<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-230 17
CHOICETEL COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
MINNESOTA 41-1649949
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9724 10TH AVENUE NORTH, PLYMOUTH, MN 55441
(Address of principal executive offices)
Issuer's telephone number: (612) 544-1260
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: Name of each exchange on which registered:
COMMON STOCK, $.01 PAR VALUE THE NASDAQ SMALLCAP MARKET
REDEEMABLE WARRANT THE NASDAQ SMALLCAP MARKET
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The revenues for ChoiceTel Communications, Inc. for the fiscal year
ended December 31, 1998 were $9,344,248.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates as of March 17, 1999, based on the closing sale price of
the Common Stock on such date as reported on the NASDAQ SmallCap Market, was
$3,240,324.
On March 1, 1999, the Company had outstanding 2,915,006 shares of Common Stock,
par value $.01 per share.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Form SB-2, Registration Number 333-29969,
are incorporated by reference into Part II of this Form 10-KSB.
Portions of the Registrant's Proxy Statement for its 1999 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (Check one): Yes No X
---- ----
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C>
ITEM 1. DESCRIPTION OF BUSINESS................................................
ITEM 2. DESCRIPTION OF PROPERTY................................................
ITEM 3. LEGAL PROCEEDINGS......................................................
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...............
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..............
ITEM 7. FINANCIAL STATEMENTS...................................................
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................................
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.............
ITEM 10. EXECUTIVE COMPENSATION.................................................
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.........................................................
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.......................................
SIGNATURES.............................................................
INDEX TO FINANCIAL STATEMENTS..........................................
INDEX TO EXHIBITS......................................................
</TABLE>
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
ChoiceTel Communications, Inc. (the "Company") was formed as a
Minnesota corporation in 1989. The Company is the largest independent payphone
service provider ("PSP") in Minnesota. The Company installed its first payphones
in early 1990 and as of December 31, 1998, had an installed phone base of
approximately 4,500 payphones in fourteen states and Puerto Rico. The Company
has grown its business through the installation of pay telephones in new areas
and through strategic asset acquisitions of payphone routes and related assets,
including 270 payphones located in Minnesota acquired from American Amusement
Arcade in 1993; 85 payphones acquired in Nevada from Telco West in 1995; an
additional 1,020 payphones acquired from Telco West in 1997 in Oregon, Idaho,
Colorado, Washington and Wyoming; 586 payphones located in Minnesota and
Wisconsin acquired from Computer Assisted Technologies, Inc. ("CAT"), together
with site contracts only for the installation of an additional 98 payphones in
1997 and 965 phones in Pennsylvania, New Jersey and Delaware from Edward Steven
Corporation and Drake Telephone Company in 1998.
INDUSTRY OVERVIEW
In 1996, calls made from pay telephones were estimated at $7 billion in
annual revenues to the United States telecommunications industry. Pay telephones
may be "public," meaning they are owned by local exchange carriers ("LECs"), or
"independent," meaning they are owned and operated by companies independent of
the LECs, such as the Company. Of the approximately 2 million pay telephones
operating in the United States in 1996, it is estimated that approximately
350,000 were independent.
Today's telecommunications marketplace was principally shaped by the
1985 AT&T divestiture of the 22 regional Bell operating companies ("RBOCs"),
which provided local telephone services within their areas of operation. The
AT&T divestiture and the many regulatory changes adopted by the FCC and state
regulatory authorities in response to the AT&T divestiture have resulted in the
creation of new business segments in the telecommunications industry. As a
result of the AT&T divestiture, pay telephones may now be owned and operated
independently.
As part of the AT&T divestiture, the United States was divided into
geographic areas known as local access transport areas or "LATAs." Telephone
service that both originates and terminates within the same LATA ("intraLATA")
is priced based on tariffs filed with and approved by state regulatory
authorities. LECs provide intraLATA telephone service to, among others,
independent pay telephone companies. LECs are generally prohibited from offering
or deriving revenues or income from services between LATAs ("interLATA"). In
addition, most state regulatory authorities require LECs to provide local access
line service to independent pay telephone companies. See "Business -
Government Regulation."
Long-distance carriers provide interLATA service and, in some
circumstances, may also provide long-distance service within LATAs. An interLATA
long-distance pay telephone call begins with an originating LEC transmitting the
call from the pay telephone that originates the call to a point of connection
with a long-distance carrier. The long-distance carrier, through its owned or
leased switching and transmission facilities, transmits the call across its
long-distance network to the LEC serving the local area in which the recipient
of the call is located. This terminating LEC then delivers the call to the
recipient. Independent PSPs contract with one or more long-distance carriers to
provide long-distance service to their pay telephones.
<PAGE>
BUSINESS STRATEGY
The Company has focused on identifying payphone sites that have the
potential to achieve a high return on investment ("ROI") after depreciating the
equipment over the life of the phone lease. Although others in the industry have
used shorter leases, the Company's analysis indicated that a long-term lease was
necessary in order to achieve the Company's ROI objective and to offer a
competitive commission to location owners ("Site Providers"). Therefore, most of
the Company's pay telephones are placed with Site Providers under leases having
terms of five years or more.
The Company's objective has been to grow through additional
acquisitions and internally, thereby achieving economies of scale. There are
approximately 1,500 independent PSPs nationally. The Company believes that there
is a significant opportunity to consolidate the highly fragmented independent
segment of the payphone industry. Further, independent PSPs, as compared to the
RBOCs, generally have a larger percentage of computer-based, or "smart," phones
in their inventory of pay telephones and their payphones are placed in locations
that generate higher revenue per phone.
During 1998, the Company researched the Puerto Rican payphone market
and determined that if and when the full benefits of the Telecommunications Act
of 1996 are reflected in the Puerto Rican payphone market, Puerto Rico will be
an attractive market for ChoiceTel to operate payphones. ChoiceTel is focusing
its resources in Puerto Rico and does not anticipate any additional acquisitions
of payphone routes in 1998.
OPERATIONS
The Company operates, services and maintains a system of approximately
4,500 pay telephones, with approximately 86% of its payphones located in
Minnesota, Pennsylvania, Oregon, and Puerto Rico. All of the Company's pay
telephones accept coins as payment for local or long-distance calls and can also
be used to place local or long-distance cashless calls.
COIN CALLS
The Company's pay telephones generate coin revenue primarily from local
calls. Until October 1997, the public utilities commissions of the states in
which the Company operated regulated the cost of local coin calls, at that time,
rates were deregulated. Management believes it can maximize payphone coin
revenues by matching the cost of a local call to the market conditions at the
phone. The amount charged for a local call ranges from $0.10 to $0.50, with most
phones charging $0.35.
Long-distance coin calls are carried by long-distance carriers that
have agreed to provide long-distance service to the Company's telephones. The
majority of the Company's phones sell coin long-distance for a rate of $0.25 per
minute, with a two-minute minimum. This rate is well below U.S. West's rates for
coin long-distance and is significantly less expensive than credit card or
collect long-distance rates. For example, U.S. West charges approximately $3.10
for the first three minutes of a coin long-distance call made in Minnesota, and
AT&T charges $3.30 and $3.50 for the first three minutes of credit card and
collect long-distance calls, respectively, made from public payphones. The
Company offers lower rates to create a better value for price sensitive
consumers and to discourage Dial-Around calling from its phones. Management
believes that its $0.25 per minute long-distance rate results in considerable
goodwill and is a point of differentiation between its phones and its local
exchange carrier ("LEC") competitors.
NON-COIN CALLS
<PAGE>
The Company also receives revenue from non-coin, or cashless, calls
made from its pay telephones, including credit card calls, calling card calls,
collect calls and third party billed calls. These calls are processed by the
payphone's computer using store and forward technology, or, if a live operator
is requested, then the call is transferred to the Company's designated operator
service provider ("OSP").
DIAL-AROUND CALLS
A Dial-Around call originates from a payphone when the user dials a
non-billable access number such as, for example, 1-800-Collect, 1-800-CallATT or
10-10-333, and thereby dials around the Company's long-distance carrier in order
to reach another long-distance carrier. The user deposits no money for the call
and, prior to 1992, the long-distance provider carrying the call paid no
commission to the payphone owner. Since 1992, payphone owners have been
compensated by long-distance carriers for Dial-Around calls. See "Government
Regulation - Dial-Around Compensation."
COMPUTER NETWORK AND EQUIPMENT. The Company focused its early efforts
on building a computer processing network that automated many of the operations
of managing a pay telephone enterprise. Specialized software was designed and
written when it was not available from industry suppliers. The Company's smart
phones are part of a centralized network that links all of the Company's phones
in the field with central processors. The system allows the Company to monitor
phone call volume, identify malfunctioning equipment, dispatch repair service,
schedule efficient coin collections, calculate commissions, print checks to Site
Providers, rate and process long-distance calls using store and forward
technology, and generate necessary reports that analyze and monitor
profitability of the phones. Management believes that as the Company grows, this
network can be expanded easily with little additional investment in
infrastructure.
The Company installs pay telephones which it believes incorporate the
latest technology. The equipment makes use of microprocessors to provide voice
synthesized calling instructions, detect and count coins deposited during each
call, inform the caller at certain intervals of the time remaining on each call,
and identify the need for and the amount of an additional deposit. The pay
telephones can be programmed and reprogrammed from the Company's central
computer facilities to update rate information or to direct different kinds of
calls to particular carriers. The Company's pay telephones can distinguish coins
by size and weight, report to a remote location the total coinage in the coin
box, perform self-diagnosis and automatically report problems to a
pre-programmed service number, and immediately report attempts of vandalism or
theft. Some of the telephones also operate on power available from the telephone
lines, thereby avoiding the need for and reliance upon an additional power
source at the installation location. The telephones are designed to have a
user-friendly appearance and manner of operation similar to LEC-owned pay
telephones.
The Company's smart phones utilize store and forward technology which
enables the Company to sell credit card, calling card and collect calls through
its own OSP. The store and forward software program provides callers with
instructions communicated by a digitized human voice for entering billing
information, such as a calling card number or a terminating phone number for a
collect call, prior to connecting a call. For example, for a collect call, a
synthesized voice directs the caller to speak his name into the payphone
handset, the caller's response is digitally recorded and played back when the
call is answered at its destination, and the called party is instructed to press
"1" on his or her telephone to accept the call. The software program also
minimizes fraudulent charges for calling card or credit card calls by
automatically communicating with a credit bureau to verify that the card has not
been identified as a lost, stolen or delinquent card. For a collect call, the
software program can also verify that the number being called is not delinquent.
After verifying the
<PAGE>
call, the payphone will complete the connection using a long-distance
carrier. When the call is concluded, the software program directs the billing
information, including the date, time and length of the call, the
billed-to-number and the charges for the call, to the Company's computer.
Later, the billing records are sent to a processing agent that bills and
collects the charges. The processing agent keeps a percentage of the billed
amount as its processing fee and remits the balance to the Company. The
Company books the net amount received as non-coin revenue.
Some of the Company's payphones, primarily those placed in locations
that are not high generators of long-distance calls, do not have store and
forward capability. In addition, customers occasionally request a live operator
even with phones that have the store and forward technology. Examples of calls
requiring live operator assistance include person-to-person calls and calls
billed to a third party. In these situations, the calls are transferred to an
OSP which completes and bills the calls and pays the Company a commission based
on the amount billed. The Company contracts with several OSPs for this 24-hour a
day service. The Company routes all of these calls to designated OSPs to
maximize the commission revenue it receives. There are numerous OSPs available
to the Company and the terms offered by them are highly competitive. In
selecting an OSP, the Company considers numerous factors including the
commission offered, the quality of service and the pricing of calls to
customers.
PLACEMENT OF PAY TELEPHONES. As of December 31, 1998, the Company's pay
telephone system consisted of approximately 4,500 telephones located in 14
states and Puerto Rico. The following table sets forth certain information as of
the dates indicated concerning the number and location of pay telephones
operated by the Company:
NUMBER OF PAY TELEPHONES
<TABLE>
<CAPTION>
STATE DECEMBER 31, DECEMBER 31,
- ----- ------------ ------------
1997 1998
------- ------
<S> <C> <C>
Minnesota............................................................ 1,849 1,925
Pennsylvania......................................................... -- 960
Oregon............................................................... 714 667
Idaho................................................................ 318 285
Puerto Rico.......................................................... -- 304
Nevada............................................................... 115 97
Additional phones in 9 states ....................................... 217 265
--- ---
Total 3,213 4,503
</TABLE>
The Company's ROI focus has enabled it to profile locations based on
the likely profitability of a location. While this methodology is proprietary,
as are the specific locations under contract, the Company's locations include a
wide variety of establishments, such as restaurants, shopping malls, convenience
stores, grocery stores, gas stations and schools. The Company's pay telephone
lease mix includes indoor phones, walk-up outdoor phones and drive-up payphones.
While the Company had a single Site Provider that accounted for more than 5% of
its pay telephones and revenue in the years ended December 31, 1995 and 1996, no
single Site Provider accounted for more than 5% of its pay telephones and
revenues in either of the years ended December 31, 1997, and 1998.
Agreements with Site Providers to install the Company's pay telephones
(the "Site Agreements") provide for revenue sharing with Site Providers,
typically a commission based on a negotiated percentage of revenue from the pay
telephone. The Site Agreements give the Company the exclusive right to install
pay
<PAGE>
telephones at that location and are generally of a five-year or greater term
with automatic renewal provisions. The Company's Site Agreements normally give
the Company the right to remove poor performing phones. Further, the Company can
typically terminate a Site Agreement on 30 days' notice to the Site Provider.
The Site Provider does not generally have the right to terminate a Site
Agreement.
PHONE LINE RATES. The Company pays local line charges for each of its
installed payphones. These line charges cover basic service to the telephone as
well as the transport of local calls. The Company's business model has always
been based on ROI and thus is highly influenced by the line rate charged by
LECs, primarily U.S. West. Pay telephones are regulated by state public
utilities commissions ("PUCs") and generally can be connected only to a Public
Access Line ("PAL"). When the Company commenced operations, the PAL rate in
effect was approximately equal to the cost of a standard business line, plus
additional charges based on the number of calls placed at the phone, this
resulted in an average phone bill of about $130 per month per phone.. In April
1996, the Company's wholly owned subsidiary, ChoiceTel, Inc. ("CI"), was
approved to operate as a competitive local exchange carrier "CLEC" in Minnesota.
As a CLEC, CI was able to purchase standard business lines, which U.S. West sold
for $54 per line, and resell them to Payphone companies as PALs, which US West
sold for a higher price. In May 1997, CI entered into an agreement with U.S.
West that provides CI with a 21.5% reseller discount on the pre-tax cost of
telephone lines in Minnesota. Over the years, US West has reduced the cost of a
PAL, so that by April 1998, the cost of a PAL was the same as a standard
business line.
On March 9, 1998, the FCC issued an order, effective on April 8, 1998,
which would require payphone providers to use LEC-provided PALs in order to
continue to receive dial-around compensation from long-distance carriers after
January 1, 1999. LEC-provided PALs are similar in cost to the lines the Company
purchases from its CLEC, however without the opportunity to earn the resellers'
discount. On February 4, 1999 the Minnesota PUC ordered U.S. West to extend the
21.5% resellers' discount to PALs purchased by resellers. US West has filed for
reconsideration by the Minnesota PUC.
MARKETING. At December 31, 1998, six of the Company's employees devoted
substantially all of their time to locating and contracting with new Site
Providers in Minnesota, Puerto Rico and Oregon. In addition, the Company engages
independent contractors in Puerto Rico to locate new sites for payphone
installations. Management believes a successful contracting program requires
identifying good locations, selling Site Providers on the benefits of the
Company's payphones, and negotiating favorable Site Agreement terms.
Identifying good locations for payphones is the most important aspect
of the Company's marketing program, which includes an evaluation of population
density, calling patterns and neighborhood socio-economic factors. The Company
concentrates its efforts towards high traffic locations, lower income
neighborhoods, and venues where people expect to find payphones.
The Company promotes its payphone program to Site Providers by
emphasizing service and maintenance. Site Providers generally view the payphone
as a customer service rather than a profit center. Providing repair and
collection services during evenings and on weekends and providing live call
placement assistance sometimes is more important in securing the Site Agreement
than the amount of commission paid to the Site Provider.
SERVICE AND MAINTENANCE. The Company believes it offers many of its
Site Providers a higher level of service than is provided by the LEC
competitors, who typically offer lower commissions and do not monitor payphone
performance. The Company monitors its payphones electronically and offers
evening and weekend repair service. The Company uses 41 full- and part-time
field service technicians, each of whom
<PAGE>
collects money, cleans phones and responds to trouble calls made by either a
consumer or by the telephone itself as part of its internal diagnostic
procedures. Many technicians are also responsible for the installation of new
telephones. Due to the ability of the field service technicians to perform
multiple service and maintenance functions, the Company is able to limit the
frequency of trips to each pay telephone as well as the number of employees
needed to service the pay telephones.
COMPETITION
The Company competes for pay telephone locations with LECs and other
independent pay telephone operators. The Company also competes indirectly with
long-distance carriers, which can offer Site Providers commissions on
long-distance calls made from LEC-owned payphones. Most LECs and long-distance
carriers against which the Company competes and some independent pay telephone
companies have substantially greater financial, marketing and other resources
than the Company. In addition, many LECs, faced with competition from the
Company and other independent pay telephone companies, have increased their
compensation arrangements with Site Providers to offer more favorable commission
schedules.
The Company believes the principal competitive factors in the pay
telephone business are (i) responsiveness to customer service needs, (ii) the
amount of commission payments to a Site Provider and the opportunity for a Site
Provider to obtain commissions on both local and long-distance calls from the
same company, (iii) the quality of service and the availability of specialized
services provided to a Site Provider and telephone users, and (iv) the ability
to serve accounts with locations in several LATAs or states. The Company
believes that independent pay telephone operators have an advantage over LECs in
that they can offer Site Providers commissions on coin and cashless local and
long-distance calls.
Opening the local telephone markets to competition will likely reduce
telephone line charges, which is the Company's largest operating expense. In
most of the areas where the Company operates, it must purchase local telephone
service from a single regulated monopoly (such as U.S. West). As AT&T, MCI,
Sprint and others compete to offer local telephone service, telephone line
charges are expected to decline. In addition, the Company expects that its high
number of telephone lines will give it the ability to negotiate additional
volume discounts. In 1998, a CLEC in Minnesota began offering PALs priced 25%
below the Company's cost. At December 31, 1998 the Company had converted
approximately 300 lines and has plans to convert additional lines as exchanges
are made available.
Commencing in the 1998 fourth quarter, the Company began to experience
a negative impact on its revenues, which management believes results from
increased usage of wireless devices, which appear to be reducing consumers'
reliance on payphones. Accordingly, while the means and desire to communicate by
telephone generally increases, the Company anticipates that its payphones may
experience decreased usage, and that the heavy promotion and proliferation of
affordable wireless devices and related service charges may adversely impact its
revenues.
GOVERNMENT REGULATION
In January 1996, Congress passed the Telecom Act, a comprehensive
telecommunications bill that, in part, dealt with several concerns of the
independent pay telephone industry. Congress stated that its intent was to
create a "pro-competitive, de-regulatory national policy framework designed to
accelerate rapidly private sector deployment of advanced telecommunications and
information technologies and services to all Americans by opening all
telecommunications markets to competition." The Telecom Act, among other things,
requires local telephone companies to eliminate subsidies of their pay telephone
services and to treat their own and independent payphones in a nondiscriminatory
manner. Of particular importance to the
<PAGE>
Company, the Telecom Act addressed the inherently unfair disadvantage
independent pay telephone companies have in competing with regulated
monopolies, the compensation of independent pay telephone companies for calls
made from their equipment that previously offered no compensation, and the
issue of price regulation of local calls by the various state PUCs.
COMPETITION WITH RBOCS. Under the Telecom Act, the RBOCs must operate
their payphone divisions with separate profit and loss statements. The Company
believes that this will likely result in the Company's RBOC competitors being
less aggressive in bidding for locations. It also may result in the RBOCs
removing many low volume pay telephones that collectively compete with the
Company's pay telephones.
DIAL-AROUND COMPENSATION. Pay telephones are required by the FCC to
provide equal Dial-Around access to all long-distance carriers, either by access
code (such as "10-10-333") or by 800 service. Prior to November 1996, the
Company received $6 per payphone per month from long-distance carriers for
providing this Dial-Around service. The Telecom Act recognized that it is a
burden to payphone companies to provide such access and that the compensation
paid to payphone companies for this access should be greater. Because the
infrastructure to track and compensate for these calls did not exist at that
time, the FCC's 1996 order raised the flat rate of compensation for the
Dial-Around service to approximately $45 per payphone per month, based on $0.35
per call times the national average of 131 monthly Dial-Around calls placed per
payphone. In October 1997, the method of compensating payphone companies was
scheduled to switch to a per call charge of $0.35 to be tracked and paid by the
long-distance carriers and, in November 1998, the per call charge was scheduled
to equal the cost of a local pay telephone call
The FCC's 1996 order implementing the increased Dial-Around
compensation was appealed, with the intent of decreasing the amount of
Dial-Around compensation mandated by the order. In July 1997, the Court remanded
the matter to the FCC for reconsideration of the rate of Dial-Around
compensation. The Court found that the per call charge of $0.35 was
inappropriate because the FCC did not consider evidence of the differences in
the cost of coin calls and Dial-Around calls. The long-distance carriers then
petitioned the Court to clarify the effect of the Court's July decision and to
vacate the portion of the FCC's 1996 order setting the rate of Dial-Around
compensation pending the FCC's re-examination of the Dial-Around rate. Further,
in a letter to the FCC dated August 15, 1997, AT&T challenged the FCC's
authority to order the long-distance carriers to make any payments during the
pendency of the rate determination and stated its intention to make Dial-Around
payments voluntarily based on its imputed rate of $0.12 per call, subject to
retroactive adjustments, up or down, after the FCC's final order on remand. The
Court agreed with the long-distance carriers. In a decision dated September 16,
1997, the Court vacated the portion of the FCC's 1996 order setting the rate of
Dial-Around compensation pending a new FCC order on remand. Accordingly, the
long-distance carriers were not required to make Dial-Around payments to
payphone service providers until the FCC issued a new order setting the Dial-
Around rate. On October 9, 1997, the FCC issued an order establishing the
Dial-Around rate as of October 7, 1997 at $0.284 per call ($0.35 minus an offset
of $0.066 for expenses unique to coin calls) for the two years beginning October
7, 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 payphone per
month. Because the Company could not be certain what the rate of Dial-Around
compensation would be for the period from November 7, 1996 through October 6,
1997, it has determined the amount of its revenue from Dial-Around compensation
for the six months ended June 30, 1997 and going forward through October 6, 1997
based upon the previous rate of $6.00 per payphone per month, and established an
$85,000 liability for revenue accrued in excess of the previous rate during the
period from November 6, 1996 through December 31, 1996. Beginning October 7,
1997, the Company began recognizing revenue from Dial-Around compensation based
upon the Dial-Around rate of
<PAGE>
$0.284 per call multiplied by an estimated number of dial-around calls per
phone. On May 15, 1998 the Court again remanded the dial-around rate back to
the FCC for further justification of the $0.35 starting point. On February 4,
1999 the FCC issued an order reducing the dial around rate to $0.24
retroactive to October 7, 1997 and going forward until at least January 31,
2002. The FCC indicated that it planned to address Dial-Around compensation
for the period from November 7, 1996 through October 6, 1997 in a subsequent
order and tentatively concluded that the $0.24 per call rate adopted on a
going forward basis should also govern compensation during the period from
November 7, 1996 through October 6, 1997. However, there can be no assurance
that Dial-Around compensation will not be based on a rate that is less than
$6.00 per payphone per month for the period from November 7, 1996 through
October 6, 1997 or that is less than $0.24 per call for the period beginning
October 7, 1997. The setting of a rate of Dial-Around compensation that is to
be paid to the Company that is less than the Company's estimate of such rate
could have an adverse effect on the results of operations and financial
condition of the Company, which could be material.
DEREGULATION OF LOCAL PAY TELEPHONE RATES. The FCC also adopted rules
pursuant to the Telecom Act which on October 7, 1997, repealed all rules
regulating the cost of a local call placed at a payphone and allowed the market
to set the rate for local coin calls, unless the state can demonstrate to the
satisfaction of the FCC that there are market failures within the state that
would not allow market-based rates.
EMPLOYEES
As of December 31, 1998, the Company had 65 employees, 52 of whom were
full-time. No employees are covered by a collective bargaining agreement. The
Company believes that its relationships with employees are good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate offices are located in approximately 5,000
square feet of leased space in Plymouth, Minnesota. The lease for this property
expires in May 2000 and the Company has two successive options to extend the
lease for additional one-year periods. The Company also leases approximately
2,250 square feet of warehouse and office space in Lake Oswego, Oregon. The
lease for this property expires in July 1999 and the Company has an option to
extend the lease for one additional one-year period. The Company also leases
approximately 2,000 square feet of office space in San Juan Puerto Rico. The
lease for this property expires in April 2000 and the Company holds three
successive options to extend the lease for additional one-year periods. The
Company also leases 2,000 square feet of warehouse space in Conshohocken,
Pennsylvania. The Company believes that its current facilities are sufficient
for its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
MINNESOTA SALES TAX. The Company, based on an 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 coin-operated payphone receipts were subject
to state sales tax. Despite the Department's position, management is still of
the view that the Company is not subject to sales tax, and the Company is
challenging the imposition of the tax. The Company retained special tax counsel
to contest the Department's position that coin-operated payphone receipts are
subject to sales tax. Nonetheless, the Company has established a reserve of
$1,362,000 as of December 31, 1998, to provide for the potential sales tax
liability and will continue to reserve on a monthly basis until a definitive
ruling is obtained.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the 4th quarter of the fiscal year ended December 31, 1998.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Redeemable Warrants have been quoted on
the NASDAQ SmallCap Market under the symbol "PHON" and "PHONW", respectively,
since November 10, 1997 . The following table sets forth, for the periods
indicated, the range of high and low prices for the Company's Common Stock and
Redeemable Warrants as reported on the NASDAQ SmallCap Market.
<TABLE>
<CAPTION>
COMMON STOCK REDEEMABLE
------------ WARRANTS
----------
High Low High Low
<S> <C> <C> <C> <C>
1997:
Fourth Quarter................................ $6.250 $4.625 $1.375 $0.75
1998:
First Quarter................................. $4.000 $3.25 $0.750 $0.50
Second Quarter................................ $4.375 $3.50 $0.625 $0.50
Third Quarter................................. $5.125 $3.00 $0.563 $0.25
Fourth Quarter................................ $4.250 $2.50 $0.250 $0.063
</TABLE>
As of November 30, 1998, there were 300 shareholders of the Company's
Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED IN THIS REPORT, INFORMATION
CONTAINED IN THIS FORM 10-KSB 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", "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 RISK 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 when consumers access a long-distance carrier directly
by dialing an access number
<PAGE>
or 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 service,
repair and maintenance costs.
