<PAGE>
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, 1998
-------------
COMMISSION FILE NUMBER 0-230 17
--------
CHOICETEL CORPORATION
---------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1649949
- --------- ----------
(STATE OF JURISDICTION OR IRS EMPLOYER ID NO.
INCORPORATION OF ORGANIZATION)
9724 10TH AVE. NORTH, PLYMOUTH, MN 55441
- ---------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 612-544-1260
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-QSB INDEX
AUGUST 10, 1998
Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
December 31, 1997 and June 30, 1998
Consolidated Statements of Operations -
Three months ended June 30, 1997 and 1998
Six months ended June 30, 1997 and 1998
Consolidated Statements of Cash Flows -
Six months ended June 30, 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: August 10, 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 JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash ........................................................ $ 343,705 $ 636,617
Short-term investments ...................................... 1,151,215
Accounts receivable ......................................... 575,313 869,274
Prepaid:
Rent ...................................................... 93,357 106,941
Other ..................................................... 458,509 258,562
Deferred taxes 601,000 601,000
----------- -----------
Total current assets .................................... 3,223,099 2,472,394
----------- -----------
Property and equipment, net ................................. 4,521,017 6,018,809
Other assets:
Prepaid rents ............................................... 92,179 71,651
Rental agreements, net of accumulated amortization of
$355,412 at Dec. 1997, and $511,370 at June 1998............. 3,212,450 6,113,052
----------- -----------
3,304,629 6,184,703
----------- -----------
$11,048,745 $14,675,906
----------- -----------
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 1,127,574
Accounts payable ............................................ 48,000 81,823
Accrued expenses ............................................ 2,116,142 2,051,348
----------- -----------
Total current liabilities ................................. 3,496,682 3,610,745
Long-term liabilities:
Deferred taxes 449,000 449,000
Long-term debt, net of current portion ...................... 1,269,985 4,688,723
----------- -----------
1,718,985 5,137,723
Shareholders' equity .......................................... 5,833,078 5,927,439
----------- -----------
$11,048,745 $14,675,907
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Service revenue ............................ $1,791,638 $2,015,074 $3,120,000 $3,998,755
Cost of service ............................ 917,193 920,051 1,719,284 1,851,712
---------- ---------- ---------- ----------
Gross margin ............................... 874,445 1,095,023 1,400,716 2,147,043
---------- ---------- ---------- ----------
Selling, general and admin:
Salary and benefits ...................... 338,097 435,962 586,585 804,196
Travel and related ....................... 35,869 47,983 61,992 90,025
Office and overhead ...................... 88,337 186,781 165,205 339,941
---------- ---------- ---------- ----------
462,303 670,726 813,782 1,234,162
Depreciation and amortization .............. 193,702 289,677 402,147 581,174
Interest ................................... 181,886 32,659 324,920 73,144
Sales tax contingency ...................... 59,065 63,841 110,140 133,550
---------- ---------- ---------- ----------
896,956 1,056,903 1,650,989 2,022,029
---------- ---------- ---------- ----------
Income (loss) before income taxes .......... (22,511) 38,120 (250,273) 125,014
Provision for income taxes (7,879) 15,140 (87,595) 50,006
---------- ---------- ---------- ----------
Net income (loss)........................... $ (14,632) $ 22,980 $ (162,678) $ 75,008
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Per share net income (loss)................. $ (0.01) $ 0.01 $ (0.08) $ 0.03
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares outstanding-weighted average 1,948,489 2,915,006 1,951,516 2,915,006
Per share diluted net income $ 0.01 $ 0.03
---------- ----------
---------- ----------
Shares outstanding - diluted 2,943,577 2,943,577
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 1997 1998
------------------------ ------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ............................................ $ (162,678) $ 75,008
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization ................................ 402,147 581,174
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable ...................................... (7,534) (293,961)
Prepaid rent and other. .................................. (250,896) 206,891
Increase (decrease) in:
Accounts payable ......................................... 80,496 (105,416)
Accrued expenses ......................................... 82,755 (64,794)
Unearned line charge received ............................ (12,663)
------------ -----------
Net cash provided by (used in) operating activities............. 131,627 398,902
------------ -----------
Cash flows used in investing activities:
Purchase of equipment and rental contracts ................... (4,136,331) (4,988,568)
Sales of short-term investments............................... 1,151,215
------------ -----------
Net cash (used in) provided from investing activities (4,136,331) (3,837,353)
Cash flows from financing activities:
Proceeds from
Issuance of:
Long-term debt ........................................... 630,942 4,300,000
Common stock ............................................. 38,000
Collections of subscription receivable ..................... 25,990 8,571
Principal payments on long-term debt ....................... (625,319) (577,208)
Net change in notes payable ................................ 3,115,864
------------ -----------
Net cash provided by financing activities .................. 3,185,477 3,731,363
------------ -----------
Net increase (decrease) in cash ................................ (819,227) 292,912
Cash, beginning balance ........................................ 875,150 343,705
------------ -----------
Cash, ending balance ........................................... $ 55,923 $ 636,617
------------ -----------
------------ -----------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 324,920 $ 73,144
------------ -----------
------------ -----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 AND
SIX MONTH PERIOD ENDED MARCH 31 1998 (UNAUDITED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF COMBINATION:
The consolidated financial statements include the accounts of ChoiceTel
Communications, Inc (formerly Intelliphone, Inc.) and its wholly owned
subsidiary Choicetel, Inc., after elimination of all material intercompany
transactions.
