<PAGE>
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
--- ---
<PAGE>
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
<PAGE>
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
<PAGE>
CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ -----------
1997 1998
------------ -----------
<S> <C> <C>
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
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1997 1998
------------ -----------
<S> <C> <C>
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
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
1997 1998
------------- ------------
<S> <C> <C>
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
------------ -----------
------------ -----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
5. NOTES PAYABLE:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
6. LONG-TERM DEBT:
<PAGE>
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Year ending December 31 Amount
----------------------- ------
<S> <C>
1998 $465,838
1999 559,112
2000 505,455
2001 91,828
2002 13,590
----------
$1,635,823
----------
</TABLE>
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:
<PAGE>
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ --------
<S> <C>
1998 $43,345
1999 45,388
2000 19,295
--------
$108,028
--------
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
Cost $934,856
Less accumulated depreciation 55,646
--------
$879,210
--------
</TABLE>
The future minimum lease payments under capital leases and their net present
value are as follows:
Total future minimum lease payments, payable in:
<TABLE>
<CAPTION>
<S> <C>
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
--------
</TABLE>
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:
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1998
---- ----
Shares Weighted avg Shares Weighted avg
exercise price exercise price
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
1997 Weighted average
---- exercise price
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Current, state $ 2000
Deferred:
Federal (90,000)
State (16,000)
Effect of change in tax status (46,000)
--------
$150,000
--------
--------
</TABLE>
A reconciliation between the statutory federal income tax rates to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Statutory federal tax rate 33.0%
State taxes (net of federal tax benefit) 3.6%
Effect of change in tax status 16.2%
----
<PAGE>
Effective tax rate 52.8%
----
----
</TABLE>
The deferred tax asset and deferred tax liability consists of the following at
December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
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
--------
--------
</TABLE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
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.
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