-----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, EMkyg3y8kX8kDMD2/K2xkQOzPAQ7ippTN32PD1oFKQPzOvkumM7ll1GBncRsa6Z8 T+9hJODHvi+W+vemLAVsFw== 0001047469-98-020576.txt : 19980518 0001047469-98-020576.hdr.sgml : 19980518 ACCESSION NUMBER: 0001047469-98-020576 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-23017 FILM NUMBER: 98623341 BUSINESS ADDRESS: STREET 1: 9724 10TH AVE NORTH STREET 2: 612-544-1260 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 10-Q 1 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 ----------------- Commission file number 0-230 17 ------------------- CHOICETEL CORPORATION --------------------------- (Exact name of registrant as specified in its charter) Minnesota 41-1649949 - ------------------------------ ----------------------------- (State of other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 9724 10th Ave North, Plymouth, MN 55441 - --------------------------------------- ----------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 612-544-1260 --------------------------- N/A - ------------------------------------------------------------------------------ (Former name, former address and former fiscal year if changed from last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- CHOICETEL COMMUNICATIONS, INC. FORM 10-Q INDEX MAY 15, 1998 Part I: Financial Information Item 1. Financial Statements Consolidated Balance Sheet - December 31, 1997 and March 31, 1998 Consolidated Statements of Operations - Three months ended March 31, 1997 and 1998 Consolidated Statements of Cash Flows - Three months ended March 31, 1997 and 1998 Notes to Consolidated financial statements Item 2. Management's Discussion and Analysis Part II: Other information Item 1. Legal proceedings - None Item 2. Change in securities and use of proceeds Item 6. Exhibits and Reports on Form 8-K (a) 27 Financial Data Schedule (b) Reports on 8-k Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHOICETEL COMMUNICATIONS, INC. Date: May 15, 1998 By: /s/ Jack S. Kohler - --------------------------------------- Jack S. Kohler Vice President and Chief Financial Officer CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED)
DECEMBER 31, MARCH 31, ------------ ----------- 1997 1998 ------------ ----------- ASSETS Current assets: Cash ............................................ $ 343,705 $ 285,085 Short-term investments .......................... 1,151,215 637,329 Accounts receivable ............................. 575,313 837,829 Prepaid: Rent .......................................... 93,357 76,897 Other ......................................... 458,509 304,613 Deferred taxes 601,000 601,000 ----------- ----------- Total current assets ........................ 3,223,099 2,742,753 ----------- ----------- Property and equipment, net ..................... 4,521,017 4,378,540 Other assets: Prepaid rents ................................... 92,179 119,550 Rental agreements, net of accumulated amortization of $355,412 at Dec. 1997, and $258,717 at March 1998..................... 3,212,450 3,134,456 ----------- ----------- 3,304,629 3,254,006 ----------- ----------- $11,048,745 $10,375,299 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Checks outstanding in excess of bank balance $ 139,239 Notes payable ................................... 350,000 $ 350,000 Current portion of long-term debt ............... 843,301 841,156 Accounts payable ................................ 48,000 39,765 Accrued expenses ................................ 2,116,142 2,004,823 ----------- ----------- Total current liabilities ..................... 3,496,682 3,235,744 Long-term liabilities: Deferred taxes 449,000 449,000 Long-term debt, net of current portion .......... 1,269,985 794,667 ----------- ----------- 1,718,985 1,243,667 Shareholders' equity .............................. 5,833,078 5,895,888 ----------- ----------- $11,048,745 $10,375,299 ----------- ----------- ----------- -----------
See notes to consolidated financial statements. CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------- 1997 1998 ------------ ----------- Service revenue ........................... $ 1,328,362 $ 1,983,681 Cost of service ........................... 802,091 931,661 ------------ ----------- Gross margin .............................. 526,271 1,051,839 ------------ ----------- Selling, general and admin: Salary and benefits ..................... 248,488 368,233 Travel and related ...................... 26,123 42,042 Office and overhead ..................... 76,868 153,160 ------------ ----------- 351,494 563,435 Depreciation and amortization ............. 208,445 291,497 Interest .................................. 143,034 40,485 Sales tax contingency ..................... 51,075 69,709 ------------ ----------- 754,048 965,126 ------------ ----------- Income (loss) before income taxes ......... (227,777) 86,713 Provision for income taxes (91,111) 34,685 ------------ ----------- Net income (loss).......................... $ (136,666) $ 52,028 ------------ ----------- ------------ ----------- Per share net income (loss)................ $ (0.07) $ 0.02 ------------ ----------- ------------ ----------- Shares outstanding-weighted average 1,948,489 2,915,006 Per share diluted net income $ 0.02 ----------- ----------- Shares outstanding - diluted 2,943,577
