<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 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: 614-764-2933
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 August 14, 1998:
Voting, No par value: 27,607,219
(1) A proposal to effect the reincorporation of SmarTalk TeleServices, Inc. 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.
<PAGE>
EXPLANATORY NOTE
As discussed in Note 1 and Note 9 to the condensed consolidated financial
statements of SmarTalk TeleServices, Inc. ("SmarTalk" or the "Company") included
herein, the Company's independent accountants, PricewaterhouseCoopers LLP
("PwC"), have informed the Company's management that significant issues exist
with regard to the Company's accounting treatment for deferred revenue recorded
in conjunction with acquisitions that occurred during 1997 and with respect to
certain components of the restructuring reserve taken at the end of 1997. The
Company and the Company's Board of Directors (the "Board") are working with PwC
to resolve these accounting issues. There can be no assurance that other issues
will not be raised by PwC as a result of its review. The financial information
set forth herein for the quarter and the six month period ended June 30, 1998,
and for all periods during 1997, is based on SmarTalk's internal accounting
records and presented in a manner consistent with SmarTalk's previous financial
reports. Because the Company and PwC have not concluded their review, none of
this financial information has been adjusted to reflect any changes that may be
suggested by PwC as a result of its review of the Company's accounting
practices. In communications to date with the Company regarding the foregoing
issues, PwC has informed the Company that its 1997 and 1998 financial statements
will require adjustment upon completion of the review process. The amounts of
such adjustments have yet to be determined.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMARTALK TELESERVICES, INC. AND SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
----------------- -----------------
ASSETS 1998 1997
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 31,705,864 $ 63,066,576
Trade accounts receivable (less allowance for doubtful
accounts of $1,445,932 and $669,206, respectively) 45,934,488 34,203,477
Notes receivable 19,067,995 --
Receivable from American Express Company -- 2,570,000
Inventories 7,257,901 4,441,521
Prepaid expenses 1,442,424 1,414,703
Other current assets 9,512,410 7,637,849
--------------- ---------------
Total current assets 114,921,082 113,334,126
Non-current assets:
Property and equipment, net 19,529,891 15,379,018
Intangibles, net 229,530,054 222,536,934
Note receivable from ACMI L.L.C., net -- 2,234,763
Other non-current assets 17,740,225 10,438,043
--------------- ---------------
Total assets $ 381,721,252 $ 363,922,884
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 23,698,724 $ 17,520,529
Deferred revenue 29,455,088 40,248,400
Accrued marketing costs 1,121,698 1,811,817
Accrued interest payable 2,785,919 2,615,480
Other accrued expenses 16,283,109 5,571,728
Excise and sales tax payable 3,147,882 5,565,072
Income taxes payable 1,175,951 --
Restructure reserve 22,008,229 23,943,070
Reserve for discontinued operations 1,035,000 --
Accrued litigation settlement -- 4,500,003
Current portion of long-term debt 7,437,092 8,688,784
--------------- ---------------
Total current liabilities 108,148,692 110,464,883
Long-term debt less current portion 151,125,819 151,169,932
--------------- ---------------
Total liabilities 259,274,511 261,634,815
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 25,448,948 and 23,626,684 shares, 199,906,341 175,420,772
respectively
Accumulated deficit (77,520,156) (73,276,513)
Cumulative translation adjustment 60,556 143,810
--------------- ---------------
Total shareholders' equity 122,446,741 102,288,069
--------------- ---------------
Total liabilities and shareholders' equity $ 381,721,252 $ 363,922,884
=============== ===============
</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 June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $51,830,277 $11,796,890 $94,235,441 $19,165,223
Cost of revenue 29,200,682 7,204,054 54,761,037 11,964,802
----------- ----------- ----------- -----------
Gross profit 22,629,595 4,592,836 39,474,404 7,200,421
Sales and marketing 8,051,458 2,996,050 15,553,386 5,541,464
General and administrative 10,192,605 2,619,144 21,371,823 3,520,375
----------- ----------- ----------- -----------
Operating income (loss) 4,385,532 (1,022,358) 2,549,195 (1,861,418)
Interest income 1,220,792 580,761 2,349,798 1,109,524
Interest expense 2,511,714 224,748 4,938,537 224,748
----------- ----------- ----------- -----------
Income (Loss) from continuing
operations before income taxes 3,094,610 (666,345) (39,544) (976,642)
Provision for income taxes 1,175,951 -- 1,175,951 --
----------- ----------- ----------- -----------
Income (Loss) from continuing
operations 1,918,659 (666,345) (1,215,495) (976,642)
----------- ----------- ----------- -----------
Discontinued operations:
Loss from discontinued
operations to the
Measurement Date -- -- (578,148) --
Income (Loss) from the
Measurement Date to the
date of disposal of
discontinued operations 250,000 -- (2,450,000) --
----------- ----------- ----------- -----------
Net income (loss) $ 2,168,659 $ (666,345) $(4,243,643) $ (976,642)
=========== =========== =========== ===========
Per share income (loss):
Continuing operations $ .08 $ (.05) $ (.05) $ (.07)
Discontinued operations .01 -- (.12) --
----------- ----------- ----------- -----------
