-----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, JSB1SZ5J6PN6Twba2YJBhLtLhJP59ftnu7zfImmf5KWukatFfB1l8vasR1wWe5qq SD7dYevvr/mSQMzab1QDTQ== 0001047469-98-034500.txt : 19980915 0001047469-98-034500.hdr.sgml : 19980915 ACCESSION NUMBER: 0001047469-98-034500 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980914 ITEM INFORMATION: FILED AS OF DATE: 19980914 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: 8-K SEC ACT: SEC FILE NUMBER: 000-23017 FILM NUMBER: 98709135 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 8-K 1 FORM 8-K FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) SEPTEMBER 14, 1998 ------------------ COMMISSION FILE NUMBER 0-230 17 -------- CHOICETEL CORPORATION --------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA 41-1649949 --------- ---------- (STATE OF JURISDICTION OR IRS EMPLOYER ID NO. INCORPORATION OF ORGANIZATION) 9724 10TH AVE. NORTH, PLYMOUTH, MN 55441 ---------------------------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 612-544-1260 ------------ ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS Filed herewith is the following exhibit: 99 Audited Financial Statements of Edward Stevens Corporation and Drake Telephone, Inc. acquired by ChoiceTel Communications on June 30, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused to be signed on its behalf by the undersigned thereunto duly authorized. CHOICETEL COMMUNICATIONS, INC. (Registrant) Dated: September 14, 1998 By \s\ Jack S. Kohler -------------- Jack S. Kohler Vice President and Chief Financial Officer EX-99 2 EXHIBIT 99 COMBINED FINANCIAL STATEMENTS FOR: EDWARD STEVEN CORPORATION AND DRAKE TELEPHONE, INC. Years ended December 31, 1997 and 1996 INDEPENDENT AUDITORS' REPORT Board of Directors Edward Steven Corporation and Drake Telephone, Inc. Philadelphia, Pennsylvania We have audited the accompanying combined balance sheets of Edward Steven Corporation and Drake Telephone, Inc. as of December 31, 1997 and 1996, and the related combined 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 combined financial position of Edward Steven Corporation and Drake Telephone, Inc. as of December 31, 1997 and 1996, and the combined 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 June 19, 1998 EDWARD STEVEN CORPORATION AND DRAKE TELEPHONE, INC. COMBINED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996 ------------ ----------- Current assets: Cash $ 40,927 $ 48,355 Accounts receivable, considered collectible 130,557 74,143 Due from: Employee 1,004 5,030 Related parties 102,450 92,032 Note receivable 18,890 Prepaid expenses 29,365 18,615 ----------- ---------- Total current assets 323,193 238,175 ----------- ---------- Property and equipment, net 308,954 406,184 ----------- ---------- Other assets 59,062 70,248 ----------- ---------- $ 691,209 $ 714,607 ----------- ---------- ----------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Checks issued in excess of bank balance $ 14,356 $ 75,969 Current portion of long-term debt 42,549 57,435 Accounts payable 99,525 83,130 Accrued expenses 203,682 70,529 Due to related parties 104,500 85,600 ----------- ---------- Total current liabilities 464,612 372,663 ----------- ---------- Long-term debt, net of current portion 101,588 167,127 ----------- ---------- Shareholders' equity 125,009 174,817 ----------- ---------- $ 691,209 $ 714,607 ----------- ---------- ----------- ----------
See notes to combined financial statements. 2 EDWARD STEVEN CORPORATION AND DRAKE TELEPHONE, INC. COMBINED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ----------- ---------- Service revenue $ 2,306,560 $2,081,395 Cost of service 1,132,438 1,001,729 ----------- ---------- Gross margin 1,174,122 1,079,666 Selling, general and administrative expenses: Officer salaries 616,811 473,599 Other salary and benefits 325,427 239,446 Travel and related 38,044 38,206 Office and overhead 118,714 185,595 ----------- ---------- 1,098,996 936,846 Depreciation and amortization 120,221 122,856 Interest 25,213 16,664 Other (income) expense (20,500) 6,111 ----------- ---------- 1,223,930 1,082,477 ----------- ---------- Loss before proforma income taxes (49,808) (2,811) Proforma income tax benefit (unaudited) 17,400 1,000 ----------- ---------- Net loss (unaudited) $ (32,408) $ (1,811) ----------- ---------- ----------- ----------
See notes to combined financial statements. 3 EDWARD STEVEN CORPORATION AND DRAKE TELEPHONE, INC. COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997 AND 1996
Edward Steven Drake Telephone, Corporation Inc., common common stock, stock, 100 100 shares shares authorized authorized and outstanding and outstanding Retained no par value no par value earnings Total --------------- --------------- ----------- ---------- Balance, January 1, 1996 $ 7,500 $ 262,477 $ 269,977 Issuance of common stock $ 100 100 Shareholder distributions (92,449) (92,449) Net loss (2,811) (2,811) -------- --------- ---------- ---------- Balance, December 31, 1996 7,500 100 167,217 174,817 Net loss (49,808) (49,808) -------- --------- ---------- ---------- Balance, December 31, 1997 $ 7,500 $ 100 $ 117,409 $ 125,009 -------- --------- ---------- ---------- -------- --------- ---------- ----------
