<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1998 COMMISSION FILE NO. 0-21579
SMARTALK TELESERVICES, INC.
INCORPORATED UNDER THE LAWS IRS EMPLOYER IDENTIFICATION
OF CALIFORNIA(1) NO. 95-4502740
5080 TUTTLE CROSSING BLVD.
DUBLIN, OHIO 43016-3566
TELEPHONE: 614-789-8500
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 13, 1998:
Voting, No par value: 22,600,440
- --------
(1) A proposal to effect the reincorporation of SmarTalk TeleServices, Inc.
(the "Company") from California to Delaware was approved by the
shareholders of the Company on December 31, 1997. Accordingly, subject to
receipt of requisite regulatory approval, the Company's state of
incorporation will change from California to Delaware and the Company
will be a Delaware corporation.
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<PAGE>
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO
CERTAIN INFORMATION
Subsequent to the filing with the Securities and Exchange Commission of its
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, SmarTalk
TeleServices, Inc.'s ("SmarTalk" or the "Company") management in conjunction
with the Company's independent accountants, PricewaterhouseCoopers LLP
("PwC"), determined that significant issues existed with regard to the
Company's accounting treatment for deferred revenue recorded in conjunction
with acquisitions that occurred during 1997, the restructuring reserve taken
during the fourth quarter of 1997, the charge for acquired research and
development in-process taken during the fourth quarter of 1997 as well as
certain other items including manufacturer's development funds and accounts
receivable. The Company's investigation into these issues ultimately resulted
in the restatement of the Company's revenues and financial results for the
year ended 1997 and for the first and second quarters of 1998. (See Note 8 to
the Company's consolidated financial statements.)
This Quarterly Report on Form 10-Q/A amends Items 1 and 2 of Part I and
Items 1 and 6 of Part II of the Company's Quarterly Report on Form 10-Q
previously filed for the quarter ended March 31, 1998. This Quarterly Report
on Form 10-Q/A is filed in connection with the Company's restatement of its
financial statements for the quarter ended March 31, 1998. Financial statement
information and related disclosures included in this amended filing reflect,
where appropriate, changes as a result of the restatement. Except as otherwise
noted, information contained in this Quarterly Report is as of March 31, 1998.
This Quarterly Report on Form 10-Q/A contains statements that constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, which generally can be identified by the use of
forward-looking terminology such as "anticipate," "believe," "target,"
"estimate," "may," "will," "expect," "plan," "project" or "continue" or the
negative thereof or other variations thereon or similar terminology. Such
statements are based on information available to management as of the time of
such statements and relate to, among other things, expectations of the
business environment in which the Company operates, projections of future
performance, perceived opportunities in the market and statements regarding
the Company's mission and vision. Such statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions,
including risks related to the highly competitive market in which the Company
operates; the need to attract and retain qualified management personnel;
uncertainty in consumer acceptance of the Company's products and services,
including its prepaid cellular product; possible difficulty in obtaining
acceptable financing for the Company's continued expansion; and difficulty in
integrating the Company's operations acquired primarily through acquisitions.
These and other risks, uncertainties and assumptions identified from time to
time in the Company's filings with the Securities and Exchange Commission,
including without limitation, its annual reports on Form 10-K and its
quarterly reports on Form 10-Q, as amended, could cause the Company's future
results to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company. Many of such factors are
beyond the Company's ability to control or predict. These forward-looking
statements speak only as of the date for which they are made. The Company
disclaims any intent or obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or
otherwise.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SMARTALK TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------------- --------------
(AS RESTATED-- (AS RESTATED--
SEE NOTE 8) SEE NOTE 8)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 47,270,374 $ 62,900,673
Trade accounts receivable (less allowance for
doubtful accounts of $593,026 and $1,482,206,
respectively)................................. 30,661,549 28,012,237
Receivable from American Express Company....... -- 2,570,000
Inventories.................................... 6,507,560 4,301,487
Prepaid expenses............................... 1,529,204 1,377,844
Other current assets........................... 7,033,669 7,464,040
------------ ------------
Total current assets......................... 93,002,356 106,626,281
Non-current assets:
Property and equipment, net.................... 16,128,793 14,208,975
Intangibles, net............................... 234,425,658 235,506,706
Note receivable from ACMI, L.L.C., net......... 2,493,104 2,234,763
Other non-current assets....................... 17,365,171 9,724,352
------------ ------------
Total assets................................. $363,415,082 $368,301,077
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 19,040,393 $ 15,081,532
Deferred revenue............................... 19,649,742 28,885,002
Accrued marketing costs........................ 948,240 1,811,817
Accrued interest payable....................... 557,834 2,615,480
Other accrued expenses......................... 8,232,089 5,571,728
Excise and sales tax payable................... 5,835,097 5,565,072
Reserve for discontinued operations............ 2,336,053 --
Accrued litigation settlement.................. -- 4,500,003
Current portion of long-term debt.............. 7,768,497 7,285,401
------------ ------------
Total current liabilities.................... 64,367,945 71,316,035
Long-term debt less current portion.............. 150,874,753 150,874,753
------------ ------------
Total liabilities................................ 215,242,698 222,190,788
Shareholders' equity:
Preferred stock, no par value; authorized
10,000,000 shares; no shares issued and
outstanding................................... -- --
Common stock, no par value; authorized
100,000,000 shares; issued and outstanding
22,461,749 and 21,350,852 shares,
respectively.................................. 196,269,244 178,670,477
Accumulated deficit............................ (48,050,437) (32,703,998)
Cumulative translation adjustment.............. (46,423) 143,810
------------ ------------
Total shareholders' equity....................... 148,172,384 146,110,289
------------ ------------
Total liabilities and shareholders' equity....... $363,415,082 $368,301,077
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
SMARTALK TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1998 1997
--------------- -------------
(AS RESTATED --
SEE NOTE 8)
<S> <C> <C>
Revenue........................................ $ 36,381,371 $ 7,368,333
Cost of revenue................................ 24,797,956 4,760,748
------------ ------------
Gross profit................................. 11,583,415 2,607,585
Sales and marketing............................ 7,337,399 2,545,414
General and administrative..................... 15,052,575 901,231
------------ ------------
Operating loss............................... (10,806,559) (839,060)
