|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previous: ALYDAAR SOFTWARE CORP /NC/, 10-12G/A, 1997-08-07 |
Next: MARQUEE GROUP INC, 8-A12B, 1997-08-07 |
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
May 28, 1997
SmarTalk TeleServices, Inc.
(Exact name of registrant as specified in its charter)
California
(State or jurisdiction of incorporation)
0-21579 95-4502740
(Commission File Number) (IRS Employer Identification No.)
1640 South Sepulveda Boulevard, Suite 500, Los Angeles, CA 90025
(Address of principal executive offices) (Zip Code)
(310) 444-8800
(Registrant's Telephone Number)
<PAGE>
Item 7 of Form 8-K filed on June 12, 1997 is hereby amended in its entirety to
read as follows:
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
SmarTel's audited and unaudited financial statements required by
this Item 7(a) are filed as exhibit 99.2 and 99.3, respectively.
(b) Pro Forma Financial Information.
SmarTel's pro forma financial statements required by this Item
7(b) are filed as exhibit 99.4.
(c) Exhibits.
*2.1 Agreement and Plan of Merger, dated May 24, 1997,
among SmarTalk TeleServices, Inc., SMTK Acquisition
Corporation, SmarTel Communications, Inc. and each of
the stockholders of SmarTel Communications, Inc.
appearing as signatories (without schedules)/1/.
*4.1 Terms of Contingent Value Rights.
23.1 Consent of Arthur Andersen LLP
*99.1 Press release, dated May 28, 1997, of SmarTalk
TeleServices, Inc.
99.2 Audited Year End Financial Statements.
99.3 Unaudited Interim Financial Statements.
99.4 Pro Forma Financial Statements.
- ----------------
* Filed previously.
/1/ SmarTalk shall supplementally furnish a copy of any omitted schedule to
the Securities and Exchange Commission upon request.
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SMARTALK TELESERVICES, INC.
(Registrant)
By /s/ ERICH L. SPANGENBERG
-----------------------------
Erich L. Spangenberg
President and Chief Operating
Officer
Date: August 7, 1997
3
<PAGE>
EXHIBIT INDEX
Number Subject Matter
- ------ --------------
*2.1 Agreement and Plan of Merger, dated May 24, 1997, among
SmarTalk TeleServices, Inc., SMTK Acquisition Corporation,
SmarTel Communications, Inc. and each of the stockholders
of SmarTel Communications, Inc. appearing as signatories
(without schedules)/1/.
*4.1 Terms of Contingent Value Rights.
23.1 Consent of Arthur Andersen LLP
*99.1 Press release, dated May 28, 1997, of SmarTalk TeleServices,
Inc.
99.2 Audited Year End Financial Statements.
99.3 Unaudited Interim Financial Statements.
99.4 Pro forma Financial Statements.
- ----------------
* File previously.
/1/ SmarTalk shall supplementally furnish a copy of any omitted schedule to
the Securities and Exchange Commission upon request.
4
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
Form 8-K/A of our report dated April 4, 1997 (except with respect to the matter
discussed in Notes 1, 3(a), 4(d), 5 and 9, as to which the date is May 24, 1997)
on the financial statements of SmarTel Communications, Inc. and subsidiaries
(the Company) as of December 31, 1995 and 1996 and for the three years in the
period ended December 31, 1996. It should be noted that we have not audited any
financial statements of the Company subsequent to December 31, 1996 or performed
any audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
Boston, Massachusetts
August 5, 1997
<PAGE>
EXHIBIT 99.2
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Financial Statements
as of December 31, 1996, 1995 and 1994
Together with Independent Auditors' Report
1
<PAGE>
Report of Independent Public Accountants
To the Stockholders of
SmarTel Communications, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of SmarTel
Communications, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, redeemable preferred stock and stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1996.
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SmarTel
Communications, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
April 4, 1997 (except with respect
to the matter discussed in Notes 1,
3(a), 4(d), 5 and 9, as to which the
date is May 24, 1997)
2
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets--December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,763,473 $ 1,869,656
Accounts receivable, net of allowance for doubtful accounts 785,146 565,576
Inventories 26,798 30,238
Other current assets 132,745 148,857
----------- -----------
Total current assets 2,708,162 2,614,327
----------- -----------
Property and Equipment:
Computer and office equipment 189,523 159,926
Printing equipment 29,788 23,717
Leasehold improvements 63,153 63,153
Furniture and fixtures 13,046 -
----------- -----------
295,510 246,796
Less--Accumulated depreciation and amortization 101,511 42,244
----------- -----------
193,999 204,552
----------- -----------
Other Assets:
Note receivable from stockholder 79,180 -
Intangible assets, net of accumulated amortization of $15,206 and $0 at
December 31, 1996 and 1995, respectively 46,524 61,730
Organization costs, net of accumulated amortization of $29,015 and $14,911 at
December 31, 1996 and 1995, respectively 40,162 54,267
Other assets 50,677 50,639
----------- -----------
$ 3,118,704 $ 2,985,515
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Subordinated notes payable to stockholders, current portion $ 157,500 $ -
Capital lease obligation, current portion 12,459 13,500
Equipment line of credit, current portion 16,798 11,199
Unsecured note payable - 15,000
Accounts payable 1,764,543 435,255
Accrued expenses 282,068 139,806
Deferred revenue 1,327,550 578,369
----------- -----------
Total current liabilities 3,560,918 1,193,129
----------- -----------
Equipment Line of Credit, net of current portion 33,597 44,795
----------- -----------
Subordinated Notes Payable to Stockholders - 157,500
----------- -----------
Minority Interest--Preferred Stock 30,000 30,000
----------- -----------
Commitments and Contingencies (Notes 3, 4, 6 and 7)
Redeemable Preferred Stock:
Authorized--4,002 shares
Issued and outstanding--3,909 shares (liquidation preference of $4,161,019
and $4,040,989 at December 31, 1996 and 1995, respectively) 3,796,190 2,718,686
Stockholders' Equity (Deficit):
Common stock, $.001 par-
Authorized--10,000,000 shares
Issued and outstanding--2,434,035 shares 2,434 2,434
Additional paid-in capital 1,507,004 1,507,004
Accumulated deficit (5,811,439) (2,668,033)
----------- -----------
Total stockholders' equity (deficit) (4,302,001) (1,158,595)
----------- -----------
$ 3,118,704 $ 2,985,515
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
for the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Revenues $ 5,496,640 $ 2,546,246 $ 861,270
Cost of Revenues 4,057,265 1,309,249 355,752
----------- ----------- ----------
Gross profit 1,439,375 1,236,997 505,518
Selling, General and Administrative Expenses 3,524,677 2,043,007 741,714
Loss on Discontinuance of Long Distance