RESULTS OF OPERATIONS
The following table presents certain items in the combined statements
of operations as a percentage of revenue for the years ended December 31, 1997
and 1998.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA: 1997 1998
---- ----
<S> <C> <C>
REVENUE:
Coin revenue............................ 78.2% 72.0%
Non-coin revenue......................... 13.8 11.5
Dial-around revenue...................... 6.7 14.6
CLEC revenue............................. 1.3 1.9
Total Revenue............................ 100% 100%
SERVICE COSTS AND EXPENSES:
Telephone line charges................... 31.4% 26.1%
Commissions.............................. 18.3 16.6
Service, repair and maintenance ......... 2.9 2.6
Total cost of service.................... 52.6% 45.3%
Gross margin............................. 47.4% 54.7%
Selling, general and admin. ............. 25.0 32.4
Interest................................. 9.9 3.3
Depreciation and amortization............ 13.1 14.1
Sales tax contingency.................... 3.4 2.7
Net income (loss) before income tax (4.0%) 2.2%
provision................................
Average phones in service................ 2,980 3,800
</TABLE>
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31 1997.
Total revenue for the year ended December 31, 1998, increased
approximately $2,263,000, or 32%, compared to the year ended December 31,
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
3,800 during the 1998 period, an increase of 27.5%. Coin revenue increased
$1,320,000 or 23.8% and non-coin revenues increased $121,000 or 12.4%
compared to the previous year period. Management believes that lower non-coin
revenues are due to increased dial-around calls. Dial-around compensation
increased $918,000 or 194.7%. The Company accrued dial-around compensation at
approximately $30.50 per phone per month during the 1998 period compared to
$13.00 per phone per month during the 1997 period. CLEC margin from
internally reselling local telephone service increased $87,000 or 91.4%
compared to the previous year period. The Company received a resellers
discount for the last 6 months of 1997 and for 12 months in 1998.
Commencing in the fourth quarter of 1998, the Company experienced a
significant decrease in coin revenues in the Midwest region. The Midwest region
includes Minnesota and Wisconsin and represents approximately 48% of the phones
in service at December 31, 1998. During the fourth quarter of 1998, despite a 6%
increase in the number of phones in service in the Midwest region, total coin
revenues in that region decreased $129,000 or 11.2% as compared to the fourth
quarter of 1997. Management attributes the reduction to increased competition
from wireless communication devices.
Telephone and long-distance charges increased $377,000 or 17.0% as
compared to the previous year period. Site Provider commissions increased
$260,000 or 20.1% over the previous year period. Selling, general and
administrative ("SG&A") expenses increased by $1,253,000 or 70.8%, 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 of marketing, administration and office
expenses to open a leasing office in Puerto Rico, and salaries and
commissions paid to leasing agents who signed approximately 1,600 phone
locations during the period, 300 of which were installed at December 31, 1998.
Interest expense decreased by $391,000 or 55.8% compared to the prior
year. Depreciation and amortization for the 1998 period increased $389,000 or
42.0%. The increase is a result of increased depreciation and amortization
associated with acquiring the Jay Telephone route and is reduced by
approximately $75,000 as a result of increasing the estimated useful life of
payphones from 7 years to 10 years effective the fourth quarter of 1998.
Management believes a 10 year useful life is a better estimate of payphone
performance. Without this change, depreciation and amortization increased
$464,000 or 50% over the previous year.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
For the year ended December 31, 1997, total revenue increased
approximately $3,603,000, or 101.2%, compared to the year ended December 31,
1996. This growth was primarily attributable to the increase in the average
number of pay telephones in service from 1,125 during 1996 to 2,980 during 1997.
Coin revenues during the period increased by $2,728,000 or 97.0% and non-coin
revenues increased by $556,500 or 110.8%.
Telephone charges increased in 1997 by $935,000 or 72.5% above the
previous year's period. The growth in telephone charges was kept below the rate
of growth in payphones primarily due to the Company's subsidiary, CI, receiving
authorization to act as a reseller of telephone service in April 1996, which
ultimately reduced the Company's line charges in Minnesota to $52 per line.
<PAGE>
Commissions paid to Site Providers increased $714,000 or 123.2% above
the previous year's period, primarily as the result of the growth of phones in
service. Collection, repair and maintenance increased $578,500 or 190.1% above
the previous year period. In the 1997 period, selling, general and
administrative expenses increased approximately $566,000, or 88.1%, from the
prior year's period. Interest expense increased $463,000 or 386.9% compared to
the prior year period due to increased borrowing to finance the acquisition of
routes from Telco West and Computer Assisted Technologies, Inc. ("CAT").
Depreciation and amortization increased in 1997 by $569,500, an increase of
156.1% over the prior year's period, attributable to amortization associated
with the acquired phones and contracts.
EXPANSION INTO PUERTO RICO
During 1998, the Company began researching the Puerto Rican payphone
market. It was determined that although the Puerto Rican Regulatory Board (PRRB)
had not required the Puerto Rican Telephone Company (PRTC) to provide
"competition neutral" service to independent payphone providers at a "cost-based
rate", the Company was confident that the Telecom Act would eventually correct
this situation. In March, the Company hired a Leasing Manager for Puerto Rico
and began contracting with local businesses to provide payphone service. In
April the Company received its first payphone lines from the PRTC and
installed its first payphones. As of December 31, 1998 the Company had
installed 300 payphones and had signed agreements to install an additional
1,300 payphones. On March 1, 1999 the Company had 13 fulltime employees in
Puerto Rico.
In March of 1998, the Company received verbal assurances from the PRTC,
that payphone lines would be made available, and the charge would be a flat rate
of $50.00 per month per line. However, when actually invoiced the bills
included additional charges ranging from $0.13 to $0.26 per call. At that
time, the PRTC and the Company agreed that until a final decision was reached
on a rate case before the PRRB, the Company would not pay the per call
charges. On May 27, 1998 the PRRB ruled on that rate case and instructed the
PRTC to reduce the per call charges to between $0.01 and $0.03 per call,
depending upon the routing of the call. The PRTC appealed the ruling to the
Court of Appeals, which upheld the ruling in December 1998. The PRTC appealed
the ruling to the Puerto Rican Supreme Court, which on January 28, 1999
agreed to hear the case and issued a stay of execution until the court
renders a decision on the appeal. During the second and third quarters of
1998 the Company accrued unpaid line charges at the rate of $0.15 per call.
In the fourth quarter the Company reduced the accrued unpaid line charges to
$0.06 per call. If the Puerto Rican Supreme Court reverses the Court of
Appeals, and reinstates the old rates, then the Company estimates it would
have an unrecorded liability at December 31, 1998 of $45,000.
On September 21, 1998, hurricane Georges struck Puerto Rico, causing
considerable damage to the Island including widespread loss of telephone
service. Damage to the Company's property was not significant, however the
subsequent interruption in telephone service resulted in considerable down time
at some payphones. For 7 days following the storm, the Company programmed its
payphones to provide free local calls in Puerto Rico. This public service was
widely broadcast on local radio.
PUBLIC INTERNET ACCESS TERMINALS
During 1998, the Company began test marketing public internet access
terminals, which allow a customer to access the internet while away from their
home or office computer. The customers have the option of paying the charges,
currently $1.00 for 5 minutes, using cash or a credit card. At December 31, 1998
the Company had contracted with site providers to install 10 terminals, of which
5 were installed. Under the terms of the contracts, the Company receives all
revenues generated by the terminals in return for
<PAGE>
a commission payment based upon revenues generated.
Based on results of testing through December 31, 1998, management has
determined to continue public internet testing in order to determine whether
consumer demand will be sufficient to generate a return on the investment, which
currently is approximately $5,000 per terminal. Management is also considering
other strategies to develop the market, including bringing into the business
joint venture partners that may benefit in owning part of a network of public
internet terminals, with the goals of lowering the Company's investment per
terminal and accelerating the growth of the network.
SALES TAX CONTINGENCY
Based on its analysis of the published regulations of the Minnesota
Department of Revenue the Company 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, on December 31, 1996, the Company established a reserve of
$865,000 for the years prior thereto and has reserved an additional $242,760
and $253,970 for the year ended December 31, 1997 and 1998 respectively.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1998, the Company's operating
activities provided $1,307,000. Investments in equipment and rental
agreements used $5,419,000 and principal payments on long-term debt and fees
used $1,179,000. Activities were funded with 4,150,000 in bank debt, the sale
of $1,151,000 in short-term investments and collections of stock
subscriptions of $9,000, resulting in a $19,534 increase in cash balances.
On June 30, 1998, the Company entered into a Credit Agreement with
Norwest Bank (the "Bank") pursuant to which the Company borrowed $3,800,000 to
acquire the Jay Telephone route. The Company granted the Bank a first lien on
all of its assets to secure its obligations to the Bank. The agreement provided
for the payment of interest at an annual rate equal to 1.0% over the "reference"
rate announced from time to time by the Bank. The principal balance is amortized
over 60 months. On December 16, 1998 the agreement was amended to provide the
Company a $1,000,000 line of credit to be used to accelerate the rate of
installations in Puerto Rico. The line of credit converts into a fully
amortizing term loan on September 30, 1999 to be amortized over the following 45
months, at December 31, 1998 the Company had drawn $350,000 from the line of
credit.
On June 30, 1998 as part of the purchase of the Jay Telephone route,
the Company delivered a performance-based contingent promissory note of $500,000
due October 30, 1999. The principal balance of the note is subject to
reductions depending upon the performance of the acquired phones during the
12 months ending June 30, 1999. Based upon performance to date, the Company
does not anticipate that it will be required to make any payments on the note.
During the first quarter of 1999, the Company agreed in principle to
sell approximately 1000 payphones in an all cash transaction. The transaction is
subject to completion of due diligence and other customary closing conditions.
The Company anticipates the transaction will be completed in the second quarter
of 1999 and that net proceeds will be applied to the reduction of debt and the
installation of payphones in Puerto Rico. The Company expects to partially
offset the loss of revenues derived from the assets to be sold with revenues
from the Puerto Rican phones and through reduced borrowing costs.
RECENT ACQUISITIONS
<PAGE>
On June 30, 1998 the Company completed its acquisition from Edward
Steven Corporation and Drake Telephone Company of 965 payphones located
principally in Philadelphia, Pennsylvania, as well as the trade name "Jay
Telephone Vending". The purchase price for the acquired assets was $4,005,987
with the Company paying the purchase in cash of which $3,800,000 was provided
by a bank loan. An additional amount up to $500,000 may be due based upon the
performance of acquired phones during the twelve months ending June 30, 1999.
Based upon performance to date, the Company does not anticipate that it will
be required to make any additional payments.
ACCOUNTING STATEMENTS
In 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, EARNINGS PER SHARE. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to Statement 128
requirements.
In 1997, the FASB issued Statements No. 130, REPORTING COMPREHENSIVE
INCOME, and No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, effective for fiscal years beginning after December 15, 1997. The
adoption by the Company of these Statements in January 1998 is not expected to
have a material impact on the Company's financial statements.
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year
in the date field, with the result that data referring to the year 2000 and
subsequent years may be misinterpreted by these programs. If present in the
computer applications of the Company and not corrected, this problem could cause
computer applications to fail or to create erroneous results and could cause a
disruption in operations and have a short-term adverse effect on the Company's
business and results of operations. The Company has evaluated its principal
computer systems and has determined that they are substantially Year 2000
compliant. The Company has initiated discussions with its key suppliers to
determine whether they have any Year 2000 issues, and has received assurances
that they do not anticipate any disruption in operations. The Company has not
incurred any material expenses to date in connection with this evaluation and
does not anticipate material expenses in the future, depending on the status of
its suppliers and customers with respect to this issue.
ITEM 7. FINANCIAL STATEMENTS
The following financial information of the Company is included as
follows:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors...................................................................
Consolidated Financial Statements:
Consolidated Balance Sheets for Years Ended December 31, 1998 and 1997.....................
Consolidated Statements of Operations for Years Ended December 31, 1998
and 1997...................................................................................
Consolidated Statements of Shareholders' Equity for Years Ended December 31,
1998 and 1997..............................................................................
Consolidated Statements of Cash Flows for Years Ended December 31, 1998
<PAGE>
and 1997...................................................................................
Notes to Consolidated Financial Statements.................................................
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information regarding concerning the Directors, Executive Officers,
Promoters and Control Persons is set forth in the Company's definitive Proxy
Statement to be delivered to stockholders in connection with the Company's
Annual meeting of Stockholders to be held on May 25, 1999 (the "Proxy
Statement") under the headings "Election of Directors" and "Executive Officers",
which information is incorporated herein by reference to the Proxy Statement
which the Company intends to file with the Securities and Exchange Commission by
April 19, 1999. The information regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934 is set forth in the Proxy statement under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance", which
information is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation", which information is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Beneficial
Ownership of Common Stock", which information is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transaction is
set forth in the Proxy Statement under the heading "Certain Transactions", which
information is incorporated herein by reference.
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. SEE "EXHIBIT INDEX" ON PAGE FOLLOWING SIGNATURES.
(b) REPORTS ON FORM 8-K
The Company filed reports on Form 8-K on November 16, 1998 reporting
the Company's financial results for the third quarter ended September 30, 1998
and on December 21, 1998 reporting anticipated 4th quarter results.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CHOICETEL COMMUNICATIONS, INC.
Date: March 30, 1999
By /s/ Gary S. Kohler
----------------------------
Gary S. Kohler
Chairman of the Board of Directors
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Power of Attorney
Each person whose signature appears below constitutes and appoints
JEFFREY R. PALETZ and JACK S. KOHLER as his true and lawful attorneys-in-fact
and agents, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form
10-KSB and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all said attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
<TABLE>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Gary S. Kohler Director March 30, 1999
-----------------------------------------------
Gary S. Kohler
/s/ Jeffrey R. Paletz President and Director March 30, 1999
-----------------------------------------------
Jeffrey R. Paletz
/s/ Melvin Graf Executive Vice President and March 30, 1999
----------------------------------------------- Director
Melvin Graf
/s/ Jack S. Kohler Vice President and Chief Financial March 30, 1999
----------------------------------------------- Officer
Jack S. Kohler
/s/ Dustin Elder Vice President March 30, 1999
-----------------------------------------------
Dustin Elder
/s/ Robert A. Hegstrom Director March 30, 1999
-----------------------------------------------
Robert A. Hegstrom
/s/ Michael Wigley Director March 30, 1999
-----------------------------------------------
Michael Wigley
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C.
EXHIBIT INDEX TO FORM 10-KSB
OF
CHOICETEL COMMUNICATIONS, INC.
For the Fiscal Year Ended December 31, 1999
Commission File Number: 0-230 17
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<C> <S>
3.1 Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 of the Registrant's Registration
Statement on Form SB-2; Registration No. 333-29969)
3.2 Bylaws (incorporated by reference to Exhibit 3.2 of the
Registrant's Registration Statement on Form SB-2; Registration No.
333-29969)
4.1 Specimen Certificate representing the Common Stock (incorporated
by reference to Exhibit 4.1 of the Registrant's Registration
Statement on Form SB-2; Registration No. 333-29969)
4.2 Form of Redeemable Warrant Agreement with Norwest Bank Minnesota,
National Association, including certificate representing the
Redeemable Warrants (incorporated by reference to Exhibit 4.2 of
the Registrant's Registration Statement on Form SB-2; Registration
No. 333-29969)
10.1* 1997 Long-Term Incentive and Stock Option Plan (incorporated by
reference to Exhibit 10.1 of the Registrant's Registration
Statement on Form SB-2; Registration No. 333-29969)
10.2 Lease Agreement (incorporated by reference to Exhibit 10.2 of the
Registrant's Registration Statement on Form SB-2; Registration No.
333-29969)
10.3* Bonus Program (incorporated by reference to Exhibit 10.3 of the
Registrant's Registration Statement on Form SB-2; Registration No.
333-29969)
10.4 Amended and Restated Loan Agreement with National City Bank, dated
as of January 2, 1997 (incorporated by reference to Exhibit 10.4
of the Registrant's Registration Statement on Form SB-2;
Registration No. 333-29969)
10.5 Promissory Note payable to Serence Paletz, dated April 10, 1995
(incorporated by reference to Exhibit 10.5 of the Registrant's
Registration Statement on Form SB-2; Registration No. 333-29969)
10.6 Promissory Note payable to William Opsahl, dated April 18, 1995
(incorporated by reference to Exhibit 10.6 of the Registrant's
Registration Statement on Form SB-2; Registration No. 333-29969)
<PAGE>
10.7 Promissory Note payable to Miriam Graf, dated November 3, 1995
(incorporated by reference to Exhibit 10.7 of the Registrant's
Registration Statement on Form SB-2; Registration No. 333-29969)
10.8 Promissory Note payable to William Opsahl, dated December 2, 1995
(incorporated by reference to Exhibit 10.8 of the Registrant's
Registration Statement on Form SB-2; Registration No. 333-29969)
10.9 Promissory Note payable to Ronald M. Gross and Elaine Weitzman,
dated December 7, 1995 (incorporated by reference to Exhibit 10.9
of the Registrant's Registration Statement on Form SB-2;
Registration No. 333-29969)
10.10 Promissory Note payable to William B. Topp and Norma Topp, dated
July 7, 1996 (incorporated by reference to Exhibit 10.10 of the
Registrant's Registration Statement on Form SB-2; Registration No.
333-29969)
10.11 Promissory Note payable to The Topp Family Trust, dated July 27,
1996 (incorporated by reference to Exhibit 10.11 of the
Registrant's Registration Statement on Form SB-2; Registration No.
333-29969)
10.12 Agreement for Sale and Purchase of Business Assets with Telco
West, Inc. ("Telco"), dated January 2, 1997 (incorporated by
reference to Exhibit 10.12 of the Registrant's Registration
Statement on Form SB-2; Registration No. 333-29969)
10.13 Installment Collateral Note payable to Telco, dated January 2,
1997 (incorporated by reference to Exhibit 10.13 of the
Registrant's Registration Statement on Form SB-2; Registration No.
333-29969)
10.14 Installment Collateral Note payable to Telco, dated January 2,
1997 (incorporated by reference to Exhibit 10.14 of the
Registrant's Registration Statement on Form SB-2; Registration No.
333-29969)
10.15 Agreement for Sale and Purchase of Assets with Computer Assisted
Technologies, Inc. ("CAT"), dated as of March 14, 1997
(incorporated by reference to Exhibit 10.15 of the Registrant's
Registration Statement on Form SB-2; Registration No. 333-29969)
10.16 Route Service Agreement with CAT, dated as of February 1, 1997
(incorporated by reference to Exhibit 10.16 of the Registrant's
Registration Statement on Form SB-2; Registration No. 333-29969)
10.17* Employment Agreement with Jeffrey R. Paletz, dated as of April 15,
1997 (incorporated by reference to Exhibit 10.17 of the
Registrant's Registration Statement on Form SB-2; Registration No.
333-29969)
10.18* Employment Agreement with Melvin Graf, dated as of April 15, 1997
(incorporated by reference to Exhibit 10.18 of the Registrant's
Registration Statement on Form SB-2; Registration No. 333-29969)
10.19* Employment Agreement with Jack S. Kohler, dated as of April 15,
1997 (incorporated by reference to Exhibit 10.19 of the
Registrant's Registration Statement on Form SB-2; Registration No.
333-29969)
10.20* Employment Agreement with Dustin Elder, dated as of August 14,
1997
10.21 Agreement for Service Resale with U.S. West Communications, Inc.,
undated
<PAGE>
(incorporated by reference to Exhibit 10.21 of the Registrant's
Registration Statement on Form SB-2; Registration No. 333-29969)
10.22 Agreement for Sale and Purchase of Business Assets with Edward
Steven Corporation and Drake Telephone Company, dated May 7, 1998
**
10.23 Credit Agreement with Norwest Bank Minnesota, dated as of June 30,
1998 **
10.24 First Amendment to the Credit Agreement with Norwest Bank
Minnesota, dated as of December 16, 1998 **
21 Subsidiaries of Registrant **
24 Power of Attorney (included on the signature page of this Form
10-KSB)
27 Financial Data Schedule (filed with electronic version only)
</TABLE>
-------------
* Management contract or compensatory plan or arrangement.
** Filed herewith.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS FOR:
CHOICETEL COMMUNICATIONS,
INC. AND SUBSIDIARIES
Years ended
December 31, 1998 and 1997
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
ChoiceTel Communications, Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of ChoiceTel
Communications, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated 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 consolidated financial position of ChoiceTel
Communications, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
consolidated 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
March 16, 1999
<PAGE>
<TABLE>
<CAPTION>
CHOICETEL COMMUNICATIONS, INC. CONSOLIDATED
AND SUBSIDIARIES BALANCE SHEETS
DECEMBER 31
- ---------------------------------------------------------------------------------------------------
1998 1997
------------- -------------
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 363,239 $ 343,705
Short-term investments 1,151,215
Accounts receivable 1,080,794 575,313
Prepaid:
Rent 176,411 93,357
Other 487,149 458,509
Deferred taxes 710,000 601,000
------------- -------------
Total current assets 2,817,593 3,223,099
------------- -------------
Property and equipment, net 6,336,401 4,521,017
------------- -------------
Other assets:
Prepaid rents 73,998 92,179
Rental contracts, net of accumulated amortization
of $776,333 in 1998 and $355,412 in 1997 5,501,771 3,212,450
Deferred financing, net of accumulated
amortization of $3,000 in 1998 27,000
------------- -------------
5,602,769 3,304,629
------------- -------------
$ 14,756,763 $ 11,048,745
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Checks outstanding in excess of bank balance $ 74,604 $ 139,239
Notes payable 350,000 350,000
Current portion of long-term debt 1,222,559 843,301
Accounts payable 238,944 48,000
Accrued expenses 2,339,805 2,116,142
------------- -------------
Total current liabilities 4,225,912 3,496,682
------------- -------------
Long-term liabilities:
Deferred taxes 653,000 449,000
Long-term debt, net of current portion 3,891,732 1,269,985
------------- -------------
4,544,732 1,718,985
------------- -------------
Shareholders' equity 5,986,119 5,833,078
-------------- -------------
$ 14,756,763 $ 11,048,745
-------------- -------------
-------------- -------------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
CHOICETEL COMMUNICATIONS, INC. CONSOLIDATED
AND SUBSIDIARIES STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1998 1997
------------ -----------
<S> <C> <C>
Service revenue $ 9,344,248 $ 7,081,227
Cost of service 4,231,342 3,725,204
------------ -----------
Gross margin 5,112,906 3,356,023
------------ -----------
Selling, general and administrative expenses:
Salary and benefits 1,873,070 1,260,863
Travel and related 196,598 128,115
Office and overhead 952,066 379,711
------------ -----------
3,021,734 1,768,689
------------ -----------
Depreciation and amortization 1,317,051 927,697
Interest 310,081 701,048
Sales tax contingency 253,972 242,760
------------ -----------
4,902,838 3,640,194
------------ -----------
Income (loss) before income taxes 210,068 (284,171)
Provision for income taxes (benefit) 95,000 (150,000)
------------ -----------
Net income (loss) $ 115,068 $ (134,171)
------------ -----------
------------ -----------
Earnings per common share:
Basic $ .04 $ (.06)
------------ -----------
------------ -----------
Diluted $ .04 $ (.06)
------------ -----------
------------ -----------
Weighted average number of common shares outstanding:
Basic 2,915,006 2,114,922
------------ -----------
------------ -----------
Diluted 2,916,457 2,114,922
------------ -----------
------------ -----------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
CHOICETEL COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS
AND SUBSIDIARIES OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
---------------------------------------
CHOICETEL
CHOICETEL, INC. COMMUNICATIONS, INC.
------------------- --------------------
10,000,000 SHARES 15,000,000 SHARES
AUTHORIZED, NO PAR AUTHORIZED, $.01 PAR ADDITIONAL
------------------ --------------------- PAID-IN ACCUMULATED SUBSCRIPTIONS
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE TOTAL
-------- --------- --------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <S> <C> <C> <C>
Balance, January 1, 1997 846,508 $ 1,000 1,919,266 $ 1,459,473 $ (751,814) $ (44,571) $ 664,088
Contributions of subsidiary stock to
parent (846,508) (1,000) $ 1,000
Reclassification of S-Corp accumulated
deficit (751,814) 751,814
Collection of subscription receivable 25,990 25,990
Conversion to $.01 par value stock (1,440,280) 1,440,280
Issuance of stock as compensation 9,500 95 37,905 38,000
Issuance of stock in acquisition 186,240 1,862 743,098 744,960
Issuance of 800,000 common shares
in public offering 800,000 8,000 4,486,211 4,494,211
Net loss (134,171) (134,171)
------- -------- --------- ----------- ---------- ---------- --------- ----------
Balance, December 31, 1997 -0- -0- 2,915,006 29,150 5,956,680 (134,171) (18,581) 5,833,078
Issuance of stock warrants 9,000 9,000
Issuance of stock options 20,392 20,392
Collection of subscription receivable 8,581 8,581
Net income 115,068 115,068
------- -------- --------- ----------- ---------- ---------- --------- ----------
Balance, December 31, 1998 $ 2,915,006 $ 29,150 $5,986,072 $ (19,103) $ (10,000) $5,986,119
------- -------- --------- ----------- ---------- ---------- --------- ----------
------- -------- --------- ----------- ---------- ---------- --------- ----------
</TABLE>
See notes to financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CHOICETEL COMMUNICATIONS, INC. CONSOLIDATED
AND SUBSIDIARIES STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 115,068 $ (134,171)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Deferred taxes 95,000 (152,000)
Depreciation 893,129 681,983
Amortization 423,922 245,714
Stock based compensation issued 29,392 38,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (505,481) (402,379)
Prepaid expenses (93,513) (54,737)
Increase (decrease) in:
Checks outstanding in excess of bank balance (64,635) 61,908
Accounts payable 190,944 48,000
Accrued expenses 223,663 929,481
----------- -----------
Net cash provided by operating activities 1,307,489 1,261,799
----------- -----------
Cash flows used in investing activities:
Purchase of:
Equipment (1,116,263) (1,223,657)
Rental contracts (296,506)
Redemption (purchase) of short-term investments 1,151,215 (1,151,215)
Payments for acquisitions (205,987) (2,300,224)
Advances in connection with acquisition (309,479)
----------- -----------
Net cash used in investing activities (467,541) (4,984,575)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance common stock 4,494,211
Payments of subscription receivable 8,581 25,990
Principal payments on long-term debt (1,148,995) (1,046,201)
Increase in notes payable 350,000
Payments on notes payable (360,000)
Loan origination fees (30,000)
------------- ----------
Net cash (used in) provided by financing activities (820,414) 3,114,000
------------- -----------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
CHOICETEL COMMUNICATIONS, INC. CONSOLIDATED
AND SUBSIDIARIES STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------
1998 1997
------------ -----------
<S> <C> <C>
Net increase (decrease) in cash $ 19,534 $ (608,776)
Cash, beginning balance 343,705 952,481
------------ -----------
Cash, ending balance $ 363,239 $ 343,705
------------ -----------
------------ -----------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 340,012 $ 714,381
------------ -----------
------------ -----------
Supplemental cash flows information:
Details of acquisitions:
Fair value of assets $ 4,005,987 $ 5,810,350
Liabilities assumed (includes $1,556,500 of
seller financing) 2,765,166
Issuance of note 3,800,000
Issuance of stock 744,960
------------ -----------
Cash paid for assets $ 205,987 $ 2,300,224
------------ -----------
------------ -----------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
CHOICETEL COMMUNICATIONS, INC. NOTES TO CONSOLIDATED
AND SUBSIDIARIES FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements for 1998 and 1997 include the
accounts of ChoiceTel Communications, Inc. (formerly Intelliphone, Inc.)
and its wholly owned subsidiaries, Choicetel, Inc. and Public Internet
Access Holding Corp. All material intercompany balances have been
eliminated.