Interest income................................ 1,142,311 528,763
Interest expense............................... (2,404,043) --
------------ ------------
Loss from continuing operations before income
taxes......................................... (12,068,291) (310,297)
Provision for income taxes..................... -- --
------------ ------------
Loss from continuing operations................ (12,068,291) (310,297)
Discontinued operations:
Loss from discontinued operations to the
Board Resolution Date....................... (578,148) --
Loss from the Board Resolution Date to the
date of disposal of discontinued
operations.................................. (2,700,000) --
------------ ------------
Net loss....................................... $(15,346,439) $ (310,297)
============ ============
Per share loss--basic and diluted:
Continuing operations........................ $ (.55) $ (.02)
Discontinued operations...................... (.15) --
------------ ------------
Total........................................ $ (.70) $ (.02)
------------ ------------
Weighted average number of shares.............. 21,902,362 12,897,674
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
SMARTALK TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
----------------------- STOCK ACCUMULATED TRANSLATION
SHARES AMOUNT SUBSCRIPTION DEFICIT ADJUSTMENT TOTAL
---------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995.................. 8,824,834 $ 315,000 $(300,000) $ (1,394,774) $ -- $ (1,379,774)
Issuance of subscribed shares.... -- -- 300,000 -- -- 300,000
Purchase of assets of
related entity.................. -- -- -- (2,464,028) -- (2,464,028)
Compensation under stock
options issued.................. -- 24,000 -- -- -- 24,000
Proceeds from sale of stock, net
of costs........................ 4,000,000 50,439,595 -- -- -- 50,439,595
Stock options exercised.......... 4,625 8,186 -- -- -- 8,186
Net loss......................... -- -- -- (3,112,548) -- (3,112,548)
---------- ------------ --------- ------------ --------- ------------
December 31, 1996.................. 12,829,459 50,786,781 -- (6,971,350) -- 43,815,431
Stock options exercised.......... 227,398 851,485 -- -- -- 851,485
Distribution agreement........... 330,205 7,596,093 -- -- -- 7,596,093
Acquisitions:
ConQuest Telecommunication
Services Corp. ................. 4,488,935 71,917,228 -- -- -- 71,917,228
GTI Telecom, Inc................. 2,580,001 34,259,820 -- -- -- 34,259,820
SmarTel Communications, Inc. .... 714,286 9,494,290 -- -- -- 9,494,290
Cardinal Voicecard Limited....... 115,000 2,170,625 -- -- -- 2,170,625
Frontier Selected Assets......... 65,568 1,594,155 -- -- -- 1,594,155
Cumulative translation
adjustment...................... -- -- -- -- 143,810 143,810
Net loss......................... -- -- -- (25,732,648) -- (25,732,648)
---------- ------------ --------- ------------ --------- ------------
December 31, 1997 (As Restated--See
Note 8)........................... 21,350,852 178,670,477 -- (32,703,998) 143,810 146,110,289
Stock options exercised.......... 714,026 7,542,427 -- -- -- 7,542,427
USA Telecommunications Services,
Inc............................. 81,302 2,500,037 -- -- -- 2,500,037
Litigation settlement............ 215,569 4,500,003 -- -- -- 4,500,003
Licensing agreement.............. 100,000 3,056,300 -- -- -- 3,056,300
Cumulative transaction
adjustments..................... -- -- -- -- (190,233) (190,233)
Net loss......................... -- -- -- (15,346,439) -- (15,346,439)
---------- ------------ --------- ------------ --------- ------------
March 31, 1998 (As Restated--See
Note 8)........................... 22,461,749 $196,269,244 $ -- $(48,050,437) $ (46,423) $148,172,384
========== ============ ========= ============ ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
SMARTALK TELESERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1998 1997
------------------------------
(AS RESTATED--
SEE NOTE 8)
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................... $ (15,346,439) $ (310,297)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation................................. 1,374,619 43,355
Amortization................................. 5,528,687 --
Loss from discontinued operations............ 2,700,000 --
Provision for bad debt....................... 410,820 --
Lease termination fee........................ -- (325,810)
Changes in assets and liabilities, net of ef-
fects from acquisitions, dispositions, and
foreign currency adjustments which increase
(decrease) cash:
Trade accounts receivable................... (3,046,704) (650,273)
Receivable from American Express Company ... 2,570,000 --
Inventories................................. (2,103,903) (208,217)
Prepaid expenses............................ (70,296) (133,196)
Other current assets........................ 1,449,135 (248,843)
Other non-current assets.................... (5,603,283) (66,947)
Accounts payable............................ 3,945,656 (760,559)
Deferred revenue............................ (9,235,260) (61,549)
Accrued marketing costs..................... (863,577) (136,931)
Accrued interest............................ (2,057,646) --
Other accrued expenses...................... 2,463,088 (124,257)
Reserve for discontinued operations......... (363,947) --
Excise and sales tax payable................ 270,025 30,462
-------------- -------------
Net cash used by operating activities........ (17,979,025) (2,953,062)
-------------- -------------
Cash flows from investing activities:
Note receivable from ACMI, L.L.C............. (258,341) --
Capital expenditures......................... (3,206,241) (96,423)
Acquisition costs............................ (1,413,754) --
-------------- -------------
Net cash used by investing activities....... (4,878,336) (96,423)
-------------- -------------
Cash flows from financing activities:
Stock options exercised....................... 7,542,427 574,296
Payments on capital lease obligations......... (125,132) --
-------------- -------------
Net cash provided by financing activities.... 7,417,295 574,296
-------------- -------------
Effect of currency exchange rate change....... (190,233) --
-------------- -------------
Decrease in cash and cash equivalents.......... (15,630,299) (2,475,189)
Cash and cash equivalents at beginning of peri-
od............................................ 62,900,673 44,830,487
-------------- -------------
Cash and cash equivalents at end of period..... $ 47,270,374 $ 42,355,298
============== =============
Supplement disclosure of cash flow information:
Cash paid for interest....................... $ 2,057,647 $ --
============== =============
Issuance of stock for litigation settlement.. $ 4,500,003 $ --
============== =============
Issuance of stock for licensing agreement.... $ 3,056,300 $ --
============== =============
Issuance of stock for acquisitions........... $ 2,500,037 $ --
============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
SMARTALK TELESERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF INTERIM PRESENTATION
The accompanying interim period consolidated financial statements are
unaudited, pursuant to certain rules and regulations of the Securities and
Exchange Commission, and include, in the opinion of management, all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the results for the periods indicated; which, however,
are not necessarily indicative of results which may be expected for the full
year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The financial statements should be read in conjunction with the
financial statements and the notes thereto for the year ended December 31,
1997, as restated, and other information included in SmarTalk TeleServices,
Inc.'s (the "Company") Form 10-K, as amended, and Forms 8-K, as filed with the
Securities and Exchange Commission.