Service Businesses, net (Note 1) - 310,613 58,230
----------- ----------- ----------
Loss from operations (2,085,302) (1,116,623) (294,426)
Interest Income (Expense), net 7,241 (211) -
Other Income, net 12,159 - -
----------- ----------- ----------
Net loss (2,065,902) (1,116,834) (294,426)
----------- ----------- ----------
Accretion of Redeemable Preferred Stock Dividends and
Discount (1,074,744) (223,905) -
----------- ----------- ----------
Net Loss Attributable to Common Stockholders $(3,140,646) $(1,340,739) $ (294,426)
=========== =========== ==========
Net Loss per Common Share $(1.29) $(.71) $(.18)
====== ===== =====
Weighted Average Number of Common
Shares Outstanding 2,434,035 1,895,495 1,612,511
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity
(Deficit)
for the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK -------STOCKHOLDERS' EQUITY (DEFICIT)-------
Common Stock
Number Redemption Number $.001
of Shares Value of Shares Par Value
<S> <C> <C> <C> <C>
Balance, December 31, 1993 (Unaudited) - $ - 1,539,000 $1,539
Sale of common stock - - 130,183 130
Net loss - - - -
----------- ---------- ---------- -----------
Balance, December 31, 1994 - - 1,669,183 1,669
Issuance of redeemable preferred stock and
warrants, net of issuance costs of $191,097 3,002 1,494,996 - -
Accretion of preferred stock dividends - 33,989 - -
Accretion of preferred stock discount - 190,491 - -
Preferred stock dividend on common stock 908 1,000,000 - -
Exercise of common stock warrants in exchange for
redemption of preferred stock (1) (790) 789,888 790
Repurchase and retirement of common stock - - (25,036) (25)
Net loss - - - -
----------- ---------- ---------- -----------
Balance, December 31, 1995 3,909 2,718,686 2,434,035 2,434
Accretion of preferred stock dividends - 120,030 - -
Accretion of preferred stock discount - 957,474 - -
Net loss - - - -
----------- ---------- ---------- -----------
Balance, December 31, 1996 3,909 $3,796,190 2,434,035 $2,434
=========== ========== ========== ===========
<CAPTION>
-------STOCKHOLDERS' EQUITY (DEFICIT)-------
Total
Additional Stockholder's
Paid-in Accumulated EQuity
Capital Deficit (Deficit)
<S> <C> <C> <C>
Balance, December 31, 1993 (Unaudited) $ - $ 5,823 $ 7,362
Sale of common stock 199,831 - 199,961
Net loss - (294,426) (294,426)
---------- ----------- -----------
Balance, December 31, 1994 199,831 (288,603) (87,103)
Issuance of redeemable preferred stock and
warrants, net of issuance costs of $191,097 1,507,004 (191,097) 1,315,907
Accretion of preferred stock dividends - (33,989) (33,989)
Accretion of preferred stock discount - (190,491) (190,491)
Preferred stock dividend on common stock (199,831) (800,169) (1,000,000)
Exercise of common stock warrants in exchange for
redemption of preferred stock - - 790
Repurchase and retirement of common stock - (46,850) (46,875)
Net loss - (1,116,834) (1,116,834)
---------- ----------- -----------
Balance, December 31, 1995 1,507,004 (2,668,033) (1,158,595)
Accretion of preferred stock dividends - (120,030) (120,030)
Accretion of preferred stock discount - (957,474) (957,474)
Net loss - (2,065,902) (2,065,902)
---------- ----------- -----------
Balance, December 31, 1996 $1,507,004 $(5,811,439) $(4,302,001)
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(2,065,902) $(1,116,834) $(294,426)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities-
Depreciation and amortization 88,576 50,161 6,993
Changes in assets and liabilities-
Accounts receivable (219,570) (327,617) (191,940)
Inventories 3,440 (21,688) (8,550)
Other current assets 16,112 (99,720) (39,036)
Accounts payable 1,329,288 329,895 65,218
Accrued expenses 142,262 (65,003) 126,214
Deferred revenue 749,181 507,213 71,156
----------- ----------- ---------
Net cash provided by (used in) operating activities 43,387 (743,593) (264,371)
----------- ----------- ---------
Cash Flows from Investing Activities:
Note receivable from stockholder (79,180) - -
Purchases of property and equipment (86,156) (184,996) (31,496)
Proceeds from sale of property and equipment 48,489 - -
Increase in other assets (38) (40,039) (10,600)
Organization costs - (53,032) (16,145)
----------- ----------- ---------
Net cash used in investing activities (116,885) (278,067) (58,241)
----------- ----------- ---------
Cash Flows from Financing Activities:
Proceeds from sale of common stock - - 199,961
Proceeds from sale of minority interest--preferred stock - - 30,000
Proceeds from sale of preferred stock and warrants, net of issuance costs - 2,810,903 -
Repurchase and retirement of common stock - (46,875) -
(Payments on) proceeds from subordinated notes payable to stockholders - (37,500) 195,000
(Payments on) proceeds from advances from stockholders - (62,500) 2,000
Payments on unsecured note payable (15,000) - -
Payments on capital lease obligation (12,086) (8,532) (5,328)
(Payments on) proceeds from borrowings on equipment line of credit (5,599) 55,994 -
----------- ----------- ---------
Net cash (used in) provided by financing activities (32,685) 2,711,490 421,633
----------- ----------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents (106,183) 1,689,830 99,021
Cash and Cash Equivalents, beginning of year 1,869,656 179,826 80,805
----------- ----------- ---------
Cash and Cash Equivalents, end of year $ 1,763,473 $ 1,869,656 $ 179,826
=========== =========== =========
Supplemental Disclosure of Noncash Information:
Cash paid for interest $ 7,145 $ 20,685 $ 3,955
=========== =========== =========
Supplemental Disclosure of Noncash Investing and Financing Activities:
Exercise of common stock warrants in exchange for redemption of
preferred stock $ - $ 790 $ -
=========== ============ =========
Accretion of preferred stock dividends $ 117,270 $ 33,414 $ -
=========== =========== =========
Accretion of preferred stock discount $ 957,474 $ 190,491 $ -
=========== =========== =========
Purchase of Global Media Networks-
Fair value of assets purchased $ - $ 82,673 $ -
Issuance of note payable - (15,000) -
Liabilities assumed - (67,673) -
----------- ----------- ---------
$ - $ - $ -
=========== =========== =========
Equipment acquired under capital lease obligation $ 11,045 $ - $ -
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
(1) Operations and Significant Accounting Policies
SmarTel Communications, Inc. (the Company) (formerly Z-Axis Communications)
is engaged in the business of providing marketing and telecommunications
services through the sale of prepaid telephone cards. The Company was
incorporated in 1985 as a Massachusetts corporation. On January 20, 1995,
the Company reorganized in Delaware. In connection with this
reorganization, the Delaware corporation issued 1,500 shares of common
stock for each existing share of common stock in the Massachusetts
corporation. All share amounts in the accompanying consolidated financial
statements have been retroactively restated for this reorganization.
