site Contract in excess of the Threshold Amount that does not meet all of the Key Site Contract Provisions. Within 30 days after the first anniversary of the Closing Date, Buyer shall submit any additional claims for payment under Section 2.2(b)(ii) for Site Contracts which terminated within the 12-month period after the Closing Date and which were not deducted from the Holdback Amount. Seller shall pay to Buyer the stated amount within 15 days of receiving notice from Buyer. 2.3 POST-CLOSING FINANCIALS. Within 120 days after the Closing Date, Buyer shall deliver to Seller a definitive balance sheet, income statement and proposed Price Adjustment and proposed Phone Adjustment for Buyer as of the Closing Date ("PROPOSED FINANCIALS"), which will be prepared consistent with Seller's historical accounting practices and which shall be used for determining any Post-Closing Price Adjustment and Post-Closing Phone Adjustment. Seller will provide the information necessary and assist Buyer in preparing the Proposed Financials. The Proposed Financials shall become the Post-Closing Financials and final Price Adjustment and final Phone Adjustment if Seller does not object to them in writing within 15 days of receipt thereof. In the event that Seller objects to the Proposed Financials, Seller shall notify Buyer of such objections within the 15-day period following the delivery of the Proposed Financials, stating the objection and the reasons therefor. Upon Buyer's receipt of such objection, the parties shall attempt to resolve such disagreement through negotiations. Upon resolution of such disagreement, the Proposed Financials, as amended by such negotiated resolution, shall become the Post-Closing Financials and final Price Adjustment and final Phone Adjustment. If Buyer and Seller cannot resolve such disagreement within 10 days from the end of the foregoing 15-day period, the parties shall submit the matter for resolution to a nationally recognized firm of Certified Public Accountants, not affiliated with either party (the "INDEPENDENT CPA"), with the costs thereof to be shared equally by the parties. The Independent CPA shall deliver to the parties, within 30 days of submission of the matter to such firm, a balance sheet, income statement and final Price Adjustment and final Phone Adjustment as of the Closing Date, consistent with Seller's historical accounting practices and terms of this Agreement (the "CPA 4 FINANCIALS"). The CPA Financials will become the Post-Closing Financials upon delivery thereof to the parties. ARTICLE III. ANCILLARY AGREEMENTS 3.1 STOCK PURCHASE. As consideration for the transactions contemplated by the parties under this Agreement, Buyer or its assigns, will purchase 4.5 Units (each Unit consisting of 50,000 shares of common stock and a three-year Warrant to purchase an additional 10,000 shares) of Advants, Inc., a subsidiary of Seller, pursuant to the Confidential Placement Memorandum dated August 25, 1999. The parties will enter into a subscription agreement identical in form to the attached EXHIBIT 3.1. 3.2 DELIVERY OF KIOSKS. Within 180 days after the Closing Date, Seller will deliver to Buyer without additional consideration from Buyer, one hundred (100) fully functional, ready-to-install internet kiosks with an approximate value of $4,000 per kiosk, as more fully described in the Kiosk Term Sheet attached as EXHIBIT 3.2. 3.3 SHAREHOLDERS' CONSENT. Simultaneous with the execution and delivery of this Agreement, shareholders of at least fifty-one percent (51%) of Seller's stock will enter into a shareholder agreement identical in form to EXHIBIT 3.3, which provides that the shareholders consent to, and will vote in favor of, this Agreement. 3.4 CONSULTING AGREEMENT. At Closing, Seller and Buyer shall enter into a Consulting Agreement identical in form to that attached as EXHIBIT 3.4. The Consulting Agreement shall provide that Seller will make available for six months after the Closing Date one-half of the time of Melvin Graf and Jeffrey R. Paletz. Buyer shall pay Seller pursuant to this Consulting Agreement $8,333.33 per month for the six-month term of the agreement. 3.5 SUBLEASE AGREEMENT. At Closing, Seller and Buyer shall enter into a Sublease Agreement in the form attached hereto as EXHIBIT 3.5. The Sublease Agreement shall provide that Seller will sublease to Buyer ____% of Seller's space at its place of Business at 9724 10th Avenue North, Plymouth, Minnesota. The Sublease Agreement shall provide that rent for the space subleased will be the monthly rent paid by Seller times the percentage subleased by Buyer. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER For purposes of the following representations and warranties, the term "Seller" includes both Seller and CLEC Subsidiary. Seller hereby represents and warrants as follows: 4.1 SELLER ORGANIZATION. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota. Seller has all requisite power and authority to own its properties and assets and to conduct its businesses as now conducted and as proposed to be conducted. Seller is duly qualified to do business as a foreign corporation and is 5 in good standing in every jurisdiction where the character of the properties owned or leased by it or the nature of the business conducted by it makes such qualification necessary, except where the failure to be so qualified and in good standing would not have a Material Adverse Effect (as defined in Section 4.5 of this Agreement). SCHEDULE 4.1 sets forth all of the jurisdictions in which the Seller is qualified to do business. Complete and accurate copies of the corporate documents of Seller, with all amendments thereto to the date hereof, have been furnished to Buyer or Buyer's representatives. 4.2 AUTHORIZATION; VALIDITY OF AGREEMENT. The execution, delivery and performance by Seller of this Agreement and, subject to satisfaction of the conditions herein, the consummation of the transactions contemplated hereby has been duly authorized by its directors and shareholders. The execution, delivery and performance by Seller of this Agreement and, subject to satisfaction of the conditions herein, the consummation of the transactions contemplated hereby has been duly authorized by Seller. This Agreement and the other agreements between the parties and documents delivered pursuant hereto (the "TRANSACTION DOCUMENTS") to which Seller may be party have been duly executed and delivered by Seller, as applicable, and constitute the valid binding and enforceable obligation of each of them, except as such enforceability may be limited by general principles of equity and bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to creditors rights generally (the "BANKRUPTCY EXCEPTION"). 4.3 NO CONFLICT OR VIOLATION. Except as set forth in SECTION 4.3 of the SCHEDULE OF EXCEPTIONS, the execution, delivery and performance by Seller of this Agreement and the consummation of the transactions contemplated hereby do not and will not: (i) violate or conflict with any provision of the organizational documents of Seller; (ii) violate any provision of law, statute, judgment, order, writ, injunction, decree, award, rule, or regulation of any court, arbitrator, or other governmental or regulatory authority applicable to Seller; (iii) violate, result in a breach of, constitute (with due notice or lapse of time or both) a default or cause any obligation, penalty, premium or right of termination to arise or accrue under any contract, service or other customer agreement, lease, license, loan agreement, mortgage, security agreement, trust indenture or other agreement or instrument to which Seller is a party or by which it is bound or to which its respective properties or assets is subject; (iv) result in the creation or imposition of any lien, charge or encumbrance of any kind whatsoever upon Seller's properties or assets; and (v) result in the cancellation, modification, revocation or suspension of any License (as defined in Section 4.13 of this Agreement). 4.4 FINANCIAL STATEMENTS. Attached hereto as SCHEDULE 4.4(a) are the audited balance sheets of Seller as of December 31, 1997 and 1998 and statements of income of the Seller for the years then ended and the notes thereto, if any, and attached hereto as SCHEDULE 4.4(b) is the unaudited balance sheet of the Seller as of September 30, 1999 (the "INTERIM BALANCE SHEET"), together with the related unaudited statement of income for the period then ended and the notes thereto, if any (all such financial statements, including the Estimated Closing Financials, being hereinafter collectively referred to as the "FINANCIAL STATEMENTS"). The Financial Statements, including the notes thereto: (i) were prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby (except that the Interim 6 Balance Sheet, the Estimated Closing Financials and the related statement of income and cash flow are subject to normal year-end adjustments and may omit footnotes); (ii) present fairly the financial position, results of operations and changes in cash flow of the Seller as of such dates and for the periods then ended (subject, in the case of the unaudited interim Financial Statements, including the Estimated Closing Financials, to normal year-end audit adjustments consistent with prior periods); (iii) reflect accurately in all material respects the assets, liabilities, costs and expenses of the Seller, as they relate to the Business; and (iv) are in all material respects accurate, complete, correct and in accordance with the books of account and records of the Seller. 4.5 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in SECTION 4.5 of the SCHEDULE OF EXCEPTIONS, since September 30, 1999, there has been no change in the properties, assets, condition (financial or otherwise), liabilities or operations of the Business, which, individually or in the aggregate, has had a material adverse effect on the Business or the financial condition, operations or prospects of the Business (a "MATERIAL ADVERSE EFFECT"). Except as set forth in SECTION 4.5 of the SCHEDULE OF EXCEPTIONS, Seller is not aware of any facts related to Seller that, individually or in the aggregate, would as of the Effective Date be reasonably likely to have a Material Adverse Effect. 