<PAGE>
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
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COMMISSION FILE NUMBER 0-230 17
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CHOICETEL CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1649949
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(STATE OF JURISDICTION OR IRS EMPLOYER ID NO.
INCORPORATION OF ORGANIZATION)
9724 10TH AVE. NORTH, PLYMOUTH, MN 55441
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 612-544-1260
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<PAGE>
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
<PAGE>
COMBINED FINANCIAL STATEMENTS FOR:
EDWARD STEVEN CORPORATION
AND DRAKE TELEPHONE, INC.
Years ended
December 31, 1997 and 1996
<PAGE>
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
<PAGE>
EDWARD STEVEN CORPORATION AND DRAKE TELEPHONE, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
------------ -----------
<S> <C> <C>
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
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Total current assets 323,193 238,175
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Property and equipment, net 308,954 406,184
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Other assets 59,062 70,248
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$ 691,209 $ 714,607
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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
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Total current liabilities 464,612 372,663
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Long-term debt, net of current portion 101,588 167,127
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Shareholders' equity 125,009 174,817
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$ 691,209 $ 714,607
----------- ----------
----------- ----------
</TABLE>
See notes to combined financial statements.
2
<PAGE>
EDWARD STEVEN CORPORATION AND DRAKE TELEPHONE, INC.
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
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
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1,223,930 1,082,477
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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)
----------- ----------
----------- ----------
</TABLE>
See notes to combined financial statements.
3
<PAGE>
EDWARD STEVEN CORPORATION AND DRAKE TELEPHONE, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
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
--------------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
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
-------- --------- ---------- ----------
-------- --------- ---------- ----------
</TABLE>
See notes to combined financial statements.
4
<PAGE>
EDWARD STEVEN CORPORATION AND DRAKE TELEPHONE, INC.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
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
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Net cash provided by operating
activities 95,210 124,156
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Cash flows from investing activities:
Purchase of equipment (11,805) (47,124)
Investment in note receivable (18,890)
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Net cash used in investing activities (30,695) (47,124)
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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
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Net cash used in financing activities (71,943) (67,539)
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Net (decrease) increase in cash (7,428) 9,493
Cash, beginning 48,355 38,862
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Cash, ending $ 40,927 $ 48,355
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Supplemental disclosure of cash flow
information:
Cash paid for interest $ 25,213 $ 16,665
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----------- ----------
</TABLE>
See notes to combined financial statements.
5
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
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
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$ 308,954 $ 406,184
--------------- ---------------
--------------- ---------------
</TABLE>
4. Other assets:
Other assets consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
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
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$ 59,062 $ 70,248
--------------- ---------------
--------------- ---------------
</TABLE>
5. Long-term debt:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
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
</TABLE>
8
<PAGE>
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):
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
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 $1,219 plus interest
at 8.0% through December 1997, note
is unsecured. 14,013
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$ 144,137 224,562
Less current portion 42,549 57,435
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$ 101,588 $ 167,127
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-------------- ---------------
</TABLE>
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
------------------------ ---------------
<S> <C>
1998 $ 42,549
1999 42,144
2000 42,595
2001 16,849
---------------
$ 144,137
---------------
---------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
------------------------ -----------
<S> <C>
1998 $ 13,340
1999 10,665
2000 1,560
-----------
$ 25,565
-----------
-----------
</TABLE>
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
<PAGE>
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