Prior to 1994, the Company was also engaged in the business of selling long
distance services principally to other businesses. The Company discontinued
its operation in this business in June 1994 and, as a result, recorded a
loss of approximately $58,000, net of $98,500 of revenue, in the
accompanying consolidated statement of operations for the year ended
December 31, 1994.
In addition, during 1994, the Company began developing technology in an
attempt to enter the international call arbitrage business. The Company
abandoned this attempt in June 1995 and, as a result, recorded a loss of
approximately $311,000 in the accompanying statement of operations for the
year ended December 31, 1995. Through December 31, 1994, approximately
$30,000 was charged to selling, general and administrative expenses
relating to the development of this abandoned product line.
On December 21, 1995, the Company acquired certain assets and liabilities
of Global Media Network (see Note 8).
The Company continues to be subject to certain risks common to companies in
similar stages of development. Principal among these risks are dependence
on key individuals; successful marketing of current products and services,
combined with the need to successfully develop and introduce new products
and services; dependence on independent commission agents whose
compensation is based on the profitability of prepaid telephone card
programs; the ability to raise additional capital to fund operations; and
the ability to achieve profitable future operations. On May 24, 1997, the
Company merged with SmarTalk Teleservices, Inc. (see Note 9).
The accompanying consolidated financial statements reflect the application
of the following significant accounting policies:
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries, SmarTel, Inc. (90%-
owned), SmarTel Communications of Virginia, Inc. (100%-owned) and
SmarTel International, Inc. (100%-owned). All significant intercompany
transactions and balances have been eliminated in consolidation.
7
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
(Continued)
(1) Operations and Significant Accounting Policies (Continued)
(b) Management's Use of Estimates
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(c) Revenue Recognition
The Company sells its product into two distinct markets, retail and
promotional. Retail card sales are ultimately funded by the end user,
while promotional card sales are funded by third parties who have
promotional information attached to the card. Promotional cards are
then given to the end user to promote the buyer's product or service.
The Company accounts for revenue from these sales as follows:
. For retail markets, the Company records deferred retail revenue
when it sells the card and recognizes revenues as the ultimate
customer utilizes the calling time or as the card expires. Retail
card revenue for the years ended December 31, 1996 and 1995 was
approximately $512,000 and $142,000, respectively. The Company
did not have any retail card revenue for the year ended
December 31, 1994.
. For promotional markets, the Company estimates that only a
portion of the telecommunication service available on these cards
will be utilized by the end user. Accordingly, the Company has
deferred revenue related to the expected future utilization rate
of telephone time on promotional cards, based on historical
actual usage rates and the extrapolation of these rates over the
remaining life of the cards. Revenue related to the promotional
aspect of the card, including telephone time estimated not to be
used, is recognized upon shipment of the cards, and revenue
related to the telephone time estimated to be used is recognized
as the ultimate customer utilizes the calling time or the card
expires. If all telephone time on unexpired promotional programs
outstanding at December 31, 1996 and 1995 were to be used,
deferred revenue would increase by approximately $2,500,000 and
$1,530,000, respectively.
8
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
(Continued)
(1) Operations and Significant Accounting Policies (Continued)
(c) Revenue Recognition (Continued)
. Revenue from third-party prepaid phone cards for which the
Company acts solely as a reseller is recognized upon delivery.
. The Company's primary costs of its prepaid telephone cards
include the cost of design and manufacturing of the cards, long-
distance carrier fees for processing the calls generated by use
of the prepaid telephone cards and switch administration fees.
For retail and promotional telephone cards, these costs are
expensed as the associated revenues are earned.
Substantially all prepaid telephone cards sold by the Company have
expiration dates 12 months from the date of delivery to the customer
and provide that payments for cards are nonrefundable.
The Company utilizes several service bureaus to process calls and
provide administrative support for calls generated by the use of
prepaid telephone cards. These services are concentrated with one
service provider. The Company could be adversely affected if this
service bureau were unable or unwilling to continue this relationship.
Management believes that there are alternative service bureaus it
could use to minimize any adverse impact on the loss of the existing
service bureau.
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of less than three months to be cash equivalents. These
investments are reported at cost, which approximates market value.
(e) Inventories
Inventories are recorded at the lower of cost (first-in, first-out) or
market. At December 31, 1996, inventories consisted primarily of
printing materials and supplies used in the production of the
telephone cards.