NATURE OF BUSINESS:
Intelliphone, Inc. was incorporated in October 1989 and changed its name to
ChoiceTel Communications, Inc. in April 1997. The Company provides coin
operated telephone service in ten states, however, revenue is generated
predominately in Minnesota and Oregon.
Choicetel, Inc. was incorporated in 1995 and was dormant until June 1996
when operations began. Choicetel is a CLEC and resells local telephone service
to pay telephone owners in Minnesota. Choicetel's largest customer is ChoiceTel
Communications.
SHORT-TERM INVESTMENTS
The Company classifies all of its marketable securities, consisting of U.S.
Treasury Bills, as available-for-sale. Available-for-sale securities are
carried at fair value, with the unrealized gains and losses, net of income
taxes, reported as a component of shareholders' equity.
PROPERTY AND EQUIPMENT AND DEPRECIATION METHODS:
Property and equipment, consisting principally of coin operated telephones,
are stated at cost. Depreciation is being provided by the straight-line method
over the estimated useful lives, principally seven years, of the related assets.
Phone locations are evaluated by management to determine if their carrying
amounts have been impaired. No reductions for impaired assets have occurred.
PREPAID RENTS:
Prepaid rents represent incentives paid to property owners to secure long
term phone location agreements at such sites and are being amortized as consumed
per the phone location agreement.
RENTAL AGREEMENTS:
Rental agreements consist of the purchase price paid for phone location
agreements in excess of the purchase price of the related equipment on site and
are amortized on a straight line basis over the estimated remaining life of the
rental agreements, currently ranging from five to twelve years.
INCOME TAXES:
Prior to 1997 ChoiceTel Communications, Inc. and Choicetel, Inc., were "S"
corporations under the Internal Revenue Code. Instead of paying corporate
income taxes, the shareholders of an "S" corporation are taxed individually on
their proportionate share of the Company's taxable income or loss.
<PAGE>
Effective January 1997, ChoiceTel Communication's "S" corporation status
terminated and it became subject to federal and state income taxes.
STOCK-BASED COMPENSATION:
Prior to January 1, 1996, the Company accounted for its stock options in
accordance with the provisions of Accounting Principles Board Opinion No. 25
(APB No. 25), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. As such, compensation
expense was recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS No.
123), which permits entities to recognize as expense over the vesting period the
fair value of all stock-based award on the date of grant. Alternatively, SFAS
No. 123 allows entities to continue to apply the provisions of APB No. 25 and
provide pro forma net income disclosures for employee stock option grants as if
the fair-value based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per share is computed on the basis of the number of
shares of common stock outstanding during the period. Diluted net income per
share includes the effect of options, warrants, and a convertible note. Diluted
net loss per share is not included as it is antidilutive.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of certain assets and
liabilities and disclosures. Accordingly, the actual amounts could differ from
those estimates. Any adjustments applied to estimated amounts are recognized in
the year in which such adjustments are determined.
2. SHAREHOLDERS' EQUITY:
In February, 1997 the shareholders of Choicetel, Inc. contributed all
outstanding shares of Choicetel, Inc. to the Company. The contribution was
recorded as an adjustment to additional paid-in capital.
In November 1997, the Company completed an initial public offering of 800,000
Units at an offering price of $7.00 per Unit. Each Unit consisted of one share
of Common Stock and one Redeemable Warrant. The Company received net proceeds
of approximately $4,499,000 after the payment of approximately $1,101,000 in
related underwriting fees and offering costs. A portion of the proceeds were
used to retire existing debt and debt acquired in the acquisition of Telco
Northwest.