Total basic $ .09 $ (.05) $ (.17) $ (.07)
=========== =========== =========== ===========
Weighted average number of shares 25,328,917 13,940,285 24,833,912 13,421,860
=========== =========== =========== ===========
</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
Initial issuance of
Worldwide Direct common
shares..................... 1,772,800 800 -- -- -- 800
Initial issuance of World-
wide Direct preferred
shares..................... 503,032 3,687,388 -- -- -- 3,687,388
Acquisitions:
ConQuest Telecommunications. 4,488,935 64,528,441 -- -- -- 64,528,441
GTI Telecom................. 2,580,001 34,830,000 -- -- -- 34,830,000
SmarTel Telecommunications.. 714,286 9,375,004 -- -- -- 9,375,004
Cardinal VoiceCard Ltd...... 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.................... -- -- -- (66,305,163) -- (66,305,163)
---------- ------------ --------- ------------ -------- ------------
December 31, 1997............. 23,626,684 175,420,772 -- (73,276,513) 143,810 102,288,069
Licensing agreement......... 100,000 3,056,300 -- -- -- 3,056,300
Second issuance of Worldwide
Direct preferred shares.... 439,168 3,045,600 -- -- -- 3,045,600
USA Telecommunications
Services, acquisition...... 81,302 2,500,037 -- -- -- 2,500,037
Litigation settlement....... 215,569 4,500,003 -- -- -- 4,500,003
Stock options exercised..... 779,409 7,692,803 -- -- -- 7,692,803
ConQuest Telecommunications
acquisition................ 106,816 2,084,826 -- -- -- 2,084,826
SmarTel Telecommunications
acquisition................ 100,000 1,606,000 -- -- -- 1,606,000
Cumulative translation
adjustment................. -- -- -- -- (83,254) (83,254)
Net loss.................... -- -- -- (4,243,643) -- (4,243,643)
---------- ------------ --------- ------------ -------- ------------
June 30, 1998................. 25,448,948 $199,906,341 $ -- $(77,520,156) $ 60,556 $122,446,741
========== ============ ========= ============ ======== ============
</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>
Six Months Ended June 30,
-----------------------------
1998 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net Loss.......................................................................... $ (4,243,643) $ (976,642)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation..................................................................... 1,529,687 158,342
Amortization..................................................................... 5,828,339 395,715
Discontinued operations.......................................................... 1,353,051 --
Provision for bad debts.......................................................... 776,726 276
Sublease termination fee......................................................... -- (325,810)
Changes in assets and liabilities, which increase (decrease) cash
Accounts receivable.............................................................. (15,513,473) (2,140,172)
Inventories...................................................................... (2,559,263) (130,114)
Prepaid expenses................................................................. (27,720) (1,721,609)
Other current assets............................................................. (839,588) 748,843
Other non-current assets......................................................... (5,546,313) (362,879)
Accounts payable................................................................. 5,365,408 (738,997)
Deferred revenue................................................................. (12,584,793) 51,240
Accrued marketing costs.......................................................... (690,119) (136,931)
Accrued interest................................................................. 170,439 --
Other accrued expenses........................................................... 10,852,630 329,155
Restructuring reserve............................................................ (1,934,840) --
Excise and sales tax payable..................................................... (2,417,191) --
Income taxes payable............................................................. 1,175,952 --
------------ -----------
Net cash used by operating activities.............................................. (19,304,711) (4,849,583)
------------ -----------
Cash flows from investing activities:
Cash for acquisitions............................................................. (4,302,550) --
Proceeds from sale of discontinued operations..................................... 1,000,000
Repayment of ACMI note receivable................................................. 1,000,000 --
Capital expenditures.............................................................. (6,371,222) (475,182)
License fee....................................................................... (3,000,000) --
Acquisition costs, net of cash acquired............................................ (3,081,134) (1,623,342)
------------ -----------
Net cash used by investing activities.............................................. (14,754,906) (2,098,524)
------------ -----------
Cash flows from financing activities
Stock options exercised........................................................... 7,692,802 594,093
Second issuance of Worldwide Direct preferred..................................... 3,045,600 --
Repayment of note payable to WorldCom............................................. -- (6,383,691)
Long-term debt.................................................................... (652,874) --
Capital lease payments............................................................ (96,352) --
Repayment of Star Bank line of credit............................................. (7,193,575) --