Nature of business:
Intelliphone, Inc. was incorporated in October 1989 and changed its name
to ChoiceTel Communications, Inc. in April 1997. The Company provides
coin operated pay telephone service in fourteen states and Puerto Rico,
however, revenue is generated predominantly in Minnesota, Oregon and
Pennsylvania.
Choicetel, Inc. was incorporated in 1995 and was dormant until June 1996
when operations began. Choicetel, Inc. is a reseller of telephone service
to pay telephone owners in Minnesota.
Public Internet Access Holding Corp. was incorporated in 1998 and has not
started operations.
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. In October 1998, the Company changed the
estimated useful life of all phones to 10 years based on their experience.
The effect of this change resulted in $75,000 less depreciation expense
for 1998. 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.
Prepaid rents:
Prepaid rents represent incentives paid to phone location merchants and
property owners to secure long-term contracts at such sites and are being
amortized as consumed per the rental agreement.
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.
Deferred financing:
Deferred financing costs are being amortized over the life of the related
notes on a straight-line basis.
7
<PAGE>
CHOICETEL COMMUNICATIONS, INC. NOTES TO CONSOLIDATED
AND SUBSIDIARIES FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
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.
Effective January 1997, ChoiceTel Communications, Inc.'s "S" corporation
status terminated and it became subject to federal and state income taxes.
Stock-based compensation:
The Company accounts for its stock options in accordance with the
provisions of Accounting Principles Board Opinion No. 25 (APB No. 25),
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations.
As such, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
The Company has also adopted SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS No. 123), which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards 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.
Earnings (loss) per share:
In 1997, the Company adopted SFAS Statement No. 128, "Earnings per Share".
Basic earnings per common share are based on the weighted average number
of common shares outstanding in each year. Diluted earnings per common
share assume that outstanding common shares were increased by shares
issuable upon exercise of stock options and warrants for which market
price exceeds exercise price, less shares which could have been purchased
by the Company with related proceeds. This calculation added 1,451
shares to the diluted weighted average shares outstanding in 1998.
Stock options and warrants of 1,225,000 and 1,082,500, for December 31,
1998 and 1997, respectively, were not used in the calculation of diluted
earnings (loss) per share because they were antidilutive.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, stock issued by the Company at prices less than the initial
offering price during the twelve months immediately preceding the initial
public offering have been included in the determination of shares used in
the calculation of historical earnings (loss) per share as if they were
outstanding for all periods.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of certain assets and liabilities
and disclosures. Accordingly, the actual amounts could differ from those
estimates. Any adjustments applied to estimated amounts are recognized in
the year in which such adjustments are determined. Estimates that are
susceptible to significant change are disclosed in notes 3 and 7.
8
<PAGE>
CHOICETEL COMMUNICATIONS, INC. NOTES TO CONSOLIDATED
AND SUBSIDIARIES FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
2. SHAREHOLDERS' EQUITY:
In February 1997, the shareholders of Choicetel, Inc. contributed all
outstanding shares of Choicetel, Inc. to the Company. The contribution was
recorded as an adjustment to additional paid-in capital.
In April 1997, the shareholders approved an increase in the number of authorized
shares of common stock from 2,000,000 with no par value to 15,000,000 with $.01
par value. The shareholders also approved the authorization of 5,000,000 shares
of preferred stock with $.01 par value. The change in par value did not affect
any existing rights of shareholders and has been recorded as an adjustment to
additional paid-in capital and common stock. No shares of preferred stock were
issued as of December 31, 1998.
In November 1997, the Company completed the issuance of an additional 800,000
shares of common stock through a public offering, resulting in net proceeds
(after deducting issuance costs) of $4,494,211. A portion of the proceeds were
used to retire existing debt and debt acquired in the acquisition of Telco West,
Inc.
3. ACQUISITIONS:
Jay Telephone Vending:
On June 30, 1998, the Company purchased a route of payphones in Philadelphia,
Pennsylvania along with the trade name Jay Telephone Vending from Edward Steven
Corporation and Drake Telephone Company. The total cost for the acquired assets
was $4,005,987, and was financed by the bank with a $3,800,000 note payable. An
additional amount up to $500,000 may be due based upon the performance of
acquired phones during the twelve months ending June 30, 1999.
The following summarized unaudited pro forma information assumes the
acquisitions had occurred on January 1, 1997.
The pro forma amounts reflect the results of operations for the Company, the
acquired business, and the following purchase acquisition adjustments for the
period presented:
- - Depreciation on fixed assets and amortization of contracts is based on the
purchase price allocation.
- - Elimination of the salaries of the officers of the acquired company.
- - Interest expense on additional debt that would have been incurred to
finance the acquisition.
9
<PAGE>
CHOICETEL COMMUNICATIONS, INC. NOTES TO CONSOLIDATED
AND SUBSIDIARIES FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
3. ACQUISITIONS (CONTINUED):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
--------------------------------------------------
PRO FORMA
COMPANY JAY TELEPHONE ADJUSTMENTS COMBINED
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Gross margin $ 5,112,906 $ 878,434 $ 5,991,340
----------- ---------- -----------
Selling, general and
administrative 3,021,734 617,674 $ (223,173) 3,416,235
Interest expense 310,081 13,413 176,587 500,081
Depreciation and amortization 1,317,051 235,539 1,552,590
Sales tax contingency 253,972 253,972
----------- ---------- ----------- -----------
Income before income taxes 210,068 247,347 (188,953) 268,462
Provision for income taxes 95,000 98,939 (75,582) 118,357
----------- ---------- ----------- -----------
Net income after tax $ 115,068 $ 148,408 $ (113,471) $ 150,105
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
--------------------------------------------------
PRO FORMA
COMPANY JAY TELEPHONE ADJUSTMENTS COMBINED
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Gross margin $ 3,356,023 $1,174,122 $ 4,530,145
----------- ---------- -----------
Selling, general and
administrative 1,768,689 1,078,496 (556,811) 2,290,374
Interest expense 701,048 25,213 332,500 1,058,761
Depreciation and amortization 927,697 120,221 370,583 1,418,501
Sales tax contingency 242,760 242,760
----------- ---------- ----------- -----------
Loss before income taxes (284,171) (49,808) (146,272) (480,251)
Provision for income taxes
(benefit) (150,000) (17,400) (58,509) (225,909)
----------- ---------- ----------- -----------
Net loss after tax $ (134,171) $ (32,408) $ (87,763) $ (254,342)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
10
<PAGE>
CHOICETEL COMMUNICATIONS, INC. NOTES TO CONSOLIDATED
AND SUBSIDIARIES FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
3. ACQUISITIONS (CONTINUED):
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.:
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 than $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 on February 1, 1997
until such time CAT received approval of the sale from the Minnesota and
Wisconsin Public Utilities Commissions. 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.
Subsequent to the closing of the sale in August 1997 the Company determined
that certain location agreements acquired in the sale may not be valid and
therefore certain adjustments to the original purchase price are necessary.
Additionally, the Company advanced monies to, and paid certain expenses of
CAT during 1997 in excess of the required lease payments of the Route
Service Agreement. Total amounts paid of $309,479 are included in the
consolidated financial statements as other prepaid expenses. These potential
adjustments have not been netted against the seller financing by the Company
although management believes the adjustment to the purchase price and
advances made substantially satisfy the $350,000 note payable.
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
1998 1997
-------------- ---------------
<S> <C> <C>
Phones and
related equipment $ 8,288,468 $ 5,937,547
Accumulated
depreciation (2,163,041) (1,469,906)
-------------- ---------------
6,125,427 4,467,641
-------------- ---------------
Office equipment
and improvements 291,093 96,860
Accumulated
depreciation (80,119) (43,484)
-------------- ---------------
210,974 53,376
-------------- ---------------
$ 6,336,401 $ 4,521,017
-------------- ---------------
-------------- ---------------
</TABLE>
11
<PAGE>
CHOICETEL COMMUNICATIONS, INC. NOTES TO CONSOLIDATED
AND SUBSIDIARIES FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
5. NOTE PAYABLE:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Note payable, Computer Assisted Technology, Inc.,
(CAT) interest only at 8.5% through February 7,
1998, at which time the principal is due.
Convertible to shares of common stock at $6.75 plus
adjustment based on IPO price of stock. The note has
not been settled due to a dispute between the
Company and CAT. See Note 3. $ 350,000 $ 350,000
----------- ----------
----------- ----------
</TABLE>
6. LONG-TERM DEBT:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Note payable, bank, due in increasing monthly
principal installments starting at $50,667,
increasing up to $70,000 at July 2002 plus interest
at a floating rate through June 2003. The interest
rate at December 31, 1998 was 8.75%. (A) (B) $ 3,495,998
Note payable, bank, revolving credit facility up to
$1,000,000, due in increasing monthly principal
installments beginning October 1999 determined as a
percent of the amount outstanding on September 30,
1999. Installments are due beginning October 1999
through June 2003, plus interest at a floating rate
(8.75% at December 31, 1998). (B) 350,000
Note payable, Telco, due in monthly installments of
$21,342 including interest at 10% through July 2001,
secured by equipment, subordinated to notes payable,
bank. 564,874 $ 753,452
Note payable, Telco, due in monthly installments of
$3,042 including interest at 10%. 364,884
Note payable, Telecapital, due in monthly
installments of $4,452 including interest at 14.5%
through April 2002, secured by equipment. 138,159 169,069
Capital leases, interest at 9.5% 551,156 825,881
Notes payable, vehicles, due in monthly installments
of $480 including interest at 8.95% through
December 2001. 14,104
----------- ----------
5,114,291 2,113,286
Less current portion 1,222,559 843,301
----------- ----------
$ 3,891,732 $ 1,269,985
------------ -----------
------------ -----------
</TABLE>
12
<PAGE>
CHOICETEL COMMUNICATIONS, INC. NOTES TO CONSOLIDATED
AND SUBSIDIARIES FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
6. LONG-TERM DEBT (CONTINUED):
(A) This note includes some mandatory prepayments based on cash flow and
penalties for other prepayments.
(B) These notes are secured by receivables, equipment, deposit accounts and an
insurance policy and partially guaranteed by certain officers. The Company is
required to maintain certain financial ratios and the notes have certain other
restrictive covenants regarding transactions of the Company.
Included in interest expense for 1997 is approximately $200,000 of interest paid
to Computer Assisted Technologies, Inc. during the Route Service Agreement
period.
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
----------------------- ------------
<S> <C>
1999 $ 1,222,559
2000 1,222,354
2001 983,837
2002 910,080
2003 765,461
------------
$ 5,114,291
------------
------------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
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 30 days notice.
Consulting agreement:
The Company paid a director/shareholder $34,800 and $24,000 for certain
consulting services in 1998 and 1997, respectively.
Leases:
Operating leases:
The Company leases its offices in Minnesota, Oregon and Puerto Rico
under operating leases expiring in May 2000. The Company also leases
office space in Pennsylvania on a month-to-month basis. The leases have
renewal options and require the Company to pay certain common area
costs and real estate taxes. Rent expense under the leases was $101,737
and $39,831 for the years ended December 31, 1998 and 1997,
respectively.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
----------------------- ----------------
<S> <C>
1999 $ 83,788
2000 26,795
----------------
$ 110,583
----------------
----------------
</TABLE>
Capital leases:
The cost of equipment, included in property and equipment, acquired under
capital leases and the related accumulated depreciation at December 31,
1998, is as follows:
<TABLE>
<CAPTION>
<S> <C>
Cost $ 934,856
Less accumulated
depreciation 177,858
------------
$ 756,998
------------
------------
</TABLE>
13
<PAGE>
CHOICETEL COMMUNICATIONS, INC. NOTES TO CONSOLIDATED
AND SUBSIDIARIES FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Capital leases (continued):
The future minimum lease payments under capital leases and their net
present value are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Total future minimum lease payments, payable in:
1999 $ 355,158
2000 241,970
----------
597,128
Less amounts representing
interest 45,972
----------
Present value of future
minimum lease payments $ 551,156
----------
----------
</TABLE>
Puerto Rico line charge contingency:
In March of 1998, the Company received verbal assurances from the Puerto
Rican Telephone Company (PRTC) that payphone lines would be made available
and the charge would be a flat rate of $50.00 per month per line. However,
when phone bills were received in the Company's offices, they included
additional charges ranging from $0.13 to $0.26 per call. At that time, the
PRTC and the Company agreed that until a final decision was reached on a
rate case before the Puerto Rican Regulatory Board (PRRB), the Company would
not pay the per call charges. On May 27, 1998 the PRRB ruled on that rate
case and instructed the PRTC to reduce the per call charges to between $.01
and $.03 per call, depending upon the routing of the call. The PRTC appealed
the ruling to the Court of Appeals, which upheld the ruling. PRTC has since
appealed the ruling to the Puerto Rico Supreme Court, which has agreed to
hear the case and has issued a stay of execution until the court renders a
decision on the appeal. From April through September 1998, the Company
accrued unpaid line charges at the rate of $0.15 per call. In October 1998,
the Company reduced the rate it was accruing line charges to $0.06 per call
based upon progress of this case.
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 issued an
order on October 9, 1997, 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 Company reduced its rate for recognizing revenue to the
previous rate of $6.00 per phone per month effective January 1, 1997 through
October 6, 1997. The 1997 change in estimate resulted in an accrual of a
$351,000 liability at December 31, 1997 to reflect an estimated liability
for the period from November 6, 1996 to October 6, 1997 and is included in
accrued expenses at December 31, 1998 and 1997.
14
<PAGE>
CHOICETEL COMMUNICATIONS, INC. NOTES TO CONSOLIDATED
AND SUBSIDIARIES FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Dial-around compensation (continued):
Effective October 7, 1997, the Company began recognizing dial around revenue
at approximately $37 per phone per month. In 1998, The FCC adjusted the rate
retroactively from October 7, 1997 to $0.24 per call or $31 per phone a
month. The rate recorded by the Company for 1998 was $31 per phone month.
The amount due from dial-around compensation included in accounts receivable
is approximately $856,000 and $410,000 at December 31, 1998 and 1997,
respectively. The ultimate resolution of matters related to dial-around
compensation could have a material effect on the Company's results of
operations.
Sales tax contingency:
After an original contact by ChoiceTel Communications, Inc., the Minnesota
Department of Revenue conducted an 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 than 85% of the fair market value of the
common stock on the date of 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.
During 1998, the Company granted options to employees and non-employee directors
to purchase 70,000 shares through the Incentive Plan. All options granted were
at the fair market value of the stock on the grant date. The employees options
vest over a three year period, the non-employee director options are exercisable
in full at the date of grant. The options have a term of five years.
Stock options were forfeited in the current year, 50,000 options at an exercise
price of $1.50 and 12,500 options at an exercise price of $4.00.
In January and February 1997, the Company granted to certain employees options
to purchase 60,000 shares of the Company's common stock. OP in 1997 were also
granted to non-employees to purchase 12,500 shares of the Company's common
stock.
Utilizing the Black Scholes option pricing model, the Company determined that
the fair value of options granted during 1998 and 1997 would not have affected
net income (loss) or income (loss) per share as reported, and accordingly, the
Company has not provided pro forma income and earnings per share information.
15
<PAGE>
CHOICETEL COMMUNICATIONS, INC. NOTES TO CONSOLIDATED
AND SUBSIDIARIES FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
8. STOCK OPTIONS AND WARRANTS (CONTINUED):
Information with respect to options outstanding as of December 31 is summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- ---------------------------
WEIGHTED- Weighted-
AVERAGE average
EXERCISE exercise
SHARES PRICE Shares price
--------------- -------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 122,500 $ 3.37 50,000 $ 1.50
Granted 70,000 4.06 72,500 4.66
Exercised
Forfeited 62,500 2.00
--------------- --------------
Outstanding at end of year 130,000 $ 4.34 122,500 $ 3.37
--------------- -------- --------------- ---------
--------------- -------- --------------- ---------
Range of exercise prices of options
outstanding at December 31 $3.38 TO $6.75 $1.50 to $6.75
Options exercisable at year end 80,000 92,500
Weighted average remaining life 3.4 YEARS 2 years
</TABLE>
During 1998 the Company issued 150,000 warrants to purchase at any time one
share of common stock, 50,000 of the warrants have an exercise price of $5.00
expiring August 2000, 50,000 of the warrants have an exercise price of $6.00
expiring in August 2001. The remaining 50,000 have an exercise price of $7.00
expiring in August 2002.
At December 31, the Company has outstanding the following warrants:
<TABLE>
<CAPTION>
Weighted
Average
exercise
1998 1997 price
--------- ---------- ----------
<S> <C> <C> <C>
Issued as part
of units in
public offering 800,000 800,000 $ 9.50
Granted to
Underwriter
in public
offering 160,000 160,000 8.95
Grant to
investment
relations
company 150,000 6.00
--------- ----------
Outstanding
at end
of year 1,110,000 960,000 $ 9.40
----------- --------- ---------
----------- --------- ---------
Warrants
exercisable
at year end 1,110,000 800,000
Weighted
average
remaining
life 3.8 YEARS 4.9 years
</TABLE>
16
<PAGE>
CHOICETEL COMMUNICATIONS, INC. NOTES TO CONSOLIDATED
AND SUBSIDIARIES FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
8. STOCK OPTIONS AND WARRANTS (CONTINUED):
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>
1998 1997
------------- --------------
<S> <C> <C>
Current, state $ 2,000 $ 2,000
Deferred:
Federal 80,000 (90,000)
State 13,000 (16,000)
Effect of change in
tax status (46,000)
------------- --------------
$ 95,000 $ (150,000)
------------- --------------
------------- --------------
</TABLE>
A reconciliation between the statutory federal income tax rates to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
Statutory federal tax
rate 34.0% 34.0%
State taxes (net of
federal tax benefit) 6.0% 6.0%
Effect of nondeductible
expenses 5.2% 5.0%
Effect of change in tax
status 7.8%
-------- -------
Effective tax rate 45.2% 52.8%
-------- -------
</TABLE>
The deferred tax asset and deferred tax liability consist of the following at
December 31:
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
Deferred tax asset:
Sales tax
contingency $ 545,000 $ 444,000
Accrued expenses 25,000 17,000
Accrued dial-around
compensation 140,000 140,000
------------- --------------
$ 710,000 $ 601,000
------------- --------------
------------- --------------
Deferred tax liability:
Depreciation $ 839,000 $ 448,000
Amortization (31,000) 1,000
Net operating loss
carryforward (155,000)
------------- --------------
$ 653,000 $ 449,000
------------- --------------
------------- --------------
</TABLE>
The Company has federal and state net operation loss carryforwards of $388,000
expiring in years 2012 and 2013.
Utilization of the deferred tax asset of $710,000 disclosed above is dependent
on future taxable profits in excess of profits arising from existing taxable
temporary differences. Although there was a reported taxable loss for the year
ended December 31, 1998 the assets have been recognized based on management's
estimate of future taxable income.
17
<PAGE>
CHOICETEL COMMUNICATIONS, INC. NOTES TO CONSOLIDATED
AND SUBSIDIARIES FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
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 carrying amount of cash, short-term
investments, accounts receivable and notes and accounts payable approximates
fair value. Fair value of long-term debt approximates recorded value based on
rates available to the Company for similar terms and maturities.
11. SUBSEQUENT EVENT:
The Company entered into an agreement in February 1999 to sell all phones in the
northwest region for $2,940,000 which generated approximately $1.9 million of
revenue in both 1998 and 1997. The sale is contingent upon certain due diligence
on the part of the buyer and the buyer's ability to obtain sufficient financing.
The proceeds from the sale will be used to pay off the long-term debt of
$564,874 which is secured by the equipment.
18
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made on
May 7, 1998, between EDWARD STEVEN CORPORATION, a Pennsylvania corporation
("ESC"); DRAKE TELEPHONE CO., a Pennsylvania corporation ("DTC" and together
with ESC, the "Sellers"); CHOICETEL COMMUNICATIONS, INC., a Minnesota
corporation (the "Purchaser"); JAY LUDWIG, a resident of the State of
Pennsylvania ("Ludwig"); and JAY SCOTT, a resident of the State of
Pennsylvania ("Scott", and together with Ludwig, the "Shareholders").
BACKGROUND:
A. The Shareholders in the aggregate own all of the outstanding
shares of capital stock of both Sellers.
B. Sellers together operate a business that provides pay telephone
services in Pennsylvania and is conducted under the name "Jay Telephone Vending"
(the "Business").
C. Sellers desire to sell to Purchaser certain assets of the
Business, and Purchaser desires to purchase such assets from Sellers, on the
terms and conditions set forth in this Agreement;
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE
Subject to and in reliance upon the representations, warranties and
agreements of the Sellers and Purchaser, and subject to the terms and conditions
of this Agreement:
1.01 SALE AND PURCHASE OF ASSETS. Sellers agree to sell, transfer,
convey and deliver to Purchaser, and Purchaser agrees to purchase from
Sellers, on the date of Closing defined in Section 3.01, at the purchase
price stated in Section 2.01, the Assets. As used in this Agreement, the
term "Assets" means, except as expressly stated herein, all of the assets
used in or relating to the Business, including, but not limited to, the
following:
(a) SITE PROVIDER CONTRACTS. All contracts pertaining to the
provision of pay telephones placed or to be placed into operation at
particular sites pursuant to an agreement therefor ("Site Contracts") with
site owners or operators ("Site Providers"), together with the Sellers'
right to provide pay telephone services to the Site Providers.
(b) EQUIPMENT. All pay telephones, and all furniture, fixtures,
equipment, machines and other tangible assets which are owned by Sellers
and used in connection with the Business as of the date of Closing
including but not limited to those tangible assets set forth on
SCHEDULE 1.01(b), hereto.
<PAGE>
(c) TRADE INFORMATION. All of Sellers' customer lists (together
with the right to solicit and service said customers), manuals, forms,
computer programs, business plans or like data respecting the Business or
the conduct thereof, whether existing or created as of the date of this
Agreement or as of the date of Closing.
(d) NAME AND PROPRIETARY INFORMATION. All rights relating to
exclusive use of the name "Jay Telephone Vending" or any similar or
derivative name, all goodwill relating thereto and to the Business, and the
right to free use of any proprietary information respecting the Business or
the conduct thereof.
(e) EXCLUDED ASSETS. The following assets shall not be sold,
transferred, conveyed or delivered to Purchaser pursuant to this Agreement:
(i) cash and monies in bank accounts, (ii) life insurance policies, (iii)
prepaid expenses, (iv) accounts receivable earned prior to the date of
Closing, (v) dial-around receivables earned prior to the date of Closing,
and (vi) all revenue earned by Sellers prior to the date of Closing
including operator service revenues and any tax or regulatory refunds or
credits, whenever received or credited. In the event Purchaser receives a
credit or a refund, Purchaser shall pay to Sellers the amount of such
credit or refund immediately upon receipt thereof.
ARTICLE II
PURCHASE PRICE; PAYMENT; NO ASSUMPTION OF LIABILITIES
2.01 PURCHASE PRICE. The aggregate purchase price for the Assets (the
"Purchase Price") shall be an amount calculated as follows, subject to a
minimum of $3,800,000 and a maximum of $4,300,000:
(a) Subject to Sections 2.01(b) and (c), below, Purchaser shall
pay to Sellers an amount equal to (i) 27.2 (the "Multiple"), TIMES (ii) the
average monthly cash flow per phone generated from the phones sold
hereunder which are installed and in service as of the date of Closing to
be set forth on a schedule identified as SCHEDULE 2.01(a) to be delivered
at or prior to Closing (collectively, the "Installed Phones") for the 12
full months following the Closing (the "12 Month Period"), TIMES (iii) the
difference between the number of Installed Phones and the number of
Installed Phones removed from service prior to the expiration of the 12
Month Period solely due to the absence of enforceable Site Contracts
therefor which have not been replaced within thirty (30) days of such
removal (provided, however, that any such replacement must have occurred
through the sole efforts of someone other than an employee of Purchaser and
the Site Contract therefor must have terms and be with a Site Provider
reasonably acceptable to Purchaser). For purposes of this Agreement, "cash
flow" shall mean coin revenue received, PLUS operator service and store and
forward receipts, PLUS dial-around compensation received, MINUS line
charges and long distance bills paid, MINUS commissions paid to Site
Providers, MINUS applicable sales, use and/or excise
2
<PAGE>
taxes which appear on the telephone bills, MINUS the charges described in
Section 2.01(d), below, but only to the extent described therein.
Notwithstanding the foregoing, the removal of any of the Installed Phones
from service prior to the expiration of the 12 Month Period for any
reason other than the absence of an enforceable Site Contract therefor,
including but not limited to removal due to store closing, fire,
vandalism, change in store ownership and expiration of the Site Contract
therefor, shall have no effect on the Purchase Price or the number used
pursuant to (iii), above, to determine the Purchase Price. Due to the
uncertainty of the dial-around compensation rate, the effect of increasing
the local coin rate, and the implementation of changes in the tariff for
local phone service, the Purchase Price as described in this Section
2.01(a) will be determined by the Accountants (as defined below) in
accordance with Section 2.02, below. Purchaser may use any
clearinghouse for the determination and distribution of its dial-around
compensation so long as its clearinghouse distributes all of the
dial-around compensation attributable to the Installed Phones for the
entire 12 Month Period no later than the date American Public
Communications Counsel Services distributes dial-around compensation
for such period.