9
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
(Continued)
(1) Operations and Significant Accounting Policies (Continued)
(f) Depreciation and Amortization
The Company provides for depreciation and amortization using the
straight-line method by charges to operations in amounts that allocate
the cost of the property and equipment over their estimated useful
lives, as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
Computer and office equipment 4-7 years
Printing equipment 5 years
Leasehold improvements Life of lease
Furniture and fixtures 7 years
(g) Note Receivable from Stockholder
On January 10, 1996, the Company entered into a $75,000 note
receivable agreement (the Note) with a stockholder. The Note accrues
interest at a rate of 5.73% compounded annually, totaling $4,180 at
December 31, 1996. Principal and accrued interest, then outstanding,
is due on January 10, 2005. The Note is secured by the stockholder's
stock in the Company.
(h) Organization Costs
Organization costs include legal fees and costs associated with
registering the Company as a public utility in jurisdictions where the
Company provides telephone services. These costs are being amortized
on a straight-line basis over five years.
(i) Minority Interest
The Company's 90%-owned subsidiary, SmarTel, Inc., has 50,000
authorized shares of preferred stock, of which 1,000 shares were
issued at $30 per share in 1994 to a third party and were outstanding
as of December 31, 1996. These 1,000 shares were convertible into a
10% interest in the subsidiary and had a $30,000 liquidation
preference. Accordingly, this minority interest reflected its priority
claim on the underlying equity in the subsidiary at December 31, 1996.
This preferred stock was returned to the Company and retired on
May 24, 1997 (see Note5).
(j) Postretirement Benefits
The Company has no obligations for postretirement benefits.
10
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
(Continued)
(1) Operations and Significant Accounting Policies (Continued)
(k) Financial Instruments
The estimated fair value of the Company's financial instruments, which
include trade accounts receivable, note receivable from stockholder
and long-term debt, approximates their carrying value.
(l) Concentration of Credit Risk
Statement of Financial Accounting Standards (SFAS) No.105, Disclosure
of Information About Financial Instruments with Off-Balance-Sheet Risk
and Financial Instruments with Concentrations of Credit Risk, requires
disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that subject the Company to
credit risk consists primarily of trade accounts receivable. The
Company had one customer who accounted for approximately 24% of
consolidated revenue for the year ended December 31, 1996. The Company
had no significant customers in the years ended December 31, 1995 and
1994.
(m) Net Loss per Common and Common Equivalent Share
Net loss per common share was computed based on the weighted average
number of common shares outstanding. The Company's net loss was
increased by $1,074,744 and $223,905 for the years ended December 31,
1996 and 1995, respectively, for accretion of dividends and discount
on redeemable preferred stock to determine the loss applicable to
common stock. Common equivalent shares are not included in the per
share calculations as the effect of their inclusion would be
antidilutive.
On March 3, 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128, Earnings per Share. SFAS No. 128 establishes
standards for computing and presenting earnings per share and applies
to entities with publicly held common stock or potential common stock.
This statement is effective for fiscal years ending after December15,
1997, and early adoption is not permitted. When adopted, the statement
will require restatement of prior years' earnings per share. The
Company believes that the adoption of SFAS No. 128 will not have a
material effect on its financial statements.
(2) Income Taxes
The Company provides for income taxes in accordance with SFAS No.109,
Accounting for Income Taxes. Under SFAS No.109, deferred tax assets and
liabilities are recognized based on temporary differences between the
financial statement and tax bases of assets and liabilities using currently
11
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
(Continued)
(2) Income Taxes (Continued)
enacted statutory rates. The Company's gross deferred tax asset of
$1,360,000 consists principally of the net operating loss carryforwards of
approximately $3,200,000. Due to the uncertainty related to the realization
of future tax return benefits of the gross deferred tax asset, a full
valuation allowance has been provided.
The United States Tax Reform Act of 1986 contains provisions that may limit
the Company's net operating loss and credit carryforwards available to be
used in any given year in the event of significant changes in the ownership
interests of significant stockholders. The Company has completed several
financings since its inception and may have incurred ownership changes, as
defined in the Tax Reform Act of 1986. The Company believes that the
ownership changes will not significantly impact its ability to utilize its
net operating loss and credit carryforwards.
(3) DEBT
(a) Subordinated Notes Payable to Stockholders
During 1994, the Company issued $195,000 of subordinated promissory
notes payable to certain stockholders. The notes were issued in
conjunction with the Company's 1994 private placement offering of its
common stock and bear interest at 10% per year, payable semiannually.
During 1995, the Company repurchased 25,036 shares of common stock and
a $37,500 subordinated note payable held by a stockholder for $87,500,
including accrued interest. These notes are unsecured and subordinate
to all present and future senior debt issuances. The outstanding
principal of $157,500 was due on February 28, 1997. These amounts and
accrued interest of $184,721 were repaid on May 24, 1997, the closing
date on sale of the Company (see Note 9). Accordingly, these amounts
have been classified as a current liability as of December 31, 1996,
in the accompanying consolidated financial statements.
(b) Lines of Credit
On September8, 1995, the Company entered into a credit facility (the
facility) with a bank, which provided for a $250,000 working capital
line of credit. This line of credit expired on September8, 1996.
Advances under this line of credit bore interest at prime plus 1%. In
addition, the facility provides for a $500,000 equipment line of
credit. Advances under this line of credit bear interest at prime
(8.25% at December 31, 1996) plus 2%. Principal payments are due in
monthly installments on the first business day of each calendar month
commencing August 5, 1996, with the final installment due on
December1, 1999. The Company was required to comply with certain
operational and financial covenants under this credit facility. The
financial covenants required certain minimum levels of profitability,
tangible net worth and liquidity. At December 31, 1996, the Company
was in default of certain of these covenants.
12
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
(Continued)
(3) Debt (Continued)
(b) Lines of Credit (Continued)
On January31, 1997, the facility was amended eliminating the existing
financial covenants and providing for one liquidity covenant. This
liquidity covenant provides that the Company shall maintain, as of the
last calendar day of each month, at least $600,000 of cash or cash
equivalents. The Company was in compliance with this covenant on
January31, 1997.