Subsequent to the filing with the Securities and Exchange Commission of its
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, the
Company's management in conjunction with PricewaterhouseCoopers LLP ("PwC")
determined that significant issues existed with regard to the Company's
accounting treatment for deferred revenue recorded in conjunction with
acquisitions that occurred during 1997, the restructuring reserve taken during
the fourth quarter of 1997, the charge for acquired research and development
in-process taken during the fourth quarter of 1997 as well as certain other
items including manufacturer's development funds, discontinued operations and
accounts receivable.
As a result of the Company's investigation into these issues, the
accompanying interim period consolidated financial statements as of March 31,
1998 and for the quarter then ended have been restated. (See Note 8 to the
Company's consolidated financial statements.)
2. DISCONTINUED OPERATIONS
On February 28, 1998 (the "Board Resolution Date"), the Board adopted a plan
to sell the Company's call center business located in Butler, Pennsylvania. In
the first quarter of 1998, the Company recorded a charge for the losses
associated with operating this business up to the Board Resolution Date and an
estimated charge for operating this business from the Board Resolution Date
through the anticipated disposition date plus the transaction costs associated
with the sale of the business. On June 12, 1998 (the "Sale Date"), the Company
sold the assets of the call center business for $1,000,000 in cash and a note
receivable (the "Call Center Note") of $19,067,995. Interest on the Call
Center Note is 12% per annum and is payable quarterly beginning September 12,
1998. The principal on the Call Center Note is due on June 12, 1999 (unless
this date is extended to June 12, 2000 by the obligor) or upon completion of a
financing transaction in excess of $50,000,000 by the obligor. The assets of
the obligor secure the Call Center Note. Due to the thinly capitalized
financial position of the obligor and the resulting risk of collection, a
valuation allowance was recorded against the Call Center Note approximately
equal to the difference between the sales price and net book value of the
tangible assets sold, or $14,684,978. No gain or loss was recorded on the
transaction. Operations for the business from January 1, 1998 to the Sale Date
and transaction costs associated with the disposal have been recorded against
the reserve for discontinued operations.
3. LICENSING AGREEMENT
On March 30, 1998, the Company entered into a new licensing agreement with
AudioFax IP LLC to license certain voice-fax mailbox technology. The Company
paid a one-time fee to license the technology until the patents expire in
2008. Prior to this agreement, the Company licensed this technology by paying
a per card fee for cards containing voice-fax mailbox services.
4. ACQUISITION
On March 23, 1998, the Company acquired USA Telecommunication Services,
Inc., (d.b.a. The Debit Cellular Network) ("DCN"), a North Carolina based
prepaid cellular card company, for 81,302 shares of
6
<PAGE>
Common Stock and $1,500,000 in cash. This acquisition has been accounted for
using the purchase method of accounting. The results of the acquired business
are included in the Company's consolidated results from the date of
acquisition.
The following unaudited pro forma summary presents the Company's combined
results as if the 1998 acquisition occurred at the beginning of the quarter,
after giving effect to certain adjustments including goodwill amortization,
depreciation and interest expense. These pro forma results are not necessarily
indicative of those that would have occurred had the acquisition occurred at
the beginning of the respective period.
<TABLE>
<CAPTION>
THREE MOS. ENDED
MARCH 31, 1998
----------------
(AS RESTATED--
SEE NOTE 8)
<S> <C>
Revenue............................................... $ 41,337,836
============
Net loss from continuing operations................... $(13,459,358)
============
Net loss per share from continuing operations--basic
and diluted.......................................... $ (.55)
============
</TABLE>
The following unaudited pro forma summary presents the Company's combined
results as if the 1997 acquisitions occurred at the beginning of the quarter,
after giving effect to certain adjustments including goodwill amortization,
depreciation and interest expense. These pro forma results are not necessarily
indicative of those that would have occurred had the acquisitions occurred at
the beginning of the respective periods.
<TABLE>
<CAPTION>
THREE MOS. ENDED
MARCH 31, 1997
----------------
<S> <C>
Revenue................................................. $37,076,209
===========
Net loss................................................ $(8,551,597)
===========
Net loss per share--basic and diluted................... $ (.39)
===========
</TABLE>
5. REVENUE RECOGNITION
The Company's revenue originates from: (i) Company and co-branded prepaid
calling cards sold through retailers; (ii) recharges on existing calling
cards; (iii) cards sold for promotional marketing campaigns; (iv) corporate
sales to businesses; (v) prepaid calling card services provided to one of the
Company's strategic partners, West Interactive Corporation ("WIC"); (vi) call
processing; and (vii) sales commissions from postpaid cellular activations.
Under the majority of agreements with retailers, the Company sells cards to
the retailer at a fixed price with normal credit terms. When the retailer is
invoiced, deferred revenue is recorded. The Company recognizes revenue and
reduces the deferred revenue account as the end user utilizes calling time or
upon expiration of cards containing unused calling time, as applicable. The
Company also records deferred revenue upon recharge of existing phone cards
and recognizes such revenue upon usage or expiration of the recharge minutes.
With respect to deferred revenue on the books of an acquired entity, the
obligation to provide future service relating to unused minutes is revalued as
of the date of acquisition. The fair value of the service obligation
represents management's best estimate of the cost to service acquired unused
minutes plus a normal profit margin for this service element (such margin
intended to cover indirect costs and provide a reasonable return). Deferred
revenue is not recorded for acquired unused minutes for which no future usage
is anticipated. The acquired deferred revenue obligation is periodically
remeasured to reflect actual used and unused minutes which may vary from
original estimates. A reduction in acquired deferred revenue is recorded based
on actual minutes used during the post-acquisition period.
