-----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, BaH6wGx859tkeOA8w1cXCrn5H+qyC2xzPHaQ0Lu9JdCkPy5MvGlUpnYo11TLvPz6 YxPiGH/zPYEKSDXplK95jA== 0000944209-97-001113.txt : 19970818 0000944209-97-001113.hdr.sgml : 19970818 ACCESSION NUMBER: 0000944209-97-001113 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970601 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970815 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: 97665137 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): June 1, 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 GTI'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 GTI's pro forma financial statements required by this Item 7(b) are filed as exhibit 99.4. (c) Exhibits *2.1 Stock Purchase Agreement, dated as of May 31, 1997, by and among SmarTalk TeleServices, Inc., GTI Telecom, Inc., Waterton Investment Group I, LLC, and William R. Harger (without schedules)/1/. *4.1 Form of SmarTalk TeleServices, Inc. 10% Subordinated Note Due 2001. *4.2 Registration Rights Agreement. 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consent of Price Waterhouse LLP. *99.1 Press Release, dated June 2, 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 15, 1997 3 EXHIBIT INDEX Number Subject Matter - ------ -------------- *2.1 Stock Purchase Agreement, dated as of May 31, 1997, by and among SmarTalk TeleServices, Inc., GTI Telecom, Inc., Waterton Investment Group I, LLC, and William R. Harger (without schedules)/1/. *4.1 Form of SmarTalk TeleServices, Inc. 10% Subordinated Note Due 2001. *4.2 Registration Rights Agreement. 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consent of Price Waterhouse LLP. *99.1 Press Release, dated June 2, 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 KPMG PEAT MARWICK LLP EXHIBIT 23.1 [LETTERHEAD OF KPMG PEAT MARWICK LLP] INDEPENDENT ACCOUNTANTS' CONSENT -------------------------------- To the Board of Directors of GTI Telecom, Inc.: We consent to the inclusion of our report dated April 4, 1997, except as to note 15 which is as of May 16, 1997, with respect to the balance sheet of GTI Telecom, Inc. as of December 31, 1996, and the related statements of operations, stockholders' deficit and cash flows for the year ended December 31, 1996, which report appears in the Form 8-K/A of SmarTalk TeleServices, Inc. dated August 13, 1997. Our report dated April 4, 1997, contains an explanatory paragraph that states that GTI Telecom, Inc. has suffered recurring losses from operations and has working capital and stockholder's deficits which raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of that uncertainty. /s/ KPMG Peat Marwick LLP Orlando, Florida August 13, 1997 EX-23.2 3 CONSENT OF PRICE WATERHOUSE LLP EXHIBIT 23.2 To the Board of Directors and Stockholders GTI Telecom, Inc. We hereby consent to the use in this Form 8-K/A of SmarTalk TeleServices, Inc. of our report dated July 18, 1996 relating to the financial statements of GTI Telecom, Inc. for the years ended December 31, 1994 and 1995. /s/ Price Waterhouse LLP Orlando, Florida August 13, 1997 EX-99.2 4 AUDITED YEAR END FINANCIAL STATEMENTS EXHIBIT 99.2 GTI TELECOM, INC. Financial Statements December 31, 1996, 1995 and 1994 With Independent Auditors' Report Thereon INDEPENDENT AUDITORS' REPORT ---------------------------- To the Stockholder of GTI Telecom, Inc.: We have audited the accompanying balance sheet of GTI Telecom, Inc. as of December 31, 1996 and the related statements of operations, changes in stockholder's deficit and cash flows for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GTI Telecom, Inc. as of December 31, 1996, and the results of its operations and cash flows for the year then ended, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 3, the Company has suffered recurring losses from operations and has working capital and stockholder's deficits which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG PEAT MARWICK LLP April 4, 1997, except as to note 15 which is as of May 16, 1997 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS July 18, 1996 To the Stockholder of GTI Telecom, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, of changes in stockholder's deficit and of cash flows present fairly, in all material respects, the financial position of GTI Telecom, Inc. (the "Company") at December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3, the Company has suffered recurring losses from operations and has a working capital deficit which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Price Waterhouse LLP GTI TELECOM, INC. Balance Sheets December 31, 1996 and 1995
ASSETS 1996 1995 ------ ------------- ------------ Current assets: Cash $ 600,614 $ 1,814,568 Accounts receivable, net (note 4) 1,602,180 851,959 Inventories (note 5) 733,838 690,648 Note receivable from stockholder (note 12) 1,279,483 209,991 Other current assets (note 6) 1,619,773 1,451,675 Prepaid expenses 16,033 -- ------------ ----------- Total current assets 5,851,921 5,018,841 Property and equipment, net (note 7) 1,829,159 1,533,203 Intangible assets (net of accumulated amortization of $318,000 and $147,000 for 1996 and 1995, respectively) 202,423 203,981 Deposits 27,360 14,181 ------------ ----------- $ 7,910,863 $ 6,770,206 ============ =========== LIABILITIES AND STOCKHOLDER'S DEFICIT - ------------------------------------- Current liabilities: Accounts payable $ 6,940,820 $ 2,223,509 Accrued expenses 1,061,329 675,854 Customer deposits 2,180,075 1,140,535 Excise and sales taxes payable (note 8) 2,302,226 837,993 Current portion of treasury stock repurchase debt and notes