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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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Date of Report (Date of earliest event reported): October 22, 1998
SMARTALK TELESERVICES, INC.
(Exact name of registrant as specified in its charter)
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CALIFORNIA 0-21579 95-4502740
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
5080 TUTTLE CROSSING BOULEVARD 43016-3566
DUBLIN, OHIO (Zip Code)
(Address of Principal
Executive Offices)
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Registrant's telephone number, including area code: (614) 789-8500
No Change
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(Former name or former address, if changed since last report)
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Item 5. Other
On October 22, 1998, SmarTalk TeleServices, Inc. (the "Company") announced that
the previously announced review of the Company's financial statements for 1997
and the first two quarters of 1998 was nearing completion. The review has been
led by the Company with the assistance of the Company's independent accountants,
PricewaterhouseCoopers LLP ("PwC"). The Company's board of directors has
received a substantially final report from PwC.
The Company further reported the findings of the review to date, including,
among other things, the adjustments relating to the purchase accounting for the
Company's 1997 acquisitions and the Company's 1997 restructuring charge.
The foregoing is a summary only and should be read in conjunction with the press
release attached hereto as Exhibit 99.1, which is incorporated herein by
reference in its entirety.
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Item 7. Exhibit
Exhibit No. Description
99.1 Press Release: SmarTalk Announces Restatement of Financial
Results for 1997 and for Q1 and Q2 1998 Nearing Completion
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
SMARTALK TELESERVICES, INC.
(Registrant)
Date: October 23, 1998 By: /s/ Thaddeus Bereday
----------------------------------------
Name: Thaddeus Bereday
Title: Vice President & General Counsel
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[SMARTALK LETTERHEAD]
NEWS RELEASE
FOR IMMEDIATE RELEASE
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Contact: Pamela Bennett
Manager, Investor Relations
(614) 789-8650
SMARTALK ANNOUNCES RESTATEMENT OF FINANCIAL RESULTS FOR 1997
AND FOR Q1 AND Q2 1998 NEARING COMPLETION
HIGHLIGHTS KEY DEVELOPMENTS AND BUSINESS PROSPECTS
----------------
COLUMBUS, OHIO, OCTOBER 22, 1998 -- SmarTalk TeleServices, Inc. (Nasdaq:
SMTK) today stated that the previously announced review of the Company's
financial statements for 1997 and the first two quarters of 1998 is nearing
completion. This review has been led by the Company with the assistance of
PricewaterhouseCoopers LLP (PwC), the Company's independent accountants, and was
reviewed by Arthur Andersen LLP, serving as an independent advisor to a special
committee of the Board of Directors.
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The Company's Board of Directors has received a substantially final report
from PwC. The report identifies adjustments relating to the purchase accounting
for the Company's 1997 acquisitions, including the recording of deferred
revenue, allocation of purchase price to intangible assets, and the write off of
in-process research and development (IPR&D). In addition, the report identifies
adjustments relating to the Company's 1997 restructuring charge, accounts
receivable reserves, write-downs of certain assets and other immaterial items.
Said Erich Spangenberg, chief executive officer, "While this review has
taken longer than anticipated, we are confident that it will ultimately put us
on a sound footing for our future financial reporting." Noting that the Company
has recently installed a new financial team, Spangenberg added, "We are
gratified that the review found no fraud or other improprieties, and we look
forward to finalizing this review and restoring credibility with the financial
community. We are committed to showing our customers, vendors and employees, who
have been supportive and patient throughout this process, that they are
associated with a winning company and a winning team."
Said Wayne V. Wooddell, who was appointed as SmarTalk's chief financial
officer in September following the resignation of Andy Folck, "We have completed
the review of most significant aspects of SmarTalk's business. We had expected
to announce final restated financial results today, but we have decided to
further review our IPR&D charge taken at the end of 1997. Based on our review to
date, we can report that breakage revenue for 1998 will decline, substantially
all of the restructuring reserves originally recorded in 1997 will be reversed
with a portion reflected as expense in 1998, and amortization of intangibles
will materially increase. While the Company anticipates continued revenue growth
at attractive rates quarter over quarter, these adjustments will negatively
impact earnings per share in 1998 and future years. The Company believes that
its future financial results should be evaluated primarily on the basis of
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), a
common measure of performance in the telecommunications industry, and top-line
revenue growth as the true measures of our performance. We look forward to
completing this review and getting back to business."
