-----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, LAo6TXvorrWvX3D8f+q86EI2882uTgaJLZtbkm16dhPpmmNwuo3xv4i+ZZ3pjarm PhHP4+95N19e5Wy/qvBc1g== 0000944209-98-001544.txt : 19980820 0000944209-98-001544.hdr.sgml : 19980820 ACCESSION NUMBER: 0000944209-98-001544 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980819 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 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21579 FILM NUMBER: 98694548 BUSINESS ADDRESS: STREET 1: 5080 TUTTLE CROSSING BLVD CITY: DUBLIN STATE: OH ZIP: 43017 BUSINESS PHONE: 6147642933 MAIL ADDRESS: STREET 1: 5080 TUTTLE CROSSING BLVD CITY: DUBLIN STATE: OH ZIP: 43017 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 1998 Commission File No. 0-21579 SMARTALK TELESERVICES, INC. -------------------------- Incorporated under the laws IRS Employer Identification of California (1) No. 95-4502740 5080 Tuttle Crossing Blvd. Dublin, Ohio 43016-3566 Telephone: 614-764-2933 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of August 14, 1998: Voting, No par value: 27,607,219 (1) A proposal to effect the reincorporation of SmarTalk TeleServices, Inc. from California to Delaware was approved by the shareholders of the Company on December 31, 1997. Accordingly, subject to receipt of requisite regulatory approval, the Company's state of incorporation will change from California to Delaware and the Company will be a Delaware corporation. EXPLANATORY NOTE As discussed in Note 1 and Note 9 to the condensed consolidated financial statements of SmarTalk TeleServices, Inc. ("SmarTalk" or the "Company") included herein, the Company's independent accountants, PricewaterhouseCoopers LLP ("PwC"), have informed the Company's management that significant issues exist with regard to the Company's accounting treatment for deferred revenue recorded in conjunction with acquisitions that occurred during 1997 and with respect to certain components of the restructuring reserve taken at the end of 1997. The Company and the Company's Board of Directors (the "Board") are working with PwC to resolve these accounting issues. There can be no assurance that other issues will not be raised by PwC as a result of its review. The financial information set forth herein for the quarter and the six month period ended June 30, 1998, and for all periods during 1997, is based on SmarTalk's internal accounting records and presented in a manner consistent with SmarTalk's previous financial reports. Because the Company and PwC have not concluded their review, none of this financial information has been adjusted to reflect any changes that may be suggested by PwC as a result of its review of the Company's accounting practices. In communications to date with the Company regarding the foregoing issues, PwC has informed the Company that its 1997 and 1998 financial statements will require adjustment upon completion of the review process. The amounts of such adjustments have yet to be determined. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SMARTALK TELESERVICES, INC. AND SUBSIDIARIES BALANCE SHEETS (UNAUDITED)
June 30, December 31, ----------------- ----------------- ASSETS 1998 1997 ----------------- ----------------- Current assets: Cash and cash equivalents $ 31,705,864 $ 63,066,576 Trade accounts receivable (less allowance for doubtful accounts of $1,445,932 and $669,206, respectively) 45,934,488 34,203,477 Notes receivable 19,067,995 -- Receivable from American Express Company -- 2,570,000 Inventories 7,257,901 4,441,521 Prepaid expenses 1,442,424 1,414,703 Other current assets 9,512,410 7,637,849 --------------- --------------- Total current assets 114,921,082 113,334,126 Non-current assets: Property and equipment, net 19,529,891 15,379,018 Intangibles, net 229,530,054 222,536,934 Note receivable from ACMI L.L.C., net -- 2,234,763 Other non-current assets 17,740,225 10,438,043 --------------- --------------- Total assets $ 381,721,252 $ 363,922,884 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 23,698,724 $ 17,520,529 Deferred revenue 29,455,088 40,248,400 Accrued marketing costs 1,121,698 1,811,817 Accrued interest payable 2,785,919 2,615,480 Other accrued expenses 16,283,109 5,571,728 Excise and sales tax payable 3,147,882 5,565,072 Income taxes payable 1,175,951 -- Restructure reserve 22,008,229 23,943,070 Reserve for discontinued operations 1,035,000 -- Accrued litigation settlement -- 4,500,003 Current portion of long-term debt 