payable (note 9) 1,319,688 1,291,719 Current portion of capital leases payable (note 10) 187,481 65,443 Deferred revenue - telecards 5,671,907 6,633,790 ------------ ----------- Total current liabilities 19,663,526 12,868,843 Treasury stock repurchase debt and notes payable (note 9) 244,203 1,114,895 Capital leases payable (note 10) 417,866 368,477 ------------ ----------- Total liabilities 20,325,595 14,352,215 ------------ ----------- Stockholder's deficit: Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares issued and outstanding (note 14) -- -- Common stock, $.001 par value, 10,000,000 shares authorized, 1,000 issued 1 1 Additional paid-in capital 83,707 83,707 Accumulated deficit (9,888,128) (5,055,405) Treasury stock - 500 common shares in treasury, at cost (2,610,312) (2,610,312) ------------ ----------- Total stockholder's deficit (12,414,732) (7,582,009) Commitments, contingencies and subsequent events (notes 8, 13, 14 and 15) ------------ ----------- $ 7,910,863 $ 6,770,206 ============ ===========
See accompanying notes to financial statements. GTI TELECOM, INC. Statements of Operations Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------------ ------------ ------------ Net revenues $21,168,508 $ 8,771,398 $ 2,627,107 ----------- ----------- ----------- Operating expenses: Cost of revenues 18,226,789 6,320,806 2,148,781 Selling, general and administrative expenses 6,575,261 4,904,562 2,090,322 Depreciation and amortization expense 773,727 278,735 72,874 ----------- ----------- ----------- Total operating expenses 25,575,777 11,504,103 4,311,977 ----------- ----------- ----------- Loss from operations (4,407,269) (2,732,705) (1,684,870) ----------- ----------- ----------- Other income (expenses): Other income 133,908 1,870 Interest expense, net (559,362) (143,057) (34,031) ----------- ----------- ----------- (425,454) (141,187) (34,031) ----------- ----------- ----------- Net loss before income taxes (4,832,723) (2,873,892) (1,718,901) Income taxes -- -- -- ----------- ----------- ----------- Net loss $(4,832,723) $(2,873,892) $(1,718,901) =========== =========== =========== Net Loss per common share $ (9,665.45) $ (3,179.08) $ (1,718.90) =========== =========== =========== Weighted average number of shares outstanding 500 904 1,000 =========== =========== ===========
See accompanying notes to financial statements. GTI TELECOM, INC. Statements of Stockholder's Deficit Years ended December 31, 1996, 1995 and 1994
SERIES A PREFERRED STOCK (NOTE 14) ADDITIONAL TOTAL ---------------- COMMON PAID-IN ACCUMULATED TREASURY STOCKHOLDER'S SHARES AMOUNT STOCK CAPITAL DEFICIT STOCK DEFICIT ------ ------ ------ ---------- ----------- ----------- ------------- Balance at December 31, 1993 - $ - $ 10 $ 83,698 $ (462,612) $ - $ (378,904) Adjustment of par value of common stock from $.01 to $.001 - - (9) 9 - - - Net loss - - - - (1,718,901) - (1,718,901) ------ ------ ------ ---------- ----------- ----------- ------------- Balance at December 31, 1994 - - 1 83,707 (2,181,513) - (2,097,805) Purchase of treasury stock - - - - - (2,610,312) (2,610,312) Net loss - - - - (2,873,892) - (2,873,892) ------ ------ ------ ---------- ----------- ----------- ------------- Balance at December 31, 1995 - - 1 83,707 (5,055,405) (2,610,312) (7,582,009) Net loss - - - - (4,832,723) - (4,832,723) ------ ------ ------ ---------- ----------- ----------- ------------- Balance at December 31, 1996 - $ - $ 1 $ 83,707 $(9,888,128) $(2,610,312) $ (12,414,732) ====== ====== ====== ========== =========== =========== =============
See accompanying notes to financial statements. 5 GTI TELECOM, INC. Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
1996 1995 1994 ------------ ------------ ------------ Cash flows from operating activities: Net loss $(4,832,723) $(2,873,892) $(1,718,901) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization 773,727 278,735 72,874 Increase (decrease) in cash caused by changes in operating assets and liabilities: Accounts receivable (750,221) (508,047) (202,775) Inventories (43,190) (342,862) (303,588) Other current assets (168,098) (1,219,497) (189,798) Prepaid expenses (16,033) 26,199 (23,272) Intangible assets (169,298) (100,387) (103,594) Deposits (13,179) 9,176 (23,357) Accounts payable 4,717,311 1,597,565 426,786 Accrued expenses 385,475 55,438 573,318 Customer deposits 1,039,540 1,110,342 30,193 Excise and sales taxes payable 1,464,233 607,390 213,536 Deferred distribution agreement -- -- (200,000) Deferred revenue - telecards (961,883) 4,417,940 1,961,195 ----------- ----------- ----------- Cash provided by operating activities 1,425,661 3,058,100 512,617 ----------- ----------- ----------- Cash flows used in investing activities: Acquisition of property and equipment (595,682) (1,371,406) (256,152) Proceeds from equipment sale leaseback -- 414,744 -- ----------- ----------- ----------- Cash used in investing activities (595,682) (956,662) (256,152) ----------- ----------- -----------
(Continued) GTI TELECOM, INC. Statements of Cash Flows, Continued
1996 1995 1994 ------------ ---------- --------- Cash used in financing activities: Principal payments for treasury stock repurchase debt (831,342) (403,698) -- Principal payments on notes payable (28,381) -- -- Proceeds from notes payable -- 50,000 50,000 Collection of stockholder notes receivable 220,000 20,000 -- Advances to stockholder under notes receivable (1,289,492) (202,949) (64,396) Principal payments for capital leases (114,718) (8,166) -- ----------- ---------- --------- Cash used in financing activities (2,043,933) (544,813) (14,396) ----------- ---------- --------- (Decrease) increase in cash (1,213,954) 1,556,625 242,069 Cash at beginning of year 1,814,568 257,943 15,874 ----------- ---------- --------- Cash at end of year $ 600,614 $1,814,568 $ 257,943 =========== ========== ========= Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 287,756 $ 143,100 $ 32,500 =========== ========== =========