7
<PAGE>
Substantially all prepaid phone cards sold by the Company have expiration
dates and expire as of that date, if never activated, or six months after the
initial activation unless recharged. For cards that have no printed expiration
date, revenue for unused minutes is recognized when cards have been dormant
for greater than 12 months.
6. DIVIDENDS
There were no dividends declared or paid for the three months ended March
31, 1998 or 1997.
7. SUBSEQUENT EVENTS
On April 20, 1998, Intrine Communications ("'Intrine"), filed a complaint
against the Company and DCN in the Superior Court of California in Los Angeles
County. In the complaint, Intrine alleges that, by virtue of the Company's
acquisition of DCN, the Company and DCN breached written and oral agreements
not to circumvent and appropriate for themselves the benefits of a purported
deal by Intrine to acquire DCN. The lawsuit seeks damages and injunctive
relief. Management of the Company believes that the claims against the Company
and DCN are without merit and does not at present expect this lawsuit to have
a material adverse effect on the Company's financial position, liquidity, cash
flow or results of operations.
On April 27, 1998, the Star Line of Credit was paid in full and the credit
facility terminated.
On April 30, 1998, the Company acquired the outstanding stock of Canada
Telecom Network, Inc., a Montreal, Quebec, Canada based prepaid calling card
company, for $3,000,000 in cash and $5,500,000 in a subordinated, 7.5% per
annum note which matures April 30, 2000. This acquisition was accounted for
using the purchase method of accounting and the results of the acquired
business are included in the Company's consolidated results of operations from
the date of acquisition.
On June 10, 1998, the Company acquired the outstanding stock of Worldwide
Direct, Inc., a Framingham, Massachusetts based prepaid cellular
communications company ("Worldwide"), for 2,715,000 shares of Common Stock.
The Company has restructured this transaction to provide for the issuance of
additional equity and/or debt securities based on the occurrence of certain
conditions. As a result of this restructuring, the acquisition required the
use of the purchase method of accounting and the results of the acquired
business are included in the Company's consolidated results of operations from
the date of acquisition.
On June 19, 1998, the Company received payment for the ACMI, L.L.C. note
receivable. The note receivable had a net book value of $2,234,763 on such
date and the repayment amount was $1,000,000 in cash. Since this note was
acquired through the ConQuest acquisition, the devaluation of the note was
recorded as a reduction of goodwill. Additionally, the Company was required to
release 106,816 shares of its Common Stock that was held in escrow and used as
collateral to secure the note. The value of these shares had previously been
recorded as an increase to goodwill.
As of July 1, 1998, the Company issued a promissory note in the amount of
$5,000,000 and agreed to issue 1,000,000 shares of Common Stock to acquire a
distribution arrangement with a former distributor of Worldwide and certain
contractual relationships. The arrangement also provides for the issuance of
additional equity and/or debt securities upon the occurrence of certain
conditions.
On July 9, 1998, the Company completed a private placement of 1,751,824
shares of its Common Stock, realizing proceeds before transaction costs of
$29,999,986. On August 28, 1998, the terms of the private placement were
restructured. In the event that the Company's Common Stock trades below the
initial purchase price during specified periods, the Company will be obligated
to issue up to $18,500,000 of additional Common Stock for no additional
consideration. In addition, the Company granted an option exercisable for a
period of two years commencing March 1, 1999 in connection with the private
placement pursuant to which an additional $20,000,000 of the Company's Common
Stock may be purchased. In the event the aggregate amount of Common Stock
issued by the Company pursuant to the private placement would exceed 20% of
the Company's total outstanding shares as of July 9, 1998 (the "20%
Threshold"), as a result of either the exercise of the option or the initial
purchase price adjustment, the Company would be required to obtain shareholder
approval of the private placement or issue a note in a principal amount equal
to the value of the Common Stock that otherwise would exceed the 20%
Threshold. The Company expects to use the proceeds from this private placement
to accelerate its entry into the prepaid cellular market and for general
corporate purposes.
8
<PAGE>
Since July 23, 1998, 19 putative class actions have been filed against the
Company and certain current and former members of its management and board of
directors in state and Federal courts alleging violations of state and Federal
Securities laws with respect to certain alleged misrepresentations and/or
omissions in regard to the Company's projected and actual revenues and
earnings. These lawsuits seek unspecified damages on behalf of certain classes
of persons who purchased the Company's securities during periods between
May 1997 and August, 1998. The complaints generally allege that the Company
made material misrepresentations and omissions in regard to the Company's
projected and actual revenues and earnings. Although the Company intends to
defend against these lawsuits vigorously, it is not feasible to predict or
determine the final outcome of these proceedings at this time. An unfavorable
outcome with respect to such proceedings could have a material adverse effect
on the Company's financial condition and results of operations.
8. RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial
statements for the quarter ended March 31, 1998, the Company's management in
conjunction with PwC determined that significant issues existed with regard to
the Company's accounting treatment for deferred revenue recorded in connection
with acquisitions that occurred during 1997, the restructuring reserve taken
during the fourth quarter of 1997, the charge for acquired research and
development in-process taken during the fourth quarter of 1997 as well as
certain other items including manufacturer's development funds and accounts
receivable. As a result, the accompanying consolidated financial statements as
of March 31, 1998 and for the quarter then ended have been restated.