3. ACQUISITIONS:
Telco West, Inc.:
On January 2, 1997 the Company purchased a route of pay telephones in the
Northwestern United States from Telco West, Inc. (Telco). The purchase price
was approximately $3,400,000 and was financed primarily with bank and seller
financing. The Company accounted for the acquisition using the purchase method
and accordingly the results of operations of the Telco route are included in the
consolidated financial statements since the date of acquisition.
<PAGE>
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.
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 $4,300,000, financed with bank financing of $3,800,000, and the
balance by delivery of a note in the principal amount of $500,000. The note is
subject to potential reductions based upon the performance of the acquired
phones during the first 12 months following the acquisition.
The unaudited pro forma statement of operations below reflects the acquisition
as if it had been completed as of the beginning of the current year. The pro
forma statement is presented for illustration purposes only and is not
indicative of what the Company's actual results would have been.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
-------------------------------
PRO FORMA
COMPANY JAY TELEPHONE ADJUSTMENTS COMBINED
--------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
GROSS MARGIN 2,147,043 793,678 84,756 3,025,477
--------- ------- -------- ---------
SELLING, GENERAL AND
ADMINISTRATIVE 1,234,162 617,674 (223,173) 1,628,663
INTEREST EXPENSE 73,144 13,413 176,587 263,144
DEPRECIATION AND AMORTIZATION 581,174 0 235,539 816,713
SALES TAX CONTINGENCY 133,550 0 0 133,550
--------- ------- -------- ---------
INCOME BEFORE INCOME TAXES 125,013 162,591 (104,197) 183,407
PROVISION FOR INCOME TAXES 50,005 65,036 (41,679) 73,362
--------- ------- -------- ---------
NET INCOME AFTER TAX 75,008 97,555 (62,518) 110,045
--------- ------- -------- ---------
--------- ------- -------- ---------
</TABLE>
<PAGE>
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Phones and related equipment $5,937,547 $7,816,676
Accumulated depreciation (1,469,906) (1,882,232)
---------- ----------
4,467,641 5,934,444
Office equipment and improvements 96,860 140,738
Accumulated depreciation (43,484) (56,373)
---------- ----------
53,376 84,365
---------- ----------
$4,521,017 $6,018,809
---------- ----------
---------- ----------
</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:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Note payable, Telco, due in monthly installments
of $21,342 including interest at 10.25% through
July 2001, secured by equipment. $753,452 $661,165
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. 169,069 154,170
Note payable, Jay Telephone, due October 1999
subject to adjustments for phone performance 500,000
Note payable, bank due in monthly installments
plus interest at 1% above prime rate 3,800,000
Capital leases, interest at 9.5% 825,881 700,962
---------- ----------
2,113,286 5,816,297
Less current portion 843,301 1,127,574
---------- ----------
$1,269,985 $4,688,723
---------- ----------
---------- ----------
</TABLE>
<PAGE>
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending December 31 Amount
----------------------- ------
<S> <C>
1998 $650,314
1999 1,700,368
2000 1,217,961
2001 885,082
2002 897,096
2003 465,476
----------
$5,816,297
----------
----------
</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 $14,000 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:
<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:
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Total future minimum lease payments, payable in:
1998 $341,426
1999 355,158
2000 241,970
--------
938,554
Less amounts representing interest 112,673
--------
Present value of future minimum lease payments $825,881
--------
--------
</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 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 to reflect an estimated liability for payments
received in excess of the amount accrued for the period from November 6, 1996
to October 6, 1997. Effective October 7, 1997, January 1, 1998 and April 1,
1998 the Company recognizing dial around revenue at $37.20, $29.82, and
$32.66 per phone per month respectively. The setting of lower dial-around
rates by the FCC could have a material effect on the Company's results of
operations.
Sales tax contingency:
After an original contact by ChoiceTel Communications, Inc., the
Minnesota Department of Revenue conducted and audit of the Company's revenues
for calculation of sales taxes the department asserts are due on telephone
receipts. While the Company does not believe its coin receipts are subject
to sales tax and has Notified the Minnesota Department of Revenue of its
position, it may have to assert its position in the Minnesota courts in order
to prevail. The financial statements include an accrual management believes
is sufficient to cover this contingency.
