-----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, N2PenvFtoZFMGKbr8G6Qznpcfd+4irHOCM/AL2K4LukUsAjVKOSkCJ4kXeWvieZZ OGN1paSz9eJ5DQSy9Mbzag== 0001047469-99-031915.txt : 19990816 0001047469-99-031915.hdr.sgml : 19990816 ACCESSION NUMBER: 0001047469-99-031915 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-23017 FILM NUMBER: 99688781 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 10QSB 1 10QSB FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 ------------- COMMISSION FILE NUMBER 0-230 17 -------- CHOICETEL COMMUNICATIONS, INC. ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA 41-1649949 - ------------------------------ ------------------- (STATE OF JURISDICTION OR IRS EMPLOYER ID NO. INCORPORATION OF ORGANIZATION) 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 ---- ---- AS OF DATE OF FILING, THE COMPANY HAS 2,915,007 SHARES OUTSTANDING. CHOICETEL COMMUNICATIONS, INC. FORM 10-QSB INDEX AUGUST 13, 1999 Part I: Financial Information Item 1. Financial Statements Consolidated Balance Sheet -- December 31, 1998 and June 30, 1999 Consolidated Statements of Operations -- Three months ended June 30, 1998 and 1999 Six months ended June 30, 1998 and 1999 Consolidated Statements of Cash Flows -- Six months ended June 30, 1998 and 1999 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis Part II: Other Information Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K (a) 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: August 13, 1999 By: /S/ JACK S. KOHLER ------------------ Jack S. Kohler Vice President and Chief Financial Officer CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET DECEMBER 31, 1998 AND JUNE 30, 1999 (UNAUDITED)
JUNE 30, DECEMBER 31, ASSETS 1999 1998 - ------------------------------------------------------ ----------- ------------ Current assets: Cash ............................................... $ 602,028 $ 363,239 Accounts receivable ................................ 1,216,879 1,080,794 Prepaid: Rent ............................................. 103,437 176,411 Other ............................................ 210,661 487,149 Deferred taxes ..................................... 757,000 710,000 ----------- ----------- Total current assets ........................... 2,890,005 2,817,593 ----------- ----------- Property and equipment, net ........................ 6,728,494 6,336,401 ----------- ----------- Other assets: Prepaid rents ...................................... 56,055 73,998 Rental agreements, net of accumulated amortization of $776,333 at Dec. 1998, and $1,075,320 at June 1999 5,239,249 5,501,771 Deferred financing, net of accumulated amortization of $3,000 at Dec. 1998, and $8,000 at June 1999 ...... 35,065 27,000 ----------- ----------- 5,330,369 5,602,769 ----------- ----------- $14,948,868 $14,756,763 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Checks outstanding in excess of bank balance ....... $ 45,935 $ 74,604 Notes payable ...................................... 350,000 350,000 Current portion of long-term debt .................. 1,485,207 1,222,559 Accounts payable ................................... 343,217 238,944 Accrued expenses ................................... 2,316,511 2,339,805 Deposit on sale of assets .......................... 325,000 ----------- ----------- Total current liabilities ....................... 4,865,870 4,225,912 ----------- ----------- Long-term liabilities: Deferred taxes ..................................... 652,000 653,000 Long-term debt, net of current portion ............. 3,493,907 3,891,732 ----------- ----------- 4,145,907 4,544,732 ----------- ----------- Shareholders' equity ................................. 5,937,091 5,986,119 ----------- ----------- $14,948,868 $14,756,763 ----------- ----------- ----------- -----------
See notes to consolidated financial statements. CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30, JUNE 30, ------------------------------ ----------------------------- 1999 1998 1999 1998 ----------- ---------- ---------- ---------- Service revenue.............................. $ 5,153,902 $3,998,755 $2,718,888 $2,015,074 Cost of service.............................. 2,437,969 1,851,712 1,251,209 920,051 ----------- ---------- ---------- --------- Gross margin................................. 2,715,933 2,147,043 1,467,679 1,095,023 ----------- ---------- ---------- ---------- Selling, general and admin: Service and collection..................... 