(4) Stockholders' Equity (Deficit)
(a) Common Stock
In connection with the Company's private placement offering of its
common stock and subordinated notes payable, the Company had committed
to certain levels of annual internal rate of return on each combined
debt and equity unit within three years from the completion of the
offering in December 1994. In connection with the September 15, 1995
preferred stock offering, the holders have terminated their rights
with respect to the Company's commitment to achieving these levels.
(b) Stock Option Plan
In December 1994, the Board of Directors approved the SmarTel
Communications, Inc. 1994 Stock Incentive Plan (the Plan) pursuant to
which options to purchase up to 82,500 shares of common stock may be
granted to directors, officers and other employees of the Company.
Incentive stock options may be granted under the Plan at a price not
less than the fair market value on the date of grant. Options vest
over a two-year period and expire 10 years from the date of grant. In
connection with the September 15, 1995 preferred stock offering, the
Plan was amended to provide that no additional options be granted
thereunder.
13
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
(Continued)
(4) Stockholders' Equity (Deficit) (Continued)
(b) Stock Option Plan (Continued)
The following table summarizes option activity under the Plan:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
NUMBER PRICE PER AVERAGE
OF OPTIONS SHARE EXERCISE PRICE
<S> <C> <C> <C>
Granted and Outstanding, December 31, 1994 24,500 $ .50-$ 2.00 $ 1.69
Granted 5,000 2.00 2.00
Canceled (1,000) 2.00 2.00
------- ------------- ---------
Outstanding, December 31, 1995 28,500 .50- 2.00 1.73
Granted - - -
Canceled (10,000) .50- 2.00 1.25
------- ------------- ---------
Outstanding, December 31, 1996 18,500 $ 2.00 $ 2.00
======= ======= =========
Exercisable, December 31, 1996 18,000 $ 2.00 $ 2.00
======= ======= =========
</TABLE>
The weighted average fair value of options granted during the year
ended December 31, 1995 was $.51. There were no options granted during
1996.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation, which requires the
measurement of the fair value of stock options or warrants to be
included in the statement of operations or disclosed in the notes to
the financial statements. The Company has determined that it will
continue to account for stock-based compensation for employees under
Accounting Principles Board Opinion No. 25 and elect the disclosure-
only alternative under SFAS No. 123 for options granted in 1995 and
1996 using the Black-Scholes option pricing model prescribed by SFAS
No. 123. The total value of options granted during the years ended
December 31, 1996 and 1995 was not significant.
(c) Common Stock Warrants
In connection with the September 15, 1995 preferred stock offering,
the Company granted warrants to purchase up to 1,507,968 shares of
common stock to stockholders holding 3,002 shares of preferred stock.
The warrants are exercisable at $.001 per share and expire on
September 15, 2002. During 1995 warrants to purchase 789,888 shares of
common stock were
14
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
December 31, 1996
(Continued)
(4) Stockholders' Equity (Deficit) (Continued)
(c) Common Stock Warrants (Continued)
exercised. No warrants were exercised in 1996. Warrants to purchase up
to 718,080 shares of common stock are outstanding at December 31 1996.
At any time on or after the date of the sale of the Company,
liquidation of the Company or September 15, 2002, whichever occurs
first, the warrant holders may put back the outstanding warrants and
common shares to the Company at the then current fair market value of
the common stock. However, if the Company redeems the warrant holder's
preferred stock in cash prior to September 15, 2002 a portion of the
warrants become unexercisable, as defined. The Company assigned the
fair value, calculated using the Black-Scholes option pricing model,
of $1,507,004 to the warrants as a component of additional paid-in
capital in the accompanying financial statements.
(d) Preferred Stock Dividend on Common Stock
In conjunction with the issuance of redeemable preferred stock, the
Company's Board of Directors authorized the issuance of up to 1,000
shares and declared a dividend on the Company's outstanding common
stock for an aggregate of 1,000 shares of redeemable preferred stock,
which were allocated to common stockholders based on each common
stockholder's ownership percentage. In 1995, 908 of these shares were
issued, and the 92 remaining shares were issued on May 24, 1997.
(5) Related Party Transactions
During 1994, the Company received advances of $62,500 from parties
related to corporate officers. These advances were repaid in 1995.
The Company has a business relationship with an independent distributor who
was also a stockholder in one of the Company's subsidiaries (see Note
1(i)). During the years ended December 31, 1996 and 1995, the Company
entered into arrangements for promotional cards totaling approximately
$903,000 and $1,542,000, respectively, with this distributor. In connection
with these arrangements, the Company paid approximately $118,000 and
$296,000 of commissions to this independent distributor. As of December 31,
1995 and 1996, the Company believes it has amounts due of $390,000 and
$150,000, respectively, from this distributor. This relationship was
terminated in June 1996 and the Company has commenced legal action against
this distributor to collect these amounts. Therefore, the Company has
provided a full reserve for these amounts in the accompanying financial
statements as of December 31, 1995 and 1996, respectively.
15
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
December 31, 1996
(Continued)
(5) Related Party Transactions (Continued)
On May 24, 1997, the Company reached a settlement agreement with this
distributor/stockholder. Under the terms of the settlement, the Company
forgave its claim on all amounts due from the distributor/stockholder in
exchange for the return of the distributor/stockholder's preferred stock to
the Company.
(6) Redeemable Preferred Stock
During 1995, the Company authorized the issuance of up to 4,002 shares of
redeemable preferred stock, $.001 par value, and issued 3,002 shares of
preferred stock for $1,000 per share and issued 908 shares of preferred
stock as a stock dividend to the common stockholders. At December 31 1996,
92 shares of preferred stock remain issuable. The rights and preferences of
the redeemable preferred stock are as follows.
(a) Voting
Redeemable preferred stockholders are not entitled to vote, except for
matters required by law, including, but not limited to, matters
involving alterations of rights and preferences of capital stock;
merger or sale of the Company; issuance of capital stock or rights to
capital stock, which are senior to preferred stockholders; purchase or
redemption of capital stock, other than certain preferred stock or
capital stock, as defined; or alteration of the Company's bylaws or
Certificate of Incorporation.