8. STOCK OPTIONS AND WARRANTS:
On April 11, 1997, the Company's Board of Directors adopted the
1997 Long-term Incentive and Stock Option Plan (the "Plan"). The Plan
provides for the issuance of incentive stock options and non-qualified stock
options to key employees and directors of the Company. The total number of
shares of common stock authorized and reserved for issuance under the Plan is
100,000 shares. The exercise price for each incentive stock option granted
under the Plan may not be less than the fair market value of the common stock
on the date of the grant, unless, in the case of incentive stock options, the
optionee owns greater than 10% of the total combined voting power of all
classes of capital stock of the Company, in which case the exercise price may
not be less than 110% of the fair market value of the common stock on the
date of the grant. The exercise price for each non-qualified option may not
be less the 85% of the fair market value of
<PAGE>
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 55,000 3.75
Exercised
Forfeited (12,500) 4.00
------- -------
Outstanding at end of year 122,500 $4.10 165,000 $4.00
------- ----- ------- -----
------- ----- ------- -----
Options exercisable at year end 92,500 130,000
Weighted average remaining
life 2 years 2.1 years
</TABLE>
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 are not exercisable until November 11, 1998.
Each unit contains a warrant that entitles the
<PAGE>
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%
------
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.
<PAGE>
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.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED IN THIS REPORT, INFORMATION
CONTAINED IN THIS FORM 10QSB CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH CAN BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY", "WILL",
"EXPECT", "PLAN", "ANTICIPATE", "ESTIMATE", OR "CONTINUE" OR THE NEGATIVE
THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THERE ARE
CERTAIN IMPORTANT FACTORS THAT COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM
THOSE ANTICIPATED BY SOME OF THESE FORWARD-LOOKING STATEMENTS, INCLUDING WITHOUT
LIMITATION THE EFFECTS OF CHANGES IN ECONOMIC CONDITIONS AND THE "RISK FACTORS"
ENTITLED "RISKS ASSOCIATED WITH EXPANSION STRATEGY," "COMPETITION," "PENDING
DETERMINATION OF DIAL-AROUND COMPENSATION RATE," "OTHER REGULATORY FACTORS,"
"TECHNOLOGICAL CHANGE AND NEW SERVICES," "DEPENDENCE UPON THIRD-PARTY
PROVIDERS," "SERVICE INTERRUPTIONS; EQUIPMENT FAILURES," "RELIANCE ON SINGLE
BRAND OF PAYPHONES," "SEASONALITY" AND "RELIANCE ON KEY PERSONNEL" CONTAINED IN
THE COMPANY'S PROSPECTUS DATED NOVEMBER 10, 1997 INCLUDED IN THE REGISTRATION
STATEMENT ON FORM SB-2 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
(REGISTRATION NO. 333-29969). SUCH "RISK FACTORS" ARE INCORPORATED HEREIN BY
REFERENCE. INVESTORS ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTY.
GENERAL
The Company derives revenue from three principal sources: coin calls, non-coin
calls and Dial-Around calls. Coin calls represent calls paid for with coins
deposited in the telephone. The Company recognizes coin revenue in the amount
deposited. Non-coin calls are calls charged to a customer credit card or billed
to the called party (collect calls). These calls are processed by the payphone's
computer using "store and forward" technology or, if a live operator is
requested, the call is processed by an operator service provider ("OSP") such
as, for example, AT&T, MCI or Sprint. Compensation for Dial-Around calls is paid
by long-distance carriers in accordance with rules set by the FCC when consumers
access a long-distance carrier directly by dialing an access number or an 800
number or by using a non-billable calling card in accordance with rules set by
the FCC.
The principal costs related to ongoing operation of the Company's payphones
include telephone line charges, consisting of payments made by the Company to
telephone companies and long-distance carriers for access charges and use of
their networks; commission payments to Site Providers; and collection, repair
and maintenance costs.
RECENT ACQUISITIONS
In January 1997, the Company completed its acquisition from Telco West of
site contracts for 1,020 payphones located in Colorado, Idaho, Oregon,
Washington and Wyoming and all equipment located at the respective sites, as
well as the trade name "Telco Northwest." The purchase price for the acquired
assets was $3,374,745, with the Company paying $2,173,245 in cash (financed with
a short-term bank loan) and the balance by delivery of a 10% secured
subordinated note in the principal amount of $365,000, with the principal due on
April 1, 1998, and a second 10% (adjusted to 10.25% on June 30, 1998) 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
<PAGE>
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
Computer Assisted Technologies "CAT" 586 pay telephone site contracts and
related assets, as well as site contracts only for the installation of an
additional 95 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, 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.