831,922 462,082 410,009 231,041 Marketing.................................. 246,156 231,332 96,214 115,666 Admin, office and overhead ................. 697,590 540,748 354,513 324,019 ----------- --------- ---------- ---------- 1,775,668 1,234,162 860,736 670,726 Depreciation and amortization................ 708,154 581,174 359,902 289,677 Interest..................................... 235,099 73,144 121,296 32,659 Sales tax contingency........................ 104,336 133,550 53,152 63,841 ----------- ---------- ---------- ---------- 2,823,257 2,022,029 1,395,086 1,056,903 ----------- ---------- ---------- ---------- Income (loss) before income taxes ........... (107,324) 125,014 72,593 38,120 Provision (credit) for income taxes.......... (48,296) 50,006 32,667 15,140 ----------- ---------- ---------- --------- Net income (loss)............................ $ (59,028) $ 75,008 $ 39,926 $ 22,980 ----------- ---------- ---------- --------- ----------- ---------- ---------- --------- Per share net income (loss).................. $ (0.02) $ 0.03 $ 0.01 $ 0.01 ----------- ---------- ---------- --------- ----------- ---------- ---------- --------- Shares outstanding-weighted average.......... 2,915,006 2,915,006 2,915,006 2,915,006 Per share diluted net income................. $ 0.03 $ 0.01 $ 0.01 ---------- ---------- --------- ---------- ---------- --------- Shares outstanding - diluted................. 2,915,006 2,915,006 2,915,006
See notes to consolidated financial statements. CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 1999 1998 --------- --------- Cash flows from operating activities: Net (loss)income ............................. $ (59,028) $ 75,008 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization .................. 708,154 581,174 Changes in operating assets and liabilities (Increase) decrease in: Accounts receivable ...................... (136,085) (293,961) Prepaid rent and other ................... 263,636 206,891 Deferred taxes ........................... (48,000) Increase (decrease) in: Accounts payable ......................... 75,604 (105,416) Accrued expenses ........................ (23,294) (64,794) --------- --------- Net cash provided by operating activities ...... 780,987 398,902 ---------- --------- Cash flows used in investing activities: Purchase of equipment and rental contracts ... (742,021) (4,988,568) Deposit received on sale of assets ........... 325,000 Sales of short-term investments .............. 1,151,215 ---------- Net cash (used in) investing activities ........ (417,021) (3,837,353) ---------- ---------- Cash flows from financing activities: Proceeds from Issuance of: Long-term debt ........................... 450,000 4,300,000 Collections of subscription receivable ..... 10,000 8,571 Principal payments on long-term debt ...... (585,177) (577,208) --------- --------- Net cash provided by (used in) financing activities ............................... (125,177) 3,731,363 --------- --------- Net increase in cash ........................... 238,789 292,912 Cash, beginning balance ........................ 363,239 343,705 --------- --------- Cash, ending balance ........................... $ 602,028 $ 636,617 ---------- --------- ---------- --------- Supplemental disclosure of cash flow information: Cash paid for interest ....................... $ 235,099 $ 73,144 ---------- --------- ---------- ---------
See notes to consolidated financial statements CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1998 AND SIX MONTH PERIOD ENDED JUNE 30 1999 (UNAUDITED) 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of ChoiceTel Communications, Inc (formerly Intelliphone, Inc.) and its wholly owned subsidiaries Choicetel, Inc., and Public Internet Access Holding Corp. All material intercompany balances have been eliminated. 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 fourteen states and Puerto Rico, however, revenue is generated predominately in Minnesota, Oregon, Pennsylvania and Puerto Rico. Choicetel, Inc. was incorporated in 1995 and was dormant until June 1996 when operations began. Choicetel is a Competitive local exchange carrier (CLEC) which resells local telephone service to pay telephone owners in Minnesota. Choicetel's largest customer is ChoiceTel Communications. Public Internet Access Holding Corp. was incorporated in 1998 and has not started operations. 