Supplemental disclosures of noncash financing activities: Capital lease obligations of $286,145 were incurred when the Company entered into leases for computer equipment during the year ended December 31, 1996. A note payable of $17,000 was incurred when the Company entered into a financing arrangement for an automobile during the year ended December 31, 1996. See accompanying notes to financial statements. 2 GTI TELECOM, INC. Notes to Financial Statements December 31, 1996, 1995 and 1994 (1) NATURE OF BUSINESS GTI Telecom, Inc. ("GTI" or the "Company") was incorporated on February 15, 1993 in the state of Florida. GTI is a fully integrated telecommunications company that develops, implements and supports specialized communication applications for business and individual use. GTI provides domestic and switch service for intrastate, interstate and international telephone calls and is an international carrier licensed by the Federal Communications Commission ("F.C.C."). The primary product line of GTI is telecards; which are prepaid calling cards that can be used for either domestic or international telephone calls. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION The Company sells its product in two distinct markets, retail and promotional. Retail card sales are ultimately sold to the end user, while promotional cards are given to the end user to promote the buyer's product or service. Accounts receivable relate to the sale of telecards to retail and promotional customers. Deferred revenues are established at the time the telecards are sold. Revenue is then recognized upon the utilization of minutes by the end user. Management estimates that only a portion of the calling time available on these cards will be utilized by the end user. As most of the telecards issued by the Company prior to 1996 do not have printed expiration dates, management estimates, based on usage patterns of customers, the telecard minutes associated with certain telecard sales programs which will not be used ("breakage"). As such, the Company recognizes additional revenue based upon both the expiration of cards and usage patterns for both its retail and promotional sales programs. Additional revenue from these sales is accounted for as follows. Revenue of approximately $258,000, $824,000 and $283,000 was recognized in 1996, 1995 and 1994, respectively, for telecard minutes which were not used prior to expiration of the telecards. Revenue of approximately $1,432,000, $602,000 and $383,000 was recognized in 1996, 1995 and 1994, respectively, for breakage. Approximately $648,000 of the amount recognized in 1996 for breakage represents revenue related to telecards which will expire over the next six months. (Continued) GTI TELECOM, INC. Notes to Financial Statements (b) INVENTORIES Inventories consist of telecards and supplies held primarily for sale and are stated at the lower of cost or market on a first-in, first-out basis. Cost has been determined using the average cost method. (c) OTHER CURRENT ASSETS Other current assets consist primarily of prepaid telecard and commission expense and prepaid royalties. GTI defers the recognition of production costs of telecards and commission expense for telecards sold and recognizes the expense as the related revenue is recognized. Royalty costs relate to agreements entered into by GTI to reproduce images on GTI telecards for a one, two or three year period. The costs are deferred and recognized as expense in conjunction with the recognition of revenues. (d) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Additions, improvements and expenditures that significantly extend the useful life of an asset are capitalized. Expenditures for repair and maintenance are charged to operations as incurred. The Company provides for depreciation and amortization of property, equipment and leasehold improvements over their estimated useful lives as follows: DESCRIPTION USEFUL LIVES ----------- ------------ Communications and distribution equipment 5 years Office equipment 5 years Furniture and fixtures 1-5 years Automobiles 5 years Leasehold improvements expenses are amortized over the shorter of the useful life of the asset on the term of the lease. (Continued) -2- GTI TELECOM, INC. Notes to Financial Statements (e) INTANGIBLE ASSETS GTI capitalizes expenditures for state licenses and registrations, trademarks and telecard design artwork. The costs are amortized over the estimated useful lives of the assets which range from one to five years for the state licenses, registrations and trademarks. Telecard design artwork is amortized over two years which approximates the telecard production and distribution period. (f) INCOME TAXES GTI follows Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires an asset and liability approach for financial accounting and reporting on income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Recognition of a deferred tax asset is allowed if future realization is more likely than not. As discussed more fully in note 6, GTI has established a full valuation allowance against its deferred tax asset associated with its tax carryforward benefits. (g) ADVERTISING The Company expenses costs of advertising as incurred. Advertising costs for