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To date, the findings of the review include the following:
* The Company's existing policies with respect to the full deferral of sales
proceeds (deferred revenue), and breakage (defined as the expiration of
cards with remaining unused minutes) are appropriate as they relate to
sales transactions undertaken by the Company. However, in the case of
acquisitions of prepaid calling card companies - which SmarTalk
successfully completed six times in 1997 - it was determined that deferred
revenue recorded by SmarTalk relating to the acquired companies should
exclude breakage (insofar as breakage arises from pre-acquisition sales of
cards) and should be measured at the fair value of the obligation the
Company expects to service. The reduction of the service obligation should
be recognized as revenue as minutes are used. As a result, the Company will
reverse acquiree breakage revenue previously reported in the 1997 financial
results and from results of Q1 and Q2 1998 ($10.7 million, $3.8 million and
$3.9 million, respectively) with a related reduction in intangible assets.
This adjustment will also impact Q3 and Q4 1998. The impact of this change
will be to substantially reduce previously anticipated breakage revenue for
Q3 and Q4 1998. 1999 breakage revenue will not be significantly affected by
the accounting for the 1997 acquisitions as the breakage effects from
pre-acquisition sales of cards are likely to be fully exhausted by the end
of 1998.
* In 1997, the Company recorded a restructuring reserve of $25.0 million.
Based on the review, the Company concluded that this restructuring reserve
would need to be reversed for 1997 and various components of this reserve
should be expensed as incurred during 1998.
* In connection with SmarTalk's 1997 acquisitions, approximately $260
million of the aggregate consideration paid was in excess of the fair
value of net tangible assets identified. Of this amount, $200.4 million
was allocated to goodwill. The Company commissioned a subsequent valuation
analysis, which was recently completed by an independent valuation firm.
Certain portions of the original allocation were determined to relate to
intangibles other than goodwill that are amortizable over periods ranging
from 2 to 10 years. In addition, based on the review, the Company also
concluded that, in the case of acquisitions completed in 1997 involving
the issuance of securities, the value of the shares issued should be based
on a three-day average of the share prices for the three days spanning the
announcement of the transaction, as opposed to the share price on the day
of the announcement. This re-allocation of purchase price will increase
acquisition goodwill, and the related amortization expense will result in
lower net earnings and earnings per share over the next several years.
* In June, 1998, the Company acquired Worldwide Direct, Inc. (WWD), which
originally qualified as a pooling of interests. Subsequent to June 1998,
negotiations have taken place with certain former shareholders of WWD to
modify the terms of this acquisition. As a result of these developments,
the Company's June 1998 quarterly financial results (and those for the six
months ended June 1998 and comparable periods for the prior year) will
reflect the treatment of the WWD acquisition using the purchase method of
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accounting. This change will reduce 1998 revenues and increase
amortization expense for future periods.
* In connection with the Company's 1997 acquisition of ConQuest, the Company
engaged an independent valuation firm, whose valuation report identified
$39.2 million of in-process research and development, which was recorded as
a one-time write-off in connection with the acquisition. The Company is
continuing to review the appropriateness of this charge and currently
expects a potentially material adjustment likely resulting in increased
goodwill amortization in future periods.
1997 RESTATEMENT
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SmarTalk anticipates restating 1997 revenue at $61.1 million, versus the
originally reported $71.8 million. SmarTalk is not reporting net income at this
time because it is reassessing the charge taken for the acquired IPR&D related
to the ConQuest acquisition. The Company currently estimates that, as a result
of the adjustments described above and pending finalization of the IPR&D
reassessment, the restated 1997 net loss will be in a range from $51.5 million
to $17.5 million, or $3.44 to $1.17 per share, versus net loss per share of
$4.14 as originally reported. This range assumes an allowable IPR&D charge of
$5.0 million remaining and that the corresponding increase to goodwill would be
amortized over a 15 year period.
Q1 1998 RESTATEMENT
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SmarTalk will restate Q1 1998 revenue to $36.4 million, versus the
originally reported $39.6 million. SmarTalk is not reporting net income at this
time because it is reassessing the charge taken for the acquired IPR&D related
to the ConQuest acquisition. The Company currently estimates that, as a result
of the adjustments described above and pending finalization of the IPR&D
reassessment, the restated Q1 1998 net loss from continuing operations will be
in a range from $11.8 million to $12.3 million, or $0.54 to $0.56 per share,
versus break even earnings per share from continuing operations as originally
reported. This range assumes an allowable IPR&D charge of $5.0 million remaining
and that the corresponding increase to goodwill would be amortized over a 15
year period. For every additional $5.0 million increment in the IPR&D charge
that is allowable, the Company
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estimates that the net loss per share from continuing operations would be
reduced by approximately $0.01.
