-----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, OWCC/6Oglbfq2IjXGr+cj2OMw5h00b2tFE6SiuWVamN6kHTsYWIBoBOA/gmHLvfW WNzj56OZFITGKhHQCjqjuA== 0000944209-97-001004.txt : 19970808 0000944209-97-001004.hdr.sgml : 19970808 ACCESSION NUMBER: 0000944209-97-001004 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970528 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970807 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMARTALK TELESERVICES INC CENTRAL INDEX KEY: 0001018730 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 954502740 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-21579 FILM NUMBER: 97653400 BUSINESS ADDRESS: STREET 1: 1640 S. SEPULVEDA BLVD STREET 2: SUITE 500 CITY: LOS ANGELES STATE: CA ZIP: 90025 BUSINESS PHONE: 3104448800 MAIL ADDRESS: STREET 1: 1640 S. SEPULVEDA BLVD STREET 2: SUITE 500 CITY: LOS ANGELES STATE: CA ZIP: 90025 8-K/A 1 FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 8-K/A AMENDMENT NO. 1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): May 28, 1997 SmarTalk TeleServices, Inc. (Exact name of registrant as specified in its charter) California (State or jurisdiction of incorporation) 0-21579 95-4502740 (Commission File Number) (IRS Employer Identification No.) 1640 South Sepulveda Boulevard, Suite 500, Los Angeles, CA 90025 (Address of principal executive offices) (Zip Code) (310) 444-8800 (Registrant's Telephone Number) Item 7 of Form 8-K filed on June 12, 1997 is hereby amended in its entirety to read as follows: Item 7. Financial Statements and Exhibits. (a) Financial Statements of Businesses Acquired. SmarTel's audited and unaudited financial statements required by this Item 7(a) are filed as exhibit 99.2 and 99.3, respectively. (b) Pro Forma Financial Information. SmarTel's pro forma financial statements required by this Item 7(b) are filed as exhibit 99.4. (c) Exhibits. *2.1 Agreement and Plan of Merger, dated May 24, 1997, among SmarTalk TeleServices, Inc., SMTK Acquisition Corporation, SmarTel Communications, Inc. and each of the stockholders of SmarTel Communications, Inc. appearing as signatories (without schedules)/1/. *4.1 Terms of Contingent Value Rights. 23.1 Consent of Arthur Andersen LLP *99.1 Press release, dated May 28, 1997, of SmarTalk TeleServices, Inc. 99.2 Audited Year End Financial Statements. 99.3 Unaudited Interim Financial Statements. 99.4 Pro Forma Financial Statements. - ---------------- * Filed previously. /1/ SmarTalk shall supplementally furnish a copy of any omitted schedule to the Securities and Exchange Commission upon request. 2 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SMARTALK TELESERVICES, INC. (Registrant) By /s/ ERICH L. SPANGENBERG ----------------------------- Erich L. Spangenberg President and Chief Operating Officer Date: August 7, 1997 3 EXHIBIT INDEX Number Subject Matter - ------ -------------- *2.1 Agreement and Plan of Merger, dated May 24, 1997, among SmarTalk TeleServices, Inc., SMTK Acquisition Corporation, SmarTel Communications, Inc. and each of the stockholders of SmarTel Communications, Inc. appearing as signatories (without schedules)/1/. *4.1 Terms of Contingent Value Rights. 23.1 Consent of Arthur Andersen LLP *99.1 Press release, dated May 28, 1997, of SmarTalk TeleServices, Inc. 99.2 Audited Year End Financial Statements. 99.3 Unaudited Interim Financial Statements. 99.4 Pro forma Financial Statements. - ---------------- * File previously. /1/ SmarTalk shall supplementally furnish a copy of any omitted schedule to the Securities and Exchange Commission upon request. 4 EX-23.1 2 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion in this Form 8-K/A of our report dated April 4, 1997 (except with respect to the matter discussed in Notes 1, 3(a), 4(d), 5 and 9, as to which the date is May 24, 1997) on the financial statements of SmarTel Communications, Inc. and subsidiaries (the Company) as of December 31, 1995 and 1996 and for the three years in the period ended December 31, 1996. It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 1996 or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP Boston, Massachusetts August 5, 1997 EX-99.2 3 AUDITED YEAR END FINANCIAL STATEMENTS EXHIBIT 99.2 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Financial Statements as of December 31, 1996, 1995 and 1994 Together with Independent Auditors' Report 1 Report of Independent Public Accountants To the Stockholders of SmarTel Communications, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of SmarTel Communications, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, redeemable preferred stock and stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SmarTel Communications, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Boston, Massachusetts April 4, 1997 (except with respect to the matter discussed in Notes 1, 3(a), 4(d), 5 and 9, as to which the date is May 24, 1997) 2 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets--December 31, 1996 and 1995
ASSETS 1996 1995 Current Assets: Cash and cash equivalents $ 1,763,473 $ 1,869,656 Accounts receivable, net of allowance for doubtful accounts 785,146 565,576 Inventories 26,798 30,238 Other current assets 132,745 148,857 ----------- ----------- Total current assets 2,708,162 2,614,327 ----------- ----------- Property and Equipment: Computer and office equipment 189,523 159,926 Printing equipment 29,788 23,717 Leasehold improvements 63,153 63,153 Furniture and fixtures 13,046 - ----------- ----------- 295,510 246,796 Less--Accumulated depreciation and amortization 101,511 42,244 ----------- ----------- 193,999 204,552 ----------- ----------- Other Assets: Note receivable from stockholder 79,180 - Intangible assets, net of accumulated amortization of $15,206 and $0 at December 31, 1996 and 1995, respectively 46,524 61,730 Organization costs, net of accumulated amortization of $29,015 and $14,911 at December 31, 1996 and 1995, respectively 40,162 54,267 Other assets 50,677 50,639 ----------- ----------- $ 3,118,704 $ 2,985,515 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Subordinated notes payable to stockholders, current portion $ 157,500 $ - Capital lease obligation, current portion 12,459 13,500 Equipment line of credit, current portion 16,798 11,199 Unsecured note payable - 15,000 Accounts payable 1,764,543 435,255 Accrued expenses 282,068 139,806 Deferred revenue 1,327,550 578,369 ----------- ----------- Total current liabilities 3,560,918 1,193,129 ----------- ----------- Equipment Line of Credit, net of current portion 33,597 44,795 ----------- ----------- Subordinated Notes Payable to Stockholders - 157,500 ----------- ----------- Minority Interest--Preferred Stock 30,000 30,000 ----------- ----------- Commitments and Contingencies (Notes 3, 4, 6 and 7) Redeemable Preferred Stock: Authorized--4,002 shares Issued and outstanding--3,909 shares (liquidation preference of $4,161,019 and $4,040,989 at