the years ended December 31, 1996, 1995 and 1994 amounted to approximately $1,190,000, $61,000 and $95,000, respectively. (h) USE OF ESTIMATES The preparation of 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. In particular, in preparing the Company's financial statements, management has been required to use estimates in determining revenue and cost of revenues. (Continued) -3- GTI TELECOM, INC. Notes to Financial Statements The Company has recognized revenues as described in note 2(a) based upon historic customer usage patterns. To the extent that estimated usage patterns are greater or less than these estimates, revenue associated with breakage and recorded in the accompanying statement of operations could vary from the estimates used. The Company's financial statements reflect the Company earning certain volume discounts with their sole supplier of long distance phone service due to their level of purchases. However, as further described in note 14, the Company has financed these purchases with the supplier and in the event that the Company does not meet its payment commitments under the terms of the financing agreement, the supplier can retroactively revoke the volume discount. Management believes it can meet its commitments under the financing agreement. (i) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash, accounts and notes receivable, accounts and notes payable approximates fair value because of the short maturity of those instruments. (j) RECLASSIFICATIONS Certain amounts in the 1995 and 1994 financial statements and notes have been reclassified to conform with the 1996 presentation. (3) OPERATING PLANS GTI has incurred significant operating losses since inception resulting in working capital and stockholder's deficits as of December 31, 1996, 1995 and 1994, which raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that may result from the outcome of this uncertainty. Management believes that expansion of the distribution of telecards and the introduction of new products will result in increased revenues, both domestic and international, which, when coupled with the Company seeking and obtaining additional financing will provide sufficient liquidity for GTI to continue as a going concern. (Continued) -4- GTI TELECOM, INC. Notes to Financial Statements (4) ACCOUNTS RECEIVABLE AND CONCENTRATION OF RISK Receivables at December 31, 1996 and 1995 consisted of the following:
1996 1995 ---------- --------- Trade $1,227,098 $ 833,208 Other 465,082 162,751 Allowance for doubtful accounts (90,000) (144,000) ---------- --------- $1,602,180 $ 851,959 ========== =========
The Company grants credit for sales to customers located throughout the United States. Two retail companies have been extended credit at December 31, 1996 amounting to 81% of total trade receivables. These two retail companies accounted for approximately 46% of the Company's sales during the year ended December 31, 1996. Two retail companies and one automobile rental company had been extended credit at December 31, 1995 amounting to 69% of total trade receivables. These two retail companies and one automobile rental company accounted for approximately 33% of the Company's sales during the year ended December 31, 1995. Currently the Company utilizes one supplier of long distance telephone service. While the Company believes that there are alternate suppliers, there is no guarantee that the Company will be able to secure the same rates as currently contracted in the event the relationship with the supplier is terminated. Recorded amounts due to this supplier totaled approximately $7,481,000 at December 31, 1996. The Company has granted this supplier a security interest in all assets of the Company. As further described in note 14, the Company financed certain amounts due to this supplier subsequent to December 31, 1996. (5) INVENTORIES Inventories consist of the following components as of December 31:
1996 1995 -------- -------- Raw materials $194,465 $ 14,040 Work-in-process 344,732 390,684 Finished goods 194,641 285,924 -------- -------- Total inventories $733,838 $690,648 ======== ========
(Continued) -5- GTI TELECOM, INC. Notes to Financial Statements (6) OTHER CURRENT ASSETS Other current assets consist of the following at December 31:
1996 1995 ---------- ---------- Telecards distributed $ 860,622 $ 680,033 Sales commissions 610,638 592,660 Royalties 148,513 178,982 ---------- ---------- $1,619,773 $1,451,675 ========== ==========
(7) PROPERTY AND EQUIPMENT, NET Property and equipment, net consists of the following at December 31:
1996 1995 ---------- --------- Communications and distribution equipment $1,414,134 $ 969,548 Office equipment 819,441 578,748 Furniture and fixtures 287,799 155,005 Leasehold improvements 117,102 102,306 Automobile 65,958 - ---------- ---------- 2,704,434 1,805,607 Less: accumulated depreciation (875,275) (272,404) ---------- ---------- $1,829,159 $1,533,203 ========== ==========
(Continued) -6- GTI TELECOM, INC. Notes to Financial Statements (8) EXCISE AND SALES TAXES PAYABLE GTI has recorded excise and sales taxes payable and accrued interest totaling $2,302,226 and $837,993 as of December 31, 1996 and 1995, respectively, for state, local and federal excise taxes. State and local jurisdictions in which GTI operates have not been contacted to determine amounts owed based on GTI's calculations for those jurisdictions. Federal excise taxes were first remitted in February 1997 as part of a voluntary disclosure. The Company has not yet been advised as to whether penalties and additional interest, if any, will be assessed relating to these taxes. Management is in the process of reviewing GTI's tax collection, remittance and compliance policies and procedures. Depending on the ultimate resolution of these matters, it is reasonably possible that the amount of this reserve could require adjustment in the near term. (9) LONG-TERM DEBT Long-term debt consists of the following at December 31:
1996 1995 ----------- ----------- Promissory note for treasury stock repurchase, including imputed interest of 10.75% $ 1,375,272 $ 2,206,614 Promissory note payable; interest at 13.5% per annum, payable quarterly, commencing March 31, 1996; principal balance due March 31, 1997 175,000 200,000 Promissory note payable; interest rate of 9.25%, payable in monthly installments of $542 including principal and interest, maturing in April 1999; collateralized by a vehicle 13,619 - ----------- ----------- 1,563,891 2,406,614 Less current portion (1,319,688) (1,291,719) ----------- ----------- $ 244,203 $ 1,114,895 =========== ===========
(Continued) -7- GTI TELECOM, INC. Notes to Financial Statements In October 1995, an agreement was entered into between GTI and a stockholder of GTI to repurchase all of the stockholder's stock for $3 million. GTI paid $250,000 upon the execution of the agreement and issued a noninterest bearing note payable for $2,750,000. Interest has been imputed at 10.75%. The note payments are payable in the following installments commencing in December 1995: $250,000 quarterly through June 30, 1996; $500,000 semi-annually from September 30, 1996 through June 30, 1997; and $500,000 on December 31, 1997. The note is secured by the redeemed shares of stock. In 1995 and 1994, this former stockholder served as a GTI officer and received compensation totaling approximately $135,000 and $68,000, respectively. The compensation expense is included in selling, general and administrative expenses. GTI obtained a $100,000 loan for working capital in 1993 and an additional $50,000 in 1995 and 1994. The loans bear interest at 13.5%, requires quarterly interest payments and the principal balance is due on March 31, 1997. The working capital loans were obtained from an individual who was a stockholder in a related entity which was dissolved. Aggregate future annual principal payments on long-term debt for years ending subsequent to December 31, 1996 are summarized as follows:
YEAR ENDING DECEMBER 31, ----------------------- 1997 $1,319,688 1998 242,065 1999 2,138 ---------- $1,563,891 ==========
(Continued) -8- GTI TELECOM, INC. Notes to Financial Statements (10) LEASES The Company is obligated under various capital leases for certain communications computer and office equipment which expire over the next four years. At December 31, 1996, the gross amount of property and equipment and related accumulated amortization recorded under capital leases was $701,915 and $135,384, respectively. During 1995, GTI entered into an agreement for the sale and leaseback of certain communications and distribution equipment under a capital lease. The book value and accumulated depreciation of approximately $430,000 and $54,000 were removed from the accounts and the equipment was recorded at the sale price of approximately $404,000. The deferred gain approximating $28,000 is netted against capital leases payable and will be recognized over the lease term as other income. Payments under the lease approximate $155,000 annually, commencing January 1996. The Company also has several noncancelable operating leases, primarily for office and warehouse space that expire over the next two years. Rental expense for operating leases during 1996, 1995 and 1994 was approximately $405,000, $163,000 and $94,000, respectively. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments as of December 31, 1996 are:
CAPITAL OPERATING YEAR ENDING DECEMBER 31: LEASES LEASES ----------------------- -------- ------- 1997 $252,952 $293,340 1998 240,807 52,873 1999 216,975 -- 2000 23,621 -- -------- -------- Total minimum lease payments 734,355 $346,213 ======== Less amount representing interest 129,008 -------- Present value of net minimum capital lease payments 605,347 Less current installments of obligations under capital leases 187,481 -------- Obligations under capital leases, excluding current installments $417,866 ========
-9- (Continued) GTI TELECOM, INC. Notes to Financial Statements (11) INCOME TAXES As of December 31, 1996 and 1995, GTI had a net operating loss carryforwards available to reduce future income of approximately $7,000,000 and $4,000,000, respectively. The tax net operating loss carryforwards begin expiring in the year 2008. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company's deferred income tax assets and liability are as follows:
DECEMBER 31, ------------------------- 1996 1995 ----------- ---------- Gross deferred tax assets: Net operating loss carryforward $ 2,753,541 $ 1,425,514 Excise and sales tax provision 885,143 315,337 Bad debt provision 33,867 54,311 Other 23,304 33,897 ----------- ----------- 3,695,855 1,829,059 ----------- ----------- Gross deferred tax liability: Depreciation (77,495) (81,303) ----------- ----------- Net deferred tax assets before valuation allowance 3,618,360 1,747,756 Valuation allowance (3,618,360) (1,747,756) ----------- ----------- Net deferred tax asset $ - $ - =========== ===========