Payment on Century Bank line of credit............................................ (13,442) --
------------ -----------
Net cash provided (used) by financing activities................................... 2,782,159 (5,789,598)
------------ -----------
Effect of currency exchange rate.................................................. (83,254) --
------------ -----------
Decrease in cash and cash equivalents.............................................. (31,360,712) (12,737,705)
Cash and cash equivalents at beginning of period................................... 63,066,576 44,830,487
------------ -----------
Cash and cash equivalents at end of period......................................... $ 31,705,864 $ 32,092,782
============ ============
Supplemental disclosure of cash flow information
Cash paid for interest........................................................... $ 4,314,583 $ 3,915
============ ============
Issuance of stock for acquisitions............................................... $ 6,190,863 $ 44,205,004
============ ============
Issuance of stock for litigation settlement...................................... $ 4,500,003 $ --
============ ============
Issuance of debt for acquisitions................................................ $ 5,500,000 $ 26,500,000
============ ============
Issuance of stock for licensing agreement........................................ $ 3,056,300 $ --
============ ============
Debt assumed at acquisition...................................................... $ 1,304,828 $ 6,383,691
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
SMARTALK TELESERVICES, INC.
NOTES TO FINANCIAL CONSOLIDATED 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. 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
and other information included in SmarTalk's Forms 10-K, Forms 10-Q and Forms
8-K, as filed with the Securities and Exchange Commission and as each such
report may be amended.
As publicly announced on August 10, 1998, the Company has been informed by PwC
that significant issues exist with regard to the Company's accounting treatment
for deferred revenue recorded in conjunction with acquisitions that occurred
during 1997 and with respect to certain components of the restructuring reserve
taken at the end of 1997. In communications to date with the Company regarding
the foregoing issues, PwC has informed the Company that its 1997 and 1998
financial statements will require adjustment upon completion of the review
process. The amounts of such adjustments have yet to be determined. Subject to
the foregoing, in the opinion of Company's management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the six months ended June
30, 1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998.
2. NOTE RECEIVABLE FROM ACMI, L.L.C.
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 was recorded as an increase to
goodwill.
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.
The fee is being amortized over the remaining life of the patent. Prior to this
agreement, the Company licensed this technology by paying a per card fee for
cards containing voice-fax mailbox services.
4. ACQUISITIONS
On March 23, 1998, the Company acquired USA Telecommunication Services, Inc.
(dba 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. This
acquisition has been accounted for using the purchase method of accounting.
Accordingly, the operating results of the acquired business are included in the
Company's consolidated results since the date of acquisition.
On April 30, 1998, the Company acquired the outstanding shares of Canada Telecom
Network Inc. ("CTN") 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 has been
accounted for using the purchase method of accounting. Accordingly, the results
of the acquired business are included in the Company's consolidated results
since the date of acquisition.
On June 10, 1998, the Company acquired 100% of the outstanding stock of
Worldwide Direct, Inc. ("WWD") by virtue of a merger of a wholly-owned
subsidiary of the Company with and into WWD for 2.7 million shares of Common
Stock. This business combination has been accounted for herein as a pooling-of-
interests combination. While the Company has consulted with PwC regarding
certain pooling-related matters, PwC has not reached a conclusion at present
that the combination qualifies for pooling of interest accounting. Accordingly,
the financial information for periods prior to June 10, 1998 as included herein
have been restated to reflect this accounting.
The financial position and results of operations of the Company have been
restated for all periods prior to the combination to give retroactive effect to
the WWD combination. The results of operations previously reported by the
separate enterprises and the combined amounts presented in the accompanying
supplemental consolidated financial statements are summarized in the table
below:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
SmarTalk $47,032,600 $11,796,890 $86,645,121 $19,165,223
WWD 4,797,677 -- 7,590,320 --
----------- ----------- ----------- -----------
Combined $51,830,277 $11,796,890 $94,235,441 $19,165,223
=========== =========== =========== ===========
Net Income (Loss) before income
taxes and discontinued operations:
SmarTalk $ 3,072,753 $ (666,345) $ 2,979,724 $ (976,642)
WWD 21,857 -- (3,019,268) --
----------- ----------- ----------- -----------
Combined $ 3,094,610 $ (666,345) $ (39,544) $ (976,642)
=========== =========== =========== ===========
</TABLE>
WWD was incorporated on May 12, 1997 and commenced operations on July 1, 1997.