December 31, 1996 and 1995, respectively) 3,796,190 2,718,686 Stockholders' Equity (Deficit): Common stock, $.001 par- Authorized--10,000,000 shares Issued and outstanding--2,434,035 shares 2,434 2,434 Additional paid-in capital 1,507,004 1,507,004 Accumulated deficit (5,811,439) (2,668,033) ----------- ----------- Total stockholders' equity (deficit) (4,302,001) (1,158,595) ----------- ----------- $ 3,118,704 $ 2,985,515 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 3 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994 Revenues $ 5,496,640 $ 2,546,246 $ 861,270 Cost of Revenues 4,057,265 1,309,249 355,752 ----------- ----------- ---------- Gross profit 1,439,375 1,236,997 505,518 Selling, General and Administrative Expenses 3,524,677 2,043,007 741,714 Loss on Discontinuance of Long Distance Service Businesses, net (Note 1) - 310,613 58,230 ----------- ----------- ---------- Loss from operations (2,085,302) (1,116,623) (294,426) Interest Income (Expense), net 7,241 (211) - Other Income, net 12,159 - - ----------- ----------- ---------- Net loss (2,065,902) (1,116,834) (294,426) ----------- ----------- ---------- Accretion of Redeemable Preferred Stock Dividends and Discount (1,074,744) (223,905) - ----------- ----------- ---------- Net Loss Attributable to Common Stockholders $(3,140,646) $(1,340,739) $ (294,426) =========== =========== ========== Net Loss per Common Share $(1.29) $(.71) $(.18) ====== ===== ===== Weighted Average Number of Common Shares Outstanding 2,434,035 1,895,495 1,612,511 =========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 4 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit) for the Years Ended December 31, 1996, 1995 and 1994
REDEEMABLE PREFERRED STOCK -------STOCKHOLDERS' EQUITY (DEFICIT)------- Common Stock Number Redemption Number $.001 of Shares Value of Shares Par Value Balance, December 31, 1993 (Unaudited) - $ - 1,539,000 $1,539 Sale of common stock - - 130,183 130 Net loss - - - - ----------- ---------- ---------- ----------- Balance, December 31, 1994 - - 1,669,183 1,669 Issuance of redeemable preferred stock and warrants, net of issuance costs of $191,097 3,002 1,494,996 - - Accretion of preferred stock dividends - 33,989 - - Accretion of preferred stock discount - 190,491 - - Preferred stock dividend on common stock 908 1,000,000 - - Exercise of common stock warrants in exchange for redemption of preferred stock (1) (790) 789,888 790 Repurchase and retirement of common stock - - (25,036) (25) Net loss - - - - ----------- ---------- ---------- ----------- Balance, December 31, 1995 3,909 2,718,686 2,434,035 2,434 Accretion of preferred stock dividends - 120,030 - - Accretion of preferred stock discount - 957,474 - - Net loss - - - - ----------- ---------- ---------- ----------- Balance, December 31, 1996 3,909 $3,796,190 2,434,035 $2,434 =========== ========== ========== =========== -------STOCKHOLDERS' EQUITY (DEFICIT)------- Total Additional Stockholder's Paid-in Accumulated EQuity Capital Deficit (Deficit) Balance, December 31, 1993 (Unaudited) $ - $ 5,823 $ 7,362 Sale of common stock 199,831 - 199,961 Net loss - (294,426) (294,426) ---------- ----------- ----------- Balance, December 31, 1994 199,831 (288,603) (87,103) Issuance of redeemable preferred stock and warrants, net of issuance costs of $191,097 1,507,004 (191,097) 1,315,907 Accretion of preferred stock dividends - (33,989) (33,989) Accretion of preferred stock discount - (190,491) (190,491) Preferred stock dividend on common stock (199,831) (800,169) (1,000,000) Exercise of common stock warrants in exchange for redemption of preferred stock - - 790 Repurchase and retirement of common stock - (46,850) (46,875) Net loss - (1,116,834) (1,116,834) ---------- ----------- ----------- Balance, December 31, 1995 1,507,004 (2,668,033) (1,158,595) Accretion of preferred stock dividends - (120,030) (120,030) Accretion of preferred stock discount - (957,474) (957,474) Net loss - (2,065,902) (2,065,902) ---------- ----------- ----------- Balance, December 31, 1996 $1,507,004 $(5,811,439) $(4,302,001) ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 5 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994 Cash Flows from Operating Activities: Net loss $(2,065,902) $(1,116,834) $(294,426) Adjustments to reconcile net loss to net cash provided by (used in) operating activities- Depreciation and amortization 88,576 50,161 6,993 Changes in assets and liabilities- Accounts receivable (219,570) (327,617) (191,940) Inventories 3,440 (21,688) (8,550) Other current assets 16,112 (99,720) (39,036) Accounts payable 1,329,288 329,895 65,218 Accrued expenses 142,262 (65,003) 126,214 Deferred revenue 749,181 507,213 71,156 ----------- ----------- --------- Net cash provided by (used in) operating activities 43,387 (743,593) (264,371) ----------- ----------- --------- Cash Flows from Investing Activities: Note receivable from stockholder (79,180) - - Purchases of property and equipment (86,156) (184,996) (31,496) Proceeds from sale of property and equipment 48,489 - - Increase in other assets (38) (40,039) (10,600) Organization costs - (53,032) (16,145) ----------- ----------- --------- Net cash used in investing activities (116,885) (278,067) (58,241) ----------- ----------- --------- Cash Flows from Financing Activities: Proceeds from sale of common stock - - 199,961 Proceeds from sale of minority interest--preferred stock - - 30,000 Proceeds from sale of preferred stock and warrants, net of issuance costs - 2,810,903 - Repurchase and retirement of common stock - (46,875) - (Payments on) proceeds from subordinated notes payable to stockholders - (37,500) 195,000 (Payments on) proceeds from advances from stockholders - (62,500) 2,000 Payments on unsecured note payable (15,000) - - Payments on capital lease obligation (12,086) (8,532) (5,328) (Payments on) proceeds from borrowings on equipment line of credit (5,599) 55,994 - ----------- ----------- --------- Net cash (used in) provided by financing activities (32,685) 2,711,490 421,633 ----------- ----------- --------- Net (Decrease) Increase in Cash and Cash Equivalents (106,183) 1,689,830 99,021 Cash and Cash Equivalents, beginning of year 1,869,656 179,826 80,805 ----------- ----------- --------- Cash and Cash Equivalents, end of year $ 1,763,473 $ 1,869,656 $ 179,826 =========== =========== ========= Supplemental Disclosure of Noncash Information: Cash paid for interest $ 7,145 $ 20,685 $ 3,955 =========== =========== ========= Supplemental Disclosure of Noncash Investing and Financing Activities: Exercise of common stock warrants in exchange for redemption of preferred stock $ - $ 790 $ - =========== ============ ========= Accretion of preferred stock dividends $ 117,270 $ 33,414 $ - =========== =========== ========= Accretion of preferred stock discount $ 957,474 $ 190,491 $ - =========== =========== ========= Purchase of Global Media Networks- Fair value of assets purchased $ - $ 82,673 $ - Issuance of note payable - (15,000) - Liabilities assumed - (67,673) - ----------- ----------- --------- $ - $ - $ - =========== =========== ========= Equipment acquired under capital lease obligation $ 11,045 $ - $ - =========== =========== =========