(b) Dividends
Preferred stockholders are entitled to receive cumulative annual
dividends, when, as and if declared by the Board of Directors, at the
annual rate of 3% of the base amount of each share of redeemable
preferred stock. The base amount of preferred stock as of a particular
date shall be an amount equal to the sum of $1,000 plus any unpaid
dividends on such share added to the base amount of such share and not
thereafter paid. The Company recorded $120,030 and $33,989 of dividend
accretion on the outstanding shares of preferred stock for the years
ended December 31, 1996 and 1995, respectively.
16
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
December 31, 1996
(Continued)
(6) Redeemable Preferred Stock (Continued)
(c) Liquidation Rights
In certain events, including liquidation, dissolution or winding up of
the Company, the holders of preferred stock shall be entitled, before
any distribution or payment is made upon any shares of common stock,
to be paid in cash an amount equal to the base amount of such share on
such date, plus all unpaid dividends accrued on such share and not
previously added to the base amount. If the assets of the Company
shall be insufficient to permit payment in full to the holders of the
preferred stock, then the entire assets of the Company that are
available for distributions shall be distributed ratably among the
preferred stockholders.
(d) Redemption
The preferred stock is redeemable at the option of the Company, or at
the option of the redeemable preferred stockholders, in three equal
annual installments, beginning on August 31, 2000, unless redeemed
earlier in connection with a liquidity event, as defined. The
redemption price will equal $1,000 per share plus all accrued and
unpaid dividends as of the redemption date. The proceeds from the
issuance of the 3,002 shares of preferred stock for $1,000 per share
have been allocated, based on the relative fair value, to the
preferred stock and the warrants to purchase common stock issued to
these preferred stockholders. The value attributable to the warrants
issued to purchase common stock resulted in a $1,507,004 discount to
the preferred stock. The Company has accreted this discount to the
preferred stock over the redemption period (see Note 9). The Company
recorded $957,474 and $190,491 of accretion on the discount of the
3,002 shares of preferred stock for the years ended December 31, 1996
and 1995, respectively.
If for any reason the Company shall fail to redeem for cash all
preferred shares requested to be redeemed by the holders thereof
within 30 days of notice, each preferred stockholder shall have the
right to require the Company to purchase some or all of the preferred
shares at a price equal to the redemption price on such date. To the
extent the Company does not have cash available or is not legally
permitted to make such payments, the preferred stockholders will loan
to the Company and its subsidiaries additional amounts necessary to
fund the repurchase. The resulting preferred notes shall be secured by
all assets of the Company and its subsidiaries and will bear interest
at prime plus 2%. The notes will be repaid quarterly based on
available cash .
17
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
December 31, 1996
(Continued)
(7) Commitments
(a) Lease Commitments
The Company leases its facility and certain equipment under operating
lease agreements expiring through fiscal 2000. Future minimum rental
payments due under these agreements are approximately as follows :
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1997 $142,000
1998 136,000
1999 110,000
2000 65,000
--------
$453,000
========
</TABLE>
Total rental expense included in the accompanying consolidated
statements of operations amounted to approximately $125,000 and
$31,000 for the years ended December 31, 1996 and 1995, respectively.
During 1994, the Company leased its facilities and certain office
equipment from an entity controlled by a related party to the officers
and directors of the corporation. During 1994, the Company incurred
approximately $75,000 in rental charges to this entity .
(b) Litigation
In the ordinary course of business, the Company is party to various
types of litigation. The Company believes it has meritorious defense
to all claims, and, in its opinion, all litigation currently pending
or threatened will not have a material effect on the Company's
financial position on results of operations.
(8) Acquisition of Global Media Network
On December 21, 1995, the Company acquired certain assets of Global Media
Network (GMN), previously its west coast distributor, in exchange for a
$15,000 note payable and the assumption of certain GMN liabilities totaling
$67,673.
18
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
December 31, 1996
(Continued)
(8) Acquisition of Global Media Network (Continued)
This transaction was accounted for as a purchase and, accordingly, the
results of GMN since December 21, 1995 have been included in the
accompanying consolidated financial statements. The aggregate purchase
price has allocated based on the fair value of the tangible and intangible
assets as follows:
<TABLE>
<S> <C>
Current assets $16,269
Property and equipment 4,674
Purchased intangible assets 61,730
-------
$82,673
=======
</TABLE>
Included in purchased intangible assets are amounts related to trade names
and customer lists. These intangibles will be amortized on a straight-line
basis over their estimated useful life of three years. The 1995 results of
GMN operations were not material to the financial statements taken as a
whole.
During 1995, the Company entered into arrangements for promotional cards
totaling approximately $479,000 with GMN prior to December 21, 1995. In
connection with these arrangements, the Company paid approximately $142,000
in commissions to GMN.
(9) Sale of Company to SmarTalk TeleServices, Inc.
On May 24, 1997, the Company entered into a merger agreement (the Merger)
with SmarTalk Teleservices, Inc. (SmarTalk) in which SmarTalk acquired all
outstanding common and preferred stock of the Company in a tax-free, stock-
for-stock merger transaction. Under the terms of the Merger, SmarTel common
and preferred stockholders received 714,286 shares of SmarTalk common
stock, which, using a SmarTalk per share value of $14, had an approximate
value of approximately $10,000,000. In addition, certain
officers/stockholders of SmarTel received contingent value rights which
would entitle them to receive additional shares of SmarTalk common stock
based on SmarTel's future sales and profitability.