4.6 LITIGATION. Except as set forth in SECTION 4.6(a) of the SCHEDULE OF EXCEPTIONS, there are no claims, actions, suits, proceedings, labor disputes or investigations pending or, to Seller's knowledge, threatened before any federal, state or local court or governmental, administrative or regulatory authority, domestic or foreign, or before any arbitrator of any nature, brought by or against Seller or any of its officers, directors, employees, agents involving, affecting or relating to the Business or the transactions contemplated by this Agreement. Except as set forth in SECTION 4.6(b) of the SCHEDULE OF EXCEPTIONS, none of Seller's Purchased Assets are subject to any order, writ, judgment, award, injunction or decree of any federal, state or local court or governmental or regulatory authority or arbitrator, that affects the assets, properties, operations, prospects, net income or financial condition of the Business or which would interfere with the transactions contemplated by this Agreement. 4.7 COMPLIANCE WITH APPLICABLE LAWS. The operations of the Business have been conducted in accordance with all applicable laws, regulations, orders and other requirements of all courts and other governmental or regulatory authorities having jurisdiction over Seller, or any of the assets, properties and operations, including, without limitation, all such laws, regulations, orders and requirements relating to the Business. Seller has not received notice of any violation of any such law, regulation, order or other legal requirement, and is not in default with respect to any order, writ, judgment, award, injunction or decree of any federal, state or local court or governmental or regulatory authority or arbitrator, domestic or foreign, applicable to the Business. To Seller's knowledge, there are no proposed changes in any such laws, rules or regulations (other than laws of general applicability) that would adversely affect the transactions contemplated by this Agreement or all or a substantial part of the Business. 4.8 NO UNDISCLOSED LIABILITIES. Except as identified and reflected or reserved against in the Financial Statements or as set forth in SECTION 4.8 of the SCHEDULE OF EXCEPTIONS, Seller does not have any liabilities or obligations, whether accrued, contingent, absolute, 7 determined, determinable or otherwise of any nature whatsoever, and no facts or circumstances exist which, after the passage of time, could reasonably be expected to result in any claims against, or material obligations or liabilities of Seller relating to or affecting the Business. 4.9 TAXES. (a) All Returns (as defined in Section 4.9(c) below) required to be filed by Seller have been duly filed on a timely basis and such Returns are true, complete, and correct in all material respects. All Taxes (as defined in Section 4.9(b) below) shown to be payable on the Returns or on subsequent assessments with respect thereto have been paid in full on a timely basis, and no other Taxes (other than as described in SECTION 4.9 of the SCHEDULE OF EXCEPTIONS) are payable by Seller with respect to items or periods covered by such Returns (whether or not shown on or reportable on such Returns) or with respect to any period prior to the date of this Agreement. Seller has withheld and paid over all Taxes required to have been withheld and paid over, and complied with all information reporting and backup withholding requirements, including maintenance of required records with respect thereto, in connection with amounts paid or owing to any employee, creditor, independent contractor, or other third party. There are no liens on any of the assets of Seller with respect to Taxes, other than liens for Taxes not yet due and payable or for Taxes that Seller is contesting in good faith through appropriate proceedings and for which appropriate reserves (excluding reserves for deferred Taxes) have been established. (b) For purposes of this Agreement, the term "TAXES" shall mean all taxes and similar fees and assessments, however denominated, relating to or affecting the Business, including any interest, penalties or other additions to tax that may become payable in respect thereof, imposed by any federal, territorial, state, or local or any agency or political subdivision of any such government, which taxes shall include, without limiting the generality of the foregoing, all income or profits taxes (including, but not limited to, federal income taxes and state income taxes), real property gains taxes, payroll and employee withholding taxes, unemployment insurance taxes, social security taxes, sales and use taxes, ad valorem taxes, excise taxes, franchise taxes and fees, gross receipts taxes, business license taxes, occupation taxes, real and personal property taxes, stamp taxes, environmental taxes, transfer taxes, workers' compensation, and other obligations of the same or of a similar nature to any of the foregoing, which Seller is required to pay, withhold, or collect. (c) For purposes of this Agreement, the term "RETURNS" shall mean all reports, estimates, declarations of estimated tax, information statements and returns relating to, or required to be filed in connection with, any Taxes, including information returns or reports with respect to backup withholding and other payments to third parties relating to or affecting the Business. 8 4.10 CERTAIN AGREEMENTS. (a) SECTION 4.10 of the SCHEDULE OF EXCEPTIONS sets forth a true and complete list of all material contracts, agreements, instruments, licenses, commitments and other arrangements to which Seller is a party and relating to the Business or otherwise affecting any of the assets, properties or operations relating to the Business including, as applicable but without limitation, all material written (i) contracts, agreements and commitments, (ii) agency and brokerage agreements, (iii) service and other customer contracts, (iv) contracts, loan agreements, letters of credit, repurchase agreements, mortgages, security agreements, guarantees, pledge agreements, trust indentures, promissory notes and other documents or arrangements relating to the borrowing of money or for lines of credit, (v) real property leases or any subleases relating thereto, personal property leases, employee plans, employment and labor agreements, any material agreement relating to Intellectual Property as defined in Section 4.12 (including service agreements relating thereto) and insurance contracts, (vi) agreements and other arrangements for the sale of any assets, property or rights other than in the ordinary course of business or for the grant of any options or preferential rights to purchase any assets, property or rights, (vii) documents granting any power of attorney with respect to the affairs of Seller, (viii) suretyship contracts, performance bonds, working capital maintenance or other forms of guaranty agreements, (ix) contracts or commitments limiting or restraining Buyer, Seller or any of their employees or Affiliates from engaging or competing in any lines of business or with any person, firm, or corporation, (x) partnership or joint venture agreements, (xi) material licenses, including, but not limited to, material software licenses, and (xii) all amendments, modifications, extensions or renewals of any of the foregoing (the foregoing contracts, agreements and documents are hereinafter referred to collectively as the "CONTRACTS" and individually as a "CONTRACT"). (b) To Seller's knowledge, each Contract is valid, binding and enforceable against the parties thereto in accordance with its terms, except as such enforceability may be limited by the Bankruptcy Exception, and is in full force and effect on the date hereof. Seller has performed all material obligations to be performed by it, including, but not limited to, the timely making of any rental or other payments, required to be performed by it under, and is not in material default or breach of in respect of, any Contract, and no event has occurred which, with due notice or lapse of time or both, would constitute such a default. (c) To Seller's knowledge, no other party to any Contract is in default in respect thereof, and no event has occurred which, with due notice or lapse of time or both, would constitute such a default. (d) To Seller's knowledge, no party to any Contract intends to cancel or terminate any such agreement, whether as a result of the transactions contemplated by this Agreement or otherwise. 9 (e) Each of the Site Contracts is assignable without the consent of the Site Provider and without the payment of any fine or expense and pursuant to such assignment, the assignee will have all of the rights, title and interests of the Seller and the original maker as though such assignee was an original party thereto. (f) Section 4.10 of the SCHEDULE OF EXCEPTIONS sets forth complete and correct information about each of the Seller's Site Contracts. Except as set forth in Section 4.10(f) of the SCHEDULE OF EXCEPTIONS, at least 90% of the Site Contracts have as of this date and of the Closing Date the following provisions: (i) an initial term of at least five years; (ii) automatically renews at the end of the current term; (iii) Seller's exclusive right to operate pay telephones at the location or locations subject to the Site Contract; (iv) cannot be terminated by the Site Provider during the term of the Site Contract. (g) Seller has delivered to Buyer or its representatives true and complete originals or copies of all the Site Contracts and a copy of every default notice received by Seller during the past three (3) years with respect to any of the Site Contracts. 4.11 ACCOUNTS RECEIVABLE. All accounts receivable of Seller relating to or affecting the Business that are reflected on the Financial Statements or on the accounting records of Seller as of the Closing Date represent or will represent valid obligations arising from sales actually made or services actually performed in the ordinary course of the Business. All accounts receivable payable to or for the benefit of Seller relating to or affecting the Business reflected on the Financial Statements or on the accounting records of Seller as of the Closing Date either have been collected in full or are (or will be) current and collectible in amounts not less than the aggregate amount thereof (net of reserves established in accordance with GAAP applied consistently with prior practice, carried (or to be carried) on the books of Seller. 