Q2 1998 RESTATEMENT
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SmarTalk will restate Q2 1998 revenue to $42.9 million, versus the
originally reported $51.8 million. SmarTalk is not reporting net income at this
time because it is reassessing the charge taken for the acquired IPR&D related
to the ConQuest acquisition. The Company currently estimates that, as a result
of the adjustments described above and pending finalization of the IPR&D
reassessment, the restated Q2 1998 net loss from continuing operations will be
in a range from $27.9 million to $28.4 million, or $1.20 to $1.22 per share,
versus net earnings per share from continuing operations of $0.08 as originally
reported. This range assumes an allowable IPR&D charge of $5.0 million remaining
and that the corresponding increase to goodwill would be amortized over a 15
year period. For every additional $5.0 million increment in the IPR&D charge
that is allowable, the Company estimates that the net loss per share from
continuing operations would be reduced by approximately $0.01.
A summary of the unaudited estimated effects on SmarTalk's consolidated
statements of operations and balance sheets for the relevant periods is
attached. Investors are cautioned that these results are preliminary and subject
to material adjustment pending completion of the accounting review. The actual
consolidated statements of operations and balance sheets for the relevant
periods could differ materially from the summary presented, particularly in
light of the likely write-off of the charge taken for the acquired IPR&D related
to the ConQuest acquisition. The Company anticipates filing restated financial
statements on an amended form 10-K for 1997 and on amended form 10-Q's for the
first and second quarters with the Securities and Exchange Commission in early
November. On November 13, the Company expects to report results for the third
quarter ended September 30, 1998.
RECENT DEVELOPMENTS
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Spangenberg said: "The opportunity for SmarTalk continues to be leveraging
and expanding the strong distribution asset we have assembled. One measure of
the strength of this distribution is decremented minutes, which drive revenues
and reflect consumer usage of
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the Company's services. Minutes decremented for Q1 1998 were 173.6 million, and
for Q2 1998 were 205.4 million, or an increase of approximately 18% over Q1
1998. While still being analyzed, we anticipate decremented minutes in Q3 1998
to be approximately 250 million or an increase of approximately 20% over Q2
1998.
"We anticipate that operating results for Q3 and Q4 of 1998 will be
adversely impacted by the significantly increased amortization expense, reduced
acquiree breakage revenue, and the current period recognition of expenses for
items that previously were contemplated to be included in the 1997 restructuring
charge. We expect 1999 results will be adversely impacted by the significantly
increased amortization expense. We are taking the actions necessary to
strengthen our relationships with our customers and employees, and improve
revenues and EBITDA performance."
Noting the Company's success in recent business developments, Jeff
Lindauer, the company's president and chief operating officer, said: "SmarTalk
holds a leadership position in its marketplace. Our ability to deliver both long
distance and cellular products through our distribution channels provides us
with a tremendous competitive advantage. The strength of our core operations,
our market leadership and the delivery of quality products will drive our future
success. SmarTalk is leveraging its competitive edge in the prepaid industry
with our prepaid cellular product, our Pronto!(TM) product, the
SmarTalk/American Express point of sale activation (POSA) system, the addition
of new retailers, the Catalina Marketing strategic alliance, and our core brand
relaunch. We are encouraged by these developments and anticipate creating new
partnerships to increase the number of storefronts and consumers we serve."
Highlights of recent developments include:
* PREPAID CELLULAR LAUNCH. Since SmarTalk launched its current prepaid
cellular product to retailers late in Q3 1998, the Company has acquired
distribution at Kmart, Service Merchandise, Hills Department Stores, Fred
Meyer, Ace Hardware, Fry's Electronics, Longs Drug, Bradlees, Northern
Auto, and BJ's Wholesale Club with additional locations anticipated to
follow. This product gives consumers a convenient cellular option with no
contracts, no monthly fees, no credit checks, and no security deposits. In
addition, the
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phone is also available through direct to consumer advertising featuring
corporate spokesperson Dick Clark that airs on most national cable
stations. This advertising attracts new consumers and reinforces the brand
name at retail locations with its "As Seen On TV" packaging.