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 Teleservices, Inc. ("WIC"); (vi) call processing; (vii)
sales of prepaid cellular phones, accessories and services and (viii) 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.
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.
Revenue for prepaid cellular phones, accessories, and services is recognized
upon shipment. For postpaid cellular sales the Company recognizes a sales
commission upon activation of individual customer accounts by the ultimate
carrier. In a postpaid cellular sale, the Company remains liable to refund
commissions paid by carriers for varying periods of time after activation in the
event a customer discontinues service. The Company records a reserve for these
returns at the time the related revenue is recognized.
6. RESTRUCTURING
The company recorded a $25,000,000 restructuring charge in December 1997.
Utilization against this reserve is as follows:
<TABLE>
<CAPTION>
December 31, March 31, June 30, Total
1997 1998 1998 Activity
------------ --------- -------- ----------
<S> <C> <C> <C> <C>
Personnel reductions $ 250,672 $ 494,079 $332,204 $1,076,955
Facilities and equipment realignment 703,040 324,269 50,983 1,078,292
Product conformity and sole branding 103,218 395,653 337,653 836,524
---------- ---------- -------- ----------
Total charges $1,056,930 $1,214,001 $720,840 $2,991,771
========== ========== ======== ==========
</TABLE>
7. DISCONTINUED OPERATIONS
On February 28, 1998 (the "Measurement 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 Measurement Date and an estimated charge for
operating this business from the Measurement Date through the anticipated
disposition date plus the transaction costs associated with the sale of the
business. On June 12, 1998 (the "Disposal Date"), the Company sold the assets of
the call center business for $1,000,000 in cash and a note receivable (the
"Note") of $19,067,995. Interest on the Note is 12% per annum and is payable
quarterly beginning September 12, 1998. The principal on the 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.
This business was acquired in conjunction with the ConQuest acquisition on
December 3, 1997. Therefore, a pro-rata portion of the goodwill associated with
the ConQuest acquisition was allocated to the call center business and
accordingly no sales gain or loss was recognized on the disposal. Operations for
the business from January 1, 1998 to the Disposal Date and transaction costs
associated with the disposal have been recorded against the reserve for
discontinued operations.
Revenue from the discontinued operations was $4,507,300 for the quarter ended
June 30, 1998 and $0 for the quarter ended June 30, 1997.
Summarized financial information for the discontinued operations is as follows:
<TABLE>
<CAPTION>
For the period
January 1, 1998 to
June 12, 1998
------------------
<S> <C>
Revenues $10,065,127
Loss before income taxes 3,028,148
Net loss 3,028,148
<CAPTION>
As of
June 12,
1998
---------
<S> <C>
Current assets $ 5,502,442
Total assets 20,502,442
Current liabilities 434,447
Total liabilities 434,447
-----------
Net assets of discontinued operations $20,067,995
===========
</TABLE>
SmarTalk did not own the call center business at June 30, 1997.
8. DIVIDENDS
There were no dividends declared or paid during the six months ended June 30,
1998 or 1997.
9. SUBSEQUENT EVENTS
Private Placement
On July 9, 1998, the Company completed a private placement of approximately
1.8 million shares of its common stock, realizing proceeds before transaction
costs of approximately $30 million. 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 $10 million of additional Common Stock for no
additional consideration. In addition, the Company granted an option in
connection with the private placement pursuant to which an additional $20
million 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 proceeds from this placement are to be used to
accelerate the Company's entry into the prepaid cellular market and for general
corporate purposes.
Shareholder Litigation and Accounting Issues
Since July 23, 1998, certain 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 a class of persons who
purchased the Company's securities from July 31, 1997 to August 10, 1998. The
complaints allege that the Company made material misrepresentations and
omissions in regard to the Company's projected and actual revenues and
earnings.
While management believes that the description given above is an accurate
description of the lawsuits which have been filed against the Company, lawsuits
may have been filed of which the Company is not aware. While it is not feasible
to predict or determine the final outcome of these proceedings, an adverse
outcome with respect to such proceedings could have a material adverse impact on
the Company's results of operations, financial position and statements of cash
flow.