4.12 INTELLECTUAL PROPERTY. (a) SECTION 4.12 of the SCHEDULE OF EXCEPTIONS sets forth a true and complete list of all Intellectual Property (either registered, applied for, or common law) owned by, registered in the name of, licensed to, or otherwise used by Seller that is of material importance to the conduct of the Business. Except as disclosed in Section 4.12(a) of the Schedule of Exceptions, all of the Intellectual Property listed in SECTION 4.12 of the SCHEDULE OF EXCEPTIONS is owned by Seller without any Encumbrances or used by Seller pursuant to a valid and enforceable license or other agreement. Such list includes any licenses, sublicenses or other agreements in which Seller grants a license to any person to use Intellectual Property. As used herein, "INTELLECTUAL PROPERTY" means (i) trademarks and service marks (registered or unregistered), trade dress, trade names and other names 10 and slogans embodying business or product goodwill or indications of origin, all applications or registrations in any jurisdiction pertaining to the foregoing and all goodwill associated therewith; (ii) patents, patentable inventions, discoveries, improvements, ideas, know-how, formula methodology, processes, technology and computer programs, software and databases (including source code, object code, development documentation, programming tools, drawings, specifications and data), and all applications or registrations in any jurisdiction pertaining to the foregoing, including all reissues, continuations, divisions, continuations-in-part, renewals or extensions thereof; (iii) trade secrets, know-how, including confidential and other non-public information, and the right in any jurisdiction to limit the use or disclosure thereof; (iv) copyrights in writings, designs, mask works or other works, and registrations or applications for registration of copyrights in any jurisdiction; (v) licenses, including, but not limited to software licenses, immunities, covenants not to sue and the like relating to any of the foregoing; (vi) Internet Web sites, domain names and registrations or applications for registration thereof; (vii) books and records describing or used in connection with any of the foregoing; (viii) claims or causes of action arising out of or related to infringement or misappropriation of any of the foregoing; and (ix) customer lists. (b) The grants, registrations and applications for the Intellectual Property have not lapsed, expired or been abandoned and, except as disclosed in SECTION 4.12(b) of the SCHEDULE OF EXCEPTIONS, no application or registration thereof is the subject of any legal or governmental proceeding before any governmental, registration or other authority in any jurisdiction. (c) Seller owns or has the valid right to use all of the Intellectual Property used by it or held for use by it in connection with the Business. To Seller's knowledge, there are no conflicts with or infringements by any third party of the Seller's Intellectual Property used in connection with the Business. None of Seller's Intellectual Property or the conduct of the business of Seller conflicts with or infringes in any way the proprietary right of any third party, which conflict or infringement, individually or in the aggregate, would have a Material Adverse Effect. Except as disclosed in SECTION 4.12(c) of the SCHEDULE OF EXCEPTIONS, Seller has not initiated, and, to Seller's knowledge, there is no claim, suit, action or proceeding pending or threatened against Seller as it relates to or affects the Business (i) alleging any such conflict or infringement with any third party's proprietary rights, or (ii) challenging the ownership, use, validity or enforceability of the Intellectual Property. (d) Seller has taken reasonable precautions to ensure that all trade secrets used in its Business have been properly protected and have been kept secret. (e) Seller's Intellectual Property is sufficient and adequate in all material respects for it to carry on the Business as presently conducted. 11 4.13 LICENSES, PERMITS AND GOVERNMENTAL APPROVALS. (a) SECTION 4.13(a) of the SCHEDULE OF EXCEPTIONS sets forth a true and complete list of all licenses, permits, certificates, franchises, authorizations and approvals issued or granted to Seller in connection with the Business by the United States, any state or local government, telecommunications regulatory authority, any foreign national or local government, or any department, agency, board, commission, bureau or instrumentality of any of the foregoing (each a "LICENSE" and, collectively, the "LICENSES"), and all pending applications therefor. Except as set forth in SECTION 4.13(b) of the SCHEDULE OF EXCEPTIONS, each License has been issued to, and duly obtained and fully paid for by, Seller and is valid, in full force and effect, and to Seller's knowledge, not subject to any pending or threatened administrative or judicial proceeding to suspend, revoke, cancel or declare such License invalid in any respect. (b) Seller has all Licenses required, and such Licenses are sufficient and adequate in all material respects, to permit the continued lawful conduct of the Business in the manner now conducted and the ownership, occupancy and operation of its real property for their present uses. Seller is not in violation in any material respect of any of the Licenses. Except as disclosed in SECTION 4.13(b) of the SCHEDULE OF EXCEPTIONS, the Licenses have never been suspended, revoked or otherwise terminated, subject to any fine or penalty, or subject to judicial or administrative review, for any reason other than the renewal or expiration thereof. Seller has delivered to Buyer or its representatives true and complete copies of all the Licenses together with all amendments and modifications thereto. 4.14 INTERCOMPANY AND AFFILIATE TRANSACTIONS; INSIDER INTERESTS. (a) Except as disclosed in SECTION 4.14 of the SCHEDULE OF EXCEPTIONS, there are no material transactions, intercompany agreements or arrangements of any kind, direct or indirect, between the Seller and any director, officer, employee, stockholder or relative or Affiliate thereof relating to or affecting the Business, including, without limitation, loans, guarantees or pledges to, by or for Seller from, to, by or for any of such persons, that are either (i) currently in effect or (ii) reflected in the Financial Statements. All such intercompany agreements and arrangements between such persons, if no longer in effect and if necessary for the conduct of the Business, have been replaced with comparable agreements and arrangements. (b) None of the shareholders of Seller is a party to any contract, agreement or understanding to which Seller is not a party which purports in any way to bind or obligate the Seller thereunder and relate to or affect the Business. 4.15 REAL PROPERTY. Seller does not own any real property used in the Business. SECTION 4.15 of the SCHEDULE OF EXCEPTIONS sets forth a true and complete list of all real properties leased by Seller and used in the Business (collectively, the "PROPERTY"), including a brief description of the operating facilities located thereon and the annual rent payable thereon, the length of the term, any option to renew with respect thereto and the notice and other 12 provisions with respect to termination of rights to the use thereof. Seller has a valid leasehold in the real estate shown in SECTION 4.15 of the SCHEDULE OF EXCEPTIONS as leased by it, in each case under written leases that are valid and enforceable (except as enforceability may be limited by the Bankruptcy Exception) (all such leases being referred to herein as "REAL PROPERTY LEASES"), and there does not exist under any Real Property Lease any material default by Seller or any event which with notice or lapse of time or both would constitute such a default. 4.16 PERSONAL PROPERTY. The vehicles, furniture, fixtures, equipment and other items of tangible personal property owned or leased by Seller and used in the Business (the "PERSONAL PROPERTY") are sufficient and adequate to carry on the Business as presently conducted and all items thereof are in good operating condition and repair. Seller owns outright and has good title, free and clear of all Encumbrances (other than the lien of current property taxes and assessments not in default, if any), to the Personal Property purported to be owned by Seller and to all the machinery, equipment, furniture, fixtures, inventory, receivables and other tangible or intangible personal property reflected on the Financial Statements and all such property acquired since the date thereof, except for sales and dispositions in the ordinary course of business since such date. Seller holds valid leases in all of the Personal Property leased by it, and none of such Personal Property is subject to any sublease, license or other agreement granting to any person any right to use such property (all such leases, subleases, licenses and other agreements are collectively referred to herein as "PERSONAL PROPERTY LEASES"). Seller is not in material breach of or default (and no event has occurred which, with due notice or lapse of time or both, may constitute such a lapse or default) of any Personal Property Lease. 4.17 EMPLOYEE PLANS. (a) BENEFIT PLANS; SELLER PLANS. SECTION 4.17 of the SCHEDULE OF EXCEPTIONS discloses all written and unwritten "employee benefit plans" within the meaning of Section 3(3) of ERISA relating to or affecting the Business, and any other written and unwritten profit sharing, pension, savings, deferred compensation, fringe benefit, insurance, medical, medical reimbursement, life, disability, accident, post-retirement health or welfare benefit, stock option, stock purchase, sick pay, vacation, employment, severance, termination or other plan, agreement, contract, policy, trust fund or arrangement relating to or affecting the Business (each, a "BENEFIT PLAN"), whether or not funded and whether or not terminated, (i) maintained or sponsored by the Seller, or (ii) with respect to which the Seller has or may have Liability or is obligated to contribute, or (iii) that otherwise covers any of the current or former employees of the Seller or their beneficiaries, or (iv) in which any current or former employees of the Seller or their beneficiaries participated or were entitled to participate or accrue or have accrued any rights thereunder (each, a "SELLER PLAN"). No Seller Plan covers any employees of any member of the Seller Group in any foreign country or territory. With the exception of the requirements of Section 4980B of the Code, no post-retirement benefits are provided under any Seller Plan that is a welfare benefit plan as described in ERISA Section 3(1). 