On June 30, 1998, the Company completed its 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 $4,300,000, with the Company paying
$3,800,000 in cash (financed with a bank loan) and the balance by delivery of a
note in the principal amount of $500,000. The note is subject to potential
reductions based upon the performance of the acquired phones during the first 12
months following the acquisition.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30 1997.
Total revenue for the three months ended June 30, 1998, increased
approximately $357,000, or 20.6%, compared to the three months ended June 30,
1997. This growth was due in part to the Company increasing the average number
of pay telephones in service from 2,980 during the 1997 period to 3,215 during
the 1998 period, an increase of 8%. Coin revenue increased $96,000 or 6.9% and
non coin revenues decreased $42,300 or 15.5% compared to the previous year
period. Dial-around compensation increased $300,500 or 1134.3%. The Company
accrued dial-around compensation at approximately $32.50 per phone per month
during the 1998 period compared to $6.00 per phone per month during the 1997
period.
During the quarter the Company opened a leasing office in San
Juan, Puerto Rico and at June 30 the Company's agents had signed long term
location agreements giving the Company the right to install over 300 phones, of
which 55 phones had been installed. Although management may elect not to
install all of the phones covered by the location agreements, the limited
results to date indicate that a substantial number of phones should be
financially viable. Installations of phones at present are stalled by a strike
at the local telephone company.
Telephone and long-distance charges increased $43,500 or 7.9% as compared
to the previous year period. Site Provider commissions increased $19,000 or
6.2% over the previous year period. Selling, general and administrative
("SG&A") expenses increased by $223,500 or 42.5%, primarily due to the Company's
increased spending in marketing and acquisition activities, increased costs
associated with being a publicly reporting company, and approximately $100,000
in startup costs to open and operate the Puerto Rico leasing office.
The Company used the proceeds of the November IPO to reduce long-term debt
thereby decreasing interest expense for the period by $149,000 or 82.0% compared
to the prior year. Depreciation and amortization for the 1997 period increased
$96,000 or 49.5% as a result of the higher depreciation and amortization
associated with the acquired routes.
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30 1997.
Total revenue for the six months ended June 30, 1998, increased
approximately $945,500, or 30.3%, compared to the six months ended June 30,
1997. This growth was due in part to the Company increasing the average number
of pay telephones in service from 2,810 during the 1997 period to 3,220 during
the 1998 period, an increase of 14.5%. Coin revenue increased $390,000 or 15.4%
and non coin revenues decreased $88,500 or 18.1% compared to the previous year
period. Dial-around compensation increased $601,000 or 1125.6%. The Company
accrued dial-around compensation at approximately $31.00 per phone per month
during the 1998 period compared to $6.00 per phone per month during the 1997
period. CLEC margin from internally reselling local telephone service increased
$43,000 or 102.6% compared to the previous year period.
Telephone and long-distance charges increased $128,000 or 12.9% as compared
to the previous year period. Site Provider commissions increased $73,000 or
12.6% over the previous year period. Selling, general and administrative
("SG&A") expenses increased by $427,000 or 44.5%, primarily due to increased
spending in marketing and acquisition activities, opening a leasing office in
Puerto Rico and 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 $253,000 or 77.6% compared
to the prior year. Depreciation and amortization for the 1997 period increased
$179,000 or 44.6% 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 six months ended June 30,
1998 the Company increased the reserve by $126,000.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1998, the Company's operating activities
provided $399,000. Investments in equipment and rental agreements used
$4,989,000 and principal payments on long-term debt used $577,000. Activities
were funded with a $3,800,000 bank loan, a $500,000 sellers' note and the sale
of $1,151,000 in short-term investments, resulting in a $293,000 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 22% in the 5th year.
On June 30, 1998, as part of the purchase of the Philadelphia route, the
Company gave the sellers a $500,000 note due 16 months from closing. The note
may be reduced depending upon the performance of the Philadelphia phones during
the 12 month period ending June 30, 1999, as per the purchase agreement.
<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 June 30, 1998 the Company used the proceeds to pay down $3.7 million in
short-term debt and $800,000 for the purchase of phones and contracts.
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 May 13, 1998 reporting on the signing
of an agreement to acquire Jay Telephone Vending and on May 21, 1998 reporting
the Company's financial results for the 1998 first quarter.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<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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