7,437,092 8,688,784 --------------- --------------- Total current liabilities 108,148,692 110,464,883 Long-term debt less current portion 151,125,819 151,169,932 --------------- --------------- Total liabilities 259,274,511 261,634,815 Shareholders' equity: Preferred stock, no par value; authorized 10,000,000 shares; no shares issued and outstanding -- -- Common stock, no par value; authorized 100,000,000 shares; issued and outstanding 25,448,948 and 23,626,684 shares, 199,906,341 175,420,772 respectively Accumulated deficit (77,520,156) (73,276,513) Cumulative translation adjustment 60,556 143,810 --------------- --------------- Total shareholders' equity 122,446,741 102,288,069 --------------- --------------- Total liabilities and shareholders' equity $ 381,721,252 $ 363,922,884 =============== ===============
The accompanying notes are an integral part of these consolidated financial statements. 2 SMARTALK TELESERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- --------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Revenue $51,830,277 $11,796,890 $94,235,441 $19,165,223 Cost of revenue 29,200,682 7,204,054 54,761,037 11,964,802 ----------- ----------- ----------- ----------- Gross profit 22,629,595 4,592,836 39,474,404 7,200,421 Sales and marketing 8,051,458 2,996,050 15,553,386 5,541,464 General and administrative 10,192,605 2,619,144 21,371,823 3,520,375 ----------- ----------- ----------- ----------- Operating income (loss) 4,385,532 (1,022,358) 2,549,195 (1,861,418) Interest income 1,220,792 580,761 2,349,798 1,109,524 Interest expense 2,511,714 224,748 4,938,537 224,748 ----------- ----------- ----------- ----------- Income (Loss) from continuing operations before income taxes 3,094,610 (666,345) (39,544) (976,642) Provision for income taxes 1,175,951 -- 1,175,951 -- ----------- ----------- ----------- ----------- Income (Loss) from continuing operations 1,918,659 (666,345) (1,215,495) (976,642) ----------- ----------- ----------- ----------- Discontinued operations: Loss from discontinued operations to the Measurement Date -- -- (578,148) -- Income (Loss) from the Measurement Date to the date of disposal of discontinued operations 250,000 -- (2,450,000) -- ----------- ----------- ----------- ----------- Net income (loss) $ 2,168,659 $ (666,345) $(4,243,643) $ (976,642) =========== =========== =========== =========== Per share income (loss): Continuing operations $ .08 $ (.05) $ (.05) $ (.07) Discontinued operations .01 -- (.12) -- ----------- ----------- ----------- ----------- Total basic $ .09 $ (.05) $ (.17) $ (.07) =========== =========== =========== =========== Weighted average number of shares 25,328,917 13,940,285 24,833,912 13,421,860 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 3 SMARTALK TELESERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
COMMON STOCK CUMULATIVE ----------------------- STOCK ACCUMULATED TRANSLATION SHARES AMOUNT SUBSCRIPTION DEFICIT ADJUSTMENT TOTAL ---------- ------------ ------------ ------------ ----------- ------------ December 31, 1995............. 8,824,834 $ 315,000 $(300,000) $ (1,394,774) $ -- $ (1,379,774) Issuance of subscribed shares..................... -- -- 300,000 -- -- 300,000 Purchase of assets of related entity............. -- -- -- (2,464,028) -- (2,464,028) Compensation under stock options issued............. -- 24,000 -- -- -- 24,000 Proceeds from sale of stock, net of costs............... 4,000,000 50,439,595 -- -- -- 50,439,595 Stock options exercised..... 4,625 8,186 -- -- -- 8,186 Net loss.................... -- -- -- (3,112,548) -- (3,112,548) ---------- ------------ --------- ------------ -------- ------------ December 31, 1996............. 12,829,459 50,786,781 -- (6,971,350) -- 43,815,431 Stock options exercised..... 227,398 851,485 -- -- -- 851,485 Distribution agreement...... 330,205 7,596,093 -- -- -- 7,596,093 Initial issuance of Worldwide Direct common shares..................... 1,772,800 800 -- -- -- 800 Initial issuance of World- wide Direct preferred shares..................... 503,032 3,687,388 -- -- -- 3,687,388 Acquisitions: ConQuest Telecommunications. 4,488,935 64,528,441 -- -- -- 64,528,441 GTI Telecom................. 2,580,001 34,830,000 -- -- -- 34,830,000 SmarTel Telecommunications.. 714,286 9,375,004 -- -- -- 9,375,004 Cardinal VoiceCard Ltd...... 115,000 2,170,625 -- -- -- 2,170,625 Frontier selected assets.... 