19
<PAGE>
EXHIBIT 99.3
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 394,448 $1,763,473
Accounts receivable, net of allowance for doubtful accounts of $125,000 and
$15,000 at March 31, 1997 and 1996, respectively 827,539 785,146
Inventories 27,353 26,798
Other current assets 163,904 132,745
---------- ----------
Total current assets 1,413,244 2,708,162
---------- ----------
Property and Equipment:
Computer and office equipment 196,692 189,523
Printing equipment 29,788 29,788
Leasehold improvements 63,153 63,153
Furniture and fixtures 13,918 13,046
---------- ----------
303,551 295,510
Less--Accumulated depreciation and amortization 114,722 101,511
---------- ----------
188,829 193,999
---------- ----------
Other Assets:
Note receivable from stockholder 80,314 79,180
Intangible assets, net of accumulated amortization 43,100 46,524
Organization costs, net of accumulated amortization 36,703 40,162
Other assets 50,677 50,677
---------- ----------
$1,812,867 $3,118,704
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Subordinated notes payable to stockholders, current portion $ 157,500 $157,500
Capital lease obligation, current portion 13,390 12,459
Equipment line of credit, current portion 16,798 16,798
Accounts payable 628,313 1,764,543
Accrued expenses 608,732 282,068
Deferred revenue 1,596,109 1,327,550
---------- ----------
Total current liabilities 3,020,842 3,560,918
---------- ----------
Capital Lease Obligations, net of current portion 2,737 --
---------- ----------
Equipment Line of Credit, net of current portion -- 33,597
---------- ----------
Subordinated Notes Payable to Stockholders 29,397 --
---------- ----------
Minority Interest--Preferred Stock 30,000 30,000
---------- ----------
Redeemable Preferred Stock:
Authorized-- 4,002 shares
Issued and outstanding--3,909 shares (liquidation preference of $4,190,336
and $4,161,019 at March 31, 1997 and December 31, 1996, respectively) 4,051,715 3,796,190
Stockholders' Equity (Deficit):
Common stock, $.001 par-
Authorized--10,000,000 shares
Issued and outstanding--2,434,035 shares 2,434 2,434
Additional paid-in capital 1,507,004 1,507,004
Accumulated deficit (6,831,262) (5,811,439)
---------- -----------
Total stockholders' deficit (5,321,824) (4,302,001)
---------- -----------
$1,812,867 $ 3,118,704
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues $ 789,579 $ 991,628
Cost of Revenues 524,224 636,809
----------- -----------
Gross profit 265,355 354,819
Selling, General and Administrative Expenses 1,030,105 936,120
----------- -----------
Loss from operations (764,750) (581,301)
Interest Income, net 452 1,605
Other Income (Expense), net -- (739)
----------- ----------
Net loss (764,298) (580,435)
----------- ----------
Accretion of Redeemable Preferred Stock Dividends and
Discount (255,525) --
----------- ----------
Net Loss Attributable to Common Stockholders $(1,019,823) $ (580,435)
=========== ==========
Net Loss per Common Share $(0.42) $(0.24)
====== ======
Weighted Average Number of Common
Shares Outstanding 2,434,035 2,434,035
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (764,298) $ (580,435)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities-
Depreciation and amortization 20,092 23,820
Changes in assets and liabilities-
Accounts receivable (42,391) 7,128
Inventories (555) (10,000)
Other current assets (31,159) (67,398)
Accounts payable (1,136,230) 134,721
Accrued expenses 268,559 47,986
Deferred revenue 326,664 (28,712)
----------- -----------
Net cash used in operating activities (1,359,318) (472,890)
----------- -----------
Cash Flows from Investing Activities:
Note receivable from stockholder - (75,000)
Purchases of property and equipment (8,041) (60,395)
----------- -----------
Net cash used in investing activities (8,041) (135,395)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from note receivable interest (1,134) -
Proceeds from capital lease obligations 3,668 -
Payments on borrowings on equipment line of credit (4,200) (3,852)
----------- -----------
Net cash used in financing activities (1,666) (3,852)
----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents (1,369,025) (612,137)
Cash and Cash Equivalents, beginning of year 1,763,473 1,869,686
----------- -----------
Cash and Cash Equivalents, end of year $ 394,448 $ 1,257,549
=========== ===========
Supplemental Disclosure of Noncash Investing and Financing Activities:
Accretion of preferred stock dividends $ 30,008 $ 29,318
=========== ===========
Accretion of preferred stock discount $ 225,517 $ 239,369
=========== ===========
</TABLE>
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
(Unaudited)
1. Basis of Presentation
The interim consolidated financial statements reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods. These interim consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included herein
for the year ended December 31, 1996. The interim results of operations are
not necessarily indicative of the results for the entire year ending December
31, 1997.
<PAGE>
EXHIBIT 99.4
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements are based on the
historical financial statements of SmarTalk and SmarTel adjusted to give effect
to certain transactions and events. The unaudited pro forma combined statement
of operations for the year ended December 31, 1996 and the three month period
ended March 31, 1997 and the unaudited pro forma combined balance sheet as of
March 31, 1997 give effect to the acquisition and the adoption by SmarTel of
SmarTalk accounting policies. References in this document to data presented on a
"pro forma basis" as of any date or for any period shall have the meaning set
forth above with respect to such date or period.
The unaudited pro forma combined financial statements give effect to the
acquisition by SmarTalk of SmarTel in a transaction to be accounted for as a
purchase under the purchase method of accounting and are based upon a
preliminary allocation of the purchase price and upon the assumptions and
adjustments described in the accompanying notes. The unaudited pro forma
combined financial statements should be read in conjunction with the
Consolidated Financial Statements of SmarTalk and SmarTel appearing elsewhere in
this document. The unaudited pro forma combined financial statements are
presented for information purposes only and are not necessarily indicative of
the results that would have been reported or the financial position of the
Company had such events actually occurred on the dates specified, nor is it
indicative of the Company's future results or financial position. The results of
operations for interim periods are not necessarily indicative of the results for
the full year.