(b) In the event that eighty-five percent (85%) or more of the
Installed Phones are subject to Site Contracts as of the date of Closing,
the Multiple shall be increased to 27.4.
(c) The Purchase Price shall be reduced by $2,000 for any
Installed Phone removed from service following the 12 Month Period but
before the conclusion of the Accountants' review due to the absence of an
enforceable Site Contract therefor which has not been replaced within
thirty (30) days of such removal (provided, however, that any such
replacement must have occurred through the sole efforts of someone other
than an employee of Purchaser and the Site Contract therefor must have
terms and be with a Site Provider reasonably acceptable to Purchaser). Any
Purchase Price reduction pursuant to this Section 2.01(c) shall be effected
first by reducing the principal amount of the Note (as defined below) to
the extent of the outstanding indebtedness then evidenced thereby and,
thereafter, by a cash refund to Purchaser.
(d) The parties acknowledge that the Federal Communications
Commission has authorized telephone companies to recover certain one-time
costs related to developing a tracking system for dial-around calls
("Tracking Costs"), which costs are anticipated to be passed on to pay
telephone service providers in the monthly line charges. If the portion of
these costs attributable to the Installed Phones are billed to Purchaser in
the 12 Month Period, whether as a one-time charge or spread out over a
number of months, then the Accountants shall allocate such costs over a
36-month period. For example and for illustration purposes only, if $15 of
Tracking Costs are billed to Purchaser in the 12 Month Period, then only $5
of the $15 shall be included as expense for the 12 Month Period in
determining the average monthly cash flow for the 12 Month Period.
Alternatively, if the telephone companies elect to pass on the Tracking
Costs by increasing line charges indefinitely, then the actual amounts paid
therefor by Purchaser in the 12 Month Period would be included in such
calculation as expense.
3
<PAGE>
2.02 DETERMINATION OF PURCHASE PRICE.
(a) Coopers & Lybrand L.L.P. or, in the event such firm is
unwilling or unable to undertake such engagement, another firm of certified
public accountants selected by Purchaser and reasonably acceptable to
Sellers (in either case, the "Accountants"), shall be engaged to conduct
the review described herein and to determine the cash flow generated by the
Installed Phones. The fees and expenses of the Accountants for the
foregoing services only shall be shared and paid equally by the Purchaser
and the Sellers.
(b) The review by the Accountants shall occur as soon as
reasonably practicable following Purchaser's receipt of the payment(s) for
dial-around compensation attributable to the Installed Phones for the
entire 12 Month Period, which review shall be concluded no later 30 days
after receipt of such payment(s) and a written report thereof shall be
delivered to Purchaser and Sellers within 10 days of the conclusion of the
review (the "Report Date"). The purpose of the review is to determine the
average monthly cash flow from the Installed Phones and the number of
Installed Phones removed from service both prior to the expiration of the
12 Month Period and following the 12 Month Period but before the conclusion
of the Accountants' review due to the absence of enforceable Site Contracts
therefor, all of which will be used by the Accountants to establish the
amount of the Purchase Price.
2.03 PAYMENT.
The Purchase Price shall be paid as follows:
(i) $62,500 paid contemporaneously with the execution of
this Agreement, which payment shall be non-refundable in the
event the transactions contemplated hereby are not consummated
for any reason, except that the Sellers shall refund the full
amount paid herewith in the event any of the representations,
warranties or statements made herein or in any document,
information or exhibit furnished under this Agreement or in
connection with the transactions contemplated hereby, contains
any untrue statement of a material fact, or omits to state a
material fact necessary to make the statements or facts contained
therein not misleading, which refund obligation shall be joint
and several as between the two Sellers, and
(ii) $37,500 payable on or before 5:00 p.m. Philadelphia
Time, Tuesday, May 12, 1998, and
(iii) $3,700,000 payable at Closing in cash, by
certified check or by wire transfer pursuant to Sellers'
instructions, and
4
<PAGE>
(iv) the balance, if any, to be paid in full no later than
ten (10) days after the Report Date, all as more fully set forth
in the form of promissory note attached hereto as EXHIBIT A (the
"Note"). The Note shall have an initial principal value of
$500,000 and shall be subject to reduction in an amount, if any,
by which $4,300,000 exceeds the amount of the Purchase Price as
determined by the Accountants. Further, the Note shall be
secured by either (i) an irrevocable letter of credit ("LC"),
(ii) a financial performance bond, ("Bond") or (iii) a cash
escrow ("Escrow") as determined by the Purchaser in its sole
discretion and having terms reasonably acceptable to Sellers (in
either case, the "Security Document"), a copy of which in draft
form shall be provided to Sellers no less than ten (10) days
prior to the Closing.
(v) The LC, Bond or Escrow will provide that the initial
draw by Sellers shall be in the amount directed in writing by the
Accountants. In the event either the Purchaser or Sellers
believe the Accountants' determination is incorrect by an amount
in excess of $10,000 the parties agree to meet to resolve the
dispute amicably. In the event an agreement is not reached
within 30 days after the LC, Bond or Escrow is initially drawn
against, the parties agree to submit the matter for binding
resolution in accordance with the Rules of the American
Arbitration Association in a proceeding to be venued in Chicago,
Illinois. The parties to such proceeding hereby agree to equally
share the fees payable to the arbitration panel but shall
otherwise be solely responsible for their respective costs in
connection with such proceeding. Until such time as the parties
amicably resolve the dispute or the arbitration decision is
rendered the balance of the LC, Bond, or Escrow shall remain in
place as security for the Note.
2.04 NO ASSUMPTION OF LIABILITIES. In connection with this Agreement,
neither Purchaser nor any affiliate of Purchaser is assuming or agreeing to
assume or discharge any liability or obligation of Sellers or Shareholders
whatsoever, whether now existing or hereafter incurred, including, without
limitation, any liability or obligation relating to any of the Assets or
the sale thereof, or pursuant to any lease, for the Sellers' office located
at Lee Park, 555 N. Lane, Conshohoken, Pennsylvania or otherwise, pursuant
to which either of the Sellers or either of the Shareholders is a party
except for liabilities assumed as set forth on Schedule 4.04 attached
hereto.
ARTICLE III
CLOSING
3.01 TIME AND PLACE. Subject to satisfaction or waiver of the
conditions to closing set forth in Article VII, below, the closing of the
transaction contemplated by this Agreement
5
<PAGE>
(the "Closing") shall take place at such time and location as shall be
agreed to by Sellers and Purchaser, but in no event later than
June 30, 1998.
3.02 DELIVERIES. At or before the Closing, and as a condition
precedent to Closing, unless waived in writing by the receiving party:
(a) Sellers shall deliver to Purchaser a fully-executed Bill of
Sale in the form attached as EXHIBIT B, and any other document or
instrument reasonably requested by Purchaser to evidence the sale and
transfer of any of the Assets free and clear of any and all claims, liens
or encumbrances of any kind.
(b) Ludwig shall execute and deliver to Purchaser an Employment
Agreement in the form of EXHIBIT C (the "Employment Agreement").
(c) The warranties and representations set forth in Article IV,
below, shall be true and correct on the date of Closing, as if then made,
and the Sellers shall deliver to Purchaser a certificate to that effect
signed by its chief executive officer and chief financial officer.
(d) Possession of the Assets shall be relinquished to Purchaser
by Sellers at the Closing.
(e) Purchaser shall deliver the payment required to be paid at
Closing pursuant to Section 2.03(ii), above, and the Note and Security
Document.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLERS AND SHAREHOLDERS
To induce Purchaser to consummate the transactions contemplated by
this Agreement, the Sellers and Shareholders, jointly and severally, warrant,
represent and covenant with and to Purchaser as follows, all of which
representations, warranties and covenants are made as of the date of this
Agreement and as of the date of Closing:
4.01 CORPORATE STANDING. Each of the Sellers is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and has all requisite power, authority,
permits and franchises to own, lease and operate its properties and to
carry on the Business as now being conducted. Each of the Sellers is duly
qualified and in good standing as a foreign corporation in all other states
where the character of its properties or the nature of the Business makes
such qualification necessary.
4.02 AUTHORIZATION OF AGREEMENT AND ENFORCEABILITY. The execution and
delivery of this Agreement by each of the Sellers has been duly authorized
by all necessary corporate action and the execution and delivery of this
Agreement by each of the Shareholders is done
6
<PAGE>
as their respective free acts and deeds. This Agreement has been duly
and validly executed and delivered by the Sellers and the Shareholders
and constitutes the valid and legally binding obligation of the Sellers
and the Shareholders, enforceable against the Sellers and the
Shareholders in accordance with its terms.
4.03 CHARTER AND BY-LAWS. Each of the Sellers has furnished to
Purchaser a good standing certificate issued by the Secretary of State of
Pennsylvania.
4.04 OWNERSHIP OF ASSETS. The Sellers in the aggregate own all of the
Assets free and clear of any and all liabilities, liens, encumbrances,
restrictions, assessments, obligations, charges and options of any kind
whatsoever (collectively, "Liens") except for Liens identified on Schedule
4.04 attached hereto. The Sellers in the aggregate will have at Closing
good and marketable title to the Assets and the absolute right, power and
capacity to sell, assign and deliver the Assets to Purchaser, free and
clear of any and all Liens, except for Liens identified on Schedule 4.04
attached hereto.
4.05 CAPITALIZATION. All of the issued and outstanding shares of the
capital stock of ESC, and all of the issued and outstanding shares of the
capital stock of DTC, are owned in the aggregate by the Shareholders.
There are no shareholder agreements, understandings, or commitments
relating to the right of the Sellers, respectively, to sell the Assets.
4.06 FINANCIAL CONDITION. SCHEDULE 4.06(a) attached hereto is an
unaudited analysis of pay telephone revenues and expenses for each of the
Sellers for the years ended December 31, 1997 and 1996, and for the
interim period ending on the most recent practicable date (the "Latest
Date"), and each of the Sellers will deliver to Purchaser, at Purchaser's
expense, prior to or at the Closing an audited balance sheet and statement
of income and surplus information for the same periods which will confirm
the unaudited analyses set forth on SCHEDULE 4.06(a) (collectively, the
"Financial Statements"). The Financial Statements are and will be complete
and accurate, have been and will be prepared in accordance with generally
accepted accounting principles, consistently applied, and fairly present
and will fairly present the financial condition and results of operations
of Sellers as of the dates and for the periods indicated. There has been
no material adverse change in the financial condition, properties or
business of either of the Sellers since the Latest Date. Neither of the
Sellers has any liabilities, obligations or commitments, whether absolute,
accrued, contingent or otherwise, other than (i) liabilities disclosed or
adequately provided for in the Financial Statements and (ii) liabilities
incurred in the ordinary course of business since the Latest Date which
individually and in the aggregate are not material in amount. At the date
of Closing, neither of the Sellers will have any outstanding liability for
borrowed money, or trade or other payables whether absolute, accrued,
contingent or otherwise, other than those that shall be listed in a
schedule identified as SCHEDULE 4.06(b) to be delivered to Purchaser at
Closing.
4.07 NO MATERIAL ADVERSE CHANGE. The Sellers will notify Purchaser
prior to Closing of any occurrence, event or condition which has occurred
or occurs between the date of the unaudited Financial Statements and the
Closing, and which has a reasonable likelihood
7
<PAGE>
of adversely affecting the Assets, the Business, business prospects or
the financial condition of Sellers. Since the Latest Date, there have
been no changes in the state, municipal or other non-federal laws,
regulations or orders pertaining to the provision of pay telephone
service or installation of pay telephones which will or would be
likely to materially adversely affect the Business. All known facts
material to the condition (financial or otherwise) of the Business or
the Assets have been disclosed to the Purchaser in this Agreement or
in a writing pursuant hereto.
4.08 CONTRACTS. Each of the Sellers has delivered to Purchaser a
complete and accurate list of all written documents evidencing Liens,
franchises, licenses, leases, employment agreements (including any pension,
profit sharing, bonus or severance pay commitments), and other contracts,
undertakings and commitments to which such Seller is a party or by which it
is bound or to which any of its properties are subject. Each of the
Sellers has performed all material obligations required to be performed by
it under such Liens, franchises, licenses, leases, contracts, agreements
and other undertakings and commitments and is not in material default
thereof. The lease for Sellers' office/warehouse facility can be
terminated by Sellers on no more than thirty (30) days' written notice to
the landlord thereunder, and upon such termination Sellers will have no
further obligation to such landlord. As of the date hereof, eleven (11) of
the Sellers' pay telephones are placed with the Sellers' largest Site
Provider (based on the number of Installed Phones under contract with such
Site Provider). As of the date of Closing, (i) there will be at least 960
Installed Phones and (ii) at least seventy-eight percent (78%) of the
Installed Phones will be subject to a Site Contract. As of the date hereof
and as of the date of Closing, ninety-eight percent (98%) of Sellers' Site
Contracts are and will be in full force and effect, Sellers have not
defaulted on or received either a default notice or a notice of intention
to cancel a Site Contract with respect to more than two percent (2%) of
Sellers' Site Contracts, and ninety-eight percent (98%) of Sellers' Site
Contracts have or will have as of such date the following provisions:
(a) the Site Contract has an initial term of a least five (5)
years, except as indicated on SCHEDULE 4.08(a) attached hereto,
(b) the Site Contract automatically renews at the end of the
current term, except as indicated on SCHEDULE 4.08(b) attached hereto,
(c) Except as indicated on Schedule 4.08(c) attached hereto, the
Site Contract is assignable by Sellers without the consent of the Site
Provider and pursuant to such assignment, the assignee will have all of the
rights, title and interest of the Sellers as though such assignee was an
original party thereto,
(d) Sellers have the exclusive right to operate pay telephones
at the location or locations which are the subject of the Site Contract,
8
<PAGE>
(e) Except as set forth in Schedule 4.08(a) or 4.08 (b) the Site
Contract cannot be terminated by the Site Provider during the term of the
Site Contract, and
(f) Sellers can terminate the Site Contract in the event the
revenue generated by Sellers' pay telephones at the site is insufficient.
4.09 PROPERTIES. The Sellers in the aggregate own all rights,
properties and other assets necessary to permit Sellers to conduct the
Business in all respects in the same manner as it conducts the Business on
the date hereof, and Sellers in the aggregate have good and marketable
title to all of the Assets and other properties used by them in the
Business, subject to no Liens, leases, mortgages, pledges or charges of any
kind, except as otherwise disclosed in this Agreement or in Schedule 4.04.
All of the tangible Assets are in good working order and repair excluding
normal wear and tear, are of merchantable quality, and are fit for the
particular purpose for which they are intended to be used.
4.10 INSURANCE. Each of the Sellers has delivered or will deliver on
or prior to Closing to Purchaser a complete and accurate schedule listing
and briefly describing all policies of fire, liability, automobile and
other insurance maintained by such Seller. Such policies are in amounts to
provide coverages customarily maintained by similar businesses and are in
full force and effect.
4.11 LITIGATION; COMPLIANCE WITH LAWS. Except as set forth on
SCHEDULE 4.11 hereto, no litigation, proceeding or controversy is pending
or threatened against either of the Sellers before any court or any
governmental agency. Neither of the Sellers has violated or is in
violation of any federal, state, municipal or other laws, regulations or
orders applicable to the Business or Sellers' activities, including but not
limited to those pertaining to the provision of pay telephone service and
installation of pay telephones, and any failure of Sellers to fully comply
with such laws, regulations and ordinances will not have an adverse impact
or prejudicial effect on the Business or the acquisition of the Assets by
Purchaser in accordance with the terms of this Agreement. Sellers' charges
for intrastate long-distance calls comply with all applicable state and
local laws, regulations and orders.
4.12 TAXES. Each of the Sellers has filed all federal, state, county,
municipal, local and other tax returns and information which is required by
law and has paid or made provision for the payment of all taxes due with
respect to such returns and each such return is true and correct. Sellers
and/or Shareholders shall pay all sales, use, ad valorem, value added,
excise, employment, franchise, income and similar tax liabilities
(including any interest and penalties) pertaining to the Business or the
Assets for all periods up to and including the date of Closing. In
addition, Sellers and/or Shareholders shall pay any and all sales, income
and other taxes payable by Sellers in connection with the transfer of the
Assets to the Purchaser. Neither of the Sellers has been notified that its
federal or state income tax returns have been audited by the Internal
Revenue Service or any applicable state revenue department, and neither of
the Sellers has waived any statute of limitations governing federal or
state income tax claims. All taxes, charges, levies and assessments which
either of the
9
<PAGE>
Sellers is required by law to withhold or collect have been duly withheld
or collected, and to the extent required, have been paid over to the
proper governmental authorities or are held in separate bank accounts for
such purpose.
4.13 OTHER AGREEMENTS. Neither the execution nor the delivery of this
Agreement by the Sellers and Shareholders, nor the performance of any of
their respective obligations hereunder, will result in a breach or
violation of any term or provision of or constitute a default under the
charter or By-laws of either of the Sellers or any indenture, mortgage or
other agreement or instrument to which either of the Sellers or either of
the Shareholders is a party.
4.14 BOOKS AND RECORDS. All of the books of account and other
financial and corporate records of both Sellers have been or prior to
Closing will be made available to Purchaser and its counsel and are in all
material respects complete and correct, are maintained in accordance with
customary business practices, and are accurately reflected in the Financial
Statements.
4.15 LABOR DISPUTES. Each of the Sellers is in compliance with all
laws respecting employment and employment practices, terms and conditions
of employment, and wages and hours and neither of the Sellers is engaged in
any unfair labor practices or has discriminated on the basis of age, sex,
race, religion or national origin in its employment conditions or
practices. There is no unfair labor practice or discrimination complaint
against either of the Sellers pending before or threatened before any
board, department, commission or agency, nor does any basis therefor exist.
4.16 NO BROKERS OR FINDERS. Neither the Sellers nor the Shareholders
have incurred any obligation or liability, contingent or otherwise, for any
broker's or finder's fees or commissions, or other like payments, in
connection with their respective execution and delivery of this Agreement
or the Sellers' sale of the Assets to Purchaser.
4.17 INTELLECTUAL PROPERTY. Neither of the Sellers is a party to any
intellectual property agreements to which the Assets or its use of the
Assets are subject, and the Sellers' use of the Assets does not infringe
on the protected intellectual property rights of others.
4.18 CHARGES FOR INTERSTATE CALLS. Sellers' charges for interstate
calls made from their pay telephones do not exceed $5.00 for the first
three minutes.
4.19 MATERIAL MISSTATEMENTS OR OMISSIONS. No representation, warranty
or statement of the Sellers or the Shareholders in this Agreement or in any
document, information, exhibit or schedule furnished under this Agreement
or in connection with the transactions contemplated hereby, contains or
will contain any untrue statement of a material fact, or omits to state a
material fact necessary to make the statements or facts contained therein
not misleading.
10
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER
As of the date of this Agreement and as of the date of Closing,
Purchaser represents and warrants to the Sellers as follows:
5.01 ORGANIZATION. Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of the State of Minnesota with
full power and authority to conduct the business conducted by it in the
manner in which such business has been conducted.
5.02 AUTHORITY. The execution, delivery and performance of this
Agreement and all transactions contemplated by this Agreement by Purchaser
have been duly authorized by all necessary corporate action. This
Agreement shall be a valid and binding obligation of Purchaser, enforceable
in accordance with its terms, except as limited by bankruptcy,
reorganization, insolvency, moratorium, or other similar laws presently or
hereafter in effect affecting the enforcement of creditors' rights
generally and subject to general equitable principles. Neither the
execution nor the delivery of this Agreement nor the consummation of the
transactions contemplated by this Agreement shall conflict with or result
in a breach of the charter or By-laws of Purchaser or any instrument or
agreement binding on Purchaser.
5.03 RETENTION OF EMPLOYEES. Purchaser will not reduce the Sellers'
work force in place as of the date of Closing and for the six (6) months
thereafter; provided however, individual employees may be terminated for
breach of their employment duties or failure to adhere to employment
policies and procedures.
ARTICLE VI
ACTIONS PENDING THE CLOSING
Between the date of this Agreement and the Closing, the parties agree
that they shall conduct themselves as follows:
6.01 CONTINUED CONDUCT OF BUSINESS. The Sellers shall, and the
Shareholders shall cause the Sellers to:
(a) conduct the Business only in the usual and ordinary course;
(b) refrain from amending the charter or By-laws of either of
the Sellers;
11
<PAGE>
(c) except as conducted in the ordinary course of business,
refrain from making any purchases, sales or transfers of any material
properties; entering into any material contracts or commitments;
mortgaging, pledging, hypothecating, subjecting to a Lien, assigning or
otherwise encumbering any of the Assets or other properties of either of
the Sellers;
(d) refrain from making any change in the compensation or
benefits payable to any of the employees or agents of either of the Sellers
or making any new bonus payment or arrangement or benefit to or with any of
them;
(e) preserve the present relationships with Sellers' customers,
merchants, suppliers and other persons having business dealings with the
Sellers;
(f) maintain the Assets in customary repair, order and
condition;
(g) maintain in force existing insurance policies; and
(h) refrain from selling any of the Assets out of the ordinary
course, change the character of the Business, or take actions which would
materially increase the operating expenses of the Business.
6.02 ACCESS TO RECORDS. Purchaser's representatives, attorneys and
accountants shall have reasonable access to the records and files, audits
and properties of Sellers as well as all information otherwise pertaining
to the Assets and to the business and affairs of Sellers, which information
shall be deemed confidential and shall not be disclosed to any third party
without Sellers' consent. In the event the transactions contemplated
herein are not consummated, Purchaser's representatives, attorneys and
accountants shall return to Sellers all copies of any such information
obtained by them.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
12
<PAGE>
ARTICLE VII
CONDITIONS PRECEDENT TO CLOSING
7.01 PURCHASER'S CONDITIONS. Purchaser shall not be required to close
the transaction contemplated by this Agreement unless the following
conditions have been satisfied or waived in writing by Purchaser:
(a) Each of the warranties and representations made by the
Sellers and the Shareholders herein are true and correct;
(b) The Sellers and the Shareholders, respectively, shall have
complied with the covenants required by Article VI, above, and all other
conditions of Closing which are contained in this Agreement;
(c) The Sellers shall have delivered all of the items which are
to be delivered and performed all of the things to be done by it at or
prior to the Closing;
(d) Purchaser shall have received all regulatory approvals
necessary to complete the transactions contemplated hereby;
(e) Sellers shall have delivered to Purchaser a schedule listing
all of the Installed Phones;
(f) Sellers shall have delivered to Purchaser SCHEDULES 2.01(a)
AND 4.06(b), the audited Financial Statements described in Section 4.06,
above, and the insurance policies described in Section 4.10, above; and
(g) Purchaser's Board of Directors shall have approved this
Agreement and the transactions contemplated hereby.
In the event that one or more of the foregoing conditions is not
fulfilled as of the date of Closing, Purchaser may, by written notice to
the Sellers on or prior to the date of Closing, elect not to consummate the
transactions provided for in this Agreement. Notwithstanding the
foregoing, the provisions of Section 2.03(i) and (ii) shall remain in full
force and effect.
7.02 SELLERS' CONDITIONS. The Sellers shall not be required to close
the transaction contemplated by this Agreement unless the following
conditions have been satisfied or waived in writing by the Sellers:
(a) Each of the warranties and representations made by Purchaser
herein are true and correct;
13
<PAGE>
(b) Purchaser shall have complied with all other conditions of
Closing which are contained in this Agreement; and
(c) Purchaser shall have delivered all of the items which are to
be delivered and performed all of the things to be done by it at the
Closing.
In the event that one or more of the foregoing conditions is not
fulfilled as of the date of Closing, the Sellers may, by written notice to
Purchaser on or prior to the date of Closing, elect not to consummate the
transactions provided for in this Agreement.
ARTICLE VIII
INDEMNIFICATION
8.01 SELLERS' INDEMNIFICATION. The Sellers and the Shareholders,
jointly and severally, agree to indemnify Purchaser and its directors,
officers, employees and agents, and their successors and assigns, against
any and all liabilities, claims or obligations, including costs, expenses
and attorneys' fees, of or against Purchaser, whether accrued, absolute,
contingent or otherwise, arising from, related to or caused by the Sellers'
or the Shareholders' breach of this Agreement or any of the warranties,
representations or covenants of them hereunder, or Sellers' ownership and
operation of the Assets at any time prior to the Closing; provided,
however, that in the event the removal from service of a pay telephone
acquired by Purchaser hereunder arises from, relates to or is caused by the
breach of any of the representations and warranties of Sellers and
Shareholders set forth in Article IV hereof at any time while such
representations and warranties remain in effect (a "Claim for Removed
Phones"), then the damages payable therefor to Purchaser shall be, and be
limited to, an amount per phone so removed equal to the product of:
(a) (i) the Purchase Price (as the same may be adjusted pursuant to the
provisions of Sections 2.01(a) and (c), above), DIVIDED BY
(ii) the number of pay telephones acquired by Purchaser hereunder,
TIMES
(b) (i) the difference between 28 and the number of full months elapsed
between the date of Closing and the date such phone is removed from
service, DIVIDED BY
(ii) 28.
The Sellers and the Shareholders, jointly and severally, shall further
indemnify Purchaser, and its directors, officers, employees and agents, and
their successors and assigns, against
14
<PAGE>
any and all loss, liability and expense, including reasonable attorneys'
fees, resulting from or arising out of taxes levied, imposed or assessed
by any governmental authority prior to and after the date of Closing
with respect to the income and operations of Sellers for all periods
prior to the date of Closing.
Purchaser shall give notice to the Sellers with respect to each claim
for indemnification hereunder specifying the amount and nature of the
claim, and of any matter which reasonably appears likely to give rise to an
indemnification claim. Failure to give timely notice of a matter which may
give rise to an indemnification claim shall not affect the right of
Purchaser to indemnity; provided, however, that Purchaser shall not be
entitled to indemnification for any loss, cost, damage, liability or
expense resulting directly from Purchaser's delay in promptly notifying the
Sellers of such matter. Purchaser shall give the Sellers a reasonable
opportunity to defend the same at the Sellers' expense and with counsel of
their own selection; provided that Purchaser shall at all times also have
the right to fully participate in the defense at its own expense. If the
Sellers shall, within a reasonable time after notice, fail to defend,
Purchaser shall have the right, but not the obligation, to undertake the
defense of, and to compromise or settle the claim or other matter on
behalf, for the account, and at the risk, of the Sellers and the
Shareholders. If the claim is one that cannot by its nature be defended
solely by the Sellers, then Purchaser shall make available all information
and assistance that the Sellers may reasonably request. Except with the
prior written consent of Purchaser, the Sellers shall not, in defending any
claim, enter into any settlement by which Purchaser is to be bound. The
Sellers shall pay to Purchaser any amounts due hereunder within twenty (20)
days after final judgment or compromise and settlement for payment of a
claim under this Section 8.01; provided, however, that Purchaser shall be
entitled to offset amounts owed by the Sellers and/or the Shareholders
under this Section 8.01 against amounts next due and owing to the Sellers
under this Agreement, the Note or any other agreement between Purchaser, on
the one hand, and either of the Sellers or either of the Shareholders, on
the other hand, and such offset(s) shall be in addition to any other
remedies available to Purchaser. Notwithstanding the foregoing, any Claim
for Removed Phones shall be satisfied first with an offset against the
amount, if any, due and owing to the Sellers under the Note and then as
otherwise provided herein.