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 ten years, of the related assets. In October 1998, the Company changed the estimated useful life of all phones from 7 years to 10 years, based upon its experience. The effect of this change resulted in $75,000 less depreciation expense in 1998 and $150,000 less depreciation expense in 1999. 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 economic life of the rental agreements, currently ranging from five to twelve years. DEFERRED FINANCING: Deferred financing costs are being amortized over the life of the related notes on a straight-line basis. 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. 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 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: In 1997, 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 are increased by shares issuable upon exercise of stock options and warrants for which market price exceeds exercise price, less shares which could have been purchased by the Company with the related proceeds. This calculation added 1,451 shares to the diluted weighted average shares outstanding for 1998. 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 are disclosed in note 7. 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 April 1997, the shareholders approved an increase in the number of authorized shares of common stock from 2,000,000 with no par value to 15,000,000 with $0.01 par value. The shareholders also approved the authorization of 5,000,000 shares of preferred stock with $0.01 par value. The change in par value did not affect any existing rights of shareholders and has been recorded as an adjustment to additional paid-in capital and common stock. 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. 3. ACQUISITIONS: Jay Telephone Vending: On June 30, 1998, the Company purchased a route of payphones in Philadelphia, Pennsylvania along with the trade name Jay Telephone Vending from Edward Steven Corporation and Drake Telephone Company. The purchase price for the acquired assets was $4,005,000, and was financed with the bank with a $3,800,000 note payable. The following summarized unaudited pro forma information assumes the acquisition had occurred on January 1, 1998. The pro forma statement is presented for illustration purposes only and is not indicative of what the Company's actual results would have been.
YEAR ENDED DECEMBER 31, 1998 (UNAUDITED) PRO FORMA COMPANY JAY TELEPHONE ADJUSTMENTS COMBINED ------- ------------- ----------- -------- GROSS MARGIN 5,112,906 878,434 5,991,340 --------- ------- --------- SELLING, GENERAL AND ADMINISTRATIVE 3,021,734 617,674 -223,173 3,416,235 INTEREST EXPENSE 310,081 13,413 176,587 500,081 DEPRECIATION AND AMORTIZATION 1,317,051 0 235,539 1,552,590 SALES TAX CONTINGENCY 253,972 0 0 253,972 --------- ------- -------- --------- INCOME BEFORE INCOME TAXES 210,068 247,347 -188,953 268,462 PROVISION FOR INCOME TAXES 95,000 98,939 -75,582 118,357 --------- ------- -------- --------- NET INCOME AFTER TAX 115,068 148,408 -113,471 150,105 --------- ------- -------- --------- --------- ------- -------- ---------
4. PROPERTY AND EQUIPMENT: 1999 1998 ---- ---- Phones and related equipment $ 8,994,024 $ 8,288,468 Accumulated depreciation (2,446,755) (2,163,041) ----------- ----------- 6,547,269 6,125,427 Office equipment and improvements 288,535 291,093 Accumulated depreciation (107,310) (80,119) ----------- ----------- 181,225 210,974 ----------- ----------- $ 6,728,494 $ 6,336,401 ----------- ----------- ----------- -----------
5. NOTES PAYABLE: 1999 1998 ---- ---- Note payable, shareholder, interest only at 8.5%. Convertible to shares of common stock at $5.10 per share $350,000 $350,000 -------- -------- $350,000 $350,000 -------- -------- -------- --------
6. LONG-TERM DEBT: 1999 1998 ---- ---- Note payable, Telco West, due in monthly installments of $ 564,874
$21,342 including interest at 10.25% through July 2001, secured $ 463,335 by equipment. Note payable, Telecapital, due in monthly installments of $4,452 including interest at 14.5% through April 2002, secured by equipment. 116,604 138,159 Note payable, bank, due in monthly installments plus interest at 2% above prime rate. 3,191,997 3,495,998 Note payable, bank, revolving credit facility up to $800,000, convertible to a term note in October 1999. 800,000 350,000 Capital leases at 9.5% 407,178 551,156 ---------- ---------- 4,979,114 5,114,291 Less current portion 1,485,207 1,222,559 ---------- ---------- $3,493,907 $3,891,732 ---------- ---------- ---------- ----------