A summary of the significant effects of the restatement are as follows:
<TABLE>
<CAPTION>
THREE MOS. ENDED
MARCH 31, 1998
--------------------------
AS
PREVIOUSLY
REPORTED AS RESTATED
------------ ------------
<S> <C> <C>
Statement of Operations Data:
Revenue........................................... $ 39,612,521 $ 36,381,371
Cost of revenue................................... 23,908,488 24,797,956
Gross profit...................................... 15,704,033 11,583,415
Operating expenses................................ 14,535,109 22,389,974
Loss from continuing operations................... (93,028) (12,068,291)
Net loss.......................................... (3,371,176) (15,346,439)
Statement of Cash Flows Data:
Cash used by operating activities................. (23,143,411) (17,979,025)
Cash provided (used) by investing activities...... 933,068 (4,878,336)
Cash provided (used) by financing activities...... 7,515,295 7,417,295
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
------------------------- -------------------------
AS AS
PREVIOUSLY PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Accounts receivable,
net..................... $ 35,503,661 $ 30,661,549 $ 32,699,249 $ 28,012,237
Current assets........... 99,404,180 93,002,356 111,487,102 106,626,281
Intangibles, net......... 225,677,905 234,425,658 222,536,934 235,506,706
Total assets............. 364,643,703 363,415,082 360,502,826 368,301,077
Deferred revenue......... 27,825,780 19,649,742 40,248,400 28,885,002
Restructuring reserve.... 22,729,069 -- 23,943,070 --
Current liabilities...... 96,638,949 64,367,945 106,622,503 71,316,035
Total liabilities........ 247,513,702 215,242,698 257,497,256 222,190,788
Total shareholders'
equity.................. 117,130,001 148,172,384 103,005,570 146,110,289
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
RESTATEMENT
Subsequent to the filing with the Securities and Exchange Commission of its
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, the
Company's management in conjunction with PwC determined that significant
issues existed with regard to the Company's accounting treatment for deferred
revenue recorded in conjunction with acquisitions that occurred during 1997,
the restructuring reserve taken during the fourth quarter of 1997, the charge
for acquired research and development in-process taken during the fourth
quarter of 1997 as well as certain other items including manufacturer's
development funds, discontinued operations and accounts receivable. The
Company's investigation into these issues ultimately resulted in the
restatement of the Company's financial results for the year ended 1997 and for
the first and second quarters of 1998. The financial information contained
herein has been restated to incorporate all relevant information obtained from
the aforementioned investigations. (See Note 8 to the Company's consolidated
financial statements.)
GENERAL
The Company was formed in October 1994 and had limited operations until June
1995. On October 23, 1996, the Company completed the sale of 4,000,000 shares
of its stock in a public offering. The Company's common stock, no par value
(the "Common Stock"), is listed on the NASDAQ National Market.
SmarTalk provides convenient, easy-to-use and cost-effective
telecommunications products and services to individuals and businesses
primarily through the SmarTalk prepaid phone card (the "SmarTalk Card"). The
SmarTalk Card provides customers with a single point of access to prepaid
telecommunications services at a fixed rate charge per minute regardless of
the time of day or, in the case of domestic calls, the distance of the call.
The Company's services currently include domestic calling, inbound and
outbound international long distance calling, as well as enhanced features
such as sequential calling, content delivery, speed dial and message delivery
and on selected cards, voice and fax mail services. The SmarTalk Card may be
recharged with a major credit card by calling SmarTalk's customer service
department or, in select retail locations, at point-of-sale, allowing the user
to add minutes as needed.
SmarTalk services are delivered through proprietary switching, application
and database access software which run on interactive call processing
platforms. The SmarTalk platforms and the Company's proprietary software allow
users in the system to access SmarTalk services, and provide the Company with
the flexibility to customize and add features to SmarTalk services on a
platform-wide basis.
SmarTalk's revenue originates from: (i) SmarTalk branded, co-branded, and
private label prepaid calling card sales through retailers; (ii) sales of
cards through alternate distribution channels; (iii) recharges of existing
prepaid calling cards; (iv) prepaid calling services provided to one of the
Company's strategic partners, West Interactive Corporation ("WIC"); and (v)
call processing services. The Company operates in a highly competitive market.
Future revenues and earnings may be impacted by, among other factors, the
Company's ability to address competition, its ability to sign new accounts,
its ability to introduce new products such as its prepaid cellular product
offering and its ability to integrate its operations successfully.
Under sales agreements with the majority of its retailers, the Company sells
cards to the retailer at a set price. The Company generally invoices the
retailer upon shipment of the cards. The Company also offers pay-on-sale and
pay-on-activation programs to certain retailers whereby the retailers are
invoiced upon sale to or activation by a retailer's customer, respectively.
The Company anticipates that its pay-on-sale and pay-on-activation programs
will be increasingly utilized by its retail customers. Deferred revenue is
recorded when the retailer is invoiced. The Company recognizes revenue and
reduces deferred revenue as the customer utilizes calling time or upon
expiration of cards containing unused calling time ("breakage"). The Company
also records deferred revenue upon recharge of existing prepaid calling cards
and recognizes such revenue upon the usage or expiration of the recharge
minutes. Call processing revenues are recognized as these services are
rendered.
10
<PAGE>
SmarTalk's cost of revenue consists primarily of the cost of providing long
distance services and related enhanced services, as well as the cost of
manufacturing and delivering the cards, excise taxes and Universal Service
Fund fees. The cost of providing long distance services represents obligations
to carriers that provide minutes of long distance over their networks in order
to facilitate use of SmarTalk's product.
SmarTalk seeks to leverage its competitive advantages in implementing the
key elements of its growth strategy, including: (i) increasing penetration of
retailers; (ii) developing new products and services; and (iii) continuing to
pursue selected acquisitions.
Sales and marketing expenses consist primarily of commissions and
advertising costs. The Company pays commissions to its sales representatives
based on sales to retailers. The Company also pays commissions to its sales
representatives and retailers based on the number of minutes recharged on the
SmarTalk Cards sold by each retailer. Advertising consists primarily of trade,
consumer and cooperative advertising ("co-op"). Under the typical co-op
advertising program, the Company provides advertising funds to retailers to
promote sales of SmarTalk products and services. The amount of funds the
Company provides in co-op advertising is based on a percentage of sales of
SmarTalk products to retailers. Corporate advertising expense includes trade
and consumer advertising, trade show expenses, promotional goods and the costs
of providing to retailers the Company's turnkey merchandising materials and
services.
General and administrative expenses consist primarily of salaries and
related benefits, sales and use taxes, rent, insurance, bank card processing
fees and other general expenses including depreciation and amortization. Sales
and use taxes for the SmarTalk platforms are incurred based on customer usage
of long distance minutes which are processed through the Company's platforms.