See notes to consolidated financial statements. CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
THREE MONTHS ENDED MARCH 31 --------------------------- 1997 1998 ------------- ------------ Cash flows from operating activities: Net (loss) income .............................. $ (136,666) $ 52,028 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization .................. 208,445 291,497 Changes in operating assets and liabilities (Increase) decrease in: Accounts receivable ........................ (31,437) (262,516) Prepaid rent and other. .................... (183,332) 14,528 Increase (decrease) in: Accounts payable ........................... 75,668 (8,235) Accrued expenses ........................... 91,760 (111,319) Unearned line charge received .............. (11,358) ------------ ----------- Net cash provided by (used in) operating activities...................................... 13,080 (24,017) ------------ ----------- Cash flows used in investing activities: Purchase of equipment and rental contracts ..... (3,831,141) (71,026) Sales of short-term investments................. 513,886 ------------ ----------- Net cash (used in) provided from investing activities............................ (3,831,141) 442,860 Cash flows from financing activities: Proceeds from Issuance of: Long-term debt ............................. 1,206,500 Common stock ............................... 10,000 Collections of subscription receivable ....... 5,990 Principal payments on long-term debt ......... (556,114) (477,463) Net change in notes payable .................. 2,625,000 ------------ ----------- Net cash provided by financing activities .... 3,291,376 (477,463) ------------ ----------- Net increase (decrease) in cash .................. (526,685) ( 58,620) Cash, beginning balance .......................... 875,150 343,705 ------------ ----------- Cash, ending balance ............................. $ 348,465 $ 285,085 ------------ ----------- ------------ ----------- Supplemental disclosure of cash flow information: Cash paid for interest $ 143,034 $ 54,284 ------------ ----------- ------------ -----------
See notes to consolidated financial statements. CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 AND THREE MONTH PERIOD ENDED MARCH 31 1998 (UNAUDITED) 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF COMBINATION: The consolidated financial statements include the accounts of ChoiceTel Communications, Inc (formerly Intelliphone, Inc.) and its wholly owned subsidiary Choicetel, Inc., after elimination of all material intercompany transactions. NATURE OF BUSINESS: Intelliphone, Inc. was incorporated in October 1989 and changed its name to ChoiceTel Communications, Inc. in April 1997. The Company provides coin operated telephone service in ten states, however, revenue is generated predominately in Minnesota and Oregon. Choicetel, Inc. was incorporated in 1995 and was dormant until June 1996 when operations began. Choicetel is a CLEC and resells local telephone service to pay telephone owners in Minnesota. Choicetel's largest customer is ChoiceTel Communications. SHORT-TERM INVESTMENTS The Company classifies all of its marketable securities, consisting of U.S. Treasury Bills, as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of income taxes, reported as a component of shareholders' equity. PROPERTY AND EQUIPMENT AND DEPRECIATION METHODS: Property and equipment, consisting principally of coin operated telephones, are stated at cost. Depreciation is being provided by the straight-line method over the estimated useful lives, principally seven years, of the related assets. Phone locations are evaluated by management to determine if their carrying amounts have been impaired. No reductions for impaired assets have occurred. PREPAID RENTS: Prepaid rents represent incentives paid to property owners to secure long term phone location agreements at such sites and are being amortized as consumed per the phone location agreement. RENTAL AGREEMENTS: Rental agreements consist of the purchase price paid for phone location agreements in excess of the purchase price of the related equipment on site and are amortized on a straight line basis over the estimated remaining life of the rental agreements, currently ranging from five to twelve years. INCOME TAXES: Prior to 1997 ChoiceTel Communications, Inc. and Choicetel, Inc., were "S" corporations under