Future maturities of long-term debt are as follows: At At YEAR ENDING DECEMBER 31, 6/30/99 12/31/98 ------- -------- 1999 $ 685,065 $1,222,559 2000 1,433,205 1,232,354 2001 1,178,277 983,837 2002 1,110,432 910,080 2003 572,135 765,461 ---------- ---------- $ 4,979,113 $5,114,291 ---------- ---------- ---------- ----------
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 $34,800 and $14,400 for certain consulting services in 1998 and 1999, respectively. Leases: Operating leases: The Company leases its offices in Minnesota, Oregon 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 $101,737 for the year ended December 31, 1998. Future minimum lease payments are as follows:
YEAR ENDING DECEMBER 31, AMOUNT ------------------------ ------ 1999 $ 83,788 2000 26,795 --------- $ 110,583
Capital leases: The cost of equipment, included in property and equipment, acquired under capital leases and the related accumulated depreciation at December 31, 1998, is as follows: Cost $ 934,856 Less accumulated depreciation 177,858 --------- $ 756,998 ---------
The future minimum lease payments under capital leases, at December 31, 1998, and their net present value are as follows: Total future minimum lease payments, payable in: 1999 $ 355,158 2000 241,970 ---------- 597,128 Less amounts representing interest 45,972 ---------- Present value of future minimum lease payments $ 551,156 ---------- ----------
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 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 recognized revenue at 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 and is included in accrued expenses. Effective October 7, 1997 the Company has recognized dial around revenue based upon estimated dial-around calls per phone. Estimates vary by time of year and geographic location of the phones. In 1998, The FCC adjusted the per call dial-around rate to $0.24 retroactive to October 7, 1997. The amount due from dial-around compensation included in accounts receivable is approximately $856,000 and $848,000 at December 31, 1998 and June 30, 1999, respectively. The ultimate resolution of matters related to dial-around compensation 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 which the department asserts are due on telephone receipts. While the Company does not believe its coin receipts are subject to Minnesota 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. Puerto Rico line charge contingency: In March of 1998, the Company received verbal assurances from the Puerto Rican Telephone Company (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 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 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. 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 had been granted under the plan. During 1998 the Company granted options to employees and non-employee directors to purchase 70,000 shares through the incentive plan. Information with respect to options outstanding as of December 31, 1998 and June 1999, is summarized as follows:
1998 1999 ------------- -------------- Weighted avg Weighted avg Shares Exercise Price Shares Exercise Price ------- -------------- ------- -------------- Outstanding at the beginning of the year 122,500 $3.37 130,000 $4.34 Granted 70,000 4.06 140,588 2.13 Exercised Forfeited 62,500 2.00 6,000 3.50 ------ ----- ------- ----- Outstanding at end of period 130,000 $4.34 264,588 $3.05 ------ ----- ------- ----- ------ ----- ------- ----- Options exercisable at period end 80,000 235,588
Weighted average remaining life 3.4 years 3.3 years
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, 50,000 of the warrants have an exercise price of $6.00 expiring in August 2001, and 50,000 have an exercise price of $7.00 expiring in August 2002. The Company has outstanding the following warrants:
Weighted average 12/31/98 6/30/99 Exercise price --------- --------- ---------------- Issued 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 period end 1,110,000 1,110,000 $9.40 Exercisable at period end 1,110,000 1,110,000 Weighted average remaining life 3.8 years 3.2 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:
1998 --------- Current, state $ 2,000 Deferred: Federal 80,000 State 13,000 --------- $ 95,000
A reconciliation between the statutory federal income tax rates to the Company's effective tax rate is as follows:
1998 -------- Statutory federal tax rate 34.0% State taxes (net of federal tax benefit) 6.0% Effect of nondeductible expenses 5.2% -------- Effective tax rate 45.2% -------- --------