The accompanying notes are an integral part of these consolidated financial statements. 6 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996 (1) Operations and Significant Accounting Policies SmarTel Communications, Inc. (the Company) (formerly Z-Axis Communications) is engaged in the business of providing marketing and telecommunications services through the sale of prepaid telephone cards. The Company was incorporated in 1985 as a Massachusetts corporation. On January 20, 1995, the Company reorganized in Delaware. In connection with this reorganization, the Delaware corporation issued 1,500 shares of common stock for each existing share of common stock in the Massachusetts corporation. All share amounts in the accompanying consolidated financial statements have been retroactively restated for this reorganization. Prior to 1994, the Company was also engaged in the business of selling long distance services principally to other businesses. The Company discontinued its operation in this business in June 1994 and, as a result, recorded a loss of approximately $58,000, net of $98,500 of revenue, in the accompanying consolidated statement of operations for the year ended December 31, 1994. In addition, during 1994, the Company began developing technology in an attempt to enter the international call arbitrage business. The Company abandoned this attempt in June 1995 and, as a result, recorded a loss of approximately $311,000 in the accompanying statement of operations for the year ended December 31, 1995. Through December 31, 1994, approximately $30,000 was charged to selling, general and administrative expenses relating to the development of this abandoned product line. On December 21, 1995, the Company acquired certain assets and liabilities of Global Media Network (see Note 8). The Company continues to be subject to certain risks common to companies in similar stages of development. Principal among these risks are dependence on key individuals; successful marketing of current products and services, combined with the need to successfully develop and introduce new products and services; dependence on independent commission agents whose compensation is based on the profitability of prepaid telephone card programs; the ability to raise additional capital to fund operations; and the ability to achieve profitable future operations. On May 24, 1997, the Company merged with SmarTalk Teleservices, Inc. (see Note 9). The accompanying consolidated financial statements reflect the application of the following significant accounting policies: (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, SmarTel, Inc. (90%- owned), SmarTel Communications of Virginia, Inc. (100%-owned) and SmarTel International, Inc. (100%-owned). All significant intercompany transactions and balances have been eliminated in consolidation. 7 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996 (Continued) (1) Operations and Significant Accounting Policies (Continued) (b) Management's Use of Estimates The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Revenue Recognition The Company sells its product into two distinct markets, retail and promotional. Retail card sales are ultimately funded by the end user, while promotional card sales are funded by third parties who have promotional information attached to the card. Promotional cards are then given to the end user to promote the buyer's product or service. The Company accounts for revenue from these sales as follows: . For retail markets, the Company records deferred retail revenue when it sells the card and recognizes revenues as the ultimate customer utilizes the calling time or as the card expires. Retail card revenue for the years ended December 31, 1996 and 1995 was approximately $512,000 and $142,000, respectively. The Company did not have any retail card revenue for the year ended December 31, 1994. . For promotional markets, the Company estimates that only a portion of the telecommunication service available on these cards will be utilized by the end user. Accordingly, the Company has deferred revenue related to the expected future utilization rate of telephone time on promotional cards, based on historical actual usage rates and the extrapolation of these rates over the remaining life of the cards. Revenue related to the promotional aspect of the card, including telephone time estimated not to be used, is recognized upon shipment of the cards, and revenue related to the telephone time estimated to be used is recognized as the ultimate customer utilizes the calling time or the card expires. If all telephone time on unexpired promotional programs outstanding at December 31, 1996 and 1995 were to be used, deferred revenue would increase by approximately $2,500,000 and $1,530,000, respectively. 8 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996 (Continued) (1) Operations and Significant Accounting Policies (Continued) (c) Revenue Recognition (Continued) . Revenue from third-party prepaid phone cards for which the Company acts solely as a reseller is recognized upon delivery. . The Company's primary costs of its prepaid telephone cards include the cost of design and manufacturing of the cards, long- distance carrier fees for processing the calls generated by use of the prepaid telephone cards and switch administration fees. For retail and promotional telephone cards, these costs are expensed as the associated revenues are earned. Substantially all prepaid telephone cards sold by the Company have expiration dates 12 months from the date of delivery to the customer and provide that payments for cards are nonrefundable. The Company utilizes several service bureaus to process calls and provide administrative support for calls generated by the use of prepaid telephone cards. These services are concentrated with one service provider. The Company could be adversely affected if this service bureau were unable or unwilling to continue this relationship. Management believes that there are alternative service bureaus it could use to minimize any adverse impact on the loss of the existing service bureau. (d) Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of less than three months to be cash equivalents. These investments are reported at cost, which approximates market value. (e) Inventories Inventories are recorded at the lower of cost (first-in, first-out) or market. At December 31, 1996, inventories consisted primarily of printing materials and supplies used in the production of the telephone cards. 