8.02 PURCHASER'S INDEMNIFICATION. The Purchaser agrees to indemnify
Sellers and their respective directors, officers, employees and agents, and
their successors and assigns, against any and all liabilities, claims or
obligations, including costs, expenses and attorneys' fees, of or against
either of the Sellers, whether accrued, absolute, contingent or otherwise,
arising from, related to or caused by the Purchaser's breach of this
Agreement or any of the warranties, representations or covenants of it
hereunder, or Purchaser's ownership and operation of the Assets at any time
subsequent to the Closing. The Purchaser shall further indemnify the
Sellers, and their respective directors, officers, employees and agents,
and their successors and assigns, against any and all loss, liability and
expense, including reasonable attorneys' fees, resulting from or arising
out of taxes levied, imposed or assessed by any governmental authority
after the date of Closing with respect to the income and operations of
Purchaser for all periods after the date of Closing.
15
<PAGE>
Sellers shall give notice to the Purchaser with respect to each claim
for indemnification hereunder specifying the amount and nature of the
claim, and of any matter which reasonably appears likely to give rise to an
indemnification claim. Failure to give timely notice of a matter which may
give rise to an indemnification claim shall not affect the right of Sellers
to indemnity; provided, however, that Sellers shall not be entitled to
indemnification for any loss, cost, damage, liability or expense resulting
directly from Sellers' delay in promptly notifying the Purchaser of such
matter. Sellers shall give the Purchaser a reasonable opportunity to
defend the same at the Purchaser's expense and with counsel of its own
selection; provided that Sellers shall at all times also have the right to
fully participate in the defense at their own expense. If the Purchaser
shall, within a reasonable time after notice, fail to defend, Sellers shall
have the right, but not the obligation, to undertake the defense of, and to
compromise or settle the claim or other matter on behalf, for the account,
and at the risk, of the Purchaser. If the claim is one that cannot by its
nature be defended solely by the Purchaser, then Sellers shall make
available all information and assistance that the Purchaser may reasonably
request. Except with the prior written consent of Sellers, the Purchaser
shall not, in defending any claim, enter into any settlement by which
Sellers are to be bound. The Purchaser shall pay to Sellers any amounts
due hereunder within twenty (20) days after final judgment or compromise
and settlement for payment of a claim under this Section 8.02.
ARTICLE IX
COVENANT NOT TO COMPETE
For a period of five (5) years after the date of Closing, neither the
Sellers nor the Shareholders shall directly or indirectly, either as a
principal, agent, employee, employer, stockholder, co-partner or in any other
individual or representative capacity whatsoever, engage in the States of
Pennsylvania, New Jersey or Delaware in any business directly competitive with
or similar to Purchaser's business as it exists on the date of Closing, and
neither the Sellers nor the Shareholders will directly or indirectly, either as
principal, agent, employee, employer, stockholder, co-partner or in any other
individual or representative capacity whatsoever, solicit, call on, take away,
divert or assist any person in so soliciting, diverting, calling on, or taking
away any customers of Purchaser, employ any of the then or former employees of
Purchaser (including individuals employed by either of the Sellers as of the
date hereof or as of the date of Closing but who subsequently become employees
of Purchaser), or induce any such employees to terminate their employment with
Purchaser. Notwithstanding the foregoing, (i) Purchaser acknowledges Ludwig's
existing investment in Payphone Services, Inc., a New Jersey corporation, and
hereby agrees that Ludwig may make additional investments therein but only to
maintain the percentage ownership thereof that he has on the date hereof and,
(ii) Purchaser acknowledges Scott's existing investment in "Penn Triple S
Vending" and hereby agrees that Scott may (a) make additional investments
therein but only to maintain the percentage ownership thereof that he has on the
date hereof, and (b) provide assistance thereto with respect to its vending
business other than its pay telephone services
16
<PAGE>
business, (iii) Purchaser further agrees that Scott may engage in any
business directly competitive with or similar to Purchaser's business as it
exists on the date hereof and on the following terms: Scott, on his own
behalf or on behalf of another, may continue to acquire telephones and site
locations and he will pay for all costs associated with installing the
telephones at the new locations. Purchaser will do the installation and
maintain the equipment. Profits from these sites will be divided equally
between Scott and the Purchaser after a $25 monthly per telephone deduction
for service and all other expenses associated with operating the site. After
such telephones have been in service for a full 12 months, Purchaser shall
have the option for a period of 30 days following each 12 month period for
each telephone to purchase the acquired telephones for 28 times cash flow,
which shall be defined as in section 2.01(a) hereof. If Purchaser elects not
to purchase an acquired telephone within said 30 days, it shall belong to
Scott for all purposes. (iv) Purchaser further agrees that Ludwig may engage
in any business directly competitive with or similar to Purchaser's business
as it exists on the date of Closing provided that (a) Ludwig has not been
employed by Purchaser for at least six (6) months, and (b) Ludwig, on his own
behalf or on behalf of another, may thereafter acquire telephones and site
locations and he will pay for all costs associated with installing the
telephones at the new locations. Purchaser will do the installation and
maintain the equipment. Profits from these sites will be divided equally
between Ludwig and the Purchaser after a $25 monthly per telephone deduction
for service and all other expenses associated with operating the site. After
such telephones have been in service for a full 12 months, Purchaser shall
have the option for a period of 30 days following each 12 month period for
each telephone to purchase the acquired telephones for 28 times cash flow,
which shall be defined as in section 2.01(a) hereof. If Purchaser elects not
to purchase an acquired telephone within said 30 days, it shall belong to
Ludwig for all purposes. Notwithstanding anything to the contrary herein,
neither Scott nor Ludwig shall for a period of thirteen (13) months following
the installation of each phone offer to sell such phone(s) to any other
party. The covenants contained herein shall be construed and interpreted in
any judicial proceeding to permit its enforcement to the maximum extent.
Each of the Sellers and each of the Shareholders agree that the restraint
imposed is necessary for the reasonable and proper protection of Purchaser
and its affiliates, and that said restraint is reasonable in terms of subject
matter, duration, and geographic scope. It is understood by and between the
parties that these restrictive covenants are an essential element of this
Agreement and that, but for such covenant, Purchaser would not have entered
into this Agreement. Without intending in any way to limit the remedies
available to Purchaser, each of the Sellers and each of the Shareholders
further understand and agree that damages at law may be an insufficient
remedy to Purchaser if either of them breach their respective covenants not
to compete and that Purchaser may have injunctive relief in any court of
competent jurisdiction to restrain the breach or the threatened breach of or
otherwise specifically to enforce the covenants contained in this Article IX.
ARTICLE X
MISCELLANEOUS
10.01 ADDITIONAL DOCUMENTS. Each of the parties agrees to execute
such additional documents as may reasonably be necessary to carry out the
purposes and intent of this Agreement and to fulfill the obligations of the
respective parties under this Agreement.
17
<PAGE>
10.02 BINDING ON SUCCESSORS. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties to this Agreement and their
respective successors and assigns.
10.03 SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Agreement.
10.04 ENTIRETY OF AGREEMENT. This Agreement states the entire
agreement of the parties, merges all prior negotiations, agreements and
understandings and states in full all representations, warranties and
covenants which have induced this Agreement, there being no
representations, warranties or covenants other than those stated in this
Agreement. Each party agrees that in dealing with third parties, no
contrary representations will be made.
10.05 AMENDMENT. This Agreement may be modified or amended only by an
instrument in writing, duly executed by the parties.
10.06 SURVIVAL OF REPRESENTATION AND WARRANTIES. The representations,
warranties, covenants and agreements set forth in this Agreement shall
survive for twenty-eight (28) months after the Closing; provided, however,
that the representations and warranties in Section 4.12, above, shall
survive for six (6) years after the Closing.
10.07 HEADINGS. The headings in this Agreement are included for
convenience only and shall not constitute a part of this Agreement.
10.08 NOTICES. Any notice or other communication required or
permitted under any provision of this Agreement shall be in writing and
shall be personally delivered or sent by certified mail, return receipt
requested, and addressed as follows:
To Sellers and
Shareholders: 301 S. Fawn Street
Philadelphia, PA 19103
with a copy to: Peter Meltzer
1600 Locust Street
Suite 200
Philadelphia, PA 19103
To Purchaser: 9724 10th Avenue North
Plymouth, MN 55441
Attn: Jack Kohler
18
<PAGE>
with a copy to: Robert T. Montague
Robins, Kaplan, Miller & Ciresi L.L.P.
2800 LaSalle Plaza
800 LaSalle Avenue
Minneapolis, MN 55402-2015
Either party may change its address by notice given to the other party as
specified above.
10.09 COUNTERPARTS. This Agreement may be executed in multiple
counterparts. Each counterpart shall be deemed an original agreement, but
all counterparts shall constitute only a single agreement.
10.10 GOVERNING LAW AND REMEDIES. This Agreement shall be construed
by and in accordance with the laws of the Commonwealth of Pennsylvania.
Because a breach of the provisions of this Agreement may not adequately be
compensated by money damages, any party shall be entitled, either before or
after the Closing, in addition to any other legal right or remedy available
to it, to an injunction restraining such breach or a threatened breach and
to specific performance of any such provision of this Agreement, and in
either case no bond or other security shall be required in connection
therewith, and the parties hereby consent to the issuance of such an
injunction and to the ordering of specific performance.
19
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE SELLERS:
EDWARD STEVEN CORPORATION
By: /s/ Jay Ludwig
------------------------------------
Its President
------------------------------------
DRAKE TELEPHONE CO.
By: /s/ Jay Ludwig
------------------------------------
Its President
------------------------------------
THE SHAREHOLDERS:
/s/ Jay Ludwig
---------------------------------------
Jay Ludwig
/s/ Jay Scott
---------------------------------------
Jay Scott
THE PURCHASER:
CHOICETEL COMMUNICATIONS, INC.
By: /s/ Jeffrey R. Paletz
------------------------------------
Jeffrey R. Paletz
President
20
<PAGE>
CREDIT AGREEMENT
BETWEEN
CHOICETEL COMMUNICATIONS, INC.,
AS BORROWER,
AND
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION,
AS BANK
CLOSING DATE: JUNE 30, 1998
$3,800,000 TERM LOAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II AMOUNT AND TERMS OF THE LOAN. . . . . . . . . . . . . . . . . . . . . . 7
Section 2.1 $3,800,000 Term Loan. . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.2 Interest on Notes. . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.3 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.4 Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.5 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.6 Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2.7 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 2.8 Computation of Interest and Fees . . . . . . . . . . . . . . . . 11
ARTICLE III CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 3.1 Initial Conditions Precedent . . . . . . . . . . . . . . . . . . 11
Section 3.2 Additional Conditions Precedent. . . . . . . . . . . . . . . . . 12
ARTICLE IV REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . 13
Section 4.1 Corporate Existence and Power. . . . . . . . . . . . . . . . . . 13
Section 4.2 Authorization of Borrowing; No Conflict as to Law or Agreements. 13
Section 4.3 Legal Agreements . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.4 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 4.5 Financial Condition. . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.6 Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.8 Hazardous Substances . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.9 Regulation U . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.10 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 4.11 Titles and Liens . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 4.12 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE V AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 5.1 Financial Statements . . . . . . . . . . . . . . . . . . . . . . 15
Section 5.2 Books and Records; Inspection and Examination. . . . . . . . . . 17
Section 5.3 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . 17
Section 5.4 Payment of Taxes and Other Claims. . . . . . . . . . . . . . . . 18
Section 5.5 Maintenance of Properties. . . . . . . . . . . . . . . . . . . . 18
Section 5.6 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 5.7 Preservation of Corporate Existence. . . . . . . . . . . . . . . 18
Section 5.8 Deposit Accounts . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 5.9 Senior Leverage Ratio. . . . . . . . . . . . . . . . . . . . . . 18
Section 5.10 Debt Service Coverage Ratio. . . . . . . . . . . . . . . . . . . 19
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Section 5.11 Fixed Charge Coverage Ratio. . . . . . . . . . . . . . . . . . . 19
Section 5.12 Operating Cash Flow. . . . . . . . . . . . . . . . . . . . . . . 19
Section 5.13 Key Person Life Insurance. . . . . . . . . . . . . . . . . . . . 19
ARTICLE VI NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 6.1 Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 6.2 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 6.3 Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 6.4 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 6.5 Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 6.6 Sale of Assets . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 6.7 Restrictions on Issuance and Sale of Subsidiary Stock. . . . . . 22
Section 6.8 Transactions with Affiliates . . . . . . . . . . . . . . . . . . 23
Section 6.9 Consolidation and Merger . . . . . . . . . . . . . . . . . . . . 23
Section 6.10 Sale and Leaseback . . . . . . . . . . . . . . . . . . . . . . . 23
Section 6.11 Subordinated Debt. . . . . . . . . . . . . . . . . . . . . . . . 23
Section 6.12 Hazardous Substances . . . . . . . . . . . . . . . . . . . . . . 23
Section 6.13 Restrictions on Nature of Business . . . . . . . . . . . . . . . 23
ARTICLE VII EVENTS OF DEFAULT, RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . 24
Section 7.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . 24
Section 7.2 Rights and Remedies. . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE VIII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 8.1 No Waiver; Cumulative Remedies . . . . . . . . . . . . . . . . . 27
Section 8.2 Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 8.3 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 8.4 Participations . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 8.5 Disclosure of Information. . . . . . . . . . . . . . . . . . . . 28
Section 8.6 Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . 28
Section 8.7 Indemnification by Borrower. . . . . . . . . . . . . . . . . . . 28
Section 8.8 Execution in Counterparts. . . . . . . . . . . . . . . . . . . . 28
Section 8.9 Binding Effect, Assignment . . . . . . . . . . . . . . . . . . . 28
Section 8.10 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.11 Consent to Jurisdiction. . . . . . . . . . . . . . . . . . . . . 29
Section 8.12 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.13 Severability of Provisions . . . . . . . . . . . . . . . . . . . 29
Section 8.14 Prior Agreements . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.15 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
3
<PAGE>
CREDIT AGREEMENT
Dated as of June 30, 1998
ChoiceTel Communications, Inc., a Minnesota corporation (the
"Borrower"), and Norwest Bank Minnesota, National Association, a national
banking association (the "Bank"), agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS. For all purposes of this Agreement, except
as otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned
to them in this Article, and include the plural as well as the
singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles.
"Acquisition" means the Borrower's acquisition of substantially all of
the assets of the Sellers related to the business conducted under the name
"Jay Telephone Vending" pursuant to an Asset Purchase Agreement dated May
7, 1998 among the Sellers, the Borrower, Jay Ludwig and Jay Scott.
"Advance" has the meaning set forth in Section 2.1.
"Affiliate" means (a) any director or officer of the Borrower, (b) any
Person who, individually or with his immediate family, beneficially owns or
holds 5% or more of the voting interest of the Borrower, or (c) any
corporation, partnership or other Person in which any Person or group of
Persons described above directly or indirectly owns a 5% or greater equity
interest.
"Agreement" means this Credit Agreement.
"Assignment of Deposit Accounts" means an Assignment of Deposit
Accounts duly executed by the Borrower and in form and substance
satisfactory to the Bank, assigning to the Bank all existing and future
deposit accounts of the Borrower.
"Base Rate" means the rate of interest publicly announced from time to
time by the Bank as its "prime" or "base" rate or, if the Bank ceases to
announce a rate so designated, any similar successor rate designated by the
Bank.
"Business Day" means a day other than a Saturday, Sunday, United
States
4
<PAGE>
national holiday or other day on which banks in Minnesota are permitted
or required by law to close.
"Capital Expenditure" means any expenditure of money for the purchase
or construction of fixed assets or for the purchase or construction of any
other assets, or for improvements or additions thereto, which are
capitalized on the Borrower's balance sheet.
"CI" means ChoiceTel, Inc., a Minnesota corporation.
"CI Security Agreement" means a security agreement of CI in favor of
the Bank, granting the Bank a security interest in property generally
described as all of CI's inventory, accounts, equipment and general
intangibles.
"Compliance Certificate" means a certificate in substantially the
form of Exhibit B, or such other form as the Borrower and the Bank may from
time to time agree upon in writing, executed by the chief financial officer
of the Borrower, stating (i) that any financial statements delivered
therewith have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with the accounting
practices reflected in the annual financial statements referred to in
Section 4.5, subject to year-end adjustments, (ii) whether or not such
officer has knowledge of the occurrence of any Default or Event of Default
hereunder not theretofore reported and remedied and, if so, stating in
reasonable detail the facts with respect thereto and (iii) all relevant
facts in reasonable detail to evidence, and the computations as to, whether
or not the Borrower is in compliance with the Financial Covenants.
"Debt" of any Person means (i) all items of indebtedness or liability
which in accordance with generally accepted accounting principles would be
included in determining total liabilities as shown on the liabilities side
of a balance sheet of that Person as at the date as of which Debt is to be
determined, excluding, however, accounts payable and accrued liabilities
incurred in the ordinary course of that Person's business that are owed to
sellers of goods or services to that Person and are in an amount not
greater than the cost of such goods or services, (ii) indebtedness secured
by any Lien on property owned by such Person, whether or not the
indebtedness secured thereby shall have been assumed, (iii) financial
obligations of such Person under non-compete, consulting or similar
agreements, and (iv) guaranties and endorsements (other than for purposes
of collection in the ordinary course of business) by such Person and other
contingent obligations of such Person in respect of, or to purchase or
otherwise acquire, indebtedness of others. For purposes of determining a
Person's aggregate Debt at any time, "Debt" shall also include the
aggregate payments required to be made by such Person at any time under any
lease that is considered a capitalized lease under generally accepted
accounting principles. Unless otherwise stated, Debt means Debt of the
Borrower and its Subsidiaries.
5
<PAGE>
"Debt Service Coverage Ratio" means, at any month-end, the ratio of
the Operating Cash Flow of the Borrower and its Subsidiaries during the
period of 12 successive calendar months ending on that month-end to the
Debt Service Requirements of the Borrower and its Subsidiaries as of that
month-end, all determined on a consolidated basis.
"Debt Service Requirements" means, at any month-end, the sum of all
payments of principal and interest required to be paid by the Borrower or
any Subsidiary during the immediately succeeding 12-month period on any
Debt in accordance with the terms of the instruments evidencing such Debt.
For purposes of determining Debt Service Requirements with respect to any
Debt bearing interest at a floating rate, the floating rate shall be
assumed to be fixed for the period in question at the floating rate in
effect on the first day of such period.
"Default" means an event that, with the giving of notice, the passage
of time or both, would constitute an Event of Default.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) that is, along with the Borrower, a member of a controlled
group of corporations or a controlled group of trades or businesses, as
described in sections 414(b) and 414(c), respectively, of the Internal
Revenue Code of 1986, as amended.
"Environmental Law" means the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Section 9601 ET SEQ., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 ET SEQ.,
the Hazardous Materials Transportation Act, 49 U.S.C. Section 1802 ET
SEQ., the Toxic Substances Control Act, 15 U.S.C. Section 2601 ET SEQ.,
the Federal Water Pollution Control Act, 33 U.S.C. Section 1252 ET SEQ.,
the Clean Water Act, 33 U.S.C. Section 1321 ET SEQ., the Clean Air Act, 42
U.S.C. Section 7401 ET SEQ., and any other federal, state, county,
municipal, local or other statute, law, ordinance or regulation which may
relate to or deal with human health or the environment, all as may be from
time to time amended.
"Event of Default" has the meaning specified in Section 7.1.
"Excess Cash Flow" means, with respect to any period, the Borrower's
Operating Cash Flow during that period, less the sum of (A) all interest
expensed by the Borrower during that period, (B) all payments of principal
required to be made during that period by the Borrower with respect to any
Debt, (C) all dividends actually paid by the Borrower during that period,
and (D) all Capital Expenditures actually made by the Borrower during that
period.
6
<PAGE>
"Financial Covenant" means any of the Borrower's obligations set forth
in Section 5.9, 5.10, 5.11 or 5.12 of this Agreement
"Fixed Charge Coverage Ratio" means, as of the end of any calendar
month, the ratio of (i) the Borrower's Operating Cash Flow during the
applicable period, as defined below, to (ii) the sum of interest expensed
by the Borrower during that period, all payments of principal required to
be made by the Borrower during that period with respect to any Debt, and
all Capital Expenditures made by the Borrower during that period. As used
in this definition, "applicable period" means (x) with respect to any
month-end occurring before June 30, 1999, the period commencing on July 1,
1998 and ending on such month-end, and (y) with respect to any subsequent
month-end, the period of 12 calendar months ending on such month-end.
"Floating Rate" means an annual rate equal to the sum of the Base Rate
and the applicable Margin, as determined in accordance with Section 2.2,
which rate shall change when and as the Base Rate or the Margin changes.
"Guarantors" means CI and the Individual Guarantors, collectively.
"Guaranties" means one or more guaranty agreements of the Guarantors,
acceptable to the Bank in form and substance, guarantying all present and
future debt of the Borrower to the Bank, subject, in the case of the
Individual Guarantors' Guaranties, to the limitations set forth therein.
"Hazardous Substance" means any asbestos, urea-formaldehyde,
polychlorinated biphenyls ("PCBs"), nuclear fuel or material, chemical
waste, radioactive material, explosives, known carcinogens, petroleum
products and by-products and other dangerous, toxic or hazardous
pollutants, contaminants, chemicals, materials or substances listed or
identified in, or regulated by, any Environmental Law.
"Individual Guarantors" means Jeffrey R. Paletz, Melvin Graf and Jack
S. Kohler.
"Lien" means any mortgage, deed of trust, lien, pledge, security
interest or other charge or encumbrance, of any kind whatsoever, including
but not limited to the interest of the lessor or titleholder under any
capitalized lease, title retention contract or similar agreement.
"Life Insurance Assignments" means the Assignments of Life Insurance
Policy as Collateral to be executed by the Borrower, in form and substance
satisfactory to the Bank, granting the Bank a lien on the Life Insurance
Policies to secure payment of the Note.
"Life Insurance Policies" has the meaning set forth in Section 5.13.
7
<PAGE>
"Loan Documents" means this Agreement, the Note, the Security
Agreement, the Assignment of Deposit Accounts and the Life Insurance
Assignments.
"Loan Year" means a twelve-month period, with the first such Loan Year
commencing on the date hereof and ending on the day preceding the first
anniversary hereof and with each subsequent Loan Year commencing on the
corresponding subsequent anniversary of the date hereof.
"Margin" means an amount determined pursuant to Section 2.2 that is
added to other amounts to determine the interest rates applicable
hereunder.
"Material Adverse Effect" means a material adverse effect on the
condition (financial or otherwise), properties, or operations of the
Borrower or any Subsidiary.
"Multiemployer Plan" means a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA.
"Note" has the meaning specified in Section 2.1.
"Operating Cash Flow" means, with respect to any period, the net
after-tax income of the Borrower and its Subsidiaries during that period,
PLUS the sum of any depreciation, amortization and interest expenses
recognized by the Borrower and its Subsidiaries with respect to that
period, any non-operating expenses recognized by the Borrower and its
Subsidiaries with respect to that period, and any extraordinary or non-cash
loss or expenses paid or incurred by the Borrower and its Subsidiaries
during that period, LESS the sum of any extraordinary, non-operating or
non-cash income claimed by the Borrower and its Subsidiaries during that
period, all as determined on a consolidated basis in accordance with
generally accepted accounting principles, together with such other
adjustments (to reflect anticipated cost savings, regulatory changes or
other matters) as the Borrower and the Bank may agree upon in writing.
Unless otherwise stated, Operating Cash Flow as of any month-end means the
Borrower's Operating Cash Flow during the period of 12 calendar months
ending on that month-end.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Plan" means an employee benefit plan or other plan maintained for
employees of the Borrower or any Subsidiary or ERISA Affiliate and covered
by Title IV of ERISA.
"Reportable Event" means (i) a "reportable event" described in Section
4043 of ERISA and the regulations issued thereunder, (ii) a withdrawal from
any Plan, as described in Section 4063 of ERISA, (iii) an action to
terminate a Plan for which a
8
<PAGE>
notice is required to be filed under Section 4041 of ERISA, (iv) any
other event or condition that might constitute grounds for termination
of, or the appointment of a trustee to administer, any Plan, or (v) a
complete or partial withdrawal from a Multiemployer Plan as described
in Sections 4203 and 4205 of ERISA.
"Security Agreement" means a security agreement of the Borrower in
favor of the Bank, granting the Bank a security interest in property
generally described as all of the Borrower's inventory, accounts, equipment
and general intangibles.
"Sellers" means Edward Steven Corporation and Drake Telephone Co.,
each a Pennsylvania corporation.
"Senior Debt" means all Debt of the Borrower or any Subsidiary,
including but not limited to all Debt set forth in Schedule 6.2, other than
Subordinated Debt.
"Senior Leverage Ratio" means, at the end of any calendar month, the
ratio of (A) the aggregate Senior Debt of the Borrower and its Subsidiaries
as at the end of that month, to (B) the Operating Cash Flow of the Borrower
and its Subsidiaries during the 12-month period ending on that month-end,
all determined on a consolidated basis.
"Subordinated Debt" means Debt of the Borrower or any Subsidiary which
is subordinated in right of payment to all indebtedness of the Borrower to
the Bank, on terms that have been approved in writing by the Bank and that
have been noted by appropriate legend on all instruments evidencing the
Subordinated Debt.
"Subsidiary" means (i) any corporation of which more than 50% of the
outstanding shares of capital stock having general voting power under
ordinary circumstances to elect a majority of the board of directors of
such corporation, irrespective of whether or not at the time stock of any
other class or classes shall have or might have voting power by reason of
the happening of any contingency, is at the time directly or indirectly
owned by the Borrower, by the Borrower and one or more other Subsidiaries,
or by one or more other Subsidiaries, (ii) any partnership of which 50% or
more of the partnership interests therein are directly or indirectly owned
by the Borrower, by the Borrower and one or more other Subsidiaries, or by
one or more other Subsidiaries, and (iii) any limited liability company or
other form of business organization the effective control of which is held
by the Borrower, the Borrower and one or more other Subsidiaries, or by one
or more other Subsidiaries.