13 (b) COMPLIANCE. Each Seller Plan and all related trusts, insurance contracts and funds have been created, maintained, funded and administered in all respects in compliance with all applicable Laws and in compliance with the plan document, trust agreement, insurance policy or other writing creating the same or applicable thereto. No Seller Plan is or is proposed to be under audit or investigation, and no completed audit of any Seller Plan has resulted in the imposition of any Tax, fine or penalty. Buyer shall have no liabilities following the Closing with respect to any Seller Plan. (c) MULTIEMPLOYER PLANS. No Seller Plan is a multiemployer plan within the meaning of Section 3(37) or Section 4001(a)(3) of ERISA (a "MULTIEMPLOYER PLAN"). No member of the Seller Group has withdrawn from any Multiemployer Plan or incurred any withdrawal Liability to or under any Multiemployer Plan. 4.18 LABOR RELATIONS. SECTION 4.18 of the SCHEDULE OF EXCEPTIONS sets forth a true and complete list of the names, titles, annual salaries and other compensation of all employees of the Seller involved in the Business. The relations of the Seller with its employees involved in the Business are generally good. No employee of the Seller involved in the Business is represented by any union or other labor organization. No representation election, arbitration proceeding, grievance, labor strike, dispute, slowdown, stoppage or other labor trouble is pending or to the knowledge of the Seller threatened against, involving, affecting or potentially affecting the Business. No complaint against the Seller is pending or, to the knowledge of Seller, threatened before the National Labor Relations Board, the Equal Employment Opportunity Commission or any similar state or local agency, by or on behalf of any employee of the Seller involved in the Business. The Seller has no liability for employees involved in the Business for sick leave, vacation time, severance pay or any similar item not fully reserved on the Financial Statements. The Seller has no liability for any occupational disease of any of its employees, former employees or others involved in the Business. Neither the execution and delivery of this Agreement, the performance of the provisions hereof nor the consummation of the transactions contemplated hereby will trigger any severance pay obligation under any contract or under any Law with respect to employees of the Business. 4.19 CUSTOMER RELATIONS. Except as set forth on SECTION 4.19 of the SCHEDULE OF EXCEPTIONS, to the knowledge of the Seller, there exists no condition or state of facts or circumstances involving the customers, suppliers, distributors or sales representatives of the Seller that Seller can reasonably foresee could materially adversely affect the Business after the Closing Date. 4.20. ENVIRONMENTAL MATTERS. Notwithstanding anything to the contrary contained in this Agreement and in addition to the other representations and warranties contained herein: (a) The Seller and its operations are in compliance with all applicable laws, regulations and other requirements of governmental or regulatory authorities or duties under the common law relating to toxic or hazardous substances, wastes, pollution or to the protection of health, safety or the environment relating to or affecting the Business (collectively, "ENVIRONMENTAL LAWS") and have obtained and maintained in effect all 14 licenses, permits and other authorizations or registrations required in connection with the Business (collectively "ENVIRONMENTAL PERMITS") required under all Environmental Laws and are in compliance with all such Environmental Permits. (b) The Seller has not performed or suffered any act which could give rise to, or has otherwise incurred, liability to any person in connection with the Business (governmental or not) under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 ET SEQ. ("CERCLA"), or any other Environmental Laws, nor has the Seller received notice of any such liability or any claim therefor or submitted notice pursuant to Section 103 of CERCLA to any governmental agency with respect to the Business. (c) To the Seller's knowledge, no hazardous substance, hazardous waste, contaminant, pollutant or toxic substance (as such terms are defined in any applicable Environmental Law and collectively referred to herein as "HAZARDOUS MATERIALS") has been released, placed, dumped or otherwise come to be located on, at, beneath or near any of the assets or properties owned or leased by the Seller and used in the Business or any surface waters or groundwaters thereon or thereunder in violation of any Environmental Laws or that could subject the Seller to liability under any Environmental Laws. (d) The Seller does not own or operate, and has never owned or operated, aboveground or underground storage tanks used in the Business . (e) To the Seller's knowledge, with respect to any or all of the real properties leased by the Seller and used in the Business (i) there are no asbestos-containing materials, urea formaldehyde insulation, polychlorinated biphenyls or lead-based paints present at any such properties, and (ii) there are no wetlands as defined under any Environmental Law located on any such properties. (f) To the Seller's knowledge, none of the real properties leased by the Seller and used in the Business (i) has been used or is now used for the generation, transportation, storage, handling, treatment or disposal of any Hazardous Materials, or (ii) is identified on a federal, state or local listing of sites which require or might require environmental cleanup. (g) No condition exists on any of the real properties leased by the Seller and used in the Business that upon the failure to act, the passage of time or the giving of notice would give rise to liability under any Environmental Law. (h) There are no ongoing investigations or negotiations, pending or threatened administrative, judicial or regulatory proceedings, or consent decrees or other agreements in effect that relate to environmental conditions in, on, under, about or related to Seller, its operations or the real properties leased by the Seller and used in the Business. (i) Neither the Seller nor its operations is subject to reporting requirements under the federal Emergency Planning and Community Right-to-Know Act, 42 U.S.C. 15 Section 11001 et seq., or analogous state statutes and related regulations in connection with the Business. 4.21 FINANCIAL ADVISOR. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement, based upon arrangements made by or on behalf of Seller. 4.22 YEAR 2000. Except as disclosed in SECTION 4.22 of the SCHEDULE OF EXCEPTIONS and except that it does not have an Material Adverse Effect, each material system comprised of software, hardware or data bases as used by Seller in the Business has been tested and is fully capable of providing accurate results using data having data ranges spanning the twentieth and twenty-first centuries. 4.23 ACCURACY OF INFORMATION. The descriptions set forth in the SCHEDULE OF EXCEPTIONS constitute part of the representations and warranties of Seller herein and are materially accurate descriptions of the matters disclosed therein. None of the representations, warranties or statements concerning Seller contained in this Agreement, or in the SCHEDULE OF EXCEPTIONS, schedules or exhibits hereto, or in any of the other Transaction Documents contains or will contain any materially untrue statement of a fact or, to Seller's knowledge, omit to state any material fact necessary in order to make any of such representations, warranties or statements not misleading. ARTICLE V. REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants as follows: 5.1 CORPORATE ORGANIZATION. Buyer is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Minnesota. 5.2 AUTHORIZATION; VALIDITY OF AGREEMENT. The execution, delivery and performance by Buyer of this Agreement and, subject to satisfaction of the conditions herein, the consummation of the transactions contemplated hereby has been duly authorized by Buyer. This Agreement has been duly executed and delivered by Buyer and constitutes Buyer's valid, binding and enforceable obligation. 5.3 NO CONFLICT OR VIOLATION. The execution, delivery and performance by Buyer of this Agreement and the consummation of the transactions contemplated hereby do not and will not: (i) violate or conflict with any provision of the charter documents of Buyer; (ii) violate any provision of law, statute, judgment, order, writ, injunction, decree, award, rule, or regulation of any court, arbitrator, or other governmental or regulatory authority applicable to Buyer; or (iii) violate, result in a breach of, constitute (with due notice or lapse of time or both) a default or cause any obligation, penalty or premium to arise or accrue under any contract, service or other customer agreement, lease, loan agreement, mortgage, security agreement, trust indenture or other agreement or instrument to which Buyer is a party or by which it is bound or to which its properties or assets is subject. 