9 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996 (Continued) (1) Operations and Significant Accounting Policies (Continued) (f) Depreciation and Amortization The Company provides for depreciation and amortization using the straight-line method by charges to operations in amounts that allocate the cost of the property and equipment over their estimated useful lives, as follows: ESTIMATED ASSET CLASSIFICATION USEFUL LIFE Computer and office equipment 4-7 years Printing equipment 5 years Leasehold improvements Life of lease Furniture and fixtures 7 years (g) Note Receivable from Stockholder On January 10, 1996, the Company entered into a $75,000 note receivable agreement (the Note) with a stockholder. The Note accrues interest at a rate of 5.73% compounded annually, totaling $4,180 at December 31, 1996. Principal and accrued interest, then outstanding, is due on January 10, 2005. The Note is secured by the stockholder's stock in the Company. (h) Organization Costs Organization costs include legal fees and costs associated with registering the Company as a public utility in jurisdictions where the Company provides telephone services. These costs are being amortized on a straight-line basis over five years. (i) Minority Interest The Company's 90%-owned subsidiary, SmarTel, Inc., has 50,000 authorized shares of preferred stock, of which 1,000 shares were issued at $30 per share in 1994 to a third party and were outstanding as of December 31, 1996. These 1,000 shares were convertible into a 10% interest in the subsidiary and had a $30,000 liquidation preference. Accordingly, this minority interest reflected its priority claim on the underlying equity in the subsidiary at December 31, 1996. This preferred stock was returned to the Company and retired on May 24, 1997 (see Note5). (j) Postretirement Benefits The Company has no obligations for postretirement benefits. 10 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996 (Continued) (1) Operations and Significant Accounting Policies (Continued) (k) Financial Instruments The estimated fair value of the Company's financial instruments, which include trade accounts receivable, note receivable from stockholder and long-term debt, approximates their carrying value. (l) Concentration of Credit Risk Statement of Financial Accounting Standards (SFAS) No.105, Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance-sheet and credit risk concentrations. Financial instruments that subject the Company to credit risk consists primarily of trade accounts receivable. The Company had one customer who accounted for approximately 24% of consolidated revenue for the year ended December 31, 1996. The Company had no significant customers in the years ended December 31, 1995 and 1994. (m) Net Loss per Common and Common Equivalent Share Net loss per common share was computed based on the weighted average number of common shares outstanding. The Company's net loss was increased by $1,074,744 and $223,905 for the years ended December 31, 1996 and 1995, respectively, for accretion of dividends and discount on redeemable preferred stock to determine the loss applicable to common stock. Common equivalent shares are not included in the per share calculations as the effect of their inclusion would be antidilutive. On March 3, 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, Earnings per Share. SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. This statement is effective for fiscal years ending after December15, 1997, and early adoption is not permitted. When adopted, the statement will require restatement of prior years' earnings per share. The Company believes that the adoption of SFAS No. 128 will not have a material effect on its financial statements. (2) Income Taxes The Company provides for income taxes in accordance with SFAS No.109, Accounting for Income Taxes. Under SFAS No.109, deferred tax assets and liabilities are recognized based on temporary differences between the financial statement and tax bases of assets and liabilities using currently 11 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996 (Continued) (2) Income Taxes (Continued) enacted statutory rates. The Company's gross deferred tax asset of $1,360,000 consists principally of the net operating loss carryforwards of approximately $3,200,000. Due to the uncertainty related to the realization of future tax return benefits of the gross deferred tax asset, a full valuation allowance has been provided. The United States Tax Reform Act of 1986 contains provisions that may limit the Company's net operating loss and credit carryforwards available to be used in any given year in the event of significant changes in the ownership interests of significant stockholders. The Company has completed several financings since its inception and may have incurred ownership changes, as defined in the Tax Reform Act of 1986. The Company believes that the ownership changes will not significantly impact its ability to utilize its net operating loss and credit carryforwards. (3) DEBT (a) Subordinated Notes Payable to Stockholders During 1994, the Company issued $195,000 of subordinated promissory notes payable to certain stockholders. The notes were issued in conjunction with the Company's 1994 private placement offering of its common stock and bear interest at 10% per year, payable semiannually. During 1995, the Company repurchased 25,036 shares of common stock and a $37,500 subordinated note payable held by a stockholder for $87,500, including accrued interest. These notes are unsecured and subordinate to all present and future senior debt issuances. The outstanding principal of $157,500 was due on February 28, 1997. These amounts and accrued interest of $184,721 were repaid on May 24, 1997, the closing date on sale of the Company (see Note 9). Accordingly, these amounts have been classified as a current liability as of December 31, 1996, in the accompanying consolidated financial statements. (b) Lines of Credit On September8, 1995, the Company entered into a credit facility (the facility) with a bank, which provided for a $250,000 working capital line of credit. This line of credit expired on September8, 1996. Advances under this line of credit bore interest at prime plus 1%. In addition, the facility provides for a $500,000 equipment line of credit. Advances under this line of credit bear interest at prime (8.25% at December 31, 1996) plus 2%. Principal payments are due in monthly installments on the first business day of each calendar month commencing August 5, 1996, with the final installment due on December1, 1999. The Company was required to comply with certain operational and financial covenants under this credit facility. The financial covenants required certain minimum levels of profitability, tangible net worth and liquidity. At December 31, 1996, the Company was in default of certain of these covenants. 