"Termination Premium Percentage" means, with respect to the first
three Loan Years, a percentage equal to the amount set forth below opposite
that Loan Year:
<TABLE>
<CAPTION>
LOAN YEAR APPLICABLE PERCENTAGE
<S> <C>
1 3%
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
2 2%
3 1%
</TABLE>
The Termination Premium Percentage shall be 0% with respect to the fourth
and each subsequent Loan Year.
"Welfare Plan" means a "welfare plan" as defined in Section 3(1) of
ERISA.
ARTICLE II
AMOUNT AND TERMS OF THE LOAN
Section 2.1 $3,800,000 TERM LOAN. On the date hereof, the Bank
shall make a single advance to the Borrower in the principal amount of
$3,800,000 (the "Advance"). The Advance shall be evidenced by the Borrower's
promissory note of even date herewith in substantially the form of Exhibit A
hereto (the "Note"). The proceeds of the Advance shall be used by the
Borrower to facilitate the Acquisition. The Note shall bear interest on the
unpaid principal amount thereof from the date thereof until paid as set forth
in Section 2.2.
Section 2.2 INTEREST ON NOTE.
(a) APPLICABLE RATE. The principal balance of the Note shall bear
interest at the Floating Rate.
(b) MARGINS. The Margin through and including the first adjustment
occurring as specified below shall be one percent (1.00%). The Margin shall
be adjusted each fiscal quarter of the Borrower on the basis of the Senior
Leverage Ratio of the Borrower as at the end of the previous fiscal
quarter, in accordance with the following table:
<TABLE>
<CAPTION>
Senior Leverage Ratio Margin
--------------------- ------
<S> <C>
2.50 to 1 or more 1.00%
1.50 to 1 or more, but less than 2.50 to 1 0.50%
Less than 1.50 to 1 0.00%
</TABLE>
Reductions and increases in the Margins will be made quarterly within five
calendar days following receipt of the Borrower's financial statements and
quarterly Compliance Certificates required under Section 5.1.
Notwithstanding the foregoing, (i) if the Borrower fails to deliver any
financial statements or Compliance Certificates when required under Section
5.1, the Bank may, by notice to the Borrower, increase the Basic Increment
to the highest rates set forth above until such time as the Bank has
received all such financial statements and Compliance Certificates, and
(ii) no reduction in the Margin will be made if a Default or an Event of
Default has occurred and is continuing at the time that such reduction
would otherwise be made.
(c) DEFAULT RATE. From and after the occurrence of any Default or
Event of
10
<PAGE>
Default and continuing thereafter until such Default or Event of Default
shall be remedied to the written satisfaction of the Bank, the
outstanding principal balance of the Note shall bear interest, until
paid in full, at an annual rate equal to the sum of (i) the interest
rate otherwise in effect with respect to the Note, and (ii) 300 basis
points (3.00%) (the "Default Rate"). Calculation of interest at the
Default Rate shall not be deemed a waiver or excuse of any such Default
or Event of Default.
Section 2.3 PAYMENTS.
(a) INTEREST. Interest accruing on the principal balance of the Note
each month shall be due and payable on the last day of that month,
commencing on the last day of the month hereof.
(b) PRINCIPAL. The principal balance of the Note shall be due and
payable in 60 consecutive monthly installments, due and payable on the last
day of each month, commencing July 31, 1998. Each such installment other
than the final installment shall be in an amount equal to the amount set
forth below opposite the period in which such payment is due:
<TABLE>
<CAPTION>
INSTALLMENTS DUE DURING THE PERIOD INSTALLMENT AMOUNT
---------------------------------- ------------------
<S> <C>
July 31, 1998 through July 30, 1999 $50,667
July 31, 1999 through July 30, 2000 $56,209
July 31, 2000 through July 30, 2001 $62,542
July 31, 2001 through July 30, 2002 $69,667
July 31, 2002 through June 29, 2003 $77,584
</TABLE>
The final installment due on June 30, 2003 shall be in an amount equal to
the entire principal balance of the Note then unpaid.
Section 2.4 COLLATERAL. Payment of the Note and all other amounts now
or hereafter owing by the Borrower to the Bank shall be secured by the Liens
granted under the Loan Documents, and may also now or hereafter be secured by
one or more other Liens. Each such Lien shall be prior to all other Liens of
any kind whatsoever, subject only to such exceptions as the Bank may expressly
approve in writing.
Section 2.5 FEES.
(a) ORIGINATION FEE. Concurrent with the execution hereof, the
Borrower shall pay the Bank an origination fee in the amount of $20,000,
less the engagement fee previously paid by the Borrower to the Bank in the
amount of $8,000.
(b) TERMINATION FEE. Upon prepayment of the Note or acceleration of
the maturity of the Note, the Borrower shall pay to the Bank a termination
fee equal to the Termination Premium Percentage with respect to the Loan
Year in which such
11
<PAGE>
prepayment or acceleration occurs, multiplied by the sum of the
principal balance of the Note so prepaid or due upon acceleration, as
the case may be. Notwithstanding the foregoing, no termination fee shall
be payable (i) on account of prepayment of the Note in full if such
prepayment is made solely from the proceeds of a refinancing by the
Bank, (ii) on account of any mandatory prepayment under paragraph (i) or
(ii) of Section 2.6(b), or (iii) on the first $100,000 in prepayments
made (other than from prepayments described in clause (ii)) during any
calendar year.
(c) AUDIT FEES. The Borrower shall pay to the Bank, on written
demand, reasonable fees charged by the Bank in connection with any audits
or inspections by the Bank of any collateral or the operations or
businesses of the Borrower, together with actual out-of-pocket costs and
expenses incurred in conducting any such audit or inspection; provided,
however, that, so long as no Default or Event of Default has occurred, the
Borrower shall have no obligation to reimburse the Bank for more than
$5,000 in such fees (excluding out-of-pocket costs and expenses) in any
single 12-month period. All such audits and inspections shall be for the
sole benefit of the Bank.
Section 2.6 PREPAYMENTS.
(a) VOLUNTARY PREPAYMENTS. Subject to the conditions set forth
herein, the Borrower from time to time may voluntarily prepay the Note in
whole or in part; provided that (i) any prepayment of the full amount of
the Note shall include accrued interest thereon, (ii) each partial
prepayment shall be in an aggregate amount equal to an integral multiple of
$100,000, (iii) any prepayment of the Note shall be made only upon three
Business Days' notice to the Bank, and (iv) any prepayment of the Note
during the first three Loan Years shall be accompanied by payment of a
termination fee as required under Section 2.5(b). All such prepayments
shall be applied, first, to the principal installments of the Note in
inverse order of their maturities, and second, to interest and fees with
respect thereto.
(b) MANDATORY PREPAYMENTS.
(i) EXCESS CASH FLOW. Not later than April 30, 1999, the Borrower
shall remit to the Bank an amount equal to 50% of its Excess Cash
Flow with respect to the period commencing on July 1, 1998 and
ending on December 31, 1998. Not more than 120 days following the
end of each fiscal year of the Borrower ending after December 31,
1998, the Borrower shall remit to the Bank an amount equal to 50%
of its Excess Cash Flow with respect to that year.
Notwithstanding the foregoing, no such remittance shall be
required if the Borrower's Senior Leverage Ratio as of the last
day of the applicable period is less than 2.00 to 1.
(ii) NEW CAPITAL. Immediately upon the issuance of any debt by or
equity
12
<PAGE>
interests in the Borrower, the Borrower shall remit to the
Bank an amount equal to the proceeds of such debt instruments or
equity interests. Nothing in this paragraph (ii) shall be deemed
to authorize or constitute consent to the issuance of debt
instruments or equity interests by the Borrower that otherwise
would be prohibited or restricted under this Agreement or under
any other Loan Document.
(iii) SALE OF ASSETS. If the aggregate proceeds paid on account of
sales of assets by the Borrower outside the ordinary course of
the Borrower's business in any fiscal year of the Borrower exceed
$50,000, the Borrower shall remit to the Bank an amount equal to
such excess. Such remittance will be made immediately upon
payment of the corresponding proceeds to the Borrower or its
designee. Nothing in this paragraph (iii) shall be deemed to
authorize or constitute consent to sales of assets by the
Borrower that otherwise would be prohibited or restricted under
this Agreement or under any other Loan Document.
(iv) APPLICATION OF MANDATORY PREPAYMENTS. All amounts remitted to the
Bank under this paragraph (b) shall be applied to the prepayment
of the Note in such order as the Bank may determine.
Section 2.7 PAYMENTS.
(a) MAKING OF PAYMENTS. All payments of principal of and interest due
under the Note shall be made to the Bank at its office in Minneapolis,
Minnesota, not later than 12:00 Noon, Minneapolis, Minnesota, time, on the
date due, in immediately available funds, and funds received after that
hour shall be deemed to have been received by the Bank on the next
following Business Day. The Borrower hereby authorizes the Bank to charge
the Borrower's demand deposit account maintained with the Bank for the
amount of any such payment on its due date, all without receipt of any
request for such charge or Advance, but the Bank's failure to so charge
such account shall in no way affect the obligation of the Borrower to make
any such payment.
(b) SETOFF. The Borrower agrees that the Bank shall have all rights
of setoff and bankers' lien provided by applicable law, and in addition
thereto, the Borrower agrees that if at any time any amount is due and
owing by the Borrower under this Agreement to the Bank at a time when an
Event of Default has occurred and is continuing hereunder, the Bank may
apply any and all balances, credits, and deposits, accounts or moneys of
the Borrower then or thereafter in the possession of the Bank (excluding,
however, any trust or escrow accounts held by the Borrower for the benefit
of any third party) to the payment thereof.
(c) DUE DATE EXTENSION. If any payment of principal of or interest on
the
13
<PAGE>
Note or any fees payable hereunder falls due on a day which is not a
Business Day, then such due date shall be extended to the next following
Business Day, and (in the case of principal) additional interest shall
accrue and be payable for the period of such extension.
(d) APPLICATION OF PAYMENTS. Except as otherwise provided herein, so
long as no Default or Event of Default has occurred and is continuing
hereunder, each payment received from the Borrower shall be applied to such
obligation as the Borrower shall specify by notice received by the Bank on
or before the date of such payment, or in the absence of such notice, as
the Bank shall determine in its discretion. Except as otherwise provided
herein, after the occurrence of a Default or Event of Default, the Bank
shall have the right to apply all payments received by the Bank from the
Borrower as the Bank may determine in its discretion. The Borrower agrees
that the amount shown on the books and records of the Bank as being the
principal balance of and interest on the Note shall be conclusive absent
demonstrable error.
Section 2.8 COMPUTATION OF INTEREST AND FEES. Interest under the
Note and the fees hereunder shall be computed on the basis of actual number of
days elapsed in a year of 360 days.
ARTICLE III
CONDITIONS PRECEDENT
Section 3.1 INITIAL CONDITIONS PRECEDENT. The obligation of the Bank
to make the Advance is subject to the condition precedent that the Bank shall
have received on or before the day of the Advance all of the following, each
dated (unless otherwise indicated) as of the date hereof, in form and substance
satisfactory to the Bank:
(a) The Note, properly executed on behalf of the Borrower.
(b) The Security Agreement, properly executed on behalf of the
Borrower.
(c) The CI Security Agreement, properly executed on behalf of CI.
(d) A financing statement or statements sufficient when filed to
perfect the security interests granted under the Security Agreement and the
CI Security Agreement to the extent such security interests are capable of
being perfected by filing.
(e) Current searches of appropriate filing offices showing that
(i) no state or federal tax liens have been filed and remain in effect
against the Borrower or any Subsidiary, and (ii) no financing statements
have been filed and remain in effect against the Borrower or any Subsidiary
except financing statements perfecting only Liens permitted under Section
6.1.
14
<PAGE>
(f) The Assignment of Deposit Accounts, duly executed by the
Borrower, together with one or more acknowledgments in the form attached
thereto, duly executed by the financial institutions at which the Borrower
maintains its deposit accounts.
(g) The Life Insurance Assignments, duly executed by the owners
thereof, and the Life Insurance Policies, all in form and substance
satisfactory to the Bank, together with such evidence as the Bank may
request that the Life Insurance Policies are subject to no assignments or
encumbrances other than the Life Insurance Assignments.
(h) The Guaranties, duly executed by the Guarantors.
(i) A certificate of the secretary of the Borrower and each
Subsidiary (i) certifying that the execution, delivery and performance of
the Loan Documents and other documents contemplated hereunder to which such
corporation is a party have been duly approved by all necessary action of
the Board of Directors of the Borrower or such Subsidiary, as the case may
be, and attaching true and correct copies of the applicable resolutions
granting such approval, (ii) certifying that attached to such certificate
are true and correct copies of the articles of incorporation and bylaws of
the Borrower or such Subsidiary, as the case may be, together with such
copies, and (iii) certifying the names of the officers of the Borrower and
its Subsidiaries that are authorized to sign the Loan Documents and other
documents contemplated hereunder. The Bank may conclusively rely on such
certificate until it shall receive a further certificate of the Secretary
or Assistant Secretary of the Borrower canceling or amending the prior
certificate and submitting the signatures of the officers named in such
further certificate.
(j) Certificates of good standing of the Borrower and its
Subsidiaries, dated not more than ten days before such date.
(k) A signed copy of an opinion of counsel for the Borrower,
addressed to the Bank as to matters referred to in Sections 4.1, 4.2, 4.3
and 4.7, and as to such other matters as the Bank may reasonably request,
with that opinion being acceptable to the Bank's counsel. In the case of
Section 4.7, the opinion may be to the best knowledge of such counsel, and,
in the case of Section 4.3, insofar as it relates to enforcement of
remedies, it may be subject to applicable bankruptcy, insolvency,
reorganization or similar laws affecting the rights of creditors generally
from time to time, and to usual equity principles.
(l) Such evidence as the Bank may reasonably require that the
Acquisition has been fully consummated, including but not limited to copies
of the related asset purchase agreement and bills of sale.
15
<PAGE>
(m) Such subordination agreements as the Bank may require to evidence
that all of the Borrower's Debt, other than its indebtedness arising
hereunder, has been subordinated to payment of the Borrower's indebtedness
arising hereunder on terms satisfactory to the Bank, together with all
original promissory notes or other documents evidencing such Debt.
(n) Certificates of the insurance required under the Security
Agreement, naming the Bank as lender's loss payee.
Section 3.2 ADDITIONAL CONDITIONS PRECEDENT. The obligation of the
Bank to make the Advance shall be subject to the further conditions precedent
that on the date of the Advance:
(a) the representations and warranties contained in Article IV are
correct on and as of the date of the Advance as though made on and as of
such date, except to the extent that such representations and warranties
relate solely to an earlier date; and
(b) no event has occurred and is continuing, or would result from the
Advance, which constitutes a Default or an Event of Default.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Bank as follows:
Section 4.1 CORPORATE EXISTENCE AND POWER. The Borrower and its
Subsidiaries are each corporations duly incorporated, validly existing and in
good standing under the laws of their respective jurisdictions of incorporation,
and are each duly licensed or qualified to transact business in all
jurisdictions where the character of the property owned or leased or the nature
of the business transacted by them makes such licensing or qualification
necessary, except where the failure to be so licensed or qualified (i) will not
permanently preclude the Borrower or any Subsidiary from maintaining any action
in any such jurisdiction even though such action arose in whole or in part
during the period of such failure, and (ii) will not have a Material Adverse
Effect. The Borrower has all requisite power and authority, corporate or
otherwise, to conduct its business, to own its properties and to execute and
deliver, and to perform all of its obligations under, the Loan Documents.
Section 4.2 AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR
AGREEMENTS. The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of the stockholders of the Borrower, or any
authorization, consent or approval by any governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any
provision of any law, rule or regulation (including, without limitation,
16
<PAGE>
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
the Borrower or of the Articles of Incorporation or Bylaws of the Borrower,
(iii) result in a breach of or constitute a default under any indenture or loan
or credit agreement or any other agreement, lease or instrument to which the
Borrower is a party or by which it or its properties may be bound or affected,
or (iv) result in, or require, the creation or imposition of any Lien or other
charge or encumbrance of any nature (other than those in favor of the Bank) upon
or with respect to any of the properties now owned or hereafter acquired by the
Borrower.
Section 4.3 LEGAL AGREEMENTS. This Agreement and the other Loan
Documents constitute, the legal, valid and binding obligations of the Borrower
enforceable against the Borrower in accordance with their respective terms.
Section 4.4 SUBSIDIARIES. Schedule 4.4 hereto is a complete and
correct list of all present Subsidiaries and of the percentage of the ownership
of the Borrower or any other Subsidiary in each as of the date of this
Agreement. Except as otherwise indicated in that Schedule, all shares of each
Subsidiary owned by the Borrower or by any such other Subsidiary are validly
issued and fully paid and nonassessable.
Section 4.5 FINANCIAL CONDITION. The Borrower has heretofore
furnished to the Bank its audited financial statement as of December 31, 1997,
and its unaudited interim financial statement as of March 31, 1998. Those
financial statements fairly present the financial condition of the Borrower and
its Subsidiaries on the dates thereof and the results of their operations and
cash flows for the periods then ended, and were prepared in accordance with
generally accepted accounting principles.
Section 4.6 ADVERSE CHANGE. There has been no material adverse
change in the business, properties or condition (financial or otherwise) of the
Borrower or any Subsidiary since the date of the latest financial statement
referred to in Section 4.5.
Section 4.7 LITIGATION. Except as set forth in Schedule 4.7, there
are no actions, suits or proceedings pending or, to the knowledge of the
Borrower, threatened against or affecting the Borrower or any Subsidiary or the
properties of the Borrower or any Subsidiary before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, which, if determined adversely to the Borrower or that Subsidiary,
would have a Material Adverse Effect.
Section 4.8 HAZARDOUS SUBSTANCES. To the best of the Borrower's
knowledge after reasonable inquiry, neither the Borrower nor any Subsidiary nor
any other Person has ever caused or permitted any Hazardous Substance to be
disposed of in any manner which might result in any material liability to the
Borrower or any Subsidiary on, under or at any real property which is operated
by the Borrower or any Subsidiary or in which the Borrower or any Subsidiary has
any interest; and no such real property has ever been used (either by the
Borrower, by any Subsidiary or by any other Person) as a dump site or permanent
or
17
<PAGE>
temporary storage site for any Hazardous Substance.
Section 4.9 REGULATION U. The Borrower is not engaged in the
business of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System), and no part of the proceeds of any Advance will be used
to purchase or carry any margin stock or to extend credit to others for the
purpose of purchasing or carrying any margin stock.
Section 4.10 TAXES. The Borrower and its Subsidiaries have each paid
or caused to be paid to the proper authorities when due all federal, state and
local taxes required to be withheld by them. The Borrower and its Subsidiaries
have each filed all federal, state and local tax returns which to the knowledge
of the officers of the Borrower are required to be filed, and the Borrower and
its Subsidiaries have each paid or caused to be paid to the respective taxing
authorities all taxes as shown on said returns or on any assessment received by
them to the extent such taxes have become due, other than taxes whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which the Borrower or Subsidiary has provided adequate
reserves in accordance with generally accepted accounting principles.
Section 4.11 TITLES AND LIENS. The Borrower or one of its
Subsidiaries has good title to each of the properties and assets reflected in
the latest balance sheet referred to in Section 4.5 (other than any sold, as
permitted by Section 6.6), free and clear of all Liens and encumbrances, except
for Liens permitted by Section 6.1 and covenants, restrictions, rights,
easements and minor irregularities in title which do not materially interfere
with the business or operations of the Borrower or such Subsidiary as presently
conducted. No financing statement naming the Borrower or any Subsidiary as
debtor is on file in any office except to perfect only Liens permitted by
Section 6.1.
Section 4.12 ERISA. No Plan established or maintained by the
Borrower, any Subsidiary or any ERISA Affiliate that is subject to Part 3 of
Subtitle B of Title I of ERISA had an accumulated funding deficiency (as such
term is defined in Section 302 of ERISA) in excess of $1,000,000 as of the last
day of the most recent fiscal year of such Plan ended prior to the date hereof,
and no liability to the Pension Benefit Guaranty Corporation or the Internal
Revenue Service in excess of such amount has been, or is expected by the
Borrower, any Subsidiary or any ERISA Affiliate to be, incurred with respect to
any Plan of the Borrower, any Subsidiary or any ERISA Affiliate. The Borrower
has no contingent liability with respect to any post-retirement benefit under a
Welfare Plan, other than liability for continuation coverage described in Part 6
of Subtitle B of Title I of ERISA.
ARTICLE V
AFFIRMATIVE COVENANTS
So long as the Note shall remain unpaid, the Borrower will comply with
the following requirements, unless the Bank shall otherwise consent in writing:
18
<PAGE>
Section 5.1 FINANCIAL STATEMENTS. The Borrower will deliver to the
Bank:
(a) As soon as available, and in any event within 90 days after the
end of each fiscal year of the Borrower, a copy of the annual audit report
of the Borrower prepared on a consolidated basis with the unqualified
opinion of independent certified public accountants selected by the
Borrower and acceptable to the Bank, which annual report shall include the
consolidated balance sheet of the Borrower and its Subsidiaries as at the
end of such fiscal year and the related consolidated statements of income,
shareholders' equity and cash flows of the Borrower and its Subsidiaries
for the fiscal year then ended, all in reasonable detail and all prepared
in accordance with generally accepted accounting principles applied on a
basis consistent with the accounting practices applied in the annual
financial statements referred to in Section 4.5, together with (A) a report
signed by such accountants stating that in making the investigations
necessary for said opinion they obtained no knowledge, except as
specifically stated, of any Default or Event of Default hereunder and all
relevant facts in reasonable detail to evidence, and the computations as
to, whether or not the Borrower is in compliance with the Financial
Covenants; (B) a copy of such accountants' management letter issued to the
Borrower for such year; and (C) a statement of such accountants stating
that they understand that the Bank is relying on such audit report.
(b) As soon as available and in any event within 30 days after the
end of each calendar month, consolidated balance sheets of the Borrower and
its Subsidiaries as at the end of such month and related consolidated
statements of earnings and cash flows of the Borrower and its Subsidiaries
for such month and for the year to date, in reasonable detail and stating
in comparative form the figures for the corresponding date and period in
the previous year, all prepared in accordance with generally accepted
accounting principles applied on a basis consistent with the accounting
practices reflected in the annual financial statements referred to in
Section 4.5, and certified by the chief financial officer of the Borrower,
subject to year-end audit adjustments.
(c) Concurrent with the delivery of any financial statements under
paragraph (a) or (b), a Compliance Certificate, duly executed by the chief
financial officer of the Borrower.
(d) Within 90 days after the end of each calendar year, the personal
financial statement of each Individual Guarantor as at the end of such
year, in such detail as the Bank may reasonably request; and, upon request
of the Bank from time to time, copies of each Individual Guarantor's most
recently filed federal personal income tax return, including all schedules
and attachments thereto.
(e) Not less than 30 days prior to the end of each fiscal year of the
Borrower, projections for the Borrower's financial performance during the
following
19
<PAGE>
fiscal year, including projections of income, cash flows, balance sheets
and compliance with Financial Covenants, all presented on a
month-by-month basis in such detail as the Bank may request and
certified by the chief financial officer of the Borrower as being
identical to the projections used by the Borrower for internal planning
purposes.
(f) Promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower or any
Subsidiary shall have sent to its stockholders.
(g) Promptly after the sending or filing thereof, copies of all
regular and periodic financial reports which the Borrower or any Subsidiary
shall file with the Securities and Exchange Commission or any national
securities exchange.
(h) Immediately after the commencement thereof, notice in writing of
all litigation and of all proceedings before any governmental or regulatory
agency affecting the Borrower or any Subsidiary of the type described in
Section 4.7 or which seek a monetary recovery against the Borrower or any
Subsidiary in excess of $50,000.
(i) As promptly as practicable (but in any event not later than five
business days) after an officer of the Borrower or any Subsidiary obtains
knowledge of the occurrence of any Default or Event of Default, notice of
such occurrence, together with a detailed statement by a responsible
officer of the Borrower or the appropriate Subsidiary of the steps being
taken by the Borrower or the appropriate Subsidiary to cure the effect of
such event.
(j) Promptly upon becoming aware of any Reportable Event or any
prohibited transaction (as defined in Section 4975 of the Internal Revenue
Code or Section 406 of ERISA) in connection with any Plan or any trust
created thereunder, a written notice specifying the nature thereof, what
action the Borrower has taken, is taking or proposes to take with respect
thereto, and, when known, any action taken or threatened by the Internal
Revenue Service, the Pension Benefit Guaranty Corporation or the Department
of Labor with respect thereto.
(k) Promptly upon their receipt or filing, copies of (i) all notices
received by the Borrower, any Subsidiary or any ERISA Affiliate of the
Pension Benefit Guaranty Corporation's intent to terminate any Plan or to
have a trustee appointed to administer any Plan, and (ii) all notices
received by the Borrower, any Subsidiary or any ERISA Affiliate from a
Multiemployer Plan concerning the imposition or amount of withdrawal
liability pursuant to Section 4202 of ERISA.
(l) Upon request of the Bank, copies of the most recent annual report
(Form 5500 Series), including any supporting schedules, filed by the
Borrower, any
20
<PAGE>
Subsidiary or any ERISA Affiliate with the Internal Revenue Service with
respect to any Plan.
(m) Such other information respecting the financial condition and
results of operations of the Borrower or any Subsidiary as the Bank may
from time to time reasonably request.
Section 5.2 BOOKS AND RECORDS; INSPECTION AND EXAMINATION. The
Borrower will keep, and will cause each Subsidiary to keep, accurate books of
record and account for itself in which true and complete entries will be made in
accordance with generally accepted accounting principles consistently applied
and, upon request of the Bank, will give any representative of the Bank access
to, and permit such representative to examine, copy or make extracts from, any
and all books, records and documents in its possession, to inspect any of its
properties and to discuss its affairs, finances and accounts with any of its
principal officers, all at such times during normal business hours and as often
as the Bank may reasonably request.
Section 5.3 COMPLIANCE WITH LAWS. The Borrower will, and will cause
each Subsidiary to, comply with the requirements of applicable laws and
regulations, the noncompliance with which would have a Material Adverse Effect.