The Company completed the following acquisitions from January 1, 1997 to
March 31, 1998 (the "Acquisitions"):
American Express Telecom, Inc. On December 31, 1997, SmarTalk acquired
American Express Telecom, Inc. ("Amex Telecom"), a provider of prepaid calling
products, including the FirstClass Phonecard(TM) sold through the U.S. Postal
Service and the PhoneFunds(TM) card sold through the National Park Foundation,
American Express Travel Service Offices ("AmEx TSO's"), and certain Foreign
Exchange offices. In consideration for the outstanding shares of Amex Telecom,
SmarTalk paid $44 million in cash, which was provided from SmarTalk's working
capital, with a portion thereof held in escrow pending regulatory approval to
Amex Telecom's sole stockholder, American Express Travel Related Services
Company, Inc. ("Amex TRS"). Additionally, SmarTalk purchased a profit and cost
sharing agreement between Amex Telecom and the U.S. Postal Service. The Amex
Telecom acquisition secured for SmarTalk distribution rights to certain AmEx
TSO's, distribution through the U.S. Postal Service and the National Park
Foundation and an agreement with American Express to be the exclusive provider
of a co-branded prepaid calling card for American Express. In addition,
SmarTalk was granted exclusive access to the American Express point-of-sale
system for activation and recharge of prepaid phone cards. Under the purchase
agreement, Amex TRS agreed to reimburse SmarTalk for the estimated unused
minutes as of December 31, 1997. The Company has recorded this amount as a
reduction to the purchase price and a receivable of $2,570,000 at December 31,
1997.
ConQuest Telecommunication Services Corp. On December 3, 1997, SmarTalk
entered into an interim operating agreement with ConQuest Telecommunication
Services Corp. ("ConQuest") which transferred all risks and rewards from
ConQuest to SmarTalk. SmarTalk assumed responsibility for operating the
ConQuest business and the employees of ConQuest became employees of SmarTalk
on this date. On December 31, 1997, SmarTalk acquired 100% of ConQuest's
outstanding common stock. In consideration for each outstanding share of
ConQuest common stock, ConQuest stockholders received 7.63 shares of Common
Stock (approximately 4.5 million shares of Common Stock in total). SmarTalk
also assumed $6,139,679 of ConQuest's debt. Additionally, in connection with
this acquisition SmarTalk paid $350,000 in cash in 1997 and issued
215,569 shares of Common Stock in January 1998 to obtain an agreement and
mutual release from a group of individuals that had brought a lawsuit against
ConQuest prior to the acquisition. ConQuest was a
11
<PAGE>
developer and marketer of prepaid calling cards and other enhanced
telecommunication services and technology, including domestic and
international calling services for the tour and travel industry. The
acquisition of ConQuest added significantly to SmarTalk's technological
infrastructure, customer base, platform operations and
management infrastructure.
Selected Assets of Frontier Corporation. On December 9, 1997, SmarTalk
acquired selected assets ("Frontier Selected Assets") of the retail prepaid
phone card business of Frontier Corporation, a New York corporation
("Frontier"). In consideration for the Frontier Selected Assets, SmarTalk paid
$35 million in cash and 65,568 shares of Common Stock. The acquisition of the
Frontier Selected Assets added to SmarTalk's size, scale and scope, and helped
establish SmarTalk's presence on the East Coast.
Cardinal Voicecard Limited. On August 13, 1997, SmarTalk issued 115,000
shares of Common Stock to purchase this Toronto, Ontario based company. This
acquisition provided the Company with access to the Canadian marketplace and
added to the Company's customer base.
GTI Telecom, Inc. On May 31, 1997, SmarTalk issued 2,580,001 shares of
Common Stock and $26,500,000 in subordinated 10% per annum term notes which
mature June 1, 2001 (the "GTI Notes"), to purchase GTI Telecom, Inc. ("GTI").
$25,970,000 of the GTI Notes were repaid in September 1997 at $20,614,686. The
difference of $5,355,314 was recorded as a reduction to goodwill. This
acquisition expanded the Company's customer base and added human resource,
technical and manufacturing infrastructure.
SmarTel Communications, Inc. On May 28, 1997, SmarTalk acquired SmarTel
Communications, Inc., a Delaware corporation ("SmarTel"), operating as a
Boston based prepaid promotions phone card company, for 714,286 shares of
Common Stock.
USA Telecommunications Services, Inc. On March 23, 1998, SmarTalk acquired
USA Telecommunications Services, Inc. (d.b.a. The Debit Cellular Network)
("DCN"), a North Carolina based prepaid cellular card company, for 81,302
shares of Common Stock and $1,500,000 in cash.
The Acquisitions have been accounted for using the purchase method of
accounting. Accordingly, the operating results of the Acquisitions have been
included in the Company's consolidated financial results since the date of
acquisition.
12
<PAGE>
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1998 (AS RESTATED) COMPARED WITH QUARTER ENDED MARCH
31, 1997
Revenue. Revenue increased to $36,381,371 for the quarter ended March 31,
1998 from $7,368,333 for the same period in 1997. The substantial increase in
revenue reflects an increase in usage of SmarTalk services by users of the
SmarTalk Card, the effect of the Acquisitions, an increase in the number of
retail storefronts in which the Company's product is distributed, greater
brand awareness and consumer acceptance and revenue attributable to a
distribution and processing agreement entered into on June 1, 1996 with WIC.
Revenue attributable to the distribution and processing agreement was
$4,509,588 for the quarter ended March 31, 1998 and $3,850,049 for the same
period in 1997. In addition, 6.0% of total revenue for the quarter ended March
31, 1998 consisted of revenue recognized on the unused portion of expired
cards (breakage revenue) as compared to 11.0% for the same period in 1997.
Recharge revenue for the quarters ended March 31, 1998 and 1997 was $1,101,499
and $437,055, respectively.
Cost of Revenue. Cost of revenue increased to $24,797,956 for the quarter
ended March 31, 1998 from $4,760,748 for the same period in 1997. The increase
was primarily attributable to greater use of the Company's services, the
effect of the Acquisitions and an increase in taxes. The gross profit
percentage for the quarter ended March 31, 1998 was 31.8% as compared to 35.4%
for the same period in 1997. The gross margin percentage decreased primarily
due to the decrease in breakage revenue which has minimal cost of revenues
associated with it and the effect of the additional taxes.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$7,337,399 (20.2% of revenue) for the quarter ended March 31, 1998 from
$2,545,414 (34.5% of revenue) for the same period in 1997. The increased
dollar amount was primarily due to the effect of the Acquisitions and the
continued expansion of the Company's marketing activities, which include co-op
advertising, and promotional goods. In addition, the Company paid a major
retailer $2.5 million for entering into a long term agreement. This amount was
expensed during the quarter ended March 31, 1998. The decrease as a percentage
of revenue was due to revenue growth in 1998.