The deferred tax asset and deferred tax liability consists of the following:
December 31, 1998 June 30, 1999 ----------------- ------------- Deferred tax asset: Sales tax contingency $ 545,000 $ 592,000 Accrued expenses 25,000 25,000 Accrued dial-around compensation 140,000 140,000 ------- ------- $ 710,000 $ 757,000
Deferred tax liability: Depreciation $ 839,000 $1,014,000 Amortization (31,000) (46,000) Net operating loss carry forward (155,000) (316,000) --------- --------- $ 653,000 $ 652,000 --------- --------- --------- ---------
Utilization of the deferred tax asset of $710,000 disclosed above is dependent on future taxable profits in excess of profits arising from existing taxable temporary differences. Although there was a reportable taxable loss for the year ended December 31, 1998 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. 11. SUBSEQUENT EVENTS: On July 9, 1999 the Company sold 243 phones located in Idaho and Wyoming to Alpha Telcom for $400,000, and agreed to sell an additional 820 phones located in Oregon, Washington, Nevada and Colorado by no later than November 30, 1999. The gain on the sale was not significant. 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 net of applicable sales taxes. 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, 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 and commission payments to site providers. RECENT ACQUISITIONS On June 30, 1998, the Company completed an acquisition from Edward Steven Corporation and Drake Telephone Company of site contracts for 965 payphones located principally in Philadelphia, Pennsylvania and all equipment located at the respective sites, as well as the trade name "Jay Telephone Vending". The purchase price for the acquired assets was $4,005,000, and was financed with a $3,800,000 note payable to the bank. During 1998, the Company began researching the Puerto Rican payphone market. It was determined that although the Puerto Rican Regulatory Board (PRRB) had not required the Puerto Rican 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 hired a Leasing Manager for Puerto Rico, and began contracting with local businesses to provide payphone service. In April 1998 the Company received its first payphone line from the PRTC and installed its first payphones. As of June 30, 1999 the Company had installed 825 payphones and had signed agreements to install an additional 1,200 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 appealed the ruling to the Puerto Rican 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 the second and third quarters of 1998 the Company accrued unpaid line charges at the rate of $0.15 per call. In the fourth quarter the Company reduced the accrued unpaid line charges to $0.06 per call. If the Puerto Rican 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 June 30, 1999 of $45,000 and $175,000 respectively. During 1998, the Company began test marketing public internet access terminals, which allow customers to access the internet while away from their home or office computer. The customers have the option of paying the charges, currently $1.00 for 5 minutes, using cash or a credit card. At June 30, 1999 the Company had contracted with site providers to install 10 terminals, of which 7 were installed. Under the terms of the contracts, the Company receives all revenues generated by the terminals in return for a commission payment based upon revenues generated. Based on results of testing to date, management has determined to continue public internet testing in order to determine whether consumer demand will be sufficient to generate a return on the investment, which investment currently is approximately $5,000 per terminal. Management is considering strategies to develop the internet access market, including bringing into the business joint venture partners that may benefit in owning part of a network of public internet terminals, with the goals of lowering the Company's investment per terminal and accelerating the growth of the network. During the first quarter of 1999, the Company announced it is assessing its long-term strategic plan, which may include the sale of its payphone assets and the refocusing of the Company in the public internet access market. THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30 1998. Total revenue for the three months ended June 30, 1999, increased approximately $703,000, or 34.9%, compared to the three months ended June 30, 1998. This growth was due primarily to the Company increasing