On August 10, 1998, the Company announced that it was postponing the release of
its quarterly results for the quarter ended June 30, 1998 to permit PwC to
review potentially significant issues which may exist with regard to the
Company's accounting practices. The Company has recently learned from PwC that
significant issues exist with regard to the Company's accounting treatment for
deferred revenue recorded in conjunction with acquisitions that occurred during
1997 and with respect to certain components of the restructuring reserve taken
at the end of 1997. Other issues may be identified as PwC completes its review.
The Company, together with a committee comprised of certain outside Board
members, is working with PwC to review and resolve these issues.
The financial information set forth herein for the quarter and the six month
periods ended June 30, 1998, and for all periods during 1997, is based on
SmarTalk's internal accounting records and presented in a manner consistent with
SmarTalk's previous financial reports. Because PwC has not concluded its review,
none of this financial information has been adjusted to reflect any changes that
may be suggested by PwC as a result of its review of the Company's accounting
practices. In communications to date with the Company regarding the foregoing
issues, PwC has informed the Company that its 1997 and 1998 financial statements
will require adjustment upon completion of the review process. The amounts of
such adjustments have yet to be determined.
SMARTALK TELESERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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 on the NASDAQ National Market.
SmarTalk provides convenient, easy-to-use, telecommunications products and
services to individuals and businesses primarily through the SmarTalk prepaid
phone 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 also be
recharged on-line with a major credit card, 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.
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 WIC; (vi) call
processing; (vii) sales of prepaid cellular phones, accessories and services;
and (viii) sales commissions from postpaid cellular activations. 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.
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, Universal Service Fund
fees and the costs of cellular phones and accessories. 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, which include: (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. These commissions are capitalized and
amortized based on customer usage. Advertising consists primarily of trade,
consumer, cooperative advertising ("co-op"), and Manufacturer's Development
Funds ("MDF"). 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. As a result of the
Company's acquisition of WWD the Company advertises its prepaid cellular product
and brand directly to consumers by running advertisements on television. MDF
consists of promotional and marketing funds to access shelf space. 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
June 30, 1998 (the "Acquisitions"):
Worldwide Direct, Inc. ("WWD"). On June 10, 1998, the Company acquired the
outstanding stock of WWD for 2.7 million shares of common stock. This business
combination has been accounted for as a pooling-of-interests combination.
Canada Telecom Network Inc. ("CTN"). On April 30, 1998 the Company acquired
the outstanding shares of CTN for $3,000,000 in cash and $5,500,000 in a
subordinated 7.5% note which matures April 30, 2000. The note is payable in 24
monthly blended installments of principal and interest.
USA Telecommunications, Inc. (dba Debit Cellular Network)("DCN"). On March
23, 1998 the Company acquired DCN, a North Carolina-based prepaid cellular card
company for $1,500,000 in cash and 81,302 shares of common stock.
American Express Telecom, Inc. ("Amex Telecom"). On December 31, 1997,
SmarTalk acquired 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 TSOs"), 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, Inc.
Additionally, SmarTalk purchased the 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 TSOs, 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 American Express Company agreed to
reimburse SmarTalk for the estimated unused minutes as of December 31, 1997.
ConQuest Telecommunication Service Corp. ("ConQuest"). On December 3, 1997,
SmarTalk entered into an interim operating agreement 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 SmarTalk
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 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 (the "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, Ltd. 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 international distribution.
GTI Telecom, Inc. ("GTI"). 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 this Florida based
company. $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 distribution and added human
resource, technical and manufacturing infrastructure.
SmarTel Communications, Inc. ("SmarTel"). On May 28, 1997, the Company
acquired SmarTel, a Boston-based prepaid promotions phone card company, for
714,286 shares of Common Stock.
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize the year 2000 as "OC" (the "Year 2000 Issue"). This could cause many
computer applications to fail completely or create erroneous results unless
corrective measures are taken. The Company utilizes some software and related
computer hardware technologies in its operations that will be affected by the
Year 2000 Issue. The Company is currently reviewing what actions will be
necessary to make its computer systems Year 2000 compliant. The expense
associated with these actions has yet to be fully determined, but could be
material.
6
<PAGE>
RESULTS OF OPERATIONS QUARTER ENDED JUNE 30, 1998 COMPARED WITH QUARTER ENDED
JUNE 30, 1997
Revenue. Revenue for the quarter ended June 30, 1998 was $51,830,277
compared to $11,796,890 for the quarter ended June 30, 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 West
Interactive Corporation. Revenue attributable to the distribution and processing
agreement was $4,390,939 for the quarter ended June 30, 1998 and $4,769,342 for
the same period in 1997. In addition, 9.4% of total revenue for the quarter
ended June 30, 1998 consisted of revenue recognized on the unused portion of
expired cards (breakage revenue) as compared to 8.9% for the quarter ended June
30, 1997. Recharge revenue for the quarters ended June 30, 1998 and 1997 was
$2,198,338 and $745,667, respectively.