12 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996 (Continued) (3) Debt (Continued) (b) Lines of Credit (Continued) On January31, 1997, the facility was amended eliminating the existing financial covenants and providing for one liquidity covenant. This liquidity covenant provides that the Company shall maintain, as of the last calendar day of each month, at least $600,000 of cash or cash equivalents. The Company was in compliance with this covenant on January31, 1997. (4) Stockholders' Equity (Deficit) (a) Common Stock In connection with the Company's private placement offering of its common stock and subordinated notes payable, the Company had committed to certain levels of annual internal rate of return on each combined debt and equity unit within three years from the completion of the offering in December 1994. In connection with the September 15, 1995 preferred stock offering, the holders have terminated their rights with respect to the Company's commitment to achieving these levels. (b) Stock Option Plan In December 1994, the Board of Directors approved the SmarTel Communications, Inc. 1994 Stock Incentive Plan (the Plan) pursuant to which options to purchase up to 82,500 shares of common stock may be granted to directors, officers and other employees of the Company. Incentive stock options may be granted under the Plan at a price not less than the fair market value on the date of grant. Options vest over a two-year period and expire 10 years from the date of grant. In connection with the September 15, 1995 preferred stock offering, the Plan was amended to provide that no additional options be granted thereunder. 13 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996 (Continued) (4) Stockholders' Equity (Deficit) (Continued) (b) Stock Option Plan (Continued) The following table summarizes option activity under the Plan:
EXERCISE WEIGHTED NUMBER PRICE PER AVERAGE OF OPTIONS SHARE EXERCISE PRICE Granted and Outstanding, December 31, 1994 24,500 $ .50-$ 2.00 $ 1.69 Granted 5,000 2.00 2.00 Canceled (1,000) 2.00 2.00 ------- ------------- --------- Outstanding, December 31, 1995 28,500 .50- 2.00 1.73 Granted - - - Canceled (10,000) .50- 2.00 1.25 ------- ------------- --------- Outstanding, December 31, 1996 18,500 $ 2.00 $ 2.00 ======= ======= ========= Exercisable, December 31, 1996 18,000 $ 2.00 $ 2.00 ======= ======= =========
The weighted average fair value of options granted during the year ended December 31, 1995 was $.51. There were no options granted during 1996. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation, which requires the measurement of the fair value of stock options or warrants to be included in the statement of operations or disclosed in the notes to the financial statements. The Company has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25 and elect the disclosure- only alternative under SFAS No. 123 for options granted in 1995 and 1996 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The total value of options granted during the years ended December 31, 1996 and 1995 was not significant. (c) Common Stock Warrants In connection with the September 15, 1995 preferred stock offering, the Company granted warrants to purchase up to 1,507,968 shares of common stock to stockholders holding 3,002 shares of preferred stock. The warrants are exercisable at $.001 per share and expire on September 15, 2002. During 1995 warrants to purchase 789,888 shares of common stock were 14 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements December 31, 1996 (Continued) (4) Stockholders' Equity (Deficit) (Continued) (c) Common Stock Warrants (Continued) exercised. No warrants were exercised in 1996. Warrants to purchase up to 718,080 shares of common stock are outstanding at December 31 1996. At any time on or after the date of the sale of the Company, liquidation of the Company or September 15, 2002, whichever occurs first, the warrant holders may put back the outstanding warrants and common shares to the Company at the then current fair market value of the common stock. However, if the Company redeems the warrant holder's preferred stock in cash prior to September 15, 2002 a portion of the warrants become unexercisable, as defined. The Company assigned the fair value, calculated using the Black-Scholes option pricing model, of $1,507,004 to the warrants as a component of additional paid-in capital in the accompanying financial statements. (d) Preferred Stock Dividend on Common Stock In conjunction with the issuance of redeemable preferred stock, the Company's Board of Directors authorized the issuance of up to 1,000 shares and declared a dividend on the Company's outstanding common stock for an aggregate of 1,000 shares of redeemable preferred stock, which were allocated to common stockholders based on each common stockholder's ownership percentage. In 1995, 908 of these shares were issued, and the 92 remaining shares were issued on May 24, 1997. (5) Related Party Transactions During 1994, the Company received advances of $62,500 from parties related to corporate officers. These advances were repaid in 1995. The Company has a business relationship with an independent distributor who was also a stockholder in one of the Company's subsidiaries (see Note 1(i)). During the years ended December 31, 1996 and 1995, the Company entered into arrangements for promotional cards totaling approximately $903,000 and $1,542,000, respectively, with this distributor. In connection with these arrangements, the Company paid approximately $118,000 and $296,000 of commissions to this independent distributor. As of December 31, 1995 and 1996, the Company believes it has amounts due of $390,000 and $150,000, respectively, from this distributor. This relationship was terminated in June 1996 and the Company has commenced legal action against this distributor to collect these amounts. Therefore, the Company has provided a full reserve for these amounts in the accompanying financial statements as of December 31, 1995 and 1996, respectively. 