65,568 1,594,155 -- -- -- 1,594,155 Cumulative translation adjustment................. -- -- -- -- 143,810 143,810 Net loss.................... -- -- -- (66,305,163) -- (66,305,163) ---------- ------------ --------- ------------ -------- ------------ December 31, 1997............. 23,626,684 175,420,772 -- (73,276,513) 143,810 102,288,069 Licensing agreement......... 100,000 3,056,300 -- -- -- 3,056,300 Second issuance of Worldwide Direct preferred shares.... 439,168 3,045,600 -- -- -- 3,045,600 USA Telecommunications Services, acquisition...... 81,302 2,500,037 -- -- -- 2,500,037 Litigation settlement....... 215,569 4,500,003 -- -- -- 4,500,003 Stock options exercised..... 779,409 7,692,803 -- -- -- 7,692,803 ConQuest Telecommunications acquisition................ 106,816 2,084,826 -- -- -- 2,084,826 SmarTel Telecommunications acquisition................ 100,000 1,606,000 -- -- -- 1,606,000 Cumulative translation adjustment................. -- -- -- -- (83,254) (83,254) Net loss.................... -- -- -- (4,243,643) -- (4,243,643) ---------- ------------ --------- ------------ -------- ------------ June 30, 1998................. 25,448,948 $199,906,341 $ -- $(77,520,156) $ 60,556 $122,446,741 ========== ============ ========= ============ ======== ============
The accompanying notes are an integral part of these consolidated financial statements. 4 SMARTALK TELESERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, ----------------------------- 1998 1997 ------------- ------------ Cash flows from operating activities: Net Loss.......................................................................... $ (4,243,643) $ (976,642) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation..................................................................... 1,529,687 158,342 Amortization..................................................................... 5,828,339 395,715 Discontinued operations.......................................................... 1,353,051 -- Provision for bad debts.......................................................... 776,726 276 Sublease termination fee......................................................... -- (325,810) Changes in assets and liabilities, which increase (decrease) cash Accounts receivable.............................................................. (15,513,473) (2,140,172) Inventories...................................................................... (2,559,263) (130,114) Prepaid expenses................................................................. (27,720) (1,721,609) Other current assets............................................................. (839,588) 748,843 Other non-current assets......................................................... (5,546,313) (362,879) Accounts payable................................................................. 5,365,408 (738,997) Deferred revenue................................................................. (12,584,793) 51,240 Accrued marketing costs.......................................................... (690,119) (136,931) Accrued interest................................................................. 170,439 -- Other accrued expenses........................................................... 10,852,630 329,155 Restructuring reserve............................................................ (1,934,840) -- Excise and sales tax payable..................................................... (2,417,191) -- Income taxes payable............................................................. 1,175,952 -- ------------ ----------- Net cash used by operating activities.............................................. (19,304,711) (4,849,583) ------------ ----------- Cash flows from investing activities: Cash for acquisitions............................................................. (4,302,550) -- Proceeds from sale of discontinued operations..................................... 1,000,000 Repayment of ACMI note receivable................................................. 1,000,000 -- Capital expenditures.............................................................. (6,371,222) (475,182) License fee....................................................................... (3,000,000) -- Acquisition costs, net of cash acquired............................................ (3,081,134) (1,623,342) ------------ ----------- Net cash used by investing activities.............................................. (14,754,906) (2,098,524) ------------ ----------- Cash flows