As of December 31, 1996 and 1995, a valuation allowance was recorded to fully offset the net deferred tax asset. (Continued) -10- GTI TELECOM, INC. Notes to Financial Statements The valuation allowance for deferred tax assets was increased $1,871,104 during the year ended December 31, 1996, relating primarily to continued operating losses. The difference between the "expected" tax benefit (computed by applying the federal corporate income tax rate of 34% to the net loss before income taxes) and the actual tax benefit is due to limitations on the benefit for the net operating losses recognized and the effect of the valuation allowance. (12) RELATED PARTY TRANSACTIONS During 1996 and 1995, GTI entered into note receivable agreements with the remaining stockholder of GTI. At December 31, 1996 and 1995, the notes receivable balances were $1,279,483 and $209,991, respectively. The 1996 note is due upon demand and the 1995 note was repaid during 1996. The notes earn interest at 7% per annum for 1996 and 1995, respectively. The balances are recorded as notes receivable from stockholder in the accompanying balance sheets. In January 1996, the remaining stockholder formed Tuscany, Inc., a Delaware Corporation. Tuscany, Inc. owns and operates charter aircraft. At December 31, 1996 and 1995, GTI advanced approximately $259,000 and $50,000, respectively to Tuscany, Inc. These advances are recorded as accounts receivable. During 1996, Tuscany, Inc. provided the Company with approximately $159,900 of charter aircraft services. In January 1996, the remaining stockholder purchased Wicks Printing. As of December 31, 1996, the Company advanced approximately $8,200 to Wicks Printing. During 1996, Wicks Printing provided printing services of approximately $703,000 for the production of prepaid telecards for the Company. (Continued) -11- GTI TELECOM, INC. Notes to Financial Statements (13) COMMITMENTS AND CONTINGENCIES COMMISSION AGREEMENTS GTI entered into several agreements to produce telecards with selected designs or logos. GTI provides the company, which owns the design and logo rights, a commission based on the quantity of telecards sold. Certain agreements include commitments to provide a guaranteed minimum commission or cooperative advertising costs. In accordance with the contract terms, GTI records the greater of the liability for cards sold or the guaranteed minimum. As of December 31, 1996, commitments through December 31, 1998 total approximately $220,000. DISTRIBUTION AGREEMENT On October 22, 1993, the Company entered into a three-year exclusive agreement for the distribution of telecards in Brazil. The Company sold telecards to the distributor at suggested retail prices less a stated discount percentage. The agreement terminated in 1994 and in conjunction with settlement of the agreement, the Company recognized revenue of $200,000. LITIGATION GTI is involved in litigation for which counsel has been retained. In the opinion of management, the pending matters will not result in a material adverse effect upon the financial condition or results of operations of GTI. (14) SUBSEQUENT EVENTS SERIES A CONVERTIBLE EXCHANGEABLE PREFERRED STOCK In February 1997, the Company issued 3,500 shares of Series A convertible preferred stock for $3.5 million. The preferred stock is convertible into common stock based upon a conversion price, as defined (initial conversion price is $43,000 per share), and has a liquidation preference of $1,000 per share and certain voting rights. On or after July 20, 1997 and before August 20, 1997, the holder of the preferred stock may exchange all preferred stock for telecard inventory having an aggregate card value equal to the liquidation preference plus an amount equal to any accrued interest and unpaid dividends, if any. (Continued) -12- GTI TELECOM, INC. Notes to Financial Statements WORLDCOM FINANCING AGREEMENT On January 30, 1997, the Company entered into an agreement with its sole long distance supplier, Worldcom Network Services, Inc. ("Worldcom"), to finance a portion of its indebtedness to Worldcom totaling approximately $6.0 million which is included in accounts payable and accrued expenses in the accompanying December 31, 1996 balance sheet. As part of the agreement, the Company agreed to pay monthly installments of $500,000 commencing February 25, 1997 with the final balance due on January 25, 1998. The note bears interest at 16% per annum and includes certain restrictive debt covenants as well as a lock box arrangement for cash collections of the Company. As of the date of this report, the Company was in violation of certain debt covenants. The agreement also reinstates certain volume discounts and forgives related finance charges related to these amounts contingent upon the Company's payment of all amounts due in accordance with the note agreement. SALES COMMITMENT Subsequent to December 31, 1996, the Company entered into an agreement to be the exclusive supplier of prepaid phone cards to a major retailer. As part of the supply agreement, the Company is required to support the retailer's marketing and promotion expense with payments totaling approximately 16% of the retailer's phone card purchase commitment over the two year term of the contract. (15) SALE OF COMPANY TO SMARTALK TELESERVICES, INC. On May 31, 1997, the Company entered into a merger agreement (the Merger) with SmarTalk Teleservices, Inc. (SmarTalk) in which SmarTalk acquired all outstanding common stock of the Company in a tax-free, stock-for-stock merger transaction. Under the terms of the Merger, the GTI Telecom common stockholder received 2,580,000 shares of SmarTalk common stock, which, using a SmarTalk per share value of $13.50, had an approximate value of $35,000,000. -13- EX-99.3 5 UNAUDITED INTERIM FINANCIAL STATEMENTS EXHIBIT 99.3 GTI Telecom, Inc. Balance Sheets (Unaudited)