16 5.4. ACQUISITION OF CHOICETEL, INC. SHARES FOR INVESTMENT. Buyer is acquiring the shares of the common stock of ChoiceTel, Inc. for investment purposes only and not with a view toward any distribution thereof except in compliance with applicable securities laws. ARTICLE VI. COVENANTS 6.1 CERTAIN CHANGES AND CONDUCT OF BUSINESS. (a) From and after the date of this Agreement and until the Closing Date, Seller shall conduct the Business solely in the ordinary course consistent with past practices and except as required or permitted pursuant to the terms hereof, the Seller shall not with respect to the Business: (i) make any material change in the conduct of its businesses and operations or enter into any transaction other than in the ordinary course of business consistent with past practices, or terminate or amend any material contract or enter into any new material contract without the prior written consent of Buyer, which may not be unreasonably withheld; (ii) make any sale, assignment, transfer, abandonment or other conveyance of any of the Purchased Assets or any part thereof, except transactions pursuant to existing contracts set forth in the SCHEDULE OF EXCEPTIONS and dispositions of inventory or of worn-out or obsolete equipment for fair or reasonable value in the ordinary course of business consistent with past practices; (iii) subject any of the Purchased Assets, or any part thereof, to any new lien, security interest, charge, interest or other encumbrances except as may naturally arise in the ordinary course of business consistent with past practices; (iv) enter into any new (or amend any existing) employee benefit plan, program or arrangement or any employment or consulting agreement, grant any general increase in the compensation of employees, other than officers, (including any such increase pursuant to any bonus, pension, profit-sharing or other plan or commitment) or grant any increase in the compensation payable or to become payable to any employee, except in accordance with pre-existing contractual provisions (provided that the foregoing does not prohibit payment of cash bonuses to employees to the extent such bonuses can be paid from available cash without increasing borrowings or liquidating assets to fund the bonuses); (v) make or commit to make any capital expenditure or to invest, advance, loan, pledge or donate any monies to any clients or other persons or to make any similar commitments with respect to outstanding bids or proposals; 17 (vi) fail to keep in full force and effect any insurance policies comparable in amount and scope to coverage maintained by it (or on behalf of it) on the date hereof; (vii) take any other action that would cause any of the representations and warranties made herein not to remain materially true and correct; (viii) make any change in any method of accounting or accounting principle, method, estimate or practice except for any such change required by reason of a concurrent change in GAAP; (ix) settle, release or forgive any material claim or litigation or waive any material right; or (x) commit itself to do any of the foregoing. (b) From and after the date of this Agreement and until the Closing Date, Seller shall, with respect to the Business: (i) maintain, in all material respects, its properties in accordance with present practices and in a condition suitable for their current use; (ii) file, when due or required, federal, state, foreign and other tax returns and other reports required to be filed and pay when due all taxes, assessments, fees and other charges lawfully levied or assessed against it, unless the validity thereof is contested in good faith and by appropriate proceedings diligently conducted; (iii) continue to conduct the Business in the ordinary course consistent with past practices; (iv) keep its books of account, records and files in the ordinary course and in accordance with existing practices; (v) continue to maintain existing business relationships with suppliers and customers to the extent that such relationships are, at the same time, judged to be economically beneficial to Seller, as applicable; and (vi) maintain and comply with all Licenses. 6.2 ACCESS TO PROPERTIES AND RECORDS. Seller shall afford to Buyer and Buyer's accountants, counsel agents or representatives, full access during normal business hours throughout the period prior to the Closing Date (or the earlier termination of this Agreement pursuant to ARTICLE IX) to all of Seller's properties, books, Contracts and records relating to or affecting the Business (including, but not limited to, Seller's accounting records, the workpapers of Seller's independent accountants) and, during such period, shall furnish promptly to Buyer all information concerning Seller's business, properties, liabilities and personnel relating to or affect 18 the Business as Buyer may request. If the transactions contemplated hereby are not consummated, Buyer shall continue to be bound by the Confidentiality and Nondisclosure Agreement between Seller and Elam Baer. 6.3 CONSENTS AND APPROVALS. (a). Except with regard to the Regulatory Approvals (as defined below), Seller shall use all reasonable commercial efforts to obtain, or cause Seller to obtain, all necessary consents, waivers, authorizations and approvals of all persons, firms or corporations required in connection with the execution, delivery and performance by them of this Agreement, including without limitation, those listed on SECTION 4.13(a) of the SCHEDULE OF EXCEPTIONS. Seller agrees to file a proxy statement with the Securities and Exchange Commission for the approval of the transactions described in this Agreement within ten (10) days after the execution of this Agreement. (b) The Seller shall use all reasonable commercial efforts to assist Buyer in obtaining and providing all consents, waivers, authorizations or approvals of and filings or registrations with any state public utilities commission or comparable regulatory body with authority over the Seller as a provider of telecommunications services that is required of or, in Buyer's judgment, advisable to be made by, Buyer or the Seller in connection with the execution and delivery of this Agreement or the effectuation of the transactions contemplated hereby (collectively, the "REGULATORY APPROVALS"). Pending receipt of the Regulatory Approvals, Seller will remain responsible for the operation of those aspects of the business of the Seller for which unobtained Regulatory Approvals are required and for compliance with all related applicable laws and regulations. Further, pending receipt of the Regulatory Approvals, Seller will be managed and operated in a manner that is fully consistent with the terms and conditions of existing laws and regulations applicable to the Seller's business. 6.4 FURTHER ASSURANCES. Upon the request of a party hereto at any time after the Closing Date, the other party shall forthwith execute and deliver such further instruments of assignment, transfer, conveyance, endorsement, direction or authorization and other documents as the requesting party or its counsel may request in order to perfect title of Buyer and its successors and assigns to the Purchased Assets or otherwise to effectuate the purposes of this Agreement. In addition, prior to and after the Closing Date Seller will cooperate and assist Buyer with the preparation for and transfer of the Business from Seller to Buyer, including replacing the systems and contracts not being transferred at Closing. 6.5 NON-COMPETITION. For a period of three (3) years following the Closing Date, Seller, and Gary S. Kohler, Jack S. Kohler, Melvin Graf or Jeffrey R. Paletz or any of Seller's shareholders owning more than ten percent (10%) of the total shares of Seller as of the date hereof, whether as an individual or as a group (collectively, "INTERESTED SHAREHOLDERS"), shall not directly or indirectly, either as a principal, agent, employee, employer, stockholder, co-partner or in any other individual or representative capacity whatsoever, engage in the States of Minnesota or Wisconsin in a pay telephone business that is directly competitive with or similar to Seller's pay phone business as it exists immediately prior to Closing; and Seller or any 19 of the Interested Shareholders will not directly or indirectly, either as principal, agent, employee, employer, stockholder, co-partner or in any other individual or representative capacity whatsoever, solicit, call on, take away, divert or assist any person in so soliciting, diverting, calling on, or taking away any Site Provider or customers of Buyer, employ any of the then or former employees of Buyer (including individuals employed by Seller as of the date hereof or as of the Closing Date, but who subsequently become employees of Buyer), or induce any such employees to terminate their employment with Buyer. The covenants contained herein shall be construed and interpreted in any judicial proceeding to permit its enforcement to the maximum extent. Seller and Interested Shareholders agree that the restraint imposed is necessary for the reasonable and proper protection of Buyer and its affiliates, and that said restraint is reasonable in terms of subject matter, duration, and geographic scope. It is understood by the parties that these restrictive covenants are an essential element of this Agreement and that, but for such covenant, Buyer would not have entered into this Agreement. Without intending in any way to limit the remedies available to Buyer, Seller understands and agree that damages at law may be an insufficient remedy to Buyer if either breaches this covenant not to compete and that Buyer may seek injunctive relief in any court of competent jurisdiction to restrain the breach or the threatened breach of or otherwise specifically to enforce the covenants contained in this Section 6.5. The Interested Shareholders will sign the Non-competition Agreement attached hereto as Exhibit 6.5 to effect this Section 6.5. 6.6 BEST EFFORTS. Upon the terms and subject to the conditions of this Agreement, each of the parties hereto shall use its best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable consistent with applicable law to consummate and make effective in the most expeditious manner practicable the transactions contemplated hereby. 6.7 NOTICE OF BREACH. Through the Closing Date, each of the parties hereto shall promptly give to the other Party written notice with particularity upon having knowledge of any matter that may constitute a breach of any representation, warranty, agreement or covenant contained in this Agreement. 