the Internal Revenue Code. Instead of paying corporate income taxes, the shareholders of an "S" corporation are taxed individually on their proportionate share of the Company's taxable income or loss. Effective January 1997, ChoiceTel Communication's "S" corporation status terminated and it became subject to federal and state income taxes. STOCK-BASED COMPENSATION: Prior to January 1, 1996, the Company accounted 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. As such, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS No. 123), which permits entities to recognize as expense over the vesting period the fair value of all stock-based award 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. NET INCOME (LOSS) PER SHARE: Basic net income (loss) per share is computed on the basis of the number of shares of common stock outstanding during the period. Diluted net income per share includes the effect of options, warrants, and a convertible note. Diluted net loss per share is not included as it is antidilutive. 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 of certain assets and liabilities 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. 2. SHAREHOLDERS' EQUITY: In February, 1997 the shareholders of Choicetel, Inc. contributed all outstanding shares of Choicetel, Inc. to the Company. The contribution was recorded as an adjustment to additional paid-in capital. In November 1997, the Company completed an initial public offering of 800,000 Units at an offering price of $7.00 per Unit. Each Unit consisted of one share of Common Stock and one Redeemable Warrant. The Company received net proceeds of approximately $4,499,000 after the payment of approximately $1,101,000 in related underwriting fees and offering costs. A portion of the proceeds were used to retire existing debt and debt acquired in the acquisition of Telco Northwest. 3. ACQUISITIONS: Telco West, Inc.: On January 2, 1997 the Company purchased a route of pay telephones in the Northwestern United States from Telco West, Inc. (Telco). The purchase price was approximately $3,400,000 and was financed primarily with bank and seller financing. The Company accounted for the acquisition using the purchase method and accordingly the results of operations of the Telco route are included in the consolidated financial statements since the date of acquisition. Computer Assisted Technologies Inc.: On August 14, 1997 the Company purchased a route of pay telephones in Minnesota and Wisconsin from Computer Assisted Technologies, Inc. (CAT). The purchase price was approximately $2,400,000, subject to contingent compensation and adjustment, and was financed principally through the assumption of notes and leases in the aggregate of $1,115,545, issuance of stock in the amount of $744,960, and convertible seller financing in the amount of $350,000. The purchase agreement included contingent compensation in the form of additional stock should the Initial Public Offering price of the Company's common stock be less the $8.00 per share. The Company's opening price on November 21, 1997 was $7.00 per unit and accordingly the Company has recorded the equivalent of the additional compensation of $93,121 in accrued expenses. Prior to the closing of the purchase in August 1997 the Company entered into a Route Service Agreement (Agreement) with CAT effective from February 1, 1997 until such time as CAT received approval of the sale from the Minnesota Public Utilities Commission. The Agreement provided for the servicing of the CAT pay phone route during the period up to closing. In exchange for a monthly lease fee the Company received all revenues derived from the route. The Company accounted for the CAT acquisition using the purchase method. The results of operations of the CAT route is included in the consolidated financial statements since the inception date of the Route Service Agreement through the date of acquisition. This constitutes substantially all of CAT's activity for 1997. 4. PROPERTY AND EQUIPMENT:
1997 1998 ---- ---- Phones and related equipment $5,937,547 $5,990,756 Accumulated depreciation (1,469,906) (1,678,059) ---------- ---------- 4,467,641 4,312,697 Office equipment and improvements 96,860 114,676 Accumulated depreciation (43,484) (48,833) ---------- ---------- 53,376 65,843 ---------- ---------- $4,521,017 $4,378,540 ---------- ---------- ---------- ----------
5. NOTES PAYABLE:
1997 1998 ---- ---- Note payable, shareholder, interest $350,000 $350,000 only at 8.5%. Convertible to shares of common stock at $6.75 plus adjustment based on IPO price of stock. ---------- ---------- $350,000 $350,000 ---------- ---------- ---------- ----------
6. LONG-TERM DEBT:
1997 1998 ---- ---- Note payable, Telco, due in monthly installments of $21,342 including interest at 10% through July 2001, secured by equipment. $753,452 $707,883 Note payable, Telco, due in monthly installments of $3042 including interest at 10% through April 1998, at which time the remaining principal is due, secured by equipment. 364,884 Note payable, Telecapital, due in monthly installments of $4452 including interest at 14.5% through April 2002, secured by equipment. 169,069 161,801 Capital leases, interest at 9.5% 825,881 766,139 ---------- ---------- 2,113,286 1,635,823 Less current portion 843,301 841,156 ---------- ---------- $1,269,985 $ 794,667
Included in interest expense for 1997 is approximately $200,000 of interest paid to Computer Assisted Technologies, Inc. during the Route Service Agreement period. Future maturities of long-term debt are as follows:
Year ending December 31 Amount ----------------------- ------ 1998 $465,838 1999 559,112 2000 505,455 2001 91,828 2002 13,590 ---------- $1,635,823 ----------
7. COMMITMENTS AND CONTINGENCY: Phone locations: The Company rents phone locations from merchants and property owners under varying lease terms, usually seven years, generally cancelable by the Company upon 15 days notice. Consulting agreement: The Company paid a director/shareholder $24,000 and $6,000 for certain consulting services in 1997 and 1998, respectively. Leases: Operating leases: The Company leases its offices in Minnesota and Oregon under operating leases expiring through May 2000. 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 $39,831 for the years ended December 31, 1997. Future minimum lease payments are as follows:
Year ending December 31, Amount ------------------------ -------- 1998 $43,345 1999 45,388 2000 19,295 -------- $108,028 --------
Capital leases: The cost of equipment, included in property and equipment, acquired under capital leases and the related accumulated depreciation at December 31, 1997, is as follows:
Cost $934,856 Less accumulated depreciation 55,646 -------- $879,210 --------
The future minimum lease payments under capital leases and their net present value are as follows: Total future minimum lease payments, payable in:
1998 $341,426 1999 355,158 2000 241,970 -------- 938,554 Less amounts representing interest 112,673 -------- Present value of future minimum lease payments $825,881 --------
Dial-around compensation: The Company has recognized revenue for dial-around compensation based upon rates for such compensation set by the Federal Communications Commission (FCC). In July, 1997 the U.S. Court of Appeals ruled that the rate set by the FCC was inappropriate and needed to be reexamined. The FCC solicited comments on this matter and on October 9, 1997 issued an order reestablishing a dial-around rate for the two year period commencing October 6, 1997. The FCC indicated that it planned to address dial-around compensation for the period from November 6, 1996 through October 6, 1997 in a subsequent order. There can be no assurance when the FCC will issue another order regarding the rate of dial-around compensation, what that order will determine, whether such order will be appealed, and what the determination would be upon any appeal. Accordingly, the Company has reduced its rate for recognizing revenue to the previous rate of $6.00 per phone per month for the period of January 1, 1997 through October 6, 1997. The change in estimate resulted in an accrual of a $351,000 liability at December 31, 1997 to reflect an estimated liability for the period from November 6, 1996 to October 6, 1997. Effective October 7, 1997, the Company began recognizing dial around revenue at $37.20 per phone per month, and effective January 1, 1998 lowered the rate further to $29.82 per phone per month. The setting of lower dial-around rates by the FCC could have a material effect on the Company's results of operations. Sales tax contingency: After an original contact by ChoiceTel Communications, Inc., the Minnesota Department of Revenue conducted and audit of the Company's revenues for calculation of sales taxes the department asserts are due on telephone receipts. While the Company does not believe its coin receipts are subject to sales tax and has notified the Minnesota Department of Revenue of its position, it may have to assert its position in the Minnesota courts in order to prevail. The financial statements include an accrual management believes is sufficient to cover this contingency. 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 the 85% of the fair market value of the common stock on the date of the 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. As of December 31, 1997, no options have been granted under the plan. During 1997 the Company granted to certain employees options to purchase 60,000 shares and to non-employees options to purchase 12,500 shares of the Company's common stock. Utilizing the Black Scholes option pricing model the Company determined the fair value of options granted during 1997 would not have affected net loss or loss per share as reported, and accordingly, the Company has not provided proforma income and earnings per share information. Information with respect to options outstanding as of December 31, 1997, is summarized as follows:
1997 1998 ---- ---- Shares Weighted avg Shares Weighted avg exercise price exercise price Outstanding at beginning of year 50,000 $ 1.50 122,500 $ 4.10 Granted 72, 500 5.90 54,000 3.75 Exercised Forfeited (12,500) 4.00 -------- -------- Outstanding at end of year 122,500 $ 4.10 164,000 $ 4.00 -------- -------- -------- -------- -------- -------- -------- -------- Options exercisable at year end 92,500 130,000
Weighted average remaining life 2 years 2.1 years In connection with the public offering of its stock the Company has outstanding the following warrants:
1997 Weighted average ---- exercise price Issued as part of units in offering 800,000 $ 9.50 Granted to Underwriter 160,000 8.95 --------- --------- Outstanding at end of year 960,000 $ 9.40 --------- --------- --------- --------- Warrants exercisable at year end 800,000 Weighted average remaining life 4.9 years
The warrants granted to the Underwriter consist of one warrant for 80,000 units at $8.40 per unit and is not exercisable until one year after the date the registration statement is declared effective. Each unit contains a warrant that entitles the holder to purchase at any time one share of common stock at an exercise price of $9.50. The warrants expire November 2002. 9. INCOME TAXES: On January 1, 1997 the Company terminated its status to be treated as an "S" corporation. The provision for income taxes is as follows:
1997 ---- Current, state $ 2000 Deferred: Federal (90,000) State (16,000) Effect of change in tax status (46,000) -------- $150,000 -------- --------
A reconciliation between the statutory federal income tax rates to the Company's effective tax rate is as follows:
1997 ---- Statutory federal tax rate 33.0% State taxes (net of federal tax benefit) 3.6% Effect of change in tax status 16.2% ---- Effective tax rate 52.8% ---- ----
The deferred tax asset and deferred tax liability consists of the following at December 31, 1997:
Deferred tax asset: Sales tax contingency $444,000 Employee benefits 17,000 Accrued dial-around compensation 140,000 -------- $601,000 -------- -------- Deferred tax liability: Depreciation 448,000 Amortization 1,000 -------- $449,000 -------- --------
Utilization of the deferred tax asset of $601,000 disclosed above is dependent on future taxable profits in excess of profits arising from existing taxable temporary differences. Although there was a reported loss for the year ended December 31, 1997 the assets have been recognized based on management's estimate of future taxable income. 10. FINANCIAL INSTRUMENTS: The Company's financial instruments recorded on the balance sheet include cash and short-term investments, accounts receivable, notes and accounts payable and debt. Because of their short maturity, the carry amount of cash, short-term investments, accounts receivable and notes and accounts payable approximates recorded value based on rates available to the Company for similar terms and maturities. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 called party (collect calls). These calls are processed by the payphone's computer using "store and forward" technology or, if a live operator is requested, the call is processed by an operator service provider ("OSP") such as, for example, AT&T, MCI or Sprint. Compensation for Dial-Around calls is paid by long-distance carriers in accordance with rules set by the FCC when consumers access a long-distance carrier directly by dialing an access number or an 800 number or by using a non-billable calling card in accordance with rules set by the FCC. 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 collection, repair and maintenance costs. RECENT ACQUISITIONS In January 1997, the Company completed its acquisition from Telco West of site contracts for 1,020 payphones located in Colorado, Idaho, Oregon, Washington and Wyoming and all equipment located at the respective sites, as well as the trade name "Telco Northwest." The purchase price for the acquired assets was $3,374,745, with the Company paying $2,173,245 in cash (financed with a short-term bank loan) and the balance by delivery of a 10% secured subordinated note in the principal amount of $365,000, with the principal due on April 1, 1998, and a second 10% secured subordinated note in the principal amount of $841,500, which amortizes over a 54-month period. The promissory notes are collateralized by a security interest granted in substantially all of the Company's pay telephone assets, which security interest is subordinate to the senior secured position of the Bank as the Company's primary lender. In connection with the