See notes to combined financial statements. 4 EDWARD STEVEN CORPORATION AND DRAKE TELEPHONE, INC. COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ------------- ------------ Cash flows from operating activities: Net loss $ (49,808) $ (2,811) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 109,035 110,852 Amortization 11,186 12,004 Loss on abandonment 6,111 Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable (56,414) (49,016) Employee receivables 4,026 (4,919) Prepaid expenses (10,750) 6,881 Increase (decrease) in: Checks outstanding in excess of bank balance (61,613) 14,865 Accounts payable 16,395 (13,555) Accrued expenses 133,153 43,744 ----------- ---------- Net cash provided by operating activities 95,210 124,156 ----------- ---------- Cash flows from investing activities: Purchase of equipment (11,805) (47,124) Investment in note receivable (18,890) ----------- ---------- Net cash used in investing activities (30,695) (47,124) ----------- ---------- Cash flows from financing activities: Advances to related parties (10,418) (11,330) Proceeds from related parties 18,900 75,600 Payments on long term debt (230,425) (62,384) Proceeds from long term debt 150,000 22,924 Distributions to shareholders (92,449) Sale of common stock 100 ----------- ---------- Net cash used in financing activities (71,943) (67,539) ----------- ---------- Net (decrease) increase in cash (7,428) 9,493 Cash, beginning 48,355 38,862 ----------- ---------- Cash, ending $ 40,927 $ 48,355 ----------- ---------- ----------- ---------- Supplemental disclosure of cash flow information: Cash paid for interest $ 25,213 $ 16,665 ----------- ---------- ----------- ----------
See notes to combined financial statements. 5 EDWARD STEVEN CORPORATION AND DRAKE TELEPHONE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997 AND 1996 1. Nature of business and summary of significant accounting principles: Principles of combination: The combined financial statements for 1997 and 1996 include the accounts of Edward Steven Corporation and Drake Telephone, Inc. which share common ownership. They are collectively referred to as "The Company." Nature of business: Edward Steven Corporation was incorporated in 1985 and changed its name from Jay Telephone Vending Corporation in February 1997. Drake Telephone, Inc. was incorporated in 1996. The Companies provide coin operated pay telephone service in the Philadelphia, Pennsylvania metropolitan area. 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 including rental contracts are evaluated by management to determine if their carrying amounts have been impaired. No reduction for impaired assets has occurred. Rental contracts: Rental contracts 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. Goodwill: Goodwill consists of the excess of purchase price over the fair market value of assets acquired and is amortized on a straight-line basis over 20 years. Restrictive covenants: Restrictive covenants represent covenants not to compete incurred as part of prior acquisitions and are amortized on a straight line basis over the related non-compete term. 6 EDWARD STEVEN CORPORATION AND DRAKE TELEPHONE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997 AND 1996 1. Nature of business and summary of significant accounting principles (continued): Income taxes: The shareholders of Edward Steven Corporation have elected to be taxed under subchapter "S" of the Internal Revenue Code. Therefore, no provision for income taxes has been made on its earnings. The taxes, if any, are the liability of the Company's shareholders. The earnings of Drake Telephone, Inc. are subject to corporate income taxes. For financial reporting purposes, the accompanying statements of operations include an unaudited proforma provision for income taxes, using a rate of 35%, to reflect estimated income tax of the Companies as if they had both been subject to corporate income taxes in 1997 and 1996. Concentration of risk: The Company maintains its cash in one financial institution located in Philadelphia, PA. At times deposits exceed the federally insured levels. 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. Estimates that are susceptible to significant change relate to dial-around compensation as disclosed in Note 6. 2. Due to/from related parties: Advances to and from related parties, consisting primarily of shareholders, are due on demand and bear no interest, except for a $10,000 advance from a shareholder family member that bears interest at 10%. Total interest paid to related parties was $1,000 for both the years ended December 31, 1997 and 1996. 7 EDWARD STEVEN CORPORATION AND DRAKE TELEPHONE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997 AND 1996 3. Property and equipment: Property and equipment consist of the following:
1997 1996 ---------------- --------------- Phones and related equipment $ 1,144,154 $ 1,134,246 Vehicles 82,247 80,350 Office equipment 11,188 11,188 --------------- --------------- 1,237,589 1,225,784 Accumulated depreciation 928,635 819,600 --------------- --------------- $ 308,954 $ 406,184 --------------- --------------- --------------- ---------------
4. Other assets: Other assets consist of the following:
1997 1996 --------------- --------------- Rental contracts $ 57,510 $ 57,510 Goodwill 12,684 12,684 Restrictive covenants 48,370 48,370 ---------------- --------------- 118,564 118,564 Accumulated amortization 59,502 48,316 --------------- --------------- $ 59,062 $ 70,248 --------------- --------------- --------------- ---------------
5. Long-term debt:
1997 1996 --------------- --------------- Note payable, bank, due in monthly installments of $3,125 plus interest in 1997 (interest only in 1996) at 1.0% over bank's rate (9.5% and $9.25% at December 31, 1997 and 1996, respectively) through April 2001, secured by all assets of the Company and guaranteed by its shareholders. $ 125,000 $ 145,127 Notes payable, due in monthly installments of $480 (1997) and $1,140 (1996) including interest at rates ranging from 8.0% to 9.9%, through December 2001, secured by vehicles. 19,137 31,822
8 EDWARD STEVEN CORPORATION AND DRAKE TELEPHONE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997 AND 1996 5. Long-term debt (continued):
1997 1996 --------------- --------------- Note payable, interest at 5.97%, principal and interest due February 1997, guaranteed by shareholders. $ 33,600 Note payable, vendor, due in monthly installments of $1,219 plus interest at 8.0% through December 1997, note is unsecured. 14,013 -------------- --------------- $ 144,137 224,562 Less current portion 42,549 57,435 -------------- --------------- $ 101,588 $ 167,127 -------------- --------------- -------------- ---------------
Future maturities of long-term debt are as follows:
Year Ending December 31, Amount ------------------------ --------------- 1998 $ 42,549 1999 42,144 2000 42,595 2001 16,849 --------------- $ 144,137 --------------- ---------------
6. 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. Leases: The Company leases an office facility from a shareholder of the Company under a month to month lease. Total lease payments to the shareholder were $4,800 and $7,905 for the years ended December 31, 1997 and 1996, respectively. The Company leases a warehouse facility under a month to month lease. Total lease payments under the lease were $4,724 and $4,543 for the years ended December 31, 1997 and 1996, respectively. 9 EDWARD STEVEN CORPORATION AND DRAKE TELEPHONE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997 AND 1996 6. Commitments and contingency (continued): Leases (continued): The Company leases vehicles under noncancelable operating leases with monthly lease payments of $1,120 through August 2000. Total rent expense under all noncancelable operating leases was approximately $13,000 and $16,000 for the years ended December 31, 1997 and 1996, respectively. Future minimum lease payments are as follows:
Year Ending December 31, Amount ------------------------ ----------- 1998 $ 13,340 1999 10,665 2000 1,560 ----------- $ 25,565 ----------- -----------
Dial-around compensation: The Company has recognized revenue for dial-around compensation based upon rates for such compensation set by the Federal Communication 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 on August 5, 1997 and on October 9, 1997 issued an order establishing 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 and tentatively concluded that the $0.284 per call rate adopted on a going forward basis should also govern compensation during the period from November 6, 1996 through October 6, 1997. This would be approximately $37 per phone per month. 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 Companies have reduced their rate for recognizing revenue to the previous rate of $6.00 per phone per month effective January 1, 1997 through October 6, 1997. The change in estimate resulted in an accrual of a $160,000 and $38,000 liability at December 31, 1997 and 1996, respectively, 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 approximately $37 per phone per month. The setting of lower dial-around rates could have a material effect on the Company's results of operations. 10 EDWARD STEVEN CORPORATION AND DRAKE TELEPHONE, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997 AND 1996 7. Retirement plan: The Company has a 401(k) and profit sharing plan that covers substantially all of its employees. Contributions to the plan are discretionary and were $43,238 and $42,129 for the years ended December 31, 1997 and 1996. 8. Subsequent event: In January 1998, the Company purchased a route of pay telephones in the Philadelphia, PA area. The route consists of approximately 55 pay phones. The purchase price was $77,500, financed primarily with bank financing, and will be accounted for under the purchase method. 11 -----END PRIVACY-ENHANCED MESSAGE-----