6.8 TAX MATTERS. The following provisions shall govern the allocation of responsibility between Buyer and Seller for certain tax matters following the Closing Date: (a) ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be allocated among the Purchased Assets in accordance with the allocation set forth on SECTION 6.8(a) of the SCHEDULE OF EXCEPTIONS. Buyer and Seller shall report the federal, state and local income and other Tax consequences of the purchase and sale contemplated hereby in a manner consistent with such allocation and shall not take any position inconsistent therewith upon examination of any Tax Return, in any refund claim, in any Litigation or otherwise. (b) All transfer, documentary, sales, use, stamp, registration, and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement shall be paid by Buyer when due. 20 6.9 EXCLUSIVITY. Seller will not (i) solicit, initiate, or encourage the submission of any proposal or offer from any person relating to the acquisition of any capital stock or other voting securities, or any substantial portion of the assets, of the Seller which would result in the sale of the Business (including any acquisition structured as a merger, consolidation, or share exchange) or (ii) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in, or facilitate in any other manner any effort or attempt by any person to do or seek the foregoing, except, in the case of clause (ii), where the failure of the Board of Directors of the Seller to so act in connection with any such proposal or offer would constitute a breach of the Board of Directors' fiduciary obligations to the holders of the capital stock of Seller (it being agreed and understood for this purpose that the failure to respond to any such offer or proposal which the Board of Directors of Seller determines to be superior, from a financial point of view, in comparison to the transactions contemplated by this Agreement may be deemed to be a breach of such fiduciary duty). Seller will notify the Buyer immediately if any person makes any proposal, offer, inquiry, or contact with respect to the foregoing. 6.10 INTERIM AGREEMENT WITH CLEC SUBSIDIARY. In the event that the Minnesota Public Utilities Commission approval is required and such approval cannot be obtained prior to the Closing Date, the transfer of the CLEC Subsidiary shares from Seller to Buyer will be deferred until the required approval is obtained. Prior to the transfer of the CLEC Subsidiary shares, the CLEC Subsidiary will be managed and controlled by Seller and the CLEC Subsidiary will resell its services to Buyer at the same rates it purchases these services from its vendors. This Resale Agreement will be in the form attached hereto as EXHIBIT 6.10. ARTICLE VII. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER The obligations of Buyer to consummate the transactions contemplated by this Agreement are subject to the fulfillment by Seller, at or before the Closing Date, of the following conditions, any one or more of which may be waived by Buyer in its sole discretion: 7.1 RECEIPT OF DOCUMENTS. Buyer has received, or is receiving at the Closing, all of the following, each duly executed by the parties thereto (other than Buyer) and dated the Closing Date (or an earlier date satisfactory to Buyer), in form and substance satisfactory to Buyer: (a) KIOSK AGREEMENT. Kiosk Agreement based on the terms set forth in EXHIBIT 3.2. (b) CONSULTING AGREEMENT. Consulting Agreement in the form set forth as EXHIBIT 3.4. (c) SUBLEASE AGREEMENT. Sublease Agreement in the form set forth as Exhibit 3.5. (d) NON-COMPETITION AGREEMENT. Non-Competition Agreement in the form set forth as EXHIBIT 6.5 executed and delivered by the parties listed in Section 6.5. 21 (e) RESALE AGREEMENT. Resale Agreement in the form set forth as Exhibit 6.10. (f) OTHER DOCUMENTS. All documents (including, but not limited to, a bill of sale, consents and assignments of contracts, and Board of Director's and shareholders' resolutions) Buyer may reasonably require relating to the existence of the Seller and the authority of Seller for this Agreement, or otherwise required to effect the transactions contemplated hereby, all in form and substance satisfactory to Buyer. 7.2 REPRESENTATIONS AND WARRANTIES OF SELLER; OFFICER'S CERTIFICATE. All representations and warranties made by Seller in this Agreement and the other Transaction Documents are true and correct in all material respects on and as of the Closing Date as if again made by Seller on and as of such date, and Buyer has received a certificate dated the Closing Date and signed by the Chief Executive of Seller to that effect. 7.3 NO DEFAULT. Seller is not in default of any material obligation. 7.4 FINANCING. Buyer has obtained financing sufficient to finance the transactions contemplated hereby on terms acceptable to Buyer. 7.5 PERFORMANCE OF OBLIGATIONS OF SELLER. Seller has performed in all material respects all obligations required under this Agreement and the other Transaction Documents to be performed by them on or before the Closing Date, and Buyer has received a certificate dated the Closing Date and signed by the Chief Executive of Seller to that effect. 7.6 CONSENTS AND APPROVALS. Receipt of all consents, waivers, authorizations and approvals of any person, firm or corporation, the absence of which in connection with the execution, delivery and performance of this Agreement, would result in a Material Adverse Effect. 7.7 NO VIOLATION OF ORDERS, LAWS OR REGULATIONS. No preliminary or permanent injunction or other order issued by any court or governmental or regulatory authority, domestic or foreign, nor any statute, rule, regulation, decree or executive order promulgated or enacted by any government or governmental or regulatory authority, domestic or foreign, that declares this Agreement invalid in any respect or prevents or would be violated by the consummation of the transactions contemplated hereby, or which adversely affects the assets, properties, operations, prospects, net income or financial condition of Seller is in effect; and no action or proceeding before any court or governmental or regulatory authority, domestic or foreign, has been instituted or threatened by any government or governmental or regulatory authority, domestic or foreign, or by any other person, or entity which seeks to prevent or delay the consummation of the transactions contemplated by this Agreement or which challenges the validity or enforceability of this Agreement; and the transactions contemplated hereby will not violate any applicable law or regulation. 7.8 NO MATERIAL ADVERSE CHANGE. During the period from the date of the most recently completed audit of Seller's books, records and results of operations to the Closing Date, 22 there has not been any material adverse change in the assets, properties, business, operations, prospects, net income or financial condition of Seller. 7.9 OPINION OF COUNSEL. Buyer has received a favorable opinion, dated as of the Closing Date, from counsels to the Seller, in substantially the form of EXHIBIT 7.9. 7.10 LEGAL MATTERS. All certificates, instruments, opinions and other documents required to be executed or delivered by or on behalf of Seller under the provisions of this Agreement, and all other actions and proceedings required to be taken by or on behalf of Seller in furtherance of the transactions contemplated hereby, are to be in form and substance satisfactory to counsel for Buyer. ARTICLE VIII. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER The obligations of Seller to consummate the transactions contemplated by this Agreement are subject to the fulfillment, at or before the Closing Date, of the following conditions, any one or more of which may be waived on behalf of Seller in its sole discretion: 8.1 RECEIPT OF DOCUMENTS. Buyer has executed and delivered, or is executing and delivering at the Closing, the documents listed in SECTION 8.1 of the SCHEDULE OF EXCEPTIONS to be executed by Buyer. 8.2 REPRESENTATIONS AND WARRANTIES OF BUYER. All representations and warranties made by Buyer in this Agreement are true and correct as of the Closing Date as if again made by Buyer on and as of such date, and Seller has received a certificate dated the Closing Date and signed by the Chief Executive of Buyer to that effect. 8.3 PERFORMANCE OF BUYER'S OBLIGATIONS. Buyer has performed in all material respects all obligations required under this Agreement to be performed by it on or before the Closing Date, and Seller has received a certificate dated the Closing Date and signed by the Chief Executive of Buyer to that effect. 8.4 CONSENTS AND APPROVALS. All consents, waivers, authorizations and approvals of any governmental or regulatory authority, domestic or foreign, and of any other person, firm or corporation, required in connection with the execution, delivery and performance of this Agreement, absence of which could result in material liability to Seller, have been duly obtained and are in full force and effect on the Closing Date, provided, however, approval of the Minnesota Public Utilities Commission is not a condition to the Closing of this Agreement other than for the transfer of the shares of the CLEC Subsidiary, which transfer may occur subsequent to Closing. 8.5 NO VIOLATION OF ORDERS. No preliminary or permanent injunction or other order issued by any court or governmental or regulatory authority, domestic or foreign, nor any statute, rule, regulation, decree or executive order promulgated or enacted by any government or governmental or regulatory authority, domestic or foreign, binding upon Seller that declares this 23 Agreement invalid or unenforceable in any respect or which prevents or would be violated by the consummation of the transactions contemplated hereby is in effect; and no action or proceeding before any court or governmental or regulatory authority, domestic or foreign, against Seller has been instituted or threatened by any government or governmental or regulatory authority, domestic or foreign, or by any other person or entity, which seeks to prevent or delay the consummation of the transactions contemplated by this Agreement or which challenges the validity or enforceability of this Agreement, provided, however, approval of the Minnesota Public Utilities Commission is not a condition to the Closing of this Agreement other than for the transfer of the shares of the CLEC Subsidiary, which transfer may occur subsequent to Closing. 8.6 OPINION OF COUNSEL. Seller has received a favorable opinion, dated as of the Closing Date, from counsel to Buyer, in substantially the form of EXHIBIT 8.6. 8.7 INITIAL PAYMENT. Buyer has delivered to Seller the Initial Payment in the manner described in SECTION 2.2 of this Agreement. 