the average number of pay telephones in service from 3,250 during the 1998 period to 4,800 during the 1999 period, an increase of 47.7%. Coin revenue increased $484,000 or 32.6% and non coin revenues increased $103,000 or 45.6% compared to the previous year period. Dial-around compensation increased $115,500 or 37.9%. The Company accrued dial-around compensation at approximately $27.00 per phone per month during the 1998 period compared to $30.00 per phone per month during the 1998 period. Commencing in the fourth quarter of 1998, the Company experienced a significant decrease in coin revenues in the Midwest region. The Midwest region includes Minnesota and Wisconsin and represents approximately 44% of the phones in service at June 30, 1999. During the fourth quarter of 1998, first quarter 1999, and second quarter 1999, total coin revenues in that region decreased $129,000 or 11.2%, $210,000 or 18.9%, and $209,000 or 18.7% respectively. Management attributes the reduction to increased competition from wireless communication devices. Telephone and long-distance charges increased $226,000 or 38.3% as compared to the previous year period. Site Provider commissions increased $105,000 or 31.7% over the previous year period. Selling, general and administrative ("SG&A") expenses increased by $190,000 or 28.3%, due to the increased spending to open an office in Puerto Rico and maintain the Jay Telephone Vending office. Interest expense increased $88,500 or 271.4% compared to the prior year due to the Jay Telephone acquisition and route expansion in Puerto Rico. Depreciation and amortization for the 1999 period increased $70,000 or 24.2% and was reduced by approximately $75,000 as a result of increasing the estimated useful life of payphones from 7 years to 10 years effective the fourth quarter of 1998. Management believes a 10 year useful life is a better estimate of payphone performance. Without this change, depreciation and amortization increased $145,000 or 45.2 % over the previous year as a result of the higher depreciation and amortization associated with the acquired route. Earnings before interest, tax, depreciation and amortization (EBITDA) increased $175,000 or 28.3%. Net income after tax increased $23,000 or 138.2%. SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30 1998. Total revenue for the six months ended June 30, 1999, increased approximately $1,155,000, or 28.9%, compared to the six months ended June 30, 1998. This growth was due primarily to the Company increasing the average number of pay telephones in service from 3,200 during the 1998 period to 4,700 during the 1999 period, an increase of 46.9%. Coin revenue increased $823,000 or 28.1% and non coin revenues increased $192,000 or 45.8% compared to the previous year period. Dial-around compensation increased $140,000 or 21.5%. The Company accrued dial-around compensation at approximately $27.00 per phone per month during the 1998 period compared to $30.00 per phone per month during the 1998 period. Commencing in the fourth quarter of 1998, the Company experienced a significant decrease in coin revenues in the Midwest region. The Midwest region includes Minnesota and Wisconsin and represents approximately 44% of the phones in service at June 30, 1999. During the fourth quarter of 1998, first quarter 1999, and second quarter 1999, total coin revenues in that region decreased $129,000 or 11.2%, $210,000 or 18.9%, and $209,000 or 18.7% respectively. Management attributes the reduction to increased competition from wireless communication devices. Telephone and long-distance charges increased $401,000 or 33.6% as compared to the previous year period. Site Provider commissions increased $185,500 or 28.2% over the previous year period. Selling, general and administrative ("SG&A") expenses increased by $541,500 or 43.9%, due to the Company's increased spending in Marketing and Acquisition activities, which includes $371,000 of SG&A in Puerto Rico and $241,000 of SG&A in Pennsylvania. Interest expense increased $162,000 or 221.4% compared to the prior year due to the Jay Telephone acquisition and route expansion in Puerto Rico. Depreciation and amortization for the 1999 period increased $127,000 or 21.8% and was reduced by approximately $150,000 as a result of increasing the estimated useful life of payphones from 7 years to 10 years effective the fourth quarter of 1998. Management believes a 10 year useful life is a better estimate of payphone performance. Without this change, depreciation and amortization increased $277,000 or 45.2 % over the previous year as a result of the higher depreciation and amortization associated with the acquired route. 