* PRONTO!(TM) SmarTalk also introduced its new international product,
Pronto!(TM). Pronto!(TM) is marketed to independent groceries and
convenience stores primarily through distributors in large, highly ethnic
areas such as New York, Los Angeles, and Miami. The Pronto!(TM) card
provides an inexpensive way to contact family and friends at international
destinations. This international segment of the market has been growing
rapidly as consumers are asking for a no-frills low-cost means to
communicate on a budget.
* POINT OF SALE ACTIVATION (POSA). The SmarTalk/American Express point of
sale activation system, permitting retailers to openly display SmarTalk
cards with limited risk of shrinkage, is expected to enhance the
productivity of existing accounts as additional retailers convert to this
feature. With point of sale activation in place, average cycle time between
shipment of the card to the retailer and activation by the customer can be
reduced from 30 to approximately seven days. POSA systems are in place at
the U.S. Post Office and Eckerd's, two of SmarTalk's largest customers, as
well as at Service Merchandise and American Express Travel Service Offices.
A number of the Company's top customers are expected to convert to POSA
systems over the next two quarters.
* NEW RETAILERS. SmarTalk has recently expanded its U.S. distribution with
the addition of the following retailers: Racetrac (300 storefronts), Cub
Foods (17 additional locations), American Express Travel Service Offices
(100 locations), Giant Foods (170 stores), and Spartan Foods (72
locations). In Canada, SmarTalk has expanded its distribution with the
recent addition of Jean Coutu (250 storefronts), Uniprix #2 (200
locations), Pharmax Rexall (80 outlets), Medicine Shop (50 outlets),
Financial Stop (500 outlets), Agora (817 storefronts), Shoppers Drug Mart
(800 stores), and Wal-Mart Canada (144 stores). In the U.K., SmarTalk has
expanded its distribution with the addition of Superdrug (750 storefronts),
American Express Travel Service Offices (50 locations), and Holiday Inn
U.K. (26 locations).
* CATALINA MARKETING STRATEGIC ALLIANCE. In the second quarter of 1998,
SmarTalk executed a multi-year strategic alliance with Catalina Marketing
Corporation, a promotional grocery marketer which produces point-of-sale
coupons at check out aisles. Similar to plastic prepaid phone cards, the
SmarTalk prepaid phone certificate will provide consumers with a prepaid
method to make local and long distance calls by dialing an 800 number and
activating a PIN number printed on the register tape at the point of sale.
Retailers will benefit from this option as it allows them to customize the
product to capture consumers' interests at the point of purchase.
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* CORE BRAND RELAUNCH. To enhance its leadership position in the prepaid
telecommunications category, SmarTalk is enhancing the look of its core
brand. After substantial market research and consultation with several
customers, SmarTalk has upgraded the look and feel of its product and
package to reflect the inherent quality and value of its mainstream product
offering. SmarTalk's new contemporary design will be supported by new point
of purchase merchandising and advertising.
SmarTalk TeleServices, Inc. is a leading provider of prepaid calling cards
and prepaid wireless services. Based in Dublin, Ohio, SmarTalk maintains
distribution agreements with the U.S. Postal Service and leading mass
merchandisers, consumer electronics retailers, supermarkets, hotels, home office
superstores and convenience stores throughout North America and the U.K.
SmarTalk also creates promotional card programs for advertisers and corporate
clients. Visit the SmarTalk website at www.smartalk.com.
Note: The statements in this release regarding anticipated future results and
completion of the restatement process for prior financial periods constitute
forward-looking information within the meaning of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that all forward-looking
statements involve risks and uncertainties that could cause actual results to
differ materially from those expressed in such forward-looking statements,
including risks such as: the risk that the SEC could disagree with the Company's
accounting treatment with respect to restatement items; difficulties in
achieving the Company's future business strategy due to the highly competitive
nature of the Company's business and the uncertainty in consumer acceptance for
the Company's products, including its prepaid cellular product offering;
possible difficulty in obtaining financing on acceptable terms for the Company's
future growth; and difficulty in integrating the Company's operations acquired
primarily through acquisitions. Investors who seek more information about the
Company's business and relevant risk factors may wish to review the Company's
SEC reports including, without limitation, its Annual Report on Form 10-K/A for
the year ended December 31, 1997 and its Quarterly Reports on Forms 10-Q/A.
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SMARTALK TELESERVICES, INC.