Section 5.4 PAYMENT OF TAXES AND OTHER CLAIMS. The Borrower will pay
or discharge, and will cause each Subsidiary to pay or discharge, when due,
(a) all taxes, assessments and governmental charges levied or imposed upon it or
upon its income or profits, or upon any properties belonging to it, prior to the
date on which penalties attach thereto, (b) all federal, state and local taxes
required to be withheld by it, and (c) all lawful claims for labor, materials
and supplies which, if unpaid, might by law become a Lien or charge upon any
properties of the Borrower or any Subsidiary; provided, that neither the
Borrower nor any Subsidiary shall be required to pay any such tax, assessment,
charge or claim whose amount, applicability or validity is being contested in
good faith by appropriate proceedings and for which the Borrower or such
Subsidiary has provided adequate reserves in accordance with generally accepted
accounting principles.
Section 5.5 MAINTENANCE OF PROPERTIES. The Borrower will keep and
maintain, and will cause each Subsidiary to keep and maintain, all of its
properties necessary or useful in its business in good condition, repair and
working order; provided, however, that nothing in this Section shall prevent the
Borrower or any Subsidiary from discontinuing the operation and maintenance of
any of its properties if such discontinuance is, in the judgment of the Borrower
or the appropriate Subsidiary, desirable in the conduct of its business and not
disadvantageous in any material respect to the Bank as holder of the Note.
Section 5.6 INSURANCE. The Borrower will, and will cause each
Subsidiary to, obtain and maintain insurance with insurers believed by the
Borrower to be responsible and reputable, in such amounts and against such risks
as is usually carried by companies engaged
21
<PAGE>
in similar business and owning similar properties in the same general areas
in which the Borrower or such Subsidiary operates. All casualty insurance
policies required hereunder shall include a standard lenders' loss payable
clause in favor of the Bank to the extent of its interest. All liability
policies required hereunder shall name the Bank as an additional insured.
Section 5.7 PRESERVATION OF CORPORATE EXISTENCE. The Borrower
will, and will cause each Subsidiary to, preserve and maintain its corporate
existence and all of its rights, privileges and franchises; provided,
however, that neither the Borrower nor any Subsidiary shall be required to
preserve any of its rights, privileges and franchises if its Board of
Directors shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Borrower or the appropriate
Subsidiary and that the loss thereof is not disadvantageous in any material
respect to the Bank as a holder of the Note.
Section 5.8 DEPOSIT ACCOUNTS. The Borrower shall maintain all of
its deposit accounts of any type (whether for working capital, payroll or
other purposes, and whether held jointly or individually) with the Bank or
one or more affiliates of the Bank.
Section 5.9 SENIOR LEVERAGE RATIO. The Borrower will at all times
maintain its Leverage Ratio, determined as at the end of each calendar month
designated below, at not more than the amount set forth below opposite such
month-end:
<TABLE>
<CAPTION>
MONTHS ENDING RATIO
------------- -----
<S> <C>
On or before January 30, 1999 3.00 to 1
January 31, 1999 through July 30, 1999 2.50 to 1
July 31, 1999 through July 30, 2000 2.00 to 1
July 31, 2000 and thereafter 1.50 to 1
</TABLE>
Section 5.10 DEBT SERVICE COVERAGE RATIO. The Borrower will at
all times maintain its Debt Service Coverage Ratio, determined at the end of
each calendar month, at not less than 1.15 to 1.
Section 5.11 FIXED CHARGE COVERAGE RATIO. The Borrower will at all
times maintain its Fixed Charge Coverage Ratio, determined at the end of each
calendar month, at not less than 1.05 to 1.
Section 5.12 OPERATING CASH FLOW. The Borrower shall maintain its
Operating Cash Flow for each period of 12 calendar months, determined as of
the end of each calendar month, in an amount not less than (i) with respect
to each period of 12 calendar months ending on or before June 30, 1998,
$2,200,000, (ii) with respect to each period of 12 calendar months ending
thereafter, 90% of its Operating Cash Flow during the period of 12 calendar
months ending one year prior to the date of determination.
Section 5.13 KEY PERSON LIFE INSURANCE. The Borrower shall maintain
22
<PAGE>
insurance (the "Life Insurance Policies") upon the life of each of the
Individual Guarantors, with the death benefit thereunder as to each such
Individual Guarantor in an amount not less than the amount set forth below
opposite that Individual Guarantor's name:
<TABLE>
<S> <C>
Jeffrey R. Paletz $1,000,000
Melvin Graf $600,000
Jack S. Kohler $200,000
</TABLE>
The right to receive the proceeds of the Life Insurance Policies shall be
assigned to the Bank by the Life Insurance Assignments.
ARTICLE VI
NEGATIVE COVENANTS
So long as the Note shall remain unpaid, the Borrower agrees that,
without the prior written consent of the Bank:
Section 6.1 LIENS. The Borrower will not, and will not permit any
Subsidiary to, create, incur, assume or suffer to exist any Lien or other
charge or encumbrance of any nature on any of its assets, now owned or
hereafter acquired, or assign or otherwise convey any right to receive income
or give its consent to the subordination of any right or claim of the
Borrower or any Subsidiary to any right or claim of any other Person;
excluding, however, from the operation of the foregoing:
(a) Liens for taxes or assessments or other governmental charges to
the extent not required to be paid by Section 5.4.
(b) Materialmen's, merchants', carriers' worker's, repairer's, or
other like liens arising in the ordinary course of business to the extent
not required to be paid by Section 5.4.
(c) Pledges or deposits to secure obligations under worker's
compensation laws, unemployment insurance and social security laws, or to
secure the performance of bids, tenders, contracts (other than for the
repayment of borrowed money) or leases or to secure statutory obligations
or surety or appeal bonds, or to secure indemnity, performance or other
similar bonds in the ordinary course of business.
(d) Zoning restrictions, easements, licenses, restrictions on the use
of real property or minor irregularities in title thereto, which do not
materially impair the use of such property in the operation of the business
of the Borrower or any Subsidiary or the value of such property for the
purpose of such business.
(e) Purchase money Liens (which term for purposes of this subsection
shall include conditional sale agreements or other title retention
agreements and leases in the nature of title retention agreements) upon or
in property acquired after the date
23
<PAGE>
hereof, or Liens existing in such property at the time of acquisition
thereof, or, in the case of any corporation which thereafter becomes a
Subsidiary, Liens upon or in its property, existing at the time such
corporation becomes a Subsidiary, provided that:
(i) no such Lien extends or shall extend to or cover any property of
the Borrower or such Subsidiary, as the case may be, other than
the property then being acquired and fixed improvements then or
thereafter erected thereon;
(ii) the aggregate principal amount of all Debt of the Borrower and
all Subsidiaries secured by all Liens described in this
subsection shall not exceed $25,000 at any one time outstanding;
and
(iii) the aggregate principal amount of Debt secured by Liens
described in this subsection (e) at the time of acquisition of
the property subject thereto shall not exceed 80% of the cost of
such property or of the then fair market value of such property
as determined by the Board of Directors of the Borrower,
whichever shall be less.
(f) Liens created by any Subsidiary as security for Debt owing to the
Borrower or to another Subsidiary.
(g) Liens on any property of the Borrower or any Subsidiary (other
than those described in subsection (e) and (f)) securing any indebtedness
for borrowed money in existence on the date hereof and listed in Schedule
6.1 hereto.
(h) Liens in favor of the Bank
(i) Liens arising out of a judgment against the Borrower or any
Subsidiary for the payment of money not exceeding $50,000 with respect to
which an appeal is being prosecuted and a stay of execution pending such
appeal has been secured, but only so long as all such Liens are subordinate
in all respect to all Liens in favor of the Bank.
Section 6.2 INDEBTEDNESS. The Borrower will not, and will not permit
any Subsidiary to, incur, create, assume or permit to exist any indebtedness or
liability on account of deposits or advances or any indebtedness for borrowed
money, or any other indebtedness or liability evidenced by notes, bonds,
debentures or similar obligations, except:
(a) Indebtedness to the Bank.
(b) Indebtedness of the Borrower or any Subsidiary in existence on
the date hereof and listed in Schedule 6.2 hereto, but not including any
extensions or renewals thereof.
24
<PAGE>
(c) Indebtedness of a Subsidiary to the Borrower or another
Subsidiary on account of borrowings, or indebtedness of the Borrower to a
Subsidiary on account of borrowings from that Subsidiary.
(d) Subordinated Debt, or renewals thereof.
(e) Purchase money indebtedness of the Borrower or any Subsidiary
secured by Liens permitted by subsection 6.1(e).
Section 6.3 GUARANTIES. The Borrower will not, and will not permit
any Subsidiary to, assume, guarantee, endorse or otherwise become directly or
contingently liable in connection with any obligations of any other Person,
except:
(a) The endorsement of negotiable instruments by the Borrower or any
Subsidiary for deposit or collection or similar transactions in the
ordinary course of business.
(b) Guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons in
existence on the date hereof and listed in Schedule 6.3 hereto.
Section 6.4 INVESTMENTS. The Borrower will not, and will not permit
any Subsidiary to, purchase or hold beneficially any stock or other securities
or evidence of indebtedness of, make or permit to exist any loans or advances
to, or make any investment or acquire any interest whatsoever in, any other
Person, except:
(a) Investments in direct obligations of the United States of America
or any agency or instrumentality thereof whose obligations constitute full
faith and credit obligations of the United States of America, commercial
paper issued by U.S. corporations rated "A-1" or "A-2" by Standard & Poors
Corporation or "P-1" or "P-2" by Moody's Investors Service or certificates
of deposit or bankers' acceptances having a maturity of one year or less
issued by members of the Federal Reserve System having deposits in excess
of $100,000,000.
(b) Any existing investment by the Borrower or any other Subsidiary
in the stock of any Subsidiary.
(c) Loans and advances by a Subsidiary to the Borrower or another
Subsidiary.
(d) Travel advances to officers and employees of the Borrower or any
Subsidiary in the ordinary course of business.
(e) Advances in the form of progress payments, prepaid rent or
security deposits.
25
<PAGE>
Section 6.5 DIVIDENDS. The Borrower will not declare or pay any
dividend on any class of its stock or make any payment on account of the
purchase, redemption or other retirement of any shares of such stock or make any
distribution in respect thereof, either directly or indirectly.
Section 6.6 SALE OF ASSETS. The Borrower will not, and will not
permit any Subsidiary to, sell, lease, assign, transfer or otherwise dispose of
all or a substantial part of its assets (whether in one transaction or in a
series of transactions) to any other Person other than in the ordinary course of
business, except that a wholly-owned Subsidiary of the Borrower may sell, lease,
or transfer all or a substantial part of its assets to the Borrower or another
wholly-owned Subsidiary of the Borrower, and the Borrower or such other
wholly-owned Subsidiary, as the case may be, may acquire all or substantially
all of the assets of the Subsidiary so to be sold, leased or transferred to it.
Section 6.7 RESTRICTIONS ON ISSUANCE AND SALE OF SUBSIDIARY STOCK.
The Borrower will not:
(a) permit any Subsidiary to issue or sell any shares of stock of any
class of such Subsidiary to any other Person (other than the Borrower or a
wholly-owned Subsidiary of the Borrower), except for the purpose of
qualifying directors or of satisfying pre-emptive rights or of paying a
common stock dividend on, or splitting, common stock of such Subsidiary; or
(b) sell, transfer or otherwise dispose of any shares of stock of any
class (except to a wholly-owned Subsidiary of the Borrower) of any
Subsidiary or permit any Subsidiary to sell, transfer or otherwise dispose
of (except to the Borrower or a wholly-owned Subsidiary of the Borrower or
for the purpose of qualifying directors) any shares of stock of any class
of any other Subsidiary.
Section 6.8 TRANSACTIONS WITH AFFILIATES. The Borrower will not, and
will not permit any Subsidiary to, make any loan or capital contribution to, or
any other investment in, any Affiliate, or pay any dividend to any Affiliate, or
make any other cash transfer to any Affiliate; provided, however, that so long
as no Default or Event of Default has occurred and is continuing at the time
thereof or would result therefrom, the foregoing shall not prohibit payments for
telephone line access resold by CI to the Borrower so long as the price paid by
the Borrower therefor does not exceed CI's actual out-of-pocket costs for such
access, before inclusion of any profit margin.
Section 6.9 CONSOLIDATION AND MERGER. The Borrower will not, and
will not permit any Subsidiary to, consolidate with or merge into any Person, or
permit any other Person to merge into it, or acquire (in a transaction analogous
in purpose or effect to a consolidation or merger) all or substantially all of
the assets of any other Person; provided, however, that the restrictions
contained in this Section shall not apply to or prevent the consolidation or
merger of a Subsidiary with, or a conveyance or transfer of its assets to, the
26
<PAGE>
Borrower (if the Borrower shall be the continuing or surviving corporation) or
another then-existing wholly-owned Subsidiary of the Borrower.
Section 6.10 SALE AND LEASEBACK. The Borrower will not, and will not
permit any Subsidiary to, enter into any arrangement, directly or indirectly,
with any other Person whereby the Borrower or such Subsidiary shall sell or
transfer any real or personal property, whether now owned or hereafter acquired,
and then or thereafter rent or lease as lessee such property or any part thereof
or any other property which the Borrower or such Subsidiary, as the case may be,
intends to use for substantially the same purpose or purposes as the property
being sold or transferred.
Section 6.11 SUBORDINATED DEBT. The Borrower will not, and will not
permit any Subsidiary to, (i) make any payment of, or acquire, any Subordinated
Debt except as expressly permitted by the subordination provision thereof;
(ii) give security for all or any part of such Subordinated Debt; (iii) amend or
cancel the subordination provisions of such Subordinated Debt; (iv) take or omit
to take any action whereby the subordination of such Subordinated Debt or any
part thereof to the Note might be terminated, impaired or adversely affected; or
(v) omit to give the Bank prompt written notice of any default under any
agreement or instrument relating to such Subordinated Debt by reason whereof
such Subordinated Debt might become or be declared to be immediately due and
payable.
Section 6.12 HAZARDOUS SUBSTANCES. The Borrower will not, and will
not permit any Subsidiary to, cause or permit any Hazardous Substance to be
disposed of, in any manner which might result in any material liability to the
Borrower or any Subsidiary, on, under or at any real property which is operated
by the Borrower or any Subsidiary or in which the Borrower or any Subsidiary has
any interest.
Section 6.13 RESTRICTIONS ON NATURE OF BUSINESS. The Borrower will
not, and will not permit any Subsidiary to, engage in any line of business
materially different from that presently engaged in by the Borrower or such
Subsidiary.
ARTICLE VII
EVENTS OF DEFAULT, RIGHTS AND REMEDIES
Section 7.1 EVENTS OF DEFAULT. "Event of Default", wherever used
herein, means any one of the following events:
(a) Default in the payment of any principal of or interest on the
Note when it becomes due and payable.
(b) Default in the payment of any fees required under Section 2.5
when the same become due and payable.
(c) Default in the performance, or breach, of any covenant or
agreement on the part of the Borrower contained in any Financial Covenant.
27
<PAGE>
(d) Default in the performance, or breach, of any covenant or
agreement of the Borrower in this Agreement (other than a covenant or
agreement a default in whose performance or whose breach is elsewhere in
this Section specifically dealt with), and the continuance of such default
or breach for a period of 30 days after the Bank has given notice to the
Borrower specifying such default or breach and requiring it to be remedied.
(e) Any representation or warranty made by the Borrower in this
Agreement or by the Borrower (or any of its officers) in any certificate,
instrument, or statement contemplated by or made or delivered pursuant to
or in connection with this Agreement, shall prove to have been incorrect or
misleading in any material respect when made.
(f) A default under any bond, debenture, note or other evidence of
indebtedness of the Borrower (other than to the Bank) or under any
indenture or other instrument under which any such evidence of indebtedness
has been issued or by which it is governed and the expiration of the
applicable period of grace, if any, specified in such evidence of
indebtedness, indenture or other instrument; provided, however, that if
such default shall be cured by the Borrower, or waived by the holders of
such indebtedness, in each case prior to the commencement of any action
under Section 7.2 and as may be permitted by such evidence of indebtedness,
indenture or other instrument, then the Event of Default hereunder by
reason of such default shall be deemed likewise to have been thereupon
cured or waived.
(g) An event of default shall occur under the Security Agreement or
the Assignment of Deposit Accounts, or under any other security agreement,
mortgage, deed of trust, assignment or other instrument or agreement
directly or indirectly securing any obligations of the Borrower hereunder
or under the Note or any guaranty of such obligations.
(h) Any Guarantor shall repudiate, purport to revoke, or fail to
perform any obligation under that Guarantor's Guaranty.
(i) Any Life Insurance Policy shall be terminated, by the Borrower or
otherwise; or any Life Insurance Policy shall be scheduled to terminate
within 30 days and the Borrower shall not have delivered a satisfactory
renewal thereof to the Bank; or the Borrower shall fail to pay any premium
on any Life Insurance Policy when due; or the Borrower shall take any other
action that impairs the value of any Life Insurance Policy.
(j) Default in the payment of any amount owed by the Borrower to the
Bank other than hereunder or under the Note.
(k) The Borrower or any Subsidiary shall be adjudicated a bankrupt or
28
<PAGE>
insolvent, or admit in writing its inability to pay its debts as they
mature, or make an assignment for the benefit of creditors; or the Borrower
or any Subsidiary shall apply for or consent to the appointment of any
receiver, trustee, or similar officer for it or for all or any substantial
part of its property; or such receiver, trustee or similar officer shall be
appointed without the application or consent of the Borrower or such
Subsidiary, as the case may be, and such appointment shall continue
undischarged for a period of 30 days; or the Borrower or any Subsidiary
shall institute (by petition, application, answer, consent or otherwise)
any bankruptcy, insolvency, reorganization, arrangement, readjustment of
debt, dissolution, liquidation or similar proceeding relating to it under
the laws of any jurisdiction; or any such proceeding shall be instituted
(by petition, application or otherwise) against the Borrower or any
Subsidiary; or any judgment, writ, warrant of attachment or execution or
similar process shall be issued or levied against a substantial part of the
property of the Borrower or any Subsidiary and such judgment, writ, or
similar process shall not be released, vacated or fully bonded within 30
days after its issue or levy.
(l) A petition shall be filed by or against the Borrower, any
Subsidiary or any Guarantor under the United States Bankruptcy Code naming
the Borrower, Subsidiary or Guarantor as debtor.
(m) The rendering against the Borrower of a final judgment, decree or
order for the payment of money in excess of $25,000 and the continuance of
such judgment, decree or order unsatisfied and in effect for any period of
30 consecutive days without a stay of execution; or the rendering against
the Borrower of a money final judgment, decree or order for the payment of
in excess of $200,000, regardless of the period for which such judgment,
decree or order remains outstanding.
(n) A writ of attachment, garnishment, levy or similar process
seeking a recovery of $50,000 or more shall be issued against or served
upon the Bank with respect to (i) any property of the Borrower, any
Subsidiary or any Guarantor in the possession of the Bank, or (ii) any
indebtedness of the Bank to the Borrower, any Subsidiary or any Guarantor.
(o) Any Plan shall have been terminated, or a trustee shall have been
appointed by an appropriate United States District Court to administer any
Plan, or the Pension Benefit Guaranty Corporation shall have instituted
proceedings to terminate any Plan or to appoint a trustee to administer any
Plan, or withdrawal liability shall have been asserted against the
Borrower, any Subsidiary or any ERISA Affiliate by a Multiemployer Plan; or
the Borrower, any Subsidiary or any ERISA Affiliate shall have incurred
liability to the Pension Benefit Guaranty Corporation, the Internal Revenue
Service, the Department of Labor or Plan participants in excess of
$1,000,000 with respect to any Plan; or any Reportable Event that the Bank
may determine in good faith might constitute grounds for the termination of
any Plan, for the appointment by the appropriate United States District
Court of a trustee to
29
<PAGE>
administer any Plan or for the imposition of withdrawal liability with
respect to a Multiemployer Plan, shall have occurred and be continuing
30 days after written notice to such effect shall have been given to the
Borrower by the Bank.
(p) Any law, regulation or order of any federal, state or local
governmental body or agency or any court shall be modified, issued, vacated
or rescinded, and the Bank shall determine in good faith that such
modification, issuance, vacation or rescission (i) will have a Material
Adverse Effect, and (ii) either (A) impairs the prospect of due and
punctual payment of any or all of the Borrower's indebtedness to the Bank,
or (B) substantially increases the likelihood that a Default or Event of
Default will occur; or any license, franchise or agreement permitting, or
otherwise necessary to, the operation of the business of the Borrower as
presently conducted shall be suspended or revoked or shall fail to be
renewed upon expiration.
Section 7.2 RIGHTS AND REMEDIES. Upon the occurrence of an Event of
Default or at any time thereafter until such Event of Default is cured to the
written satisfaction of the Bank, the Bank may exercise any or all of the
following rights and remedies:
(a) The Bank may, by notice to the Borrower, declare the entire
unpaid principal amount of the Note then outstanding, all interest accrued
and unpaid thereon, and all other amounts payable under this Agreement to
be forthwith due and payable, whereupon the Note, all such accrued interest
and all such amounts shall become and be forthwith due and payable, without
presentment, demand, protest or further notice of any kind, all of which
are hereby expressly waived by the Borrower.
(b) The Bank may, without notice to the Borrower and without further
action, apply any and all money owing by the Bank to the Borrower to the
payment of the Note then outstanding, including interest accrued thereon,
and of all other sums then owing by the Borrower hereunder.
(c) The Bank may exercise and enforce its rights and remedies under
the Security Agreement, the Assignment of Deposit Accounts, and/or the Life
Insurance Assignments.
(d) The Bank may exercise any other rights and remedies available to
it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in Section 7.1(l) or 7.1(n) hereof, the entire unpaid principal amount
of the Note then outstanding, all interest accrued and unpaid thereon, and all
other amounts payable under this Agreement shall be immediately due and payable
without presentment, demand, protest or notice of any kind.
30
<PAGE>
ARTICLE VIII
MISCELLANEOUS
Section 8.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay
on the part of the Bank in exercising any right, power or remedy under the
Loan Documents shall operate as a waiver thereof; nor shall the Bank's
acceptance of payments while any Default or Event of Default is outstanding
operate as a waiver of such Default or Event of Default, or any right, power
or remedy under the Loan Documents; nor shall any single or partial exercise
of any such right, power or remedy preclude any other or further exercise
thereof or the exercise of any other right, power or remedy under the Loan
Documents. The remedies provided in the Loan Documents are cumulative and
not exclusive of any remedies provided by law.
Section 8.2 AMENDMENTS, ETC. No amendment, modification,
termination or waiver of any provision of any Loan Document or consent to any
departure by the Borrower therefrom shall be effective unless the same shall
be in writing and signed by the Bank and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for
which given. No notice to or demand on the Borrower in any case shall
entitle the Borrower to any other or further notice or demand in similar or
other circumstances.
Section 8.3 NOTICE. Except as otherwise expressly provided
herein, all notices and other communications hereunder shall be in writing
and shall be (i) personally delivered, (ii) transmitted by registered mail,
postage prepaid, (iii) sent by Federal Express or similar expedited delivery
service, or (iv) transmitted by telecopy, in each case addressed to the
party to whom notice is being given at its address as set forth by its
signature below, or, if telecopied, transmitted to that party at its
telecopier number set forth by its signature below; or, as to each party, at
such other address or telecopier number as may hereafter be designated in a
notice by that party to the other party complying with the terms of this
Section. All such notices or other communications shall be deemed to have
been given on (i) the date received if delivered personally or by mail, (ii)
the date of receipt, if delivered by Federal Express or similar expedited
delivery service, or (iii) the date of transmission if delivered by telecopy,
except that notices or requests to the Bank pursuant to any of the provisions
of Article II shall not be effective until received.
Section 8.4 PARTICIPATIONS. The Bank may grant participations in
the Note to any institutional investor without the consent of the Borrower.
The Borrower shall assist the Bank in granting any such participations.
Section 8.5 DISCLOSURE OF INFORMATION. The Borrower authorizes
the Bank to disclose to any participant or assignee (each, a "Transferee")
and any prospective Transferee any and all financial and other information in
the Bank's possession concerning the Borrower which has been delivered to the
Bank by the Borrower pursuant to this Agreement or which has been delivered
to the Bank by the Borrower in connection with the Bank's credit
31
<PAGE>
evaluation of the Borrower before entering into this Agreement.
Section 8.6 COSTS AND EXPENSES. The Borrower agrees to pay on
demand all costs and expenses incurred by the Bank in connection with the
negotiation, preparation, execution, administration, amendment or enforcement
of the Loan Documents and the other instruments and documents to be delivered
hereunder and thereunder, including the reasonable fees and out-of-pocket
expenses of counsel for the Bank with respect thereto, whether paid to
outside counsel or allocated to the Bank by in-house counsel.
Section 8.7 INDEMNIFICATION BY BORROWER. The Borrower hereby
agrees to indemnify the Bank and each officer, director, employee and agent
thereof (herein individually each called an "Indemnitee" and collectively
called the "Indemnitees") from and against any and all losses, claims,
damages, reasonable expenses (including, without limitation, reasonable
attorneys' fees) and liabilities (all of the foregoing being herein called
the "Indemnified Liabilities") incurred by an Indemnitee in connection with
or arising out of the execution or delivery of this Agreement or any
agreement or instrument contemplated hereby, the performance by the parties
hereto of their respective obligations hereunder or the use of the proceeds
of the Advance (including but not limited to any such loss, claim, damage,
expense or liability arising out of any claim in which it is alleged that any
Environmental Law has been breached with respect to any activity or property
of the Borrower), except for any portion of such losses, claims, damages,
expenses or liabilities incurred solely as a result of the gross negligence
or willful misconduct of the applicable Indemnitee. If and to the extent
that the foregoing indemnity may be unenforceable for any reason, the
Borrower hereby agrees to make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible
under applicable law. All obligations provided for in this Section shall
survive any termination of this Agreement.
Section 8.8 EXECUTION IN COUNTERPARTS. This Agreement and the
other Loan Documents may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed to be an original and
all of which counterparts of this Agreement or such other Loan Document, as
the case may be, taken together, shall constitute but one and the same
instrument.
Section 8.9 BINDING EFFECT, ASSIGNMENT. The Loan Documents shall
be binding upon and inure to the benefit of the Borrower and the Bank and
their respective successors and assigns, except that the Borrower shall not
have the right to assign its rights thereunder or any interest therein
without the prior written consent of the Bank.
Section 8.10 GOVERNING LAW. The Loan Documents shall be governed
by, and construed in accordance with, the laws of the State of Minnesota.