March 31, December 31, 1997 1996 ------------- ------------ ASSETS Current Assets: Cash and cash equivalents $ 2,686,764 $ 600,614 Accounts receivable, net of allowance for doubtful accounts 2,109,088 1,602,180 Inventories 707,512 733,838 Note Receivable from shareholder 1,291,983 1,279,483 Other current assets 1,422,511 1,619,773 Prepaid Expenses 78,312 16,033 ------------ ----------- Total current assets 8,296,170 5,851,921 ------------ ----------- Property and equipment, net 2,078,567 1,829,159 Intangible assets, net of accumulated amortization 293,261 202,423 Deposits 27,360 27,360 ------------ ----------- $ 10,695,358 $ 7,910,863 ============ =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Accounts payable $ 1,879,037 $ 6,940,820 Accrued expenses 2,182,925 1,061,329 Deferred revenue 5,524,379 5,671,907 Customer deposits 4,490,240 2,180,075 Excise and sales tax payable -- 2,302,226 Notes payable - Worldcom 5,158,485 -- Treasury stock repurchase debt 732,150 1,319,688 Current portion of capital leases payable 147,324 187,481 ------------ ----------- Total current liabilities 20,114,540 19,663,526 ------------ ---------- Treasury stock repurchase debt and notes payable 244,203 244,203 Capital leases payable 417,866 417,866 ------------ ---------- Total liabilities 20,776,609 20,325,595 ------------ ---------- Stockholder's Deficit: Preferred Stock: Authorized-- 5,000,000 shares, No shares issued and outstanding 3,500,000 -- Common stock, $.001 par- Authorized--10,000,000 shares Issued and outstanding--1,000 shares 1 1 Additional paid-in capital 83,707 83,707 Accumulated deficit (11,054,647) (9,888,128) Treasury stock--500 common shares in treasury, at cost (2,610,312) (2,610,312) ------------ ----------- Total stockholder's deficit (10,081,251) (12,414,732) ------------ ----------- Commitments, contingencies and subsequent events $ 10,695,358 $ 7,910,863 ============ ===========
The accompanying notes are an integral part of these unaudited financial statements. GTI TELECOM, INC. Statements of Operations (Unaudited)
Three Months Ended March 31, ------------------------------------ 1997 1996 ----------- ----------- Revenues $ 6,124,597 $ 4,456,579 Cost of Revenues 4,906,033 3,197,302 ----------- ----------- Gross profit 1,218,564 1,259,277 Selling, General and Administrative Expenses 2,202,509 1,754,094 ----------- ----------- Loss from operations (983,945) (494,817) Other Income (Expense): Interest Expense (222,973) (29,874) Other Income, net 40,399 39,642 ----------- ----------- (182,574) 9,768 ----------- ----------- Net loss $(1,166,519) $ (485,049) ----------- ----------- Net Loss per Common Share $ (2,333.04) $ (970.10) =========== =========== Weighted Average Number of Common Shares Outstanding 500 500 =========== ===========
The accompanying notes are an integral part of these unaudited financial statements. GTI TELECOM, INC. Statements of Cash Flows (Unaudited)
Three Months Ended March 31, ---------------------------- 1997 1996 ----------- ----------- Cash Flows from Operating Activities: Net loss $(1,166,519) $ (485,048) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 207,657 149,547 Changes in assets and liabilities- Accounts receivable (506,908) (740,828) Inventories 26,326 30,152 Other current assets 197,262 (507,867) Prepaid expenses (62,279) (16,033) Accounts payable (5,061,783) 1,372,380 Accrued expenses 1,121,596 54,183 Deferred revenue (147,528) (474,101) Customer Deposits 2,310,165 (302,051) Excise & Sales Tax Payable (2,302,226) 94,593 ----------- ----------- Net cash used in operating activities (5,384,237) (825,073) ----------- ----------- Cash Flows from Investing Activities: Note receivable from stockholder (12,500) (218,016) Purchases of property and equipment (404,918) -- Proceeds from sale of property and equipment -- 16,595 (Increase) decrease in intangible assets (142,985) 13,578 Deposits -- (101,751) ----------- ----------- Net cash used in investing activities (560,403) (289,594) ----------- ----------- Cash Flows from Financing Activities: Proceeds from Worldcom note payable 5,158,485 -- Proceeds from sale of preferred stock 3,500,000 -- Payments on treasury stock repurchase (587,538) (450,000) Payments on capital lease obligation (40,157) (85,127) Payments on other long-term liabilities -- (155,828) ----------- ----------- Net cash provided by (used in) financing activities 8,030,790 (690,955) ----------- ----------- Net (Decrease) Increase in Cash and Cash Equivalents 2,086,150 (1,805,622) Cash and Cash Equivalents, beginning of period 600,614 1,814,568 ----------- ----------- Cash and Cash Equivalents, end of period $ 2,686,764 $ 8,946 =========== ===========
GTI TELECOM, INC. (Unaudited) 1. Basis of Presentation The interim 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 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 6 UNAUDITED 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 GTI adjusted to give effect to certain transactions and events. The unaudited pro forma combined statements 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 GTI 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 GTI 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 financial statements of GTI 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. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