15 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements December 31, 1996 (Continued) (5) Related Party Transactions (Continued) On May 24, 1997, the Company reached a settlement agreement with this distributor/stockholder. Under the terms of the settlement, the Company forgave its claim on all amounts due from the distributor/stockholder in exchange for the return of the distributor/stockholder's preferred stock to the Company. (6) Redeemable Preferred Stock During 1995, the Company authorized the issuance of up to 4,002 shares of redeemable preferred stock, $.001 par value, and issued 3,002 shares of preferred stock for $1,000 per share and issued 908 shares of preferred stock as a stock dividend to the common stockholders. At December 31 1996, 92 shares of preferred stock remain issuable. The rights and preferences of the redeemable preferred stock are as follows. (a) Voting Redeemable preferred stockholders are not entitled to vote, except for matters required by law, including, but not limited to, matters involving alterations of rights and preferences of capital stock; merger or sale of the Company; issuance of capital stock or rights to capital stock, which are senior to preferred stockholders; purchase or redemption of capital stock, other than certain preferred stock or capital stock, as defined; or alteration of the Company's bylaws or Certificate of Incorporation. (b) Dividends Preferred stockholders are entitled to receive cumulative annual dividends, when, as and if declared by the Board of Directors, at the annual rate of 3% of the base amount of each share of redeemable preferred stock. The base amount of preferred stock as of a particular date shall be an amount equal to the sum of $1,000 plus any unpaid dividends on such share added to the base amount of such share and not thereafter paid. The Company recorded $120,030 and $33,989 of dividend accretion on the outstanding shares of preferred stock for the years ended December 31, 1996 and 1995, respectively. 16 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements December 31, 1996 (Continued) (6) Redeemable Preferred Stock (Continued) (c) Liquidation Rights In certain events, including liquidation, dissolution or winding up of the Company, the holders of preferred stock shall be entitled, before any distribution or payment is made upon any shares of common stock, to be paid in cash an amount equal to the base amount of such share on such date, plus all unpaid dividends accrued on such share and not previously added to the base amount. If the assets of the Company shall be insufficient to permit payment in full to the holders of the preferred stock, then the entire assets of the Company that are available for distributions shall be distributed ratably among the preferred stockholders. (d) Redemption The preferred stock is redeemable at the option of the Company, or at the option of the redeemable preferred stockholders, in three equal annual installments, beginning on August 31, 2000, unless redeemed earlier in connection with a liquidity event, as defined. The redemption price will equal $1,000 per share plus all accrued and unpaid dividends as of the redemption date. The proceeds from the issuance of the 3,002 shares of preferred stock for $1,000 per share have been allocated, based on the relative fair value, to the preferred stock and the warrants to purchase common stock issued to these preferred stockholders. The value attributable to the warrants issued to purchase common stock resulted in a $1,507,004 discount to the preferred stock. The Company has accreted this discount to the preferred stock over the redemption period (see Note 9). The Company recorded $957,474 and $190,491 of accretion on the discount of the 3,002 shares of preferred stock for the years ended December 31, 1996 and 1995, respectively. If for any reason the Company shall fail to redeem for cash all preferred shares requested to be redeemed by the holders thereof within 30 days of notice, each preferred stockholder shall have the right to require the Company to purchase some or all of the preferred shares at a price equal to the redemption price on such date. To the extent the Company does not have cash available or is not legally permitted to make such payments, the preferred stockholders will loan to the Company and its subsidiaries additional amounts necessary to fund the repurchase. The resulting preferred notes shall be secured by all assets of the Company and its subsidiaries and will bear interest at prime plus 2%. The notes will be repaid quarterly based on available cash . 17 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements December 31, 1996 (Continued) (7) Commitments (a) Lease Commitments The Company leases its facility and certain equipment under operating lease agreements expiring through fiscal 2000. Future minimum rental payments due under these agreements are approximately as follows :
YEAR AMOUNT 1997 $142,000 1998 136,000 1999 110,000 2000 65,000 -------- $453,000 ========
Total rental expense included in the accompanying consolidated statements of operations amounted to approximately $125,000 and $31,000 for the years ended December 31, 1996 and 1995, respectively. During 1994, the Company leased its facilities and certain office equipment from an entity controlled by a related party to the officers and directors of the corporation. During 1994, the Company incurred approximately $75,000 in rental charges to this entity . (b) Litigation In the ordinary course of business, the Company is party to various types of litigation. The Company believes it has meritorious defense to all claims, and, in its opinion, all litigation currently pending or threatened will not have a material effect on the Company's financial position on results of operations. (8) Acquisition of Global Media Network On December 21, 1995, the Company acquired certain assets of Global Media Network (GMN), previously its west coast distributor, in exchange for a $15,000 note payable and the assumption of certain GMN liabilities totaling $67,673. 18 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Notes To Consolidated Financial Statements December 31, 1996 (Continued) (8) Acquisition of Global Media Network (Continued) This transaction was accounted for as a purchase and, accordingly, the results of GMN since December 21, 1995 have been included in the accompanying consolidated financial statements. The aggregate purchase price has allocated based on the fair value of the tangible and intangible assets as follows: Current assets $16,269 Property and equipment 4,674 Purchased intangible assets 61,730 ------- $82,673 =======
Included in purchased intangible assets are amounts related to trade names and customer lists. These intangibles will be amortized on a straight-line basis over their estimated useful life of three years. The 1995 results of GMN operations were not material to the financial statements taken as a whole. During 1995, the Company entered into arrangements for promotional cards totaling approximately $479,000 with GMN prior to December 21, 1995. In connection with these arrangements, the Company paid approximately $142,000 in commissions to GMN. (9) Sale of Company to SmarTalk TeleServices, Inc. On May 24, 1997, the Company entered into a merger agreement (the Merger) with SmarTalk Teleservices, Inc. (SmarTalk) in which SmarTalk acquired all outstanding common and preferred stock of the Company in a tax-free, stock- for-stock merger transaction. Under the terms of the Merger, SmarTel common and preferred stockholders received 714,286 shares of SmarTalk common stock, which, using a SmarTalk per share value of $14, had an approximate value of approximately $10,000,000. In addition, certain officers/stockholders of SmarTel received contingent value rights which would entitle them to receive additional shares of SmarTalk common stock based on SmarTel's future sales and profitability. 19 EX-99.3 4 UNAUDITED INTERIM FINANCIAL STATEMENTS EXHIBIT 99.3 SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited)