Cost of Revenue. Cost of revenue increased to $29,200,682 for the quarter
ended June 30, 1998 from $7,204,054 for the quarter ended June 30, 1997. The
substantial increase was primarily attributable to greater use of the Company's
services, the Acquisitions and an increase in taxes and fees. The gross profit
percentage for the quarter ended June 30, 1998 was 43.7% as compared to 38.9%
for the quarter ended June 30, 1997. The gross margin percentage increased
primarily due to lower transport and card costs and the increase in breakage
revenue which has minimal cost of revenues associated with it.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$8,051,458 (15.5% of revenue) for the quarter ended June 30, 1998 from
$2,996,050 (25.4% of revenue) for the quarter ended June 30, 1997. The increased
dollar amount was primarily due to the Acquisitions and the continued expansion
of the Company's marketing activities, which include co-op advertising, consumer
advertising, MDF and promotional goods. The decrease as a percentage of revenue
was due to revenue growth in 1998.
General and Administrative Expenses. General and administrative expenses
increased to $10,192,605 (19.7% of revenue) for the quarter ended June 30, 1998
from $2,619,144 (22.2% of revenue) for the quarter ended June 30, 1997. The
increase in dollar amount was primarily due to the Acquisitions, which include
intangible assets and goodwill amortization, depreciation expense and the
addition of personnel and costs associated with the growth in the Company's
business. The decrease as a percentage of revenue was due to revenue growth in
1998.
Interest Income and Expense. Interest income increased to $1,220,792 for
the second quarter of 1998 from $580,761 for the second quarter of 1997.
Interest expense increased to $2,511,714 for the second quarter of 1998 from
$224,748 for the second quarter of 1997. The interest income increase resulted
primarily from the Company having more funds to invest. The interest expense
increase resulted primarily from the Company's issuance of subordinated debt on
September 17, 1997.
Income Tax. The Company has provided for income taxes of $1,175,951 (an
effective rate of 38%) and $0 for the quarters ended June 30, 1998 and 1997,
respectively.
Discontinued Operations. On February 28, 1998 (the "Measurement 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 Measurement Date have been classified as a loss from discontinued
operations. The estimated loss from operations after the measurement date until
the date of sale have been recorded as a loss on disposal of discontinued
operations. This estimate was decreased by $250,000 in the second quarter of
1998.
Net Income (Loss). As a result of the above items, net income increased to
$2,168,659 for the quarter ended June 30, 1998 from $(666,345) for the quarter
ended June 30, 1997.
Decremented Minutes and PIN Activations. Decremented minutes, which
represent actual call traffic over the SmarTalk platforms, were 218,432,499 for
the quarter ended June 30, 1998 as compared to 54,824,541 for the quarter ended
June 30, 1997. PIN activations were 4,391,777 and 693,447 for the quarters ended
June 30, 1998 and 1997, respectively. These increases are due to increased usage
of the Company's services and the Acquisitions.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
Revenue. Revenue increased to $94,235,441 for the six months ended June
30, 1997 from $19,165,223 for the six months ended June 30, 1998. 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 West Interactive Corporation. Revenue attributable to the distribution
and processing agreement was $8,951,486 and $8,619,391 for the six months ended
June 30, 1998 and June 30, 1997, respectively. In addition, 11.5% of total
revenue for the six months ended June 30, 1998 consisted of breakage revenue as
compared to 9.69% for the six months ended June 30, 1997. Recharge revenue for
the six months ended June 30, 1998 and 1997 was $3,299,837 and $1,182,722,
respectively.
Cost of Revenue. Cost of revenue increased to $54,761,037 for the six
months ended June 30, 1998 from $11,964,802 for the six months ended June 30,
1997. The increase was primarily attributable to greater use of the Company's
services, the Acquisitions, and an increase taxes and fees. The gross profit
percentage for the six months ended June 30, 1998 was 41.9% as compared to 37.6%
for the six months ended June 30, 1997. The gross margin percentage increased
primarily due to lower transport and card costs and the increase in breakage
revenue which has minimal cost of revenue associated with it.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$15,553,386 (or 16.5% of revenue) for the six months ended June 30, 1998 from
$5,541,464 (or 28.9% of revenue). The decrease as a percentage of revenue was
due to revenue growth in 1998. The increased dollar amount was primarily due to
the Acquisitions and the continued expansion of the Company's marketing
activities, which include co-op, consumer advertising, MDF and promotional
goods.