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 position of the Department of Revenue 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 of $1.4 million to cover the potential of an unsuccessful resolution of this matter. LIQUIDITY AND CAPITAL RESOURCES For the six months ended June 30, 1999, the Company's operating activities provided $781,000. Investments in equipment and rental agreements used $742,000 and principal payments on long-term debt used $585,000. Activities were funded with $450,000 drawn from the credit facility with the bank, a $325,000 deposit received on a pending sale of payphones, and collection of $10,000 of subscription receivable, resulting in a $239,000 increase in cash balances. On June 30, 1998 the Company entered into a credit agreement with Norwest Bank Minnesota, pursuant to which the Company borrowed $3,800,000 to purchase a route of 965 payphones in Philadelphia, Pennsylvania. The Company has granted the Bank a first lien on all of its assets to secure its obligations to the Bank. The agreement provides for monthly payments of interest and principal. The initial interest rate is 1% over the banks reference rate and is adjusted annually based upon debt leverage. The principal balance is scheduled to be repaid 16% in the first year, 18% in the second year, 20% in the third year, 22% in the fourth year and 24% in the 5th year. On December 16, 1998 the agreement was amended to provide the Company a $1,000,000 line of credit to be used to accelerate the rate of installations in Puerto Rico. The line of credit converts into a fully amortizing term loan on September 30, 1999 to be amortized over the following 45 months. On June 30, 1999 and continuing as of the date of filing, the Company was not in compliance with several financial covenants under its Credit Agreement dated June 30, 1998 as amended, (the "Agreement") with Norwest Bank Minnesota, N.A. (the "Bank"). The Company has borrowed approximately $4 million under the Agreement and is current in all respects in its payments of principal and interest to the Bank. On July 29, 1999, the Bank notified the Company that it was in default for failure to meet the debt service coverage ratio, fixed charge coverage ratio and operating cash flow requirement. The Bank also indicated that it had no present intention to exercise its rights to accelerate the maturity of the indebtedness or to foreclose on its security interest. Certain officers and directors of the Company are guarantors of a portion of the Company's obligations under the Agreement. In addition, the Bank has advised the Company that the Bank believes the Company's undertaking to incorporate Public Internet Access Holdings Corporation ("PIAHC") as a vehicle to continue to test and develop a public Internet access business through the use of terminals in public facilities, violates a covenant in the Agreement which prohibits certain investments by the Company. The Company has initiated discussions with the Bank for the objective of modifying the Agreement, or obtaining a waiver if necessary, in order to permit the Company to pursue the Internet terminal business using the vehicle of PIAHC. During the first quarter of 1999, the Company agreed in principle to sell approximately 1,000 payphones in an all cash transaction. On July 9, 1999 the Company sold 243 phones located in Idaho and Wyoming for $400,000 and agreed to sell an additional 820 phones by no later than November 30, 1999. The Company anticipates that net proceeds will be applied to the reduction of debt and the installation of payphones in Puerto Rico. The Company expects to partially offset loss of revenues derived from the assets to be sold with revenues from the Puerto Rican phones and through reduced borrowing costs. Part II - Other Information Item 1. Legal Proceedings - None Item 6. Exhibits and Reports on Form 8-K (a) 27 - Financial Data Schedule (b) Reports on Form 8-K - None EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED FINANCIAL STATEMENTS FOR CHOICETEL COMMUNICATIONS, INC AND SUBSIDARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 602 0 1,217 0 0 2,890 9,283 2,554 14,949 4,866 0 0 0 29 5,301 14,949 0 5,154 0 2,438 2,823 0 235 (107) (48) (59) 0 0 0 (59) (0.02) (0.02)
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