Section 8.11 CONSENT TO JURISDICTION. The Borrower irrevocably (i)
agrees that any suit, action or other legal proceeding arising out of or
relating to this Agreement or any other Loan Document may be brought in a
court of record in Hennepin County in the State of
32
<PAGE>
Minnesota or in the Courts of the United States located in such State, (ii)
consents to the jurisdiction of each such court in any suit, action or
proceeding, (iii) waives any objection which it may have to the laying of
venue of any such suit, action or proceeding in any such courts and any claim
that any such suit, action or proceeding has been brought in an inconvenient
forum, and (iv) agrees that a final judgment in any such suit, action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law.
SECTION 8.12 WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK
HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN
ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT AND THE
NOTE OR THE RELATIONSHIPS ESTABLISHED HEREUNDER.
Section 8.13 SEVERABILITY OF PROVISIONS. Any provision of this
Agreement which is prohibited or unenforceable shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
Section 8.14 PRIOR AGREEMENTS. This Agreement and the other Loan
Documents and related documents described herein restate and supersede in
their entirety any and all prior agreements and understandings, oral or
written, between the Bank and the Borrower.
Section 8.15 HEADINGS. Article and Section headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their respective officers thereunto duly authorized as of
the date first above written.
Address: CHOICETEL COMMUNICATIONS, INC.
9724 10th Avenue North
Plymouth, Minnesota 55441
Attention: Jack S. Kohler
Telecopier: 612-544-1281
By /s/ Jack S. Kohler
---------------------------------
Jack S. Kohler
Its Vice President and Chief Financial
Officer
33
<PAGE>
Address: NORWEST BANK MINNESOTA,
Sixth Street and Marquette Avenue NATIONAL ASSOCIATION
Minneapolis, Minnesota 55479-0058
Attention: Communications Finance Division
Telecopier: 612-667-0505
By /s/ Jeff Roseland
---------------------------------
Jeff Roseland
Its Vice President
34
<PAGE>
EXHIBITS AND SCHEDULES
Exhibit A Note
Exhibit B Form of Compliance Certificate
----------------------------
Schedule 4.4 Subsidiaries
Schedule 4.7 Litigation
Schedule 6.1 Permitted Liens
Schedule 6.2 Permitted Indebtedness
Schedule 6.3 Permitted Guaranties
35
<PAGE>
EXHIBIT A
PROMISSORY NOTE
$3,800,000 Minneapolis, Minnesota
June 30, 1998
For value received, ChoiceTel Communications, Inc., a Minnesota
corporation (the "Borrower"), promises to pay to the order of Norwest Bank
Minnesota, National Association, a national banking association (the "Bank"),
at its main office in Minneapolis, Minnesota, or at such other place as the
holder hereof may hereafter from time to time designate in writing, in lawful
money of the United States of America and in immediately available funds, the
principal sum of Three Million Eight Hundred Thousand Dollars ($3,800,000),
and to pay interest on the principal balance of this Note outstanding from
time to time at the rate or rates determined pursuant to the Credit Agreement
of even date herewith between the Borrower and the Bank (together with all
amendments, modifications and restatements thereof, the "Credit Agreement").
This Note is issued pursuant to, and is subject to, the Credit
Agreement, which provides (among other things) for the amount and date of
payments of principal and interest required hereunder, for the acceleration
of the maturity hereof upon the occurrence of an Event of Default (as defined
therein) and for the voluntary and mandatory prepayment hereof. This Note is
the "Note," as defined in the Credit Agreement.
The Borrower shall pay all costs of collection, including
reasonable attorneys' fees and legal expenses, if this Note is not paid when
due, whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and
protest are expressly waived.
CHOICETEL COMMUNICATIONS, INC.
By /s/ Jack Kohler
-------------------------------------------
Its Vice President and Chief Financial Officer
------------------------------------------
36
<PAGE>
EXHIBIT B
COMPLIANCE CERTIFICATE
_________, ____
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479-0058
Ladies and Gentlemen:
Reference is made to the Credit Agreement (the "Credit Agreement")
dated June 30, 1998 entered into between Norwest Bank Minnesota, National
Association and ChoiceTel Communications, Inc. (the "Borrower").
All terms defined in the Credit Agreement and not otherwise defined
herein shall have the meanings given them in the Credit Agreement.
This is a Compliance Certificate submitted in connection with the
Borrower's financial statements (the "Statements") as of _________, ____ (the
"Effective Date").
I hereby certify to you as follows:
1. I am the _________________________ of the Borrower, and I am familiar
with the financial statements and financial affairs of the Borrower.
2. The Statements, and the computations below, have been prepared in
accordance with generally accepted accounting principles applied on a
basis that is consistent with the accounting practices reflected in
the annual financial statements of the Borrower previously delivered
to you.
3. The following computations set forth the Borrower's compliance or
non-compliance with the requirements set forth in Sections 5.9, 5.10,
5.11, and 5.12 of the Credit Agreement as of the Effective Date:
<TABLE>
<CAPTION>
ACTUAL REQUIRED
------ --------
<S> <C> <C>
SECTION 5.9 SENIOR LEVERAGE RATIO
Norwest Senior Debt $__________
Other Senior Debt $__________
Total Senior Debt $__________
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C>
After-tax net income $___________
+Depreciation and Amortization $___________
+Interest Expense $___________
+Operating Cash Flow Adjustments MAXIMUM PERMITTED
(per 6/30/98 letter) $___________ 3.00x before 12/31/99
+/-Non-operating,Extraordinary & 2.50x beginning 12/31/99
Non-Cash Expenses/Income $___________ 2.00x beginning 7/31/98
=Operating Cash Flow $___________ 1.50x beginning 7/31/00
Senior Debt:Operating Cash Flow ___________
SECTION 5.10 DEBT SERVICE COVERAGE RATIO
Operating Cash Flow $__________
MINIMUM PERMITTED
Total Debt Service Requirements $__________ 1.15x at all times
Operating Cash Flow:Debt Service Requirements ___________
SECTION 5.11 FIXED CHARGE COVERAGE
RATIO
Operating Cash Flow $__________
MINIMUM PERMITTED
Fixed Charges $__________ 1.05x at all times
Operating Cash Flow:Fixed Charges ___________
SECTION 5.12 OPERATING CASH FLOW
Operating Cash Flow (current) $__________
MINIMUM PERMITTED
Operating Cash Flow (last year) $__________ through 6/30/99 - $2,200,000
after 6/30/99 - 90%
Operating Cash Flow (current:last year) ___________
(through 6/30/98 only measure current OCF)
</TABLE>
Attached hereto are all relevant facts in reasonable detail to evidence, and
the computations of, the financial covenants referred to above.
4. I have no knowledge of the occurrence of any Default or Event of Default
under the Credit Agreement, except as set forth in the attachments, if any,
hereto.
Very truly yours,
CHOICETEL COMMUNICATIONS, INC.
By
Its
-----------------------------
38
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
This Amendment is agreed to as of the 16th day of December, 1998,
by and between ChoiceTel Communications, Inc., a Minnesota corporation (the
"Borrower"), and Norwest Bank Minnesota, National Association, a national
banking association (the "Bank").
The Borrower and the Bank have entered into a Credit Agreement
dated as of June 30, 1998 (as amended, the "Credit Agreement").
The Borrower has requested additional advances from the Bank to
fund expansion, and the Bank is willing to consider such advances on the
terms and subject to the conditions set forth below.
ACCORDINGLY, in consideration of the mutual covenants contained in
the Credit Agreement and herein, the parties hereby agree as follows:
1. DEFINITIONS. All terms defined in the Credit Agreement that
are not otherwise defined herein shall have the meanings given them in the
Credit Agreement.
2. AMENDMENT. The Credit Agreement is hereby amended as follows:
(a) The term, "Note", is hereby deleted in each instance in the
definitions of "Life Insurance Assignments" and "Loan Documents" in Section
1.1 of the Credit Agreement, and in Sections 2.2(a), 2.2(c), 2.3(a),
2.6(b)(iv), 2.7(a), 2.7(c), 2.7(d), 2.8, 5.5, 5.7, 6.11, 7.1(g), 7.1(j),
7.2, 8.4 and 8.12 of the Credit Agreement, and the term, "Notes", is in
each instance substituted therefor.
(b) The definitions of "Advance" and "Financial Covenant" in Section
1.1 of the Credit Agreement are hereby amended in their entirety to read,
respectively, as follows:
"Advance" means an advance by the Bank to the Borrower
pursuant to Article II.
"Financial Covenant" means any of the Borrower's obligations
set forth in Section 5.9, 5.10, 5.11, 5.12 or 5.14 of this
Agreement
(c) The definition of "Note" in Section 1.1 of the Credit Agreement
is hereby deleted, and the following is substituted therefor:
"Notes" means the Facility A Note and the Facility B Note,
collectively.
(d) The first sentence of the definition of "Operating Cash Flow" in
<PAGE>
Section 1.1 of the Credit Agreement is hereby amended in its entirety to
read as follows:
"Operating Cash Flow" means, with respect to any period, the
net after-tax income of the Borrower and its Subsidiaries during
that period, PLUS the sum of any taxes accrued by the Borrower
and its Subsidiaries with respect to such period, any
depreciation, amortization and interest expenses recognized by
the Borrower and its Subsidiaries with respect to that period,
any non-operating expenses recognized by the Borrower and its
Subsidiaries with respect to that period, and any extraordinary
or non-cash loss or expenses paid or incurred by the Borrower and
its Subsidiaries during that period, LESS the sum of any cash
payments actually made by the and its Subsidiaries in payment of
taxes due and owing during that period, and any extraordinary,
non-operating or non-cash income claimed by the Borrower and its
Subsidiaries during that period, all as determined on a
consolidated basis in accordance with generally accepted
accounting principles, together with such other adjustments (to
reflect anticipated cost savings, regulatory changes or other
matters) as the Borrower and the Bank may agree upon in writing.
(e) The following new definitions are hereby added to Section 1.1 of
the Credit Agreement:
"Facility A Note" means the Borrower's promissory note in
the form of Exhibit A hereto.
"Facility B" means the multiple-advance discretionary
revolving credit facility established under Section 2.9.
"Facility B Advance" means an advance made by the Bank to
the Borrower under Section 2.9.
"Facility B Amount" means $1,000,000, unless said amount is
reduced pursuant to Section 2.9(d), in which event it means the
amount to which said amount is reduced.
"Facility B Conversion Date" means September 30, 1999.
"Facility B Note" means the Borrower's promissory note in
the form of Exhibit C hereto.
"Puerto Rican Contribution Margin" means, with respect to
any period, the ratio (expressed as a percentage) of (i) (A) net
revenue of the Borrower during that period, minus (B) the sum of
rent expense and
2
<PAGE>
access charges with respect to that period, to (ii) net revenue
during that period, all determined in accordance with generally
accepted accounting principles with respect to solely to the
Borrower's pay phone operations in Puerto Rico.
(f) The parenthetical, "(the 'Advance')", at the end of the first
sentence of Section 2.1 of the Credit Agreement is hereby deleted; and the
parenthetical, "(the 'Note')", at the end of the second sentence of Section
2.1 of the Credit Agreement is hereby deleted.
(g) The term, "Note", in the last sentence of Section 2.1 of the
Credit Agreement and in each instance in Section 2.3(b) is hereby deleted,
and the term, "Facility A Note", is in each instance substituted therefor.
(h) The following is hereby inserted at the end of Section 2.3 of the
Credit Agreement:
(c) PRINCIPAL: FACILITY B. The principal balance of the
Facility B Note shall be due and payable in 45 monthly
installments, due and payable on the last day of each month,
commencing October 31, 1999. Each such installment other than the
final installment shall be in an amount equal to a percentage of
the principal balance of the Facility B Note outstanding at the
close of business on the Facility B Conversion Date. The
percentage on which each such installment is calculated shall be
as set forth below opposite the period in which such installment
is due:
<TABLE>
<CAPTION>
INSTALLMENTS DUE DURING THE PERIOD INSTALLMENT PERCENTAGE
---------------------------------- ----------------------
<S> <C>
October 31, 1999 through December 31, 1999 1.667%
January 1, 2000 through December 31, 2000 1.917%
January 1, 2001 through December 31, 2001 2.167%
January 1, 2002 through December 31, 2002 2.458%
January 1, 2003 through June 29, 2003 2.750%
</TABLE>
The final installment due on June 30, 2003 shall be in an amount
equal to the entire principal balance of the Facility B Note then
unpaid.
(i) Section 2.5(b) of the Credit Agreement is hereby amended in its
entirety to read as follows:
(b) TERMINATION FEE. Upon reduction of the Facility B
Amount by the Borrower pursuant to Section 2.9(d), the Borrower
shall pay to the Bank a termination fee equal to the Termination
Premium Percentage with respect to the Loan Year in which such
reduction
3
<PAGE>
occurs, multiplied by the amount of such reduction. Upon
termination of Facility B pursuant to Section 2.9(d) or 7.2,
the Borrower shall pay to the Bank a termination fee equal to the
Termination Premium Percentage with respect to the Loan Year in
which such termination occurs, multiplied by the Facility B
Amount in effect immediately prior to such termination. Upon
prepayment of either Note (other than prepayment on account of a
termination of Facility B, with respect to which a termination
fee shall be due and payable under the preceding sentence, or
prepayment of the Facility B Note prior to the Facility B
Conversion Date) or acceleration of the maturity of either Note,
the Borrower shall pay to the Bank a termination fee equal to the
Termination Premium Percentage with respect to the Loan Year in
which such prepayment or acceleration occurs, multiplied by the
principal balance of the Note so prepaid or due upon
acceleration, as the case may be. Notwithstanding the foregoing,
no termination fee shall be payable (i) on account of prepayment
of the Notes in full if such prepayment is made solely from the
proceeds of a refinancing by the Bank, (ii) on account of any
mandatory prepayment under paragraph (i) or (ii) of
Section 2.6(b), or (iii) on the first $100,000 in prepayments
made (other than from prepayments described in clause (ii))
during any calendar year.
(j) The following is hereby inserted at the end of Section 2.5:
(d) ORIGINATION FEE. On the Facility B Conversion Date, or,
if earlier, the date on which Facility B is terminated pursuant
to Section 7.2, the Borrower shall pay to the Bank an origination
fee equal to 50 basis points (0.50%) on the excess, if any, of
the principal balance of the Facility B Note on that date over
$500,000.
(k) The following new Section 2.9 is hereby inserted at the end of
Article II of the Credit Agreement:
Section 2.9 FACILITY B.
(a) GENERALLY. The Bank agrees to consider making Advances
to the Borrower from time to time during the period from the date
hereof to and including the Facility B Conversion Date in an
aggregate amount not to exceed at any time outstanding the
Facility B Amount. The proceeds of each Facility B Advance shall
be used for the Borrower's general corporate purposes. Each
Facility B Advance shall be in the amount of $100,000 or a
multiple thereof. Within the limits of the Facility B Amount, the
Borrower may, subject always to the Bank's continuing discretion,
borrow, prepay pursuant to Section 2.6 and
4
<PAGE>
reborrow under this Section 2.9. The Facility B Advances shall
be evidenced by the Facility B Note. The Facility B Note shall
bear interest on the unpaid principal amount thereof from the
date thereof until paid as set forth in Section 2.2. NOTHING
HEREIN SHOULD BE INTERPRETED AS A PROMISE TO MAKE ANY ONE OR
MORE FACILITY B ADVANCES. The Bank may in its sole discretion
elect to make any requested Facility B Advance, may reject
such request, or may condition its willingness to make any
requested Facility B Advance on one or more conditions,
including but not limited to such amendments to this Agreement
and the other Loan Documents as the Bank, in its sole
discretion, may deem appropriate.
(b) LIMITATION. Without limiting the Bank's right to refuse
any request for a Facility B Advance for any reason, the Borrower
acknowledges that the Bank does not intend to make any Facility B
Advance if, after giving effect to such Facility B Advance, the
ratio of (i) the Borrower's aggregate Senior Debt, to (ii) the
Borrower's Operating Cash Flow as of the most recent 12-month
period for which financial statements are available as of the
date of determination, would exceed 3.00 to 1.
(c) PROCEDURE FOR ADVANCES. Each Facility B Advance shall
be made on at least one Business Day's prior written request from
the Borrower to the Bank or telephonic request from any person
purporting to be authorized to request Advances on behalf of the
Borrower, which request shall specify the date of the requested
Facility B Advance and the amount thereof. If the Bank, in its
sole discretion, elects to make the requested Facility B Advance,
the Bank shall disburse the amount of the requested Facility B
Advance by crediting the same to the Borrower's demand deposit
account maintained with the Bank or in such other manner as the
Bank and the Borrower may from time to time agree. The Borrower
shall promptly confirm each telephonic request for an Advance by
executing and delivering an appropriate confirmation certificate
to the Bank. The Borrower shall be obligated to repay all
Advances notwithstanding the failure of the Bank to receive such
confirmation and notwithstanding the fact that the person
requesting same was not in fact authorized to do so. Any request
for an Advance shall be deemed to be a representation that the
statements set forth in Section 3.2 are correct.
(d) TERMINATION OR REDUCTION. The Borrower may at any time
and from time to time upon three Business Days' prior notice to
the Bank permanently terminate Facility B in whole or permanently
5
<PAGE>
reduce the Facility B Amount in part, provided that (i)
Facility B may not be terminated while any Facility B Advance
remains outstanding, (ii) each partial reduction shall be in the
amount of $250,000 or a multiple thereof, (iii) no reduction
shall reduce the Facility B Amount to an amount less than the
aggregate amount of the Facility B Advances outstanding at the
time, and (v) termination or reduction shall be accompanied by
the payment of a termination fee to the extent required by
Section 2.5(b).
(l) The phrase, "So long as the Note shall remain unpaid," at the
beginning of Articles V and VI of the Credit Agreement is hereby deleted,
and the phrase, "So long as any Note shall remain unpaid or Facility B
shall remain outstanding," is substituted therefor.
(m) The table in Section 5.9 of the Credit Agreement is hereby
amended in its entirety to read as follows:
<TABLE>
<CAPTION>
MONTHS ENDING RATIO
------------- -----
<S> <C>
On or before December 31, 1999 3.00 to 1
January 1, 2000 through June 30, 2000 2.75 to 1
July 1, 2000 through June 30, 2001 2.50 to 1
July 1, 2001 and thereafter 2.00 to 1
</TABLE>
(n) Clause (i) of Section 5.12 of the Credit Agreement is hereby
deleted, and the following is substituted therefor:
(i) with respect to each period of 12 calendar months ending on
or before June 30, 1999, $1,900,000,
(o) The table in Section 5.13 is hereby deleted, and the following is
substituted therefor:
<TABLE>
<S> <C>
Jeffrey R. Paletz $250,000
Melvin Graf $250,000
Jack S. Kohler $250,000
</TABLE>
(p) The following is hereby inserted at the end of Article V of the
Credit Agreement:
Section 5.14 PUERTO RICAN CONTRIBUTION MARGIN. The Borrower
will maintain its Puerto Rican Contribution Margin with respect
to each calendar month, determined at the end of each calendar
month, at not less than 37.5%.
6
<PAGE>
(q) The phrase, "the Note", in Section 7.1(a) of the Credit Agreement
is hereby deleted, and the phrase, "any Note", is substituted therefor.
(r) Paragraph (d) of Section 7.2 of the Credit Agreement is hereby
redesignated as paragraph (e), and the following is inserted immediately
before such paragraph:
(d) The Bank may, by notice to the Borrower, declare
Facility B to be terminated, whereupon the same shall forthwith
terminate.
(s) Exhibit A to this Amendment is hereby inserted as Exhibit C to
the Credit Agreement.
3. FEES. Concurrent with the execution hereof, the Borrower shall
pay the Bank an amendment fee and an origination fee in the amounts of $7,500
and $2,500, respectively. Such fees shall be deemed fully earned by the Bank's
entering into this Amendment, whether or not any Facility B Advance is in fact
hereafter made.
4. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants to the Bank as follows:
(a) The Borrower has all requisite power and authority, corporate or
otherwise, to execute and deliver this Amendment and the Facility B Note,
and to perform this Amendment, the Facility B Note and the Credit Agreement
as amended hereby. This Amendment and the Facility B Note have been duly
and validly executed and delivered to the Bank by the Borrower, and this
Amendment, the Facility B Note and the Credit Agreement as amended hereby
constitute the Borrower's legal, valid and binding obligations enforceable
in accordance with their terms.
(b) The execution, delivery and performance by the Borrower of this
Amendment and the Facility B Note, and the performance of the Credit
Agreement as amended hereby, have been duly authorized by all necessary
corporate action and do not and will not (i) require any authorization,
consent or approval by any governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, (ii) violate the
Borrower's articles of incorporation or bylaws or any provision of any law,
rule, regulation or order presently in effect having applicability to the
Borrower, or (iii) result in a breach of or constitute a default under any
indenture or agreement to which the Borrower is a party or by which the
Borrower or its properties may be bound or affected.
(c) All of the representations and warranties contained in Article IV
of the Credit Agreement are correct on and as
7
<PAGE>
of the date hereof as though made on and as of such date, except to the
extent that such representations and warranties relate solely to an
earlier date.
5. CONDITIONS. The amendments set forth in paragraph 2 shall be
effective only if the Bank has received (or waived the receipt of) each of the
following, in form and substance satisfactory to the Bank, on or before the date
hereof (or such later date as the Bank may agree to in writing):
(a) This Amendment, duly executed by the Borrower and each of the
Guarantors below.
(b) The Facility B Note, duly executed by the Borrower.
(c) A copy of the resolutions of the board of directors of the
Borrower evidencing approval of this Amendment, the Facility B Note, the
Credit Agreement as amended hereby, and the other matters contemplated
hereby, certified as accurate by the secretary of the Borrower.
(d) A certificate of the secretary of the Borrower and the Guarantors
(i) stating that there have been no amendments to or restatements of the
articles of incorporation or bylaws of the Borrower or the Guarantors as
furnished to the Bank in connection with the execution and delivery of the
Credit Agreement other than those that may be attached to the certificate,
and (ii) certifying the names of the officers of the Borrower and the
Guarantors that are authorized to sign the documents to be delivered
pursuant to this Agreement, together with the true signatures of such
officers.
(e) A signed copy of the opinion of counsel for the Borrower,
addressed to the Bank, confirming the matters set forth in paragraph 4
hereof (other than paragraph (c) thereof), and such other matters as the
Bank may in its sole discretion request.
6. MISCELLANEOUS. The Borrower shall pay all costs and expenses of
the Bank, including attorneys' fees, incurred in connection with the drafting
and preparation of this Amendment and any related documents. Except as amended
by this Amendment, all of the terms and conditions of the Credit Agreement shall
remain in full force and effect. This Amendment may be executed in any number
of counterparts, each of which when so executed and delivered shall be deemed to
be an original and all of which counterparts of this Amendment, taken together,
shall constitute but one and the same instrument. This Amendment shall be
governed by the substantive law of the State of Minnesota.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the date first above written.
8
<PAGE>
CHOICETEL COMMUNICATIONS, INC. NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By /s/ Jeff Paletz By /s/ Tracy Smith
------------------------------- -------------------------------
Its President Its Vice President
--------------------------- ----------------------------
CONSENT OF GUARANTORS
Each of the undersigned, as guarantors of all indebtedness of the
Borrower to the Bank under their separate guaranties, each dated June 30,
1998, hereby consents to the foregoing Amendment and acknowledges that all
indebtedness arising under the Credit Agreement, as amended thereby,
including but not limited to indebtedness evidenced by the Facility B Note,
shall constitute Indebtedness guarantied under those guaranties. The
foregoing confirmation shall not be deemed to limit the terms of the
Guaranties in any manner. The undersigned acknowledge that this Consent
merely confirms the terms of the Guaranties, and that no such confirmation is
required in connection with this Amendment or any future amendment to or
restatement of the Credit Agreement or any document executed in connection
with the Credit Agreement or this Amendment.
/s/ Jeffrey R. Paletz /s/ Melvin Graf
- --------------------------------- -----------------------------------
Jeffrey R. Paletz Melvin Graf
CHOICETEL, INC.
/s/ Jack S. Kohler
- --------------------------------- By /s/ Jeffrey R. Paletz
Jack S. Kohler --------------------------------
Its President
-----------------------------
9
<PAGE>
EXHIBIT A
(EXHIBIT C TO CREDIT AGREEMENT)
PROMISSORY NOTE
(FACILITY B)
$1,000,000 Minneapolis, Minnesota
December 16, 1998
For value received, ChoiceTel Communications, Inc., a Minnesota
corporation (the "Borrower"), promises to pay to the order of Norwest Bank
Minnesota, National Association, a national banking association (the "Bank"),
at its main office in Minneapolis, Minnesota, or at such other place as the
holder hereof may hereafter from time to time designate in writing, in lawful
money of the United States of America and in immediately available funds, the
principal sum of One Million Dollars ($1,000,000), or so much thereof as is
advanced by the Bank to the Borrower pursuant to Section 2.9 of the Credit
Agreement dated June 30, 1998 between the Borrower and the Bank (together
with all amendments, modifications and restatements thereof, the "Credit
Agreement"), and to pay interest on the principal balance of this Note
outstanding from time to time at the rate or rates determined pursuant to the
Credit Agreement.
This Note is issued pursuant to, and is subject to, the Credit
Agreement, which provides (among other things) for the amount and date of
payments of principal and interest required hereunder, for the acceleration
of the maturity hereof upon the occurrence of an Event of Default (as defined
therein) and for the voluntary and mandatory prepayment hereof. This Note is
the Facility B Note, as defined in the Credit Agreement.
The Borrower shall pay all costs of collection, including
reasonable attorneys' fees and legal expenses, if this Note is not paid when
due, whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and
protest are expressly waived.
CHOICETEL COMMUNICATIONS, INC.
By /s/ Jeffrey R. Paletz
--------------------------------
Its President
-----------------------------
10
<PAGE>
Subsidiaries of Registrant
Exhibit 21
Choicetel, Inc. - Minnesota Corporation
Public Internet Access Holding Corporation - Minnesota Corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHOICETEL
COMMUNICATIONS INC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
1998 AND 1997 AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR YEARS ENDED DECEMBER
31, 1998 AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 363
<SECURITIES> 0
<RECEIVABLES> 1,081
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,818
<PP&E> 8,580
<DEPRECIATION> (2,243)
<TOTAL-ASSETS> 14,757
<CURRENT-LIABILITIES> 4,226
<BONDS> 0
0
0
<COMMON> 29
<OTHER-SE> 5,957
<TOTAL-LIABILITY-AND-EQUITY> 14,757
<SALES> 9,344
<TOTAL-REVENUES> 9,344
<CGS> 4,231
<TOTAL-COSTS> 4,231
<OTHER-EXPENSES> 4,593
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 310
<INCOME-PRETAX> 210
<INCOME-TAX> 95
<INCOME-CONTINUING> 115
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>