8.8 LEGAL MATTERS. All certificates, instruments, opinions and other documents required to be executed or delivered by or on behalf of Buyer under the provisions of this Agreement, and all other actions and proceedings required to be taken by or on behalf of Buyer in furtherance of the transactions contemplated hereby, are to be in form and substance satisfactory to counsel for Seller. ARTICLE IX. TERMINATION 9.1 METHODS OF TERMINATION. This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time before the Closing: (a) by the mutual written consent of Seller and Buyer; (b) by Buyer, if (i) Seller fails to comply in any material respect with any of its covenants or agreements contained herein or (ii) any of the representations and warranties of Seller is definitively determined to be breached or is definitively determined to be inaccurate in any material way; (c) by Seller, if (i) Buyer fails to comply in any material respect with any of its covenants or agreements contained herein or (ii) any of the representations and warranties of Buyer is definitively determined to be breached or definitively determined to be inaccurate in any material way; (d) by Seller, if it signs a letter of intent or enters into an agreement with respect to a proposal or offer made by a third party relating to the acquisition of any or all of the assets contemplated for sale under the Agreement, which the Board of Directors of Seller has in good faith and under its fiduciary obligations determined to be superior, 24 from a financial point of view, in comparison to the transactions contemplated by this Agreement; (e) by Seller or Buyer if a court of competent jurisdiction or governmental, regulatory or administrative agency or commission has issued a non-appealable order, decree or ruling or taken any other action (which order, decree or ruling the parties hereto have used their best efforts to lift), which permanently restrains, enjoins or otherwise prohibits the transactions contemplated by this Agreement; provided, however, neither Buyer nor Seller will have a right to terminate this Agreement for the lack of obtaining Minnesota Public Utilities approval of the transfer of the CLEC Subsidiary shares; or (f) by either Buyer or Seller if the transactions contemplated hereby have not been consummated by January 31, 2000; provided that, neither Buyer nor Seller shall be entitled to terminate this Agreement pursuant to this SECTION 9.1(f) if such party's willful breach (or the willful breach by such party's affiliates) of this Agreement has prevented the consummation of the transactions contemplated by this Agreement. 9.2 EFFECT OF TERMINATION. In the event of termination and abandonment of this Agreement pursuant to SECTION 9.1 written notice thereof is to be given forthwith to the other party and this Agreement will terminate and the transactions contemplated hereby will be abandoned, without further action by Seller or Buyer. If this Agreement is terminated as provided herein, no party to this Agreement will have any liability or further obligation to any other party to this Agreement except (i) as provided in SECTIONS 9.3., 10.1, 10.2, 10.3, 11.3 and 11.5. 9.3. BREAK-UP FEE. Notwithstanding any other provision herein, if Seller terminates or abandons this Agreement pursuant to Section 9.1(d) or Section 9.1(f), or if it terminates this Agreement for any other reason, except as permitted by Sections 9.1(a), 9.1(c) or 9.1(e), then Seller shall immediately pay to Buyer the sum of $350,000 ("BREAK-UP FEE"). The Break-up Fee is not exclusive and will be in addition to other remedies that may be available to Buyer at law or in equity. ARTICLE X. INDEMNIFICATION AND LIABILITIES 10.1 COVERAGE. (a) Notwithstanding the Closing or the delivery of the Purchased Assets, Seller shall indemnify and fully defend, save and hold Buyer and its directors, officers, employees, agents, successors and assigns, harmless, and Buyer shall indemnify and fully defend, save and hold Seller and its directors, officers, employees, agents, successors and assigns harmless, if any such party at any time or from time to time suffers any damage, liability, loss, cost, expense (including all reasonable attorneys consultants' and experts' fees), claim or cause of action (each, a "LOSS") arising out of, relating to or resulting from, any and all Events of Breach (as defined below). 25 (b) As used herein, "EVENT OF BREACH" means any one or more of the following: (i) any material untruth or inaccuracy in any representation or warranty contained in this Agreement or any other Transaction Document; (ii) any failure to perform or observe any material term, provision, covenant, agreement or condition to be performed or observed under this Agreement or any other Transaction Document; (iii) the assertion of any claim or legal action against Buyer by any person or governmental authority based upon, or relating to the ownership or operation of the business of Seller or any act or omission or obligation or liability of Seller, or its directors, officers, employees or agents, and occurring, arising or accruing on or prior to the Closing Date, provided that such claim or legal action is not (A) a claim for payment of money in an amount reflected as a liability of Seller in the Financial Statements or SCHEDULE OF EXCEPTIONS or (B) based upon an act or omission which first occurred after the Closing Date; and (iv) the assertion of any claim or legal action against Seller by any person or governmental authority based upon, or relating to the ownership or operation of the Business or any act or omission or obligation or liability of Seller, or its directors, officers, employees, or agents, and occurring, arising or accruing after the Closing Date, provided that such claim or legal action is not based upon an act or omission which first occurred on or before the Closing Date. 10.2 PROCEDURES. Subject to the limitation described in SECTION 10.3, an Event of Breach occurs or is alleged and the party or parties entitled to receive the benefits of the indemnification provisions hereunder (the "INDEMNIFIED PARTY") asserts that a party or parties has become obligated to the Indemnified Party pursuant to SECTION 10.1 (the "INDEMNIFYING PARTY"), or if any suit, action, investigation, claim or proceeding is begun, made or instituted as a result of which the Indemnifying Party may become obligated to the Indemnified Party hereunder, the Indemnified Party shall promptly notify the Indemnifying Party; provided, that the failure to so promptly notify the Indemnifying Party does not relieve the Indemnifying Party of its obligations hereunder except to the extent it is materially prejudiced thereby. In case any claim is asserted or suit, action or proceeding commenced against an Indemnified Party, the Indemnifying Party will be entitled to participate therein, and, to the extent that it may wish, to assume the defense, conduct or settlement thereof; provided that such settlement is for the payment of money only, and does not impose any obligation or limitation on the Indemnified Party. After notice from the Indemnifying Party to the Indemnified Party of its election so to assume the defense, conduct or settlement thereof, the Indemnifying Party will not be liable to the Indemnified Party for any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense, conduct or settlement thereof unless the Indemnified Party has defenses that may conflict with, or that may not be available to, the Indemnifying Party. The Indemnified Party will reasonably cooperate with the Indemnifying Party in connection with any 26 such claim assumed by the Indemnifying Party to make available to the Indemnifying Party all pertinent information under the Indemnified Party's control. The Indemnified Party will not consent to the entry of a judgment or enter into any settlement with respect to the matter without the written consent of the Indemnifying Party (not to be unreasonably withheld or delayed). The Indemnifying Party will not consent to the entry of a judgment with respect to the matter or enter into any settlement which does not include a provision whereby the plaintiff or claimant in the matter releases the Indemnified Party from all liability with respect thereto, without the written consent of the Indemnified Party (not to be unreasonably withheld or delayed). 10.3 SURVIVAL OF REPRESENTATIONS/LIMITATION OF INDEMNIFICATION. (a) The representations and warranties contained in ARTICLES IV and V of this Agreement will survive until the second anniversary of the Closing Date, except those representations and warranties contained in (i) SECTION 4.10 (Taxes), which will survive until the expiration (including extensions) of the applicable statute of limitations, (ii) SECTION 4.21 (Environmental Laws), which will survive until the seventh anniversary of the Closing Date, and (iii) the first sentence of each of SECTIONS 4.1 and 5.1 and all of SECTIONS 4.2 and 5.2, which will survive indefinitely. (b) All claims made as a result of breach or inaccuracy of a representation or warranty set forth in this Agreement must be made before the time specified herein for termination of that representation or warranty. For purposes hereof, a claim will be deemed timely made if a reasonably detailed good faith written notice of the claim is delivered to the party against whom or which the claim is asserted before the expiration of the applicable representation or warranty. Claims timely made can be pursued until final resolution notwithstanding expiration of the applicable representation or warranty. (c) Buyer may not bring any claim against the Seller unless and until the aggregate amount of all claims of Buyer against the Seller that have not yet been brought exceeds $50,000, at which point any and all such claims may be brought. ARTICLE XI. MISCELLANEOUS PROVISIONS 11.1 SURVIVAL OF PROVISIONS. Subject to Sections 9.2 and 10.3 of this Agreement, the respective representations, warranties, covenants and agreements of each of the parties to this Agreement (except covenants and agreements that are expressly required to be performed and are performed in full or waived in writing on or before the Closing Date) will survive the Closing Date and the consummation of the transactions contemplated by this Agreement. 