ASSETS March 31, December 31, 1997 1996 ----------- ------------ Current Assets: Cash and cash equivalents $ 394,448 $1,763,473 Accounts receivable, net of allowance for doubtful accounts of $125,000 and $15,000 at March 31, 1997 and 1996, respectively 827,539 785,146 Inventories 27,353 26,798 Other current assets 163,904 132,745 ---------- ---------- Total current assets 1,413,244 2,708,162 ---------- ---------- Property and Equipment: Computer and office equipment 196,692 189,523 Printing equipment 29,788 29,788 Leasehold improvements 63,153 63,153 Furniture and fixtures 13,918 13,046 ---------- ---------- 303,551 295,510 Less--Accumulated depreciation and amortization 114,722 101,511 ---------- ---------- 188,829 193,999 ---------- ---------- Other Assets: Note receivable from stockholder 80,314 79,180 Intangible assets, net of accumulated amortization 43,100 46,524 Organization costs, net of accumulated amortization 36,703 40,162 Other assets 50,677 50,677 ---------- ---------- $1,812,867 $3,118,704 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Subordinated notes payable to stockholders, current portion $ 157,500 $157,500 Capital lease obligation, current portion 13,390 12,459 Equipment line of credit, current portion 16,798 16,798 Accounts payable 628,313 1,764,543 Accrued expenses 608,732 282,068 Deferred revenue 1,596,109 1,327,550 ---------- ---------- Total current liabilities 3,020,842 3,560,918 ---------- ---------- Capital Lease Obligations, net of current portion 2,737 -- ---------- ---------- Equipment Line of Credit, net of current portion -- 33,597 ---------- ---------- Subordinated Notes Payable to Stockholders 29,397 -- ---------- ---------- Minority Interest--Preferred Stock 30,000 30,000 ---------- ---------- Redeemable Preferred Stock: Authorized-- 4,002 shares Issued and outstanding--3,909 shares (liquidation preference of $4,190,336 and $4,161,019 at March 31, 1997 and December 31, 1996, respectively) 4,051,715 3,796,190 Stockholders' Equity (Deficit): Common stock, $.001 par- Authorized--10,000,000 shares Issued and outstanding--2,434,035 shares 2,434 2,434 Additional paid-in capital 1,507,004 1,507,004 Accumulated deficit (6,831,262) (5,811,439) ---------- ----------- Total stockholders' deficit (5,321,824) (4,302,001) ---------- ----------- $1,812,867 $ 3,118,704 ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, ------------------------------------ 1997 1996 ----------- ----------- Revenues $ 789,579 $ 991,628 Cost of Revenues 524,224 636,809 ----------- ----------- Gross profit 265,355 354,819 Selling, General and Administrative Expenses 1,030,105 936,120 ----------- ----------- Loss from operations (764,750) (581,301) Interest Income, net 452 1,605 Other Income (Expense), net -- (739) ----------- ---------- Net loss (764,298) (580,435) ----------- ---------- Accretion of Redeemable Preferred Stock Dividends and Discount (255,525) -- ----------- ---------- Net Loss Attributable to Common Stockholders $(1,019,823) $ (580,435) =========== ========== Net Loss per Common Share $(0.42) $(0.24) ====== ====== Weighted Average Number of Common Shares Outstanding 2,434,035 2,434,035 =========== ==========
The accompanying notes are an integral part of these consolidated financial statements. SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, ---------------------------- 1997 1996 ----------- ----------- Cash Flows from Operating Activities: Net loss $ (764,298) $ (580,435) Adjustments to reconcile net loss to net cash provided by (used in) operating activities- Depreciation and amortization 20,092 23,820 Changes in assets and liabilities- Accounts receivable (42,391) 7,128 Inventories (555) (10,000) Other current assets (31,159) (67,398) Accounts payable (1,136,230) 134,721 Accrued expenses 268,559 47,986 Deferred revenue 326,664 (28,712) ----------- ----------- Net cash used in operating activities (1,359,318) (472,890) ----------- ----------- Cash Flows from Investing Activities: Note receivable from stockholder - (75,000) Purchases of property and equipment (8,041) (60,395) ----------- ----------- Net cash used in investing activities (8,041) (135,395) ----------- ----------- Cash Flows from Financing Activities: Proceeds from note receivable interest (1,134) - Proceeds from capital lease obligations 3,668 - Payments on borrowings on equipment line of credit (4,200) (3,852) ----------- ----------- Net cash used in financing activities (1,666) (3,852) ----------- ----------- Net (Decrease) Increase in Cash and Cash Equivalents (1,369,025) (612,137) Cash and Cash Equivalents, beginning of year 1,763,473 1,869,686 ----------- ----------- Cash and Cash Equivalents, end of year $ 394,448 $ 1,257,549 =========== =========== Supplemental Disclosure of Noncash Investing and Financing Activities: Accretion of preferred stock dividends $ 30,008 $ 29,318 =========== =========== Accretion of preferred stock discount $ 225,517 $ 239,369 =========== ===========
SMARTEL COMMUNICATIONS, INC. AND SUBSIDIARIES (Unaudited) 1. Basis of Presentation The interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. These interim consolidated financial statements should be read in conjunction with the financial statements and notes thereto included herein for the year ended December 31, 1996. The interim results of operations are not necessarily indicative of the results for the entire year ending December 31, 1997. EX-99.4 5 PRO FORMA FINANCIAL STATEMENTS EXHIBIT 99.4 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following unaudited pro forma combined financial statements are based on the historical financial statements of SmarTalk and SmarTel adjusted to give effect to certain transactions and events. The unaudited pro forma combined statement of operations for the year ended December 31, 1996 and the three month period ended March 31, 1997 and the unaudited pro forma combined balance sheet as of March 31, 1997 give effect to the acquisition and the adoption by SmarTel of SmarTalk accounting policies. References in this document to data presented on a "pro forma basis" as of any date or for any period shall have the meaning set forth above with respect to such date or period. The unaudited pro forma combined financial statements give effect to the acquisition by SmarTalk of SmarTel in a transaction to be accounted for as a purchase under the purchase method of accounting and are based upon a preliminary allocation of the purchase price and upon the assumptions and adjustments described in the accompanying notes. The unaudited pro forma combined financial statements should be read in conjunction with the Consolidated Financial Statements of SmarTalk and SmarTel appearing elsewhere in this document. The unaudited pro forma combined financial statements are presented for information purposes only and are not necessarily indicative of the results that would have been reported or the financial position of the Company had such events actually occurred on the dates specified, nor is it indicative of the Company's future results or financial position. The results of operations for interim periods are not necessarily indicative of the results for the full year. PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)