acquisition, Telco West and its principal shareholder entered into a five-year non-compete agreement covering the states of Colorado, Idaho, Oregon, Washington and Wyoming. In February 1997, the Company entered into an agreement to acquire from CAT 586 pay telephone site contracts and related assets, as well as site contracts only for the installation of an additional 98 pay telephones, all located in Minnesota and Wisconsin. Pending approval of the acquisition by the MNPUC and the satisfaction of other conditions of closing, the parties entered into a Route Service Agreement effective as of February 1, 1997, pursuant to which the Company managed and serviced the CAT payphones in Minnesota and Wisconsin for a monthly fee equal to the operating revenue therefrom less equipment leasing costs and certain other expenses payable by CAT to third parties. The MNPUC entered an order on June 27, 1997, approving the Company's acquisition of CAT's assets and the transaction was consummated as of August 14, 1997. The purchase price for the assets was approximately $2,400,000, consisting of $100,000 payable in cash, $350,000 pursuant to a convertible note payable to CAT as described below, the Company's assumption of $1,115,500 of debt to two equipment leasing companies, and the balance of $838,000 by delivery to CAT of shares of unregistered Common Stock. THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31 1997. Total revenue for the three months ended March 31, 1998, increased approximately $655,500, or 49.3%, compared to the three months ended March 31, 1997. This growth was due in part to the Company increasing the average number of pay telephones in service from 2,650 during the 1997 period to 3,200 during the 1998 period. Coin revenue increased $298,500 or 27.9% and non coin revenues decreased $44,300 or 20.7% compared to the previous year period. Dial-around compensation increased $279,500 or 587.9%. The Company accrued dial-around compensation at approximately $30.00 per phone per month during the 1998 period compared to $6.00 per phone per month during the 1997 period. The Company earned $47,500 in CLEC margin from internally reselling local telephone service in the 1998 period, there was no CLEC margin earned in the 1997 period. Telephone and long-distance charges increased $105,500 or 26.7% as compared to the previous year period. Site Provider commissions increased $53,500 or 19.6% over the previous year period. Selling, general and administrative ("SG&A") expenses increased by $212,000 or 60.3%, due to the Company's increased spending in Marketing and Acquisition activities and also due to increased costs associated with being a publicly reporting company. The Company used the proceeds of the November IPO to reduce long-term debt thereby decreasing interest expense for the period by $102,500 or 71.7% compared to the prior year. Depreciation and amortization for the 1997 period increased $83,000 or 39.8% as a result of the higher depreciation and amortization associated with the acquired routes. 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, the Company has established a reserve to cover the potential of an unsuccessful resolution of this matter. During the three months ended March 31, 1997 the Company increased the reserve by $69,700. LIQUIDITY AND CAPITAL RESOURCES For the three months ended March 31, 1998, the Company's operating activities used $24,000, principal payments on long-term debt used $477,500 and investments in new installations used $71,000. Sales of short-term securities provided $514,000, resulting in a $58,500 decrease in cash balances. Part II - Other Information Item 1. Legal Proceedings - None Item 2. Changes in securities and use of proceeds In November 1997, the Company completed an initial public offering of 800,000 Units at an offering price of $7.00 per Unit. Each Unit consists of one share of Common Stock and one Redeemable Warrant. The Company received net proceeds of approximately $4.5 million net of underwriting fees and offering expenses. Through March 31, 1998 the Company used approximately $3.7 million to pay down short-term and acquisition-related debt and approximately $165,000 for the purchase of equipment. Item 6. Exhibits and Reports on Form 8-k (a) 27 - Financial Data Schedule (b) Reports on Form 8-k The company filed reports on Form 8-k on February 20, 1998 reporting the Company's financial results for the fourth quarter and year ended December 31, 1997 and on March 12, 1998 concerning a press release describing the impact of an FCC ruling and announcing the termination of a proposed acquisition. EX-27 2 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 285 637 838 0 0 2,743 6,105 (1,727) 10,375 2,236 0 0 0 29 5,867 10,375 1,984 1,984 932 932 965 0 40 87 35 52 0 0 0 52 .02 .02
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