11.2 PUBLICITY. Prior to the Closing Date, no party may, nor may it permit its affiliates, directors, officers, employees, representatives or agents to, issue or cause the publication of any press release or other announcement with respect to this Agreement or the transactions contemplated hereby without the consent of the other parties, in order that such public statement shall be jointly issued by both Buyer and Seller. Notwithstanding the foregoing, in the event any such press release or announcement is required by law securities 27 exchange to be made by the party proposing to issue the same, such party shall use its best efforts to consult in good faith with the other party prior to the issuance of any such press release or announcement. 11.3 NONDISCLOSURE AND CONFIDENTIALITY. Buyer and Seller recognize and agree that they each have certain confidential business and proprietary information and trade secrets, including, without limitation, customer lists and records, information concerning employee relations, selling, marketing and distribution techniques, methods, processes and programs of Buyer and Seller, which information and trade secrets are used by each in its business affairs to obtain a competitive advantage. Buyer and Seller further recognize that the protection of such confidential information and trade secrets against unauthorized disclosure and use is of critical importance to each in maintaining their affairs and competitive position. Accordingly, Buyer and Seller agree that they will not, at any time prior to the signing of this Agreement or thereafter, directly or indirectly make any independent use of, publish or disclose to any person or organization, any of the confidential business and proprietary information and trade secrets of the other, except to the extent required by law. Upon the written request of either Seller or Buyer, the other party will promptly return to the requesting party any such confidential information. 11.4 SUCCESSORS AND ASSIGNS; NO THIRD-PARTY BENEFICIARIES. This Agreement will inure to the benefit of, and be binding upon, the parties hereto and their respective successors and assigns; provided, that neither party may assign or delegate any of the obligations created under this Agreement without the prior written consent of the other parties. Notwithstanding the foregoing, Buyer will have the unrestricted right to assign this Agreement and/or to delegate all or any part of its obligations hereunder to any Affiliate of Buyer or to any lender in connection with any financing. Nothing in this Agreement will confer upon any person or entity not a party to this Agreement, or the legal representatives of such person or entity, any rights or remedies of any nature or kind whatsoever under or by reason of this Agreement. 11.5 FEES AND EXPENSES. Except as otherwise expressly provided in this Agreement, all legal, accounting and other fees, costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby will be paid by the party incurring such fees, costs or expenses. If any party hereto brings any action, suit, counterclaim, appeal, arbitration, mediation or other proceeding (an "ACTION") for any relief against any other party hereto or any of their affiliates, declaratory or otherwise, to enforce the terms hereof or of any other Transaction Document or to declare rights hereunder or thereunder, in addition to any damages and costs which the prevailing party otherwise would be entitled, the losing party in any such Action shall pay to the prevailing party or parties a reasonable sum for ordinary and necessary attorneys' fees and costs incurred in connection with such Action and/or enforcing any judgment, order, ruling or award (collectively, a "DECISION") granted therein, all of which must be paid whether or not such Action is prosecuted to a Decision. Any Decision entered in such Action must contain a specific provision providing for the recovery of attorneys' fees and costs incurred in enforcing such Decision. The court or arbitrator may fix the amount of reasonable attorneys' fees and costs on the request of either party. For the purposes hereof, attorneys' fees include, but are not limited to, fees incurred in the following: (1) post judgment motions and 28 collection actions; (2) contempt proceedings; (3) garnishment, levy, and debtor and third party examinations; (4) discovery; and (5) bankruptcy. "PREVAILING PARTY" within the meaning of this Section includes, without limitation, a party who agrees to dismiss an Action on the other party's payment of the sum allegedly due or performance of the covenants allegedly breached, or who obtains substantially the relief sought by it. If there are multiple claims, the prevailing party is to be determined with respect to each claim separately. The prevailing party is the party that has obtained the greater relief in connection with any particular claim, although, with respect to any claim, it may be determined by the court or arbitrator that there is no prevailing party. 11.6 NOTICES. All notices and other communications given or made pursuant hereto must be in writing and will be deemed to have been duly given or made if delivered personally or sent by registered or certified mail (postage prepaid, return receipt requested) to the parties at the following addresses: (a) If to Buyer, to: Elam Baer, President Access Anywhere LLC 501 Marquette Avenue South Minneapolis, Minnesota 55102 with a copy to: Jeffrey C. Anderson, Esq. Gray, Plant, Mooty, Mooty & Bennett, P.A. 3400 City Center 33 South Sixth Street Minneapolis, Minnesota 55402 (b) If to Seller or Seller, to: Gary Kohler ChoiceTel Communications Inc. 9724 - 10th Avenue North Plymouth, MN 55441 with a copy to: Robert T. Montague Robins, Kaplan, Miller & Ciresi L.L.P. 2800 LaSalle Plaza 800 LaSalle Avenue Minneapolis, MN 55402-2015 29 or to such other persons or at such other addresses as furnished by either party by like notice to the other, and such notice or communication will be deemed to have been given or made as of the date so delivered or mailed. 11.7 ENTIRE AGREEMENT. This Agreement and the other Transaction Documents, together with the schedules and the exhibits hereto, represent the entire agreement and understanding of the parties with reference to the transactions set forth herein and no representations or warranties have been made in connection with this Agreement other than those expressly set forth herein or in the other Transaction Documents, exhibits, certificates. This Agreement supersedes all prior negotiations, discussions, term sheets, letters of intent, correspondence, communications, understandings and agreements between the parties relating to the subject matter of this Agreement and all prior drafts of this Agreement, all of which are merged into this Agreement. No prior drafts of this Agreement and no words or phrases from any such prior drafts may be admitted into evidence in any action or suit involving this Agreement. 11.8 WAIVERS AND AMENDMENTS. The parties hereto may by written notice to the other: (a) extend the time for the performance of any of the obligations or other actions of the other; (b) waive any inaccuracies in the representations or warranties of the other contained in this Agreement; (c) waive compliance with any of the covenants of the other contained in this Agreement; (d) waive performance of any of the obligations of the other created under this Agreement; or (e) waive fulfillment of any of the conditions to its own obligations under this Agreement. The waiver by any party hereto of a breach of any provision of this Agreement will not operate or be construes as a waiver of any subsequent breach, whether or not similar, unless such waiver specifically states that it is to be construed as a continuing waiver. This Agreement may be amended, modified or supplemented only by a written instrument executed by the parties hereto. 11.9 SEVERABILITY. This Agreement will be deemed severable, and the invalidity or unenforceability of any term or provision hereof will not affect the validity or enforceability of this Agreement or of any other term or provision hereof. Furthermore, in lieu of any such invalid or unenforceable term or provision, the parties hereto intend that there will be added as a part of this Agreement a provision as similar in terms to such invalid or unenforceable provision as may be possible and be valid and enforceable. 11.10 TITLES AND HEADINGS; REFERENCES. The Article and Section headings and any table of contents contained in this Agreement are solely for convenience of reference and do not affect the meaning or interpretation of this Agreement or of any term or provision hereof. References herein to Sections, Schedules and Exhibits are to the referenced Section, SCHEDULE or Exhibit hereto unless otherwise specified. 11.11 SIGNATURES AND COUNTERPARTS. Facsimile transmission of any signed original document and/or retransmission of any signed facsimile transmission will be deemed the same as delivery of an original. At the request of any party, the parties will confirm facsimile transmission by signing a duplicate original document. This Agreement may be executed in two 30 or more counterparts, each of which will be deemed an original and all of which together will be considered one and the same agreement. 11.12 ENFORCEMENT OF THE AGREEMENT. The parties hereto acknowledge that irreparable damage would occur if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties will be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereto, this being in addition to any other remedy to which they are entitled at law or in equity. 11.13 GOVERNING LAW. This Agreement will be governed by and interpreted and enforced in accordance with the laws of the State of Minnesota without regard to the conflicts-of-law provisions. [ REMAINDER OF PAGE INTENTIONALLY LEFT BLANK ] 31 SIGNATURE PAGE FOR ASSET PURCHASE AGREEMENT IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ACCESS ANYWHERE LLC By: ------------------------------------------- -------------------------------------(name) Its: -----------------------------------(title) CHOICETEL COMMUNICATIONS INC. By: ------------------------------------------- -------------------------------------(name) Its: -----------------------------------(title) 32 EX-27 4 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHOICETEL COMMUNICATIONS, INC CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 2,323 0 1,242 0 0 4,187 113 0 9,150 2,947 0 0 0 30 6,147 9,150 0 5 0 10 292 0 0 297 (66) (231) 161 0 0 (17) (.01) (.01)
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