<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 SEPTEMBER 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
NOVEMBER 12, 1998
Part I: Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet -
December 31, 1997 and September 30, 1998
Consolidated Statements of Operations -
Three months ended September 30, 1997 and 1998
Nine months ended September 30, 1997 and 1998
Consolidated Statements of Cash Flows -
Nine months ended September 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: November 12, 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 SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 31, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash.................................... $ 407,196 343,705
Short-term investments.................. 1,151,215
Accounts receivable..................... 697,704 575,313
Prepaid:
Rent.................................. 91,482 93,357
Other................................. 349,864 458,509
Deferred taxes 645,514 601,000
------------- --------------
Total current assets.................. 2,191,760 3,223,099
------------- --------------
Property and equipment, net............. 6,185,203 4,521,017
------------- --------------
Other assets:
Prepaid rents........................... 71,053 92,179
Rental agreements, net of accumulated
amortization of $355,412 at Dec. 1997,
and $647,875 at Sept 1998................ 6,008,597 3,212,450
------------- --------------
6,079,650 3,304,629
------------- --------------
$ 14,456,613 $ 11,048,745
------------- --------------
------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Checks outstanding in excess of bank
balance.................................. $ 110,133 $ 139,239
Notes payable........................... 350,000 350,000
Current portion of long-term debt....... 1,128,186 843,301
Accounts payable........................ 122,136 48,000
Accrued expenses........................ 1,867,777 2,116,142
------------- --------------
Total current liabilities.............. 3,578,232 3,496,682
Long-term liabilities:
Deferred taxes 515,000 449,000
Long-term debt, net of current portion.. 4,411,658 1,269,985
------------- --------------
4,926,658 1,718,985
Shareholders' equity..................... 5,951,723 5,833,078
------------- --------------
$ 14,456,613 $ 11,048,745
------------- --------------
------------- --------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Service revenue..................... $ 2,880,756 $ 1,897,879 $ 6,879,511 $ 5,017,879
Cost of service..................... 1,395,673 1,071,597 3,247,384 2,790,881
----------- ----------- ----------- -----------
Gross margin........................ 1,485,083 826,282 3,632,127 2,226,998
----------- ----------- ----------- -----------
Selling, general and admin:
Salary and benefits................ 603,479 353,325 1,407,675 939,910
Travel and related................. 47,665 27,791 137,690 89,783
Office and overhead................ 189,806 111,220 529,747 276,425
----------- ----------- ----------- -----------
840,950 492,336 2,075,112 1,306,118
Depreciation and amortization....... 419,774 285,146 1,000,918 687,293
Interest............................ 126,024 157,870 199,168 482,790
Sales tax contingency............... 57,894 63,120 191,444 173,260
----------- ----------- ----------- -----------
1,444,612 998,472 3,466,642 2,649,461
----------- ----------- ----------- -----------
Income (loss) before income taxes... 40,471 (172,190) 165,485 (422,463)
Provision (credit) for income taxes 16,188 (60,267) 66,194 (147,862)
----------- ----------- ----------- -----------
Net income (loss)................... $ 24,283 $ 111,923) $ 99,291 $ (274,601)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Per share net income (loss)......... $ 0.01 $ (0.06) $ 0.03 $ (0.13)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares outstanding-weighted average 2,915,006 2,019,796 2,915,006 2,102,589
Per share diluted net income $ 0.01 $ 0.03
----------- -----------
----------- -----------
Shares outstanding - diluted 2,958,682 2,958,682
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income.............................................. $ 99,291 $ (274,601)
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Depreciation and amortization.................................. 1,000,918 687,293
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable.......................................... (122,391) 146,290
Prepaid rent and other....................................... 131,646 (238,889)
Deferred taxes............................................... 21,486
Increase (decrease) in:
Accounts payable............................................. 45,030 1,511,646
Accrued expenses............................................. (248,365) (880,630)
----------- -------------
Net cash provided by (used in) operating activities............. 927,615 951,109
----------- -------------
Cash flows used in investing activities:
Purchase of equipment and rental contracts..................... (5,461,251) (6,456,533)
Sales of short-term investments................................ 1,151,215
----------- -------------
Net cash (used in) provided from investing activities........... (4,310,036) (6,456,533)
----------- -------------
Cash flows from financing activities:
Proceeds from
Issuance of:
Long-term debt............................................... 4,300,000 1,728,204
Common stock................................................. 736,400
Collections of subscription receivable........................ 8,571 25,990
Principal payments on long-term debt.......................... (862,659) (775,319)
Net change in notes payable................................... 2,985,838
----------- -------------
Net cash provided by financing activities..................... 3,445,912 4,701,113
----------- -------------
Net increase (decrease) in cash................................ 63,491 (804,311)
Cash, beginning balance........................................ 343,705 875,150
----------- -------------
Cash, ending balance........................................... $ 407,196 $ 70,839
----------- -------------
----------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 199,168 $ 461,575
----------- -------------
----------- -------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CHOICETEL COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 AND
NINE MONTH PERIOD ENDED SEPTEMBER 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.