General and Administrative Expenses. General and administrative expenses
increased to $21,371,823 (or 22.7% of revenue) for the six months ended June 30,
1998 from $3,520,375 (or 18.4% of revenue) for the six months ended June 30,
1997. The increase in dollar amount was primarily due to the Acquisitions, which
includes intangible assets and goodwill amortization, depreciation expense, and
the addition of personnel and costs associated with the growth of the Company's
business.
Interest Income and Expense. Interest income increased to $2,349,798 for
the six months ended June 30, 1998 from $1,109,524 for the six months ended June
30, 1997. Interest expense increased to $4,938,537 for the six months ended June
30, 1998 from $224,748 for the six months ended June 30, 1997. The interest
income increase resulted primarily from the Company having more funds to invest.
The interest expense increase resulted primarily from the Company's issuance of
subordinated debt on September 17, 1997.
Income tax. The Company has recorded income tax expense and an associated
liability of $1,175,951 for the six months ended June 30, 1998. The Company had
a loss for the six months ended June 30, 1997, and accordingly had made no
provision for federal and state income taxes for that period.
Discontinued Operations. On the Measurement Date, the Board adopted a plan
to sell the Company's call center business located in Butler, Pennsylvania. The
call center operations up to the Measurement Date have been classified as a loss
from discontinued operations. The estimated loss from operations after the
Measurement Date until the date of sale has been recorded as a loss on disposal
of discontinued operations. This estimate was decreased by $250,000 in the
second quarter of 1998.
Net Income (Loss). As a result of the above items, net loss increased to
$4,243,643 for the six months ended June 30, 1998 as compared to $976,642 for
the six months ended June 30, 1997.
Decremented Minutes and Pin Activations. Decremented minutes, which
represent actual call traffic over the SmarTalk platforms, were 378,509,142 for
the six months ended June 30, 1998 as compared to 90,045,627 for the six months
ended June 30, 1997. PIN activations were 7,874,900 for the six months ended
June 30, 1998 as compared to 1,130,502 for the six months ended June 30, 1997.
These increases are due to increased usage of the Company's services and the
Acquisitions.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
On July 9, 1998 the Company completed a private placement of approximately 1.8
million shares of Common Stock, realizing proceeds before transaction costs of
approximately $30 million. The proceeds from this placement are to be used to
accelerate the Company's entry into the prepaid cellular market and for general
corporate purposes.
On September 17, 1997, SmarTalk issued 5 3/4% per annum convertible
subordinated notes due September, 2004, in an aggregate principal amount of
$150,000,000. The net proceeds to SmarTalk from the convertible subordinated
notes offering (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. The
credit facility balance of $7,193,575 was paid on April 27, 1998. The line of
credit facility was closed 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%. The credit facility was
undrawn at June 30, 1998.
Throughout 1997 to June 30, 1998, the Company has paid approximately
$96,000,000 in cash, paid $26,644,686 for acquisition indebtedness,
and has issued approximately 11,000,000 shares of Common Stock for the
Acquisitions, distribution and licensing agreements.
From inception through June 30, 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 provided net cash of $2,206,661 for
the six months ended June 30, 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.
Additionally, the Company believes that the net proceeds from the common stock
private placement and the notes offering, together with existing sources of
liquidity, will be sufficient to fund its capital expenditures, working capital,
selected acquisitions, and other cash requirements through the next 12 months.
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.
<TABLE>
<CAPTION>
CASH (USED IN) PROVIDED BY:
-------------------------------------------------
SIX MONTHS ENDED JUNE 30, OPERATIONS INVESTING FINANCING
------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
1998.................................. $(19,304,711) $(14,754,906) $ 2,782,159
1997.................................. $ (4,849,583) $ (2,098,524) $(5,789,598)
</TABLE>
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>
June 30, 1998......................... $114,921,082 $108,148,692 $6,772,390
December 31, 1997..................... $113,334,126 $110,464,883 $2,869,243
</TABLE>
The increase in working capital from December 31, 1997 to June 30, 1998 is
primarily attributable to the Company's growth and financing activities.
IMPACT OF INFLATION
SmarTalk does not consider inflation to have had a material impact on the
results of operations for the six months ended June 30, 1998 and 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Since July 23, 1998, certain putative class actions have been filed against
the Company and certain current and former members of its management and Board
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 a class of persons who purchased
the Company's securities from July 31, 1997 to August 10, 1998. The complaints
allege that the Company made material misrepresentations and omissions in regard
to the Company's projected and actual revenues and earnings.