Pro Forma Historical Historical Adjustments SmarTalk GTI for the Teleservices, Telecom Acquisition Pro Forma Inc. Inc. (Note 1) Combined ------------- ------------ ----------------- ------------ Revenue $15,021,060 $21,168,508 $(2,138,692)(a) $ 34,050,876 Cost of revenue 10,198,971 18,226,789 - 28,425,760 ----------- ----------- ----------- ------------ Gross profit (loss) 4,822,089 2,941,719 (2,138,692) 5,625,116 Sales and marketing 4,511,291 6,575,261 - 11,086,552 General and administrative 3,615,070 773,727 4,026,365 (b) 8,415,162 ----------- ----------- ----------- ------------ Operating loss (3,304,272) (4,407,269) (6,165,057) (13,876,598) Other income - 133,908 - 133,908 Interest income 443,352 - - 443,352 Interest expense (251,628) (559,362) (2,650,000)(c) (3,460,990) ----------- ----------- ----------- ------------ Loss before income taxes (3,112,548) (4,832,723) (8,815,057) (16,760,328) Provision for income taxes - - - - ----------- ----------- ----------- ------------ Net loss $(3,112,548) $(4,832,723) $(8,815,057) $(16,760,328) =========== =========== =========== ============ Net loss per share $ (1.32) ============ Weighted average number of shares outstanding 12,680,375 ============
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, 1997
Pro Forma Adjustments Historical Historical for the SmarTalk GTI Acquisition Pro Forma Teleservices, Inc. Telecom, Inc. (Note 1) Combined ------------------ --------------- ------------ ----------- Revenue $ 7,368,333 $ 6,124,597 $ (146,955)(a) $13,345,975 Cost of revenue 4,760,748 4,906,033 - 9,666,781 ----------- ------------ ----------- ----------- Gross profit (loss) 2,607,585 1,218,564 (146,955) 3,679,194 Sales and marketing 2,545,414 1,428,843 - 3,974,257 General and administrative 901,231 773,666 1,006,591 (b) 2,681,488 ----------- ------------ ----------- ----------- Operating loss (839,060) (983,945) (1,153,546) (2,976,551) Other income - 40,399 - 40,399 Interest income 528,763 - - 528,763 Interest expense - (222,973) (662,500)(c) (885,473) ----------- ------------ ----------- ----------- Loss before income taxes (310,297) (1,166,519) (1,816,046) (3,292,862) Provision for income taxes - - - - ----------- ------------ ----------- ----------- Net loss $ (310,297) $ (1,166,519) $(1,816,046) $(3,292,862) =========== ============ =========== =========== Net loss per share $ (0.21) =========== Weighted average number of shares outstanding 15,477,674 ===========
UNAUDITED PRO FORMA COMBINED BALANCE SHEET March 31, 1997
Pro Forma Adjustments Historical Historical for the SmarTalk GTI Acquisition Pro Forma Teleservices, Inc. Telecom, Inc. (Note 1) Combined --------------------- ---------------- -------------- -------------- ASSETS Current assets: Cash $42,355,298 $ 2,686,764 $ - $ 45,042,062 Trade accounts receivable, net 2,904,465 2,109,088 - 5,013,553 Inventories 809,237 707,512 (400,000)(a) 1,116,749 Prepaid expenses 460,892 1,500,823 - 1,961,715 Other current assets 1,931,611 - - 1,931,611 Note receivable from shareholder - 1,291,983 (1,291,983)(a) - ----------- ----------- ----------- ------------ Total current assets 48,461,503 8,296,170 (1,691,983) 55,065,690 Non-current assets: Property and equipment, net 1,123,626 2,078,567 3,202,193 Other non-current assets 157,456 320,621 - 478,077 Goodwill, net of amortization - - 80,527,305 (d) 80,527,305 ----------- ----------- ----------- ------------ Total assets $49,742,585 $10,695,358 $78,835,322 $139,273,265 =========== =========== =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 2,766,633 $ 1,879,037 $ - $ 4,645,670 Deferred revenue 2,638,091 5,524,379 3,285,647 (a) 11,448,117 Other accrued expenses 258,431 2,182,925 4,138,424 (a),(c) 6,579,780 Customer deposits - 4,490,240 - 4,490,240 Current portion of long-term obligations - 5,890,635 - 5,890,635 Current portion of capital lease obligations - 147,324 - 147,324 ----------- ----------- ----------- ------------ Total current liabilities 5,663,155 20,114,540 7,424,071 33,201,766 Long-term debt - 662,069 26,500,000 (b) 27,162,069 ----------- ----------- ----------- ------------ Commitments Total liabilities 5,663,155 20,776,609 33,924,071 60,363,835 ----------- ----------- ----------- ------------ Shareholders' equity (deficit): Preferred stock - 3,500,000 (3,500,000)(b) - Common stock 51,361,077 83,708 34,746,292 (b) 86,191,077 Accumulated deficit (7,281,647) (11,054,647) 11,054,647 (7,281,647) Treasury stock, at cost - (2,610,312) 2,610,312 (b) - ----------- ----------- ----------- ------------ Total shareholders' equity (deficit) 44,079,430 (10,081,251) 44,911,251 78,909,430 ----------- ----------- ----------- ------------ Total liabilities and shareholders' equity (deficit) $49,742,585 $10,695,358 $78,835,322 $139,273,265 =========== =========== =========== ============
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET - --------------------------------------------------- Note 1 - The Unaudited Pro Forma Balance Sheet has been prepared to reflect the acquisition of GTI by SmarTalk for an aggregate purchase price of $61,330,000 and estimated acquisition costs of approximately $3,138,424. 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, as follows: (b) The elimination of the equity of GTI on acquisition and the issuance of 2,580,000 shares of common stock and $26,500,000 subordinated note. (c) Estimated acquisition costs. (d) The excess of acquisition costs over the fair value of net assets acquired. 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 accounting policy of recognition based on expiration of the card or proportionately over the life of the card (based on estimated usage). (b) Amortization of goodwill on a straight line basis over 20 years. (c) To record interest expense on the $26,500,000 subordinated note, issued on acquisition with 10% interest payable quarterly. -----END PRIVACY-ENHANCED MESSAGE-----