General and Administrative Expenses. General and administrative expenses
increased to $15,052,575 (41.4% of revenue) for the quarter ended March 31,
1998 from $901,231 (12.2% of revenue) for the same period in 1997. The
increase in dollar amount and percentage of revenue was primarily due to the
effect of the Acquisitions, which included intangible assets amortization,
depreciation expense, and the addition of personnel and costs associated with
the growth in the Company's business.
Interest Income and Expense. Net interest expense for the quarter ended
March 31, 1998, was $1,261,732 as compared to net interest income of $528,763
for the same period in 1997. This was primarily due to interest expense on the
Company's subordinated debt that was issued September 17, 1997. Interest
expense for the quarter ended March 31, 1998 and the same period in 1997
included $224,774 and $0, respectively, of debt issue costs and amortization.
Income Tax. The Company had losses for the quarter ended March 31, 1998 and
the same period in 1997. Accordingly, there was no provision for income taxes.
Decremented Minutes and PIN Activations. Decremented minutes, which
represent actual call traffic over the SmarTalk platforms, were estimated at
173,643,658 for the quarter ended March 31, 1998 as compared with 35,221,086
for the same period in 1997. PIN activations were estimated at 3,483,123 and
437,055 for the quarter ended March 31, 1998 and the same period in 1997,
respectively. These increases were due to increased usage of the Company's
services and the effect of the Acquisitions.
Discontinued Operations. On February 28, 1998 (the "Board Resolution Date")
the Company's board of directors adopted a plan to sell the Company's call
center business located in Butler, Pennsylvania. The call center operations up
to the Board Resolution Date have been classified as a loss from discontinued
operations. The estimated loss from operations after the Board Resolution Date
until the anticipated date of sale have been recorded as a loss on disposal of
discontinued operations.
13
<PAGE>
Net Loss. As a result of the above items, net loss increased to $15,346,439
($.70 per share) for the quarter ended March 31, 1998 from $310,297 ($.02 per
share) for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 1997, the Company issued 4,488,935 shares of Common Stock to
purchase ConQuest.
On December 31, 1997, the Company purchased Amex Telecom for $44,000,000 in
cash.
On December 9, 1997, the Company purchased selected retail assets of
Frontier's prepaid phone card business for $35,000,000 in cash and 65,568
shares of Common Stock.
In November 1997, the Company acquired a distribution agreement for
$1,000,000 in cash and 326,531 shares of Common Stock. In December 1997, an
additional 3,674 shares of Common Stock were issued for a referral associated
with the distribution agreement.
On September 17, 1997, SmarTalk issued 5 3/4% per annum convertible
subordinated notes due September, 2004 with a principal amount of $150,000,000
(the "Notes"). The net proceeds to SmarTalk from the offering of the Notes
(after deducting the underwriting discounts and other expenses) was
$144,946,319. Interest on the Notes is payable semi-annually on March 15 and
September 15 of each year commencing March 15, 1998.
On August 6, 1997, ConQuest entered into a revolving credit facility with
Star Bank, N.A. ("Star Line of Credit"). Pursuant to the terms of the Star
Line of Credit, ConQuest could borrow up to $9,500,000 as secured by various
accounts receivable. Interest is based on the ninety-day LIBOR plus one
percent. This credit facility was assumed by SmarTalk upon the acquisition of
ConQuest and had an outstanding balance of $7,291,575 at March 31, 1998. This
credit facility was paid in full and terminated on April 27, 1998.
In December 1996, the Company entered into a revolving credit facility with
Southern California Bank ("SCB Line of Credit"). Pursuant to the terms of the
SCB Line of Credit, the Company can borrow up to $1,000,000 secured by an
assignment of a deposit account with Southern California Bank. Interest on the
outstanding principal balance, calculated from the date of each advance to the
repayment of each advance is at a fixed rate of 7.12%. This credit facility
was undrawn at March 31, 1998.
Throughout 1997 to March 31, 1998, the Company has paid approximately
$90,000,000 in cash, paid $21,144,686 for acquisition indebtedness and has
issued approximately 8,700,000 shares of Common Stock for the Acquisitions,
distribution and licensing agreements.
From inception through March 31, 1998, the Company has funded operations
primarily from borrowings under its debt agreements and the sale of its Common
Stock. The Company's operating activities used net cash of $17,979,025 for the
three months ended March 31, 1998. The cash used by operating activities is
primarily attributable to the Company's continued efforts to increase its
penetration of the retail and alternate distribution channels.
Short-term and long-term funding needs for SmarTalk relate principally to
acquisitions, additional market penetration, liquidity, operations and capital
expenditures. These requirements principally have been met through the
proceeds of the initial public offering in October 1996 and the Notes offering
in September 1997. The following table sets forth selected financial data from
the consolidated statements of cash flows. (As Restated-- See Note 8 to the
company's consolidated financial statements.)
<TABLE>
<CAPTION>
CASH (USED IN) PROVIDED BY:
---------------------------------------
QUARTER ENDED MARCH 31 OPERATIONS INVESTING FINANCING
---------------------- ------------ ------------ -----------
<S> <C> <C> <C>
1998................................. $(17,979,025) $ (4,878,336) $ 7,417,295
1997................................. $ (2,953,062) $ (96,423) $ 574,296
</TABLE>
14
<PAGE>
Working capital current assets and current liabilities are illustrated in
the table below:
<TABLE>
<CAPTION>
CURRENT CURRENT WORKING
ASSETS LIABILITIES CAPITAL
------------ ----------- -----------
<S> <C> <C> <C>
March 31, 1998.......................... $ 93,002,356 $64,367,945 $28,634,411
December 31, 1997....................... $106,626,281 $71,316,035 $35,310,246
</TABLE>
As of March 31, 1998, the Company believed that the net proceeds from the
Notes offering, together with existing sources of liquidity, would be
sufficient to fund its capital expenditures, working capital, selected
acquisitions, and other cash requirements through the next twelve months.