While management believes that the description given above is an accurate
description of the lawsuits which have been filed against the Company, lawsuits
may have been filed of which the Company is not aware. While it is not feasible
to predict or determine the final outcome of these proceedings, an adverse
outcome with respect to such proceedings could have a material adverse impact on
the Company's results of operations, financial position, and statements of cash
flow.
Item 2. Changes in Securities and Use of Proceeds
In June 1998, the Company issued 2,715,000 shares of its Common Stock in
connection with a merger. The shares were issued in reliance upon the exemption
from registration provided for under Section 4(2) of the Securities Act of 1933,
as amended (the "Act").
In May 1998, the Company granted an option to purchase 500,000 shares of its
Common Stock in connection with a strategic alliance agreement. The Company made
the sale of these unregistered securities in reliance upon Section 4(2) of the
Act.
In April, May, and June of 1998, the Company granted 370,000 options to
purchase its Common Stock to certain officers and employees of the Company and
certain other persons in consideration for their services and as an inducement
to join the Company. The Company made all of the sales of these unregistered
securities in reliance upon Section 4(2) of the Act.
Item 3. Default Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
<TABLE>
<CAPTION>
Annual Meeting dated June 18, 1998
- ------------------------------------------------------------------------------------------------------------------------
yes % no % abstain Broker Non-Votes %
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Appointment of the
Board of Directors
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Erich L. Spangenberg 12,628,746 56 0 0 113,015 0 0
- ------------------------------------------------------------------------------------------------------------------------
Robert H. Lorsch 12,628,646 56 0 0 113,115 0 0
- ------------------------------------------------------------------------------------------------------------------------
Robert M. Smith 12,628,546 56 0 0 113,215 0 0
- ------------------------------------------------------------------------------------------------------------------------
Fred F. Fielding 12,628,846 56 0 0 112,915 0 0
- ------------------------------------------------------------------------------------------------------------------------
Kenneth A. Viellieu 12,627,446 56 0 0 114,315 0 0
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Appointment of 12,731,139 56 4,923 0 5,699 0 0
Pricewaterhouse LLP as
Independent Auditors
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
SmarTalk filed a Form 8-K on June 10, 1998 pertaining to the
consummation of the acquisition of Worldwide Direct, Inc. containing item 2 and
item 7(c) exhibits 2.1 and 99.1
SmarTalk filed a Form 8-K on July 8, 1998 pertaining to the
consummation of the acquisition of Fletcher International Limited, containing
item 5 and item 7(c) exhibits 99.1 and 99.2.
SmarTalk filed a Form 8-K on August 13, 1998 pertaining to its
press release dated August 10, 1998, containing item 5 and item 7(c) exhibit
99.1.
8
<PAGE>
SIGNATURES
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)
Date: August 19, 1998 /s/ Glen Andrew Folck
---------------------------------
(Signature)
Name: Glen Andrew Folck
Title: Chief Financial Officer
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 DEC-31-1997
<CASH> 31,705,864 63,066,576
<SECURITIES> 0 0
<RECEIVABLES> 45,934,488 34,203,477
<ALLOWANCES> 1,445,932 669,206
<INVENTORY> 7,257,901 4,441,521
<CURRENT-ASSETS> 9,512,410 7,637,849
<PP&E> 19,529,891 15,379,018
<DEPRECIATION> 3,316,027 894,760
<TOTAL-ASSETS> 381,721,252 363,922,884
<CURRENT-LIABILITIES> 108,148,692 110,464,883
<BONDS> 0 0
0 0
0 0
<COMMON> 199,906,341 175,420,772
<OTHER-SE> (77,459,600) (73,132,703)
<TOTAL-LIABILITY-AND-EQUITY> 381,721,252 363,922,884
<SALES> 0 0
<TOTAL-REVENUES> 94,235,441 19,165,223
<CGS> 54,761,037 11,964,802
<TOTAL-COSTS> 36,925,209 9,061,839
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,938,537 224,748
<INCOME-PRETAX> (39,544) (976,642)
<INCOME-TAX> 1,175,951 0
<INCOME-CONTINUING> (1,215,495) (976,642)
<DISCONTINUED> (3,028,148) 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,243,643) (976,642)
<EPS-PRIMARY> (0.17) (.07)
<EPS-DILUTED> 0 0
</TABLE>