Historical Historical Adjustments SmarTalk SmarTel for the Teleservices, Communications, Acquisition Pro Forma Inc. Inc. (Note 1) Combined ---------------- --------------- -------------- -------------- Revenue $15,021,060 $ 5,496,640 $ (566,071)(a) $19,951,629 Cost of revenue 10,198,971 4,057,265 43,690 (b) 14,299,926 ----------- ----------- ----------- ----------- Gross profit 4,822,089 1,439,375 (609,761) 5,651,703 Sales and marketing 4,511,291 2,713,508 - 7,224,799 General and administrative 3,615,070 811,169 602,577 (c) 5,028,816 ----------- ----------- ----------- ----------- Operating loss (3,304,272) (2,085,302) (1,212,338) (6,601,912) Other income (expense) - 12,159 - 12,159 Interest income 443,352 7,241 - 450,593 Interest expense (251,628) - - (251,628) ----------- ----------- ----------- ----------- Loss before income taxes (3,112,548) (2,065,902) (1,212,338) (6,390,788) Provision for income taxes - - - - ----------- ----------- ----------- ----------- Net loss $(3,112,548) $(2,065,902) $(1,212,338) $(6,390,788) =========== =========== =========== =========== Net loss per share $ (0.59) =========== Weighted average number of shares outstanding 10,814,643 ===========
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, 1997
Pro Forma Adjustments Historical Historical for the SmarTalk SmarTel Acquisition Pro Forma Teleservices, Inc. Communications, Inc. (Note 1) Combined -------------------- ----------------------- -------------- -------------- Revenue $ 7,368,333 $ 789,579 $241,916 (a) $ 8,399,828 Cost of revenue 4,760,748 524,224 (6,792)(b) 5,278,180 ----------- ---------- -------- ----------- Gross profit (loss) 2,607,585 265,355 248,708 3,121,648 Sales and marketing 2,545,414 772,579 - 3,317,993 General and administrative 901,231 257,526 150,644 (c) 1,309,401 ----------- ---------- -------- ----------- Operating loss (839,060) (764,750) 98,064 (1,505,746) Other income (expense) - - - - Interest income 528,763 452 - 529,215 Interest expense - - - - ----------- ---------- -------- ----------- Loss before income taxes (310,297) (764,298) 98,064 (976,531) Provision for income taxes - - - - ----------- ---------- -------- ----------- Net loss $ (310,297) $ (764,298) $ 98,064 $ (976,531) =========== ========== ======== =========== Net loss per share $ (0.07) =========== Weighted average number of shares outstanding 13,611,942 ===========
UNAUDITED PRO FORMA COMBINED BALANCE SHEET March 31, 1997
Pro Forma Adjustments Historical Historical for the SmarTalk SmarTel Acquisition Pro Forma Teleservices, Inc. Communications, Inc. (Note 1) Combined(d) ------------------ -------------------- --------------- ------------- ASSETS Current assets: Cash $42,355,298 $ 394,448 $ - $ 42,749,746 Trade accounts receivable, net 2,904,465 827,539 - 3,732,004 Inventories 809,237 27,353 - 836,590 Prepaid expenses 460,892 - - 460,892 Other current assets 1,931,611 163,904 328,260 (a) 2,423,775 ----------- ----------- ----------- ------------ Total current assets 48,461,503 1,413,244 328,260 $ 50,203,007 Non-current assets: Property and equipment, net 1,123,626 188,829 - 1,312,455 Other non-current assets 157,456 210,794 - 368,250 Goodwill, net of amortization - - 11,298,321 (d) 11,298,321 ----------- ----------- ----------- ------------ Total assets $49,742,585 $ 1,812,867 $11,626,581 $ 63,182,033 =========== =========== =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 2,766,633 $ 628,313 $ - $ 3,394,946 Deferred revenue 2,638,091 1,596,109 1,443,117 (a) 5,677,317 Other accrued expenses 258,431 608,732 291,572 (c) 1,158,735 Current portion of note payable to shareholder(s) - 157,500 - 157,500 Current portion of long-term obligations - 16,798 - 16,798 Current portion of capital lease obligations - 13,390 - 13,390 ----------- ----------- ----------- ------------ Total current liabilities 5,663,155 3,020,842 1,734,689 10,418,686 Long-term debt - 62,134 - 62,134 ----------- ----------- ----------- ------------ Commitments Total liabilities 5,663,155 3,082,976 1,734,689 10,480,820 ----------- ----------- ----------- ------------ Preferred stock - 4,051,715 (4,051,715)(b) - ----------- ----------- ----------- ------------ Shareholders' equity (deficit): Common stock 51,361,077 1,509,438 7,865,566(b),(c) 60,736,081 Accumulated deficit (7,281,647) (6,831,262) 6,078,041 (8,034,868) Treasury stock, at cost - - - - ----------- ----------- ----------- ------------ Total shareholders' equity (deficit) 44,079,430 (5,321,824) 13,943,607 52,701,213 ----------- ----------- ----------- ------------ Total liabilities and shareholders' $49,742,585 $ 1,812,867 $11,626,581 $ 63,182,033 equity (deficit) =========== =========== =========== ============
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS - ------------------------------------------------------------- Note 1 - The Pro Forma Combined Statement of Operations gives effect to the following pro forma adjustments necessary to reflect the acquisition as outlined in the Notes to the Unaudited Pro Forma Combined Balance Sheet: (a) To adjust revenue recognized on "breakage" in accordance with the SmarTalk policy of recognition based on expiration of the card or proportionately over the life of the card (based on estimated usage). (b) To defer the production and activation costs of cards and amortize the expense to match the related revenue in accordance with the SmarTalk accounting policy. (c) Amortization of goodwill on a straight line basis over 20 years. NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET - --------------------------------------------------- Note 1 - The pro forma balance sheet has been prepared to reflect the acquisition of SmarTel by SmarTalk for an aggregate purchase price of $9,666,576 and estimated acquisition costs of approximately $291,572. Pro forma adjustments are made to reflect: (a) The preliminary purchase price allocations based on the estimated fair value of specific assets acquired and liabilities assumed in connection with the Acquisition. (b) The elimination of the equity and preferred stock of SmarTel on acquisition and the issuance of 714,286 shares of common stock and cost incurred for the acquisition. (c) Estimated acquisition costs. (d) The excess of acquisition cost over the fair value of net assets acquired (goodwill); net of estimated amortization. -----END PRIVACY-ENHANCED MESSAGE-----