UNAUDITED ESTIMATES RESTATEMENT OVERVIEW
The following table sets forth preliminary estimates of the impact of the
proposed restatements for selected items of SmarTalk's statements of operations
and balance sheets for the fiscal year ended December 31, 1997 and for the
quarters ended March 31, 1998 and June 30, 1998. Such estimates are subject to
change and, in the case of amortization, operating loss, loss before income
taxes, net loss from continuing operations and net loss per share from
continuing operations, may differ materially from the estimates set forth below.
Among other things, such estimates are based upon an assumed restated expense
for acquired in-process research & development ("IPR&D") in the amount of $5.0
million and an increase in intangibles as a result of the restatement in the
amount of $34.2 million, amortizable over a period of 15 years. As stated in the
accompanying press release, which must be read in conjunction with this summary,
the Company and its independent accountants, PricewaterhouseCoopers LLP, have
not concluded their review of the appropriate level of any IPR&D expense, and
the actual amount of IPR&D may materially differ from the estimated amount used
as an assumption herein. For each $5.0 million increase in IPR&D above the
estimated amount assumed below, (i) amortization expense would decrease by
$30,000 for the fiscal year ended December 31, 1997, $80,000 for the quarter
ended March 31, 1998, and $80,000 for the quarter ended June 30, 1998 and all
quarterly periods thereafter through the end of the 15 year amortization period,
(ii) operating loss, loss before income taxes and net loss from continuing
operations in each case would decrease by $4.97 million for the year ended
December 31, 1997, $80,000 for the quarter ended March 31, 1998, and $80,000 for
the quarter ended June 30, 1998 and all quarterly periods thereafter through the
end of the 15 year amortization period, and (iii) net loss per share from
continuing operations would decrease by $.33 for the fiscal year ended December
31, 1997, approximately $.01 for the quarter ended March 31, 1998, and
approximately $.01 for the quarter ended June 30, 1998 and all quarterly periods
thereafter through the end of the 15 year amortization period.
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Dollars in millions except per share data QUARTER ENDED
YEAR ENDED ----------------------------------------------------
DECEMBER 31, 1997 MARCH 31, 1998 JUNE 30, 1998
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STATEMENTS OF OPERATIONS AS ESTIMATED AS ESTIMATED AS ESTIMATED
SELECTED CAPTIONS REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED(1)
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Revenue $ 71.8 $ 61.1 $ 39.6 $ 36.4 $ 51.8 $ 42.9
Sales and marketing 13.5 14.4 5.4 7.3 8.1 24.5
General and administrative 11.2 11.6 6.1 8.2 5.9 9.0
Depreciation & Amortization 4.0 6.8 3.0 7.1 4.3 8.2
Restructuring expense 25.0 - - - - -
Acquired IPR&D(2) 39.2 5.0 - - - -
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Operating income (loss) (61.5) (17.1) 1.2 (11.1) 4.4 (26.7)
Net Interest expense (0.4) (0.4) (1.3) (1.3) (1.3) (1.3)
Other income (expense) 0.1 0.1 - - - (0.4)
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Income (loss) before income taxes (61.9) (17.5) (0.1) (12.3) 3.1 (28.4)
Provision for income taxes - - - - (1.2) -
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Net income (loss) from
Continuing operations $ (61.9) $ (17.5) $ (0.1) $ (12.3) $ 1.9 $ (28.4)
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Net income (loss) per share
From continuing operations $ (4.14) $ (1.17) $ 0.00 $ (0.56) $ 0.08 $ (1.22)
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BALANCE SHEETS
SELECTED CAPTIONS
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Assets:
Trade accounts receivable, net $ 32.7 $ 28.0 $ 35.5 $ 30.7 $ 45.9 $ 19.8
Intangibles, net 222.5 243.8 225.7 242.4 229.5 295.9
Liabilities:
Deferred revenue 40.2 28.9 27.8 19.6 29.5 16.8
Restructuring reserve 23.9 - 22.7 - 22.0 -
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(1) June 30, 1998 "Estimated Restated" column includes adjustments to reflect
the treatment of the acquisition of Worldwide Direct, Inc. (WWD) under the
purchase method of accounting and includes the results from WWD in the
Company's consolidated results from the date of acquisition.
(2) Acquired IPR&D is assumed to be $5.0 million for purposes of this summary
only. The actual IPR&D charge is currently being evaluated by the Company.
This amount could change materially and amortization expense in future
periods could materially change, thereby impacting future earnings
significantly.
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