As described in Note 8 to the Company's consolidated financial statements,
the consolidated financial statements of the Company have been restated to
reflect, among other things, a revaluation of the Company's accounts
receivable. The ability of the Company to satisfy its cash requirements is
dependent in part on the Company's ability to timely collect its accounts
receivable. In the event that the Company is unable to collect such
receivables in a timely fashion, the Company may be required to consider other
financing sources, including the borrowing of additional funds or the issuance
of additional debt or equity securities of the Company. There can be no
assurance that the Company would be able to obtain such financing or that such
financing would be on favorable terms.
IMPACT OF INFLATION
SmarTalk does not consider inflation to have had a material impact on the
results of operations for the three months ended March 31, 1998 and 1997.
YEAR 2000
The Company is aware of and is addressing the issues associated with the
programming code in existing computer systems as the year 2000 approaches (the
"Year 2000 Issue"). The Year 2000 Issue is pervasive and complex, as many
computer systems will be affected in some way by the rollover of the two-digit
year value to 00. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The Company utilizes
some software and related computer hardware technologies in its operations
that may be affected by the Year 2000 Issue. While the Company believes that
most of its proprietary software and platforms will be unaffected by the Year
2000 Issue, the Company is currently attempting to evaluate the impact of the
Year 2000 Issue on the systems of its vendors, suppliers and key customers.
The Company is currently reviewing what actions will be necessary to make its
computer systems and those of its vendors, suppliers and key customers year
2000 compliant. The impact of these actions has yet to be fully determined,
but could materially affect the Company's business.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The description of the Company's Legal Proceedings has changed substantially
since the end of the period to which this Quarterly Report on Form 10-Q/A
relates. The following is a description as of November 5, 1998.
On April 20, 1998, Intrine Communications ("Intrine"), filed a complaint
against the Company and DCN in the Superior Court of California in Los Angeles
County. In the complaint, Intrine alleges that, by virtue of the Company's
acquisition of DCN, the Company and DCN breached written and oral agreements
not to circumvent and appropriate for themselves the benefits of a purported
deal by Intrine to acquire DCN. The lawsuit seeks damages and injunctive
relief. Management of the Company believes that the claims against the Company
and DCN are without merit and does not at present expect this lawsuit to have
a material adverse effect on the Company's financial position, liquidity, cash
flow or results of operations.
Since July 23, 1998, 19 putative class actions have been filed against the
Company and certain current and former members of its management and board of
directors in state and Federal courts alleging violations of state and Federal
securities laws with respect to certain alleged misrepresentations and/or
omissions in regard to the Company's projected and actual revenues and
earnings. These lawsuits seek unspecified damages on behalf of certain classes
of persons who purchased the Company's securities during periods between May,
1997 and August, 1998. The complaints generally allege that the Company made
material misrepresentations and omissions in regard to the Company's projected
and actual revenues and earnings. Although the Company intends to defend
against these lawsuits vigorously, it is not feasible to predict or determine
the final outcome of these proceedings at this time. An unfavorable outcome
with respect to such proceedings could have a material adverse effect on the
Company's financial condition and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required by Item 601 of Regulation 8-K.
10.1 Employment Agreement dated January 2, 1998 between SmarTalk
TeleServices, Inc. and Jack Feingold./1/
10.2 Employment Agreement dated March 5, 1998 between SmarTalk
TeleServices, Inc. and Joseph Borocz./1/
27.1 Financial Data Schedule
- --------
(1) Incorporated by reference to SmarTalk's Quarterly Report on Form 10-Q for
the period ended March 31, 1998, as originally filed.
(b) Reports on Form 8-K
SmartTalk filed a Form 8-K on January 15, 1998 pertaining to the
consummation of the acquisition of ConQuest Telecommunication Services Corp.
containing item number 2 and item 7(c) exhibits 2.1, 99.1 and 99.2.
SmarTalk filed a Form 8-K on January 6, 1998 pertaining to the consummation
of the acquisition of American Express Telecom, Inc. containing item number 2
and item 7(c) exhibit 2.1.
16
<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/ Wayne Wooddell
_________________________________
Wayne Wooddell
Vice President and Chief Financial
Officer
Date: November 6, 1998
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1
Employment Agreement dated, January 2, 1998 between SmarTalk TeleServices, Inc.
and Jack Feingold./1/
10.2
Employment Agreement dated March 5, 1998 between SmarTalk TeleServices, Inc. and
Joseph Borocz./1/
27.1 Financial Data Schedule
</TABLE>
- --------
(1) Incorporated by reference to SmarTalk's Quarterly Report on Form 10-Q for
the period ended March 31, 1998, as originally filed.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 47,270,374 62,900,673
<SECURITIES> 0 0
<RECEIVABLES> 31,254,575 29,494,443
<ALLOWANCES> 593,026 1,482,206
<INVENTORY> 6,507,560 4,301,487
<CURRENT-ASSETS> 93,002,356 106,626,281
<PP&E> 18,698,221 15,403,784
<DEPRECIATION> 2,569,428 1,194,809
<TOTAL-ASSETS> 363,415,082 368,301,077
<CURRENT-LIABILITIES> 64,367,945 71,316,035
<BONDS> 0 0
0 0
0 0
<COMMON> 196,269,244 178,670,477
<OTHER-SE> (46,423) 143,810
<TOTAL-LIABILITY-AND-EQUITY> 363,415,082 368,301,077
<SALES> 36,381,371 7,368,333
<TOTAL-REVENUES> 36,381,371 7,368,333
<CGS> 24,797,956 4,760,748
<TOTAL-COSTS> 24,797,956 4,760,748
<OTHER-EXPENSES> 22,389,974 3,446,645
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,404,043 0
<INCOME-PRETAX> (12,068,291) (310,297)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (12,068,291) (310,297)
<DISCONTINUED> (3,278,148) 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (15,346,439) (310,297)
<EPS-PRIMARY> (.70) (.02)
<EPS-DILUTED> (.70) (.02)
</TABLE>
