-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Iy7gogXHoYTuya1Y7Zx5BtSI96rTQUODRYH4MTkpfsWyw/4FBiFNQBLmbkYpy/Dy 7y2agA59uVd+kfyUNrWnGg== 0000898430-98-003863.txt : 19981109 0000898430-98-003863.hdr.sgml : 19981109 ACCESSION NUMBER: 0000898430-98-003863 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19981106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMARTALK TELESERVICES INC CENTRAL INDEX KEY: 0001018730 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 954502740 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-21579 FILM NUMBER: 98738931 BUSINESS ADDRESS: STREET 1: 5080 TUTTLE CROSSING BLVD CITY: DUBLIN STATE: OH ZIP: 43017 BUSINESS PHONE: 6147642933 MAIL ADDRESS: STREET 1: 5080 TUTTLE CROSSING BLVD CITY: DUBLIN STATE: OH ZIP: 43017 10-Q/A 1 FORM 10-Q/A FOR THE PERIOD ENDED 03/31/1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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. PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS SMARTALK TELESERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, DECEMBER 31, 1998 1997 -------------- -------------- (AS RESTATED-- (AS RESTATED-- SEE NOTE 8) SEE NOTE 8) 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 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 2 SMARTALK TELESERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------------- 1998 1997 --------------- ------------- (AS RESTATED -- SEE NOTE 8) 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 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 SMARTALK TELESERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
COMMON STOCK CUMULATIVE ----------------------- STOCK ACCUMULATED TRANSLATION SHARES AMOUNT SUBSCRIPTION DEFICIT ADJUSTMENT TOTAL ---------- ------------ ------------ ------------ ----------- ------------ 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 ========== ============ ========= ============ ========= ============
The accompanying notes are an integral part of these consolidated financial statements. 4 SMARTALK TELESERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------------ 1998 1997 ------------------------------ (AS RESTATED-- SEE NOTE 8) 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 $ -- ============== =============
The accompanying notes are an integral part of these consolidated financial statements. 5 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 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.
THREE MOS. ENDED MARCH 31, 1998 ---------------- (AS RESTATED-- SEE NOTE 8) Revenue............................................... $ 41,337,836 ============ Net loss from continuing operations................... $(13,459,358) ============ Net loss per share from continuing operations--basic and diluted.......................................... $ (.55) ============
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.
THREE MOS. ENDED MARCH 31, 1997 ---------------- Revenue................................................. $37,076,209 =========== Net loss................................................ $(8,551,597) =========== Net loss per share--basic and diluted................... $ (.39) ===========
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 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 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:
THREE MOS. ENDED MARCH 31, 1998 -------------------------- AS PREVIOUSLY REPORTED AS RESTATED ------------ ------------ 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
MARCH 31, 1998 DECEMBER 31, 1997 ------------------------- ------------------------- AS AS PREVIOUSLY PREVIOUSLY REPORTED AS RESTATED REPORTED AS RESTATED ------------ ------------ ------------ ------------ 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
9 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 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 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 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 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.)
CASH (USED IN) PROVIDED BY: --------------------------------------- QUARTER ENDED MARCH 31 OPERATIONS INVESTING FINANCING ---------------------- ------------ ------------ ----------- 1998................................. $(17,979,025) $ (4,878,336) $ 7,417,295 1997................................. $ (2,953,062) $ (96,423) $ 574,296
14 Working capital current assets and current liabilities are illustrated in the table below:
CURRENT CURRENT WORKING ASSETS LIABILITIES CAPITAL ------------ ----------- ----------- March 31, 1998.......................... $ 93,002,356 $64,367,945 $28,634,411 December 31, 1997....................... $106,626,281 $71,316,035 $35,310,246
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 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 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 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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. 18 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 3-MOS 3-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 MAR-31-1998 MAR-31-1997 47,270,374 62,900,673 0 0 31,254,575 29,494,443 593,026 1,482,206 6,507,560 4,301,487 93,002,356 106,626,281 18,698,221 15,403,784 2,569,428 1,194,809 363,415,082 368,301,077 64,367,945 71,316,035 0 0 0 0 0 0 196,269,244 178,670,477 (46,423) 143,810 363,415,082 368,301,077 36,381,371 7,368,333 36,381,371 7,368,333 24,797,956 4,760,748 24,797,956 4,760,748 22,389,974 3,446,645 0 0 2,404,043 0 (12,068,291) (310,297) 0 0 (12,068,291) (310,297) (3,278,148) 0 0 0 0 0 (15,346,439) (310,297) (.70) (.02) (.70) (.02)
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