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.
Computer Assisted Technologies Inc.:
<PAGE>
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 $ 8,214,395
Accumulated depreciation (1,469,906) (2,154,602)
------------- -------------
4,467,641 6,059,793
Office equipment and improvements 96,860 192,651
Accumulated depreciation (43,484) (67,241)
------------- -------------
53,376 125,410
------------- -------------
$ 4,521,017 $ 6,185,203
------------- -------------
------------- -------------
</TABLE>
5. NOTES PAYABLE:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Note payable, shareholder, interest only at 8.5%.
Convertible to shares of common stock at $5.10 per $350,000 $350,000
share. -------- --------
$350,000 $350,000
-------- --------
-------- --------
</TABLE>
6. LONG-TERM DEBT:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Note payable, Telco West, due in monthly
installments of $21,342 including interest at 10.25%
through July 2001, secured by equipment. $ 753,452 $ 613,598
Note payable, Telco West, due in monthly
installments of $3,042 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 $4,452 including interest at 14.5%
through April 2002, secured by equipment. 169,069 146,308
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. 3,652,999
Capital leases at 9.5% 825,881 626,939
------------ ------------
2,113,286 5,539,844
Less current portion 843,301 1,128,186
------------ ------------
$ 1,269,985 $ 4,411,658
------------ ------------
</TABLE>
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending December 31 Amount
----------------------- ------
<S> <C>
1998 $373,861
1999 1,700,368
2000 1,217,961
2001 885,082
2002 897,096
2003 465,476
----------
$5,539,844
----------
----------
</TABLE>
<PAGE>
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 $25,000 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 year 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>
<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:
<TABLE>
Total future minimum lease payments, payable in:
<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
<PAGE>
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 and January
1, 1998 the Company recognized dial around revenue at $37.20 and $31.50 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 which the department asserts are due on telephone
receipts. While the Company does not believe its coin receipts are subject to
Minnesota sales tax and has notified the Minnesota Department of Revenue of its
position, it may have to assert its position in the Minnesota courts in order to
prevail. The financial statements include an accrual management believes is
sufficient to cover this contingency.
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.
<PAGE>
Information with respect to options outstanding as of December 31, 1997 and
September 1998, is summarized as follows:
<TABLE>
<CAPTION>
1997 1998
---- ----
Weighted average Weighted average
Shares exercise price Shares exercise price
<S> <C> <C> <C> <C>
Outstanding at the 50,000 $1.50 122,500 $4.10
beginning of the year
Granted 72,500 $5.90 200,000 4.96
Exercised
Forfeited (12,500) 4.00
Outstanding at end of
period 122,500 $4.10 310,000 4.66
------- ----- ------- ----
------- ----- ------- ----
Options exercisable at
period end 92,500 280,000
Weighted average
remaining life 2 years 2.75 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 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 $ 2,000
Deferred:
Federal (90,000)
State (16,000)
Effect of change in tax status (46,000)
--------
$150,000
--------
--------
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
December 31, September 30, 1998
1997
<S> <C> <C>
Deferred tax asset:
Sales tax contingency $ 444,000 $ 505,514
Employee benefits 17,000
Accrued dial-around compensation 140,000 140,000
----------- -----------
$ 601,000 $ 645,514
Deferred tax liability:
Depreciation $ 448,000 $ 514,000
Amortization 1,000 1,000
----------- -----------
$ 449,000 $ 515,000
</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 net of applicable sales taxes. Non-coin calls are calls charged to a
customer credit card or billed to the called party (collect calls). These calls
are processed by the payphone's computer using "store and forward" technology
or, if a live operator is requested, the call is processed by an operator
service provider ("OSP") such as, for
<PAGE>
example, AT&T, MCI or Sprint. Compensation for Dial-Around calls is paid by
long-distance carriers in accordance with rules set by the FCC when consumers
access a long-distance carrier directly by dialing an access number, an 800
number, or by using a non-billable calling card.