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Historical Historical Adjustments
SmarTalk SmarTel for the
Teleservices, Communications, Acquisition Pro Forma
Inc. Inc. (Note 1) Combined
---------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue $15,021,060 $ 5,496,640 $ (566,071)(a) $19,951,629
Cost of revenue 10,198,971 4,057,265 43,690 (b) 14,299,926
----------- ----------- ----------- -----------
Gross profit 4,822,089 1,439,375 (609,761) 5,651,703
Sales and marketing 4,511,291 2,713,508 - 7,224,799
General and administrative 3,615,070 811,169 602,577 (c) 5,028,816
----------- ----------- ----------- -----------
Operating loss (3,304,272) (2,085,302) (1,212,338) (6,601,912)
Other income (expense) - 12,159 - 12,159
Interest income 443,352 7,241 - 450,593
Interest expense (251,628) - - (251,628)
----------- ----------- ----------- -----------
Loss before income taxes (3,112,548) (2,065,902) (1,212,338) (6,390,788)
Provision for income taxes - - - -
----------- ----------- ----------- -----------
Net loss $(3,112,548) $(2,065,902) $(1,212,338) $(6,390,788)
=========== =========== =========== ===========
Net loss per share $ (0.59)
===========
Weighted average number of shares outstanding 10,814,643
===========
</TABLE>
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1997
<TABLE>
<CAPTION>
Pro Forma
Adjustments
Historical Historical for the
SmarTalk SmarTel Acquisition Pro Forma
Teleservices, Inc. Communications, Inc. (Note 1) Combined
-------------------- ----------------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue $ 7,368,333 $ 789,579 $241,916 (a) $ 8,399,828
Cost of revenue 4,760,748 524,224 (6,792)(b) 5,278,180
----------- ---------- -------- -----------
Gross profit (loss) 2,607,585 265,355 248,708 3,121,648
Sales and marketing 2,545,414 772,579 - 3,317,993
General and administrative 901,231 257,526 150,644 (c) 1,309,401
----------- ---------- -------- -----------
Operating loss (839,060) (764,750) 98,064 (1,505,746)
Other income (expense) - - - -
Interest income 528,763 452 - 529,215
Interest expense - - - -
----------- ---------- -------- -----------
Loss before income taxes (310,297) (764,298) 98,064 (976,531)
Provision for income taxes - - - -
----------- ---------- -------- -----------
Net loss $ (310,297) $ (764,298) $ 98,064 $ (976,531)
=========== ========== ======== ===========
Net loss per share $ (0.07)
===========
Weighted average number of shares outstanding 13,611,942
===========
</TABLE>
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
March 31, 1997
<TABLE>
<CAPTION>
Pro Forma
Adjustments
Historical Historical for the
SmarTalk SmarTel Acquisition Pro Forma
Teleservices, Inc. Communications, Inc. (Note 1) Combined(d)
------------------ -------------------- --------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $42,355,298 $ 394,448 $ - $ 42,749,746
Trade accounts receivable, net 2,904,465 827,539 - 3,732,004
Inventories 809,237 27,353 - 836,590
Prepaid expenses 460,892 - - 460,892
Other current assets 1,931,611 163,904 328,260 (a) 2,423,775
----------- ----------- ----------- ------------
Total current assets 48,461,503 1,413,244 328,260 $ 50,203,007
Non-current assets:
Property and equipment, net 1,123,626 188,829 - 1,312,455
Other non-current assets 157,456 210,794 - 368,250
Goodwill, net of amortization - - 11,298,321 (d) 11,298,321
----------- ----------- ----------- ------------
Total assets $49,742,585 $ 1,812,867 $11,626,581 $ 63,182,033
=========== =========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 2,766,633 $ 628,313 $ - $ 3,394,946
Deferred revenue 2,638,091 1,596,109 1,443,117 (a) 5,677,317
Other accrued expenses 258,431 608,732 291,572 (c) 1,158,735
Current portion of note payable to shareholder(s) - 157,500 - 157,500
Current portion of long-term obligations - 16,798 - 16,798
Current portion of capital lease obligations - 13,390 - 13,390
----------- ----------- ----------- ------------
Total current liabilities 5,663,155 3,020,842 1,734,689 10,418,686
Long-term debt - 62,134 - 62,134
----------- ----------- ----------- ------------
Commitments
Total liabilities 5,663,155 3,082,976 1,734,689 10,480,820
----------- ----------- ----------- ------------
Preferred stock - 4,051,715 (4,051,715)(b) -
----------- ----------- ----------- ------------
Shareholders' equity (deficit):
Common stock 51,361,077 1,509,438 7,865,566(b),(c) 60,736,081
Accumulated deficit (7,281,647) (6,831,262) 6,078,041 (8,034,868)
Treasury stock, at cost - - - -
----------- ----------- ----------- ------------
Total shareholders' equity (deficit) 44,079,430 (5,321,824) 13,943,607 52,701,213
----------- ----------- ----------- ------------
Total liabilities and shareholders' $49,742,585 $ 1,812,867 $11,626,581 $ 63,182,033
equity (deficit) =========== =========== =========== ============
</TABLE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
- -------------------------------------------------------------
Note 1 - The Pro Forma Combined Statement of Operations gives effect to the
following pro forma adjustments necessary to reflect the acquisition as
outlined in the Notes to the Unaudited Pro Forma Combined Balance
Sheet:
(a) To adjust revenue recognized on "breakage" in accordance with the SmarTalk
policy of recognition based on expiration of the card or proportionately
over the life of the card (based on estimated usage).
(b) To defer the production and activation costs of cards and amortize the
expense to match the related revenue in accordance with the SmarTalk
accounting policy.
(c) Amortization of goodwill on a straight line basis over 20 years.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
- ---------------------------------------------------
Note 1 - The pro forma balance sheet has been prepared to reflect the
acquisition of SmarTel by SmarTalk for an aggregate purchase price of
$9,666,576 and estimated acquisition costs of approximately $291,572.
Pro forma adjustments are made to reflect:
(a) The preliminary purchase price allocations based on the
estimated fair value of specific assets acquired and liabilities assumed in
connection with the Acquisition.
(b) The elimination of the equity and preferred stock of SmarTel on acquisition
and the issuance of 714,286 shares of common stock and cost incurred for the
acquisition.
(c) Estimated acquisition costs.
(d) The excess of acquisition cost over the fair value of net assets acquired
(goodwill); net of estimated amortization.
|
|