The principal costs related to ongoing operation of the Company's payphones
include telephone line charges, consisting of payments made by the Company to
telephone companies and long-distance carriers for access charges and use of
their networks; 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% 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
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.
During April 1998 the Company opened a leasing office in San Juan, Puerto
Rico and by the end of September the Company's agents had signed long term
location agreements giving the Company the right to install over 1500 phones, of
which 150 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 the phones are producing comparable revenues to
payphones that the company operates in other areas. However, line rates charged
by the Puerto Rican Telephone Company are higher than normal, and are being
addressed by the payphone industry
<PAGE>
and the Puerto Rican Utilities Board. In the meantime, the Company is taking a
conservative approach to installations as it awaits resolution of this important
issue.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30 1997.
Total revenue for the three months ended September 30, 1998, increased
approximately $983,000, or 51.8%, compared to the three months ended September
30, 1997. This growth was due in part to the Company increasing the average
number of pay telephones in service from 3,100 during the 1997 period to 4,350
during the 1998 period, an increase of 40%. Coin revenue increased $548,000 or
36.8% and non coin revenues increased $113,500 or 33.6% compared to the previous
year period. Dial-around compensation increased $311,500 or 511.0%. The
Company accrued dial-around compensation at approximately $28.50 per phone per
month during the 1998 period compared to $6.00 per phone per month during the
1997 period.
Telephone and long-distance charges increased $246,000 or 42.1% as compared
to the previous year period. Site Provider commissions increased $75,500 or
20.2% over the previous year period. Selling, general and administrative
("SG&A") expenses increased by $343,000 or 52.9%, 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. This includes spending
approximately $150,000 in startup costs to develop and operate the Puerto Rico
office. These startup costs include salaries and commissions paid to leasing
agents to sign approximately 1,000 phone locations during the period.
Interest expense decreased $32,000 or 20.2% compared to the prior year.
Depreciation and amortization for the 1997 period increased $135,000 or 47.2% as
a result of the higher depreciation and amortization associated with the
acquired routes.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30
1997.
Total revenue for the nine months ended September 30, 1998, increased
approximately $1,862,000, or 37.1%, compared to the nine months ended September
30, 1997. This growth was due in part to the Company increasing the average
number of pay telephones in service from 2,900 during the 1997 period to 3,600
during the 1998 period, an increase of 24.1%. Coin revenue increased $934,000
or 23.2% and non coin revenues decreased $43,000 or 5.2% compared to the
previous year period. Dial-around compensation increased $889,500 or 646.6%.
The Company accrued dial-around compensation at approximately $31.50 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 $81,500 or 380% compared to the previous year period.
Telephone and long-distance charges increased $327,000 or 21% as compared to
the previous year period. Site Provider commissions increased $126,500 or 12.9%
over the previous year period. Selling, general and administrative ("SG&A")
expenses increased by $772,500 or 50.4%, 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. This includes spending
approximately $250,000 in startup costs to open a leasing office in Puerto
Rico. These startup costs include salaries and commissions paid to leasing
agents to sign approximately 1,700 phone locations during the period.
Interest expense decreased by $283,500 or 58.7% compared to the prior year.
Depreciation and amortization for the 1998 period increased $313,500 or 45.6% as
a result of the higher depreciation and amortization associated with the
acquired routes.
SALES TAX CONTINGENCY.
<PAGE>
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 nine months ended September
30, 1998 the Company increased the reserve by $191,000.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1998, the Company's operating
activities provided $928,000. Investments in equipment and rental agreements
used $4,310,000 and principal payments on long-term debt used $863,000.
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 $63,000
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 coming 12 months 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 July 6, 1998 reporting on the closing
of the acquisition of Jay Telephone Vending and on August 19, 1998 reporting the
Company's financial results for the 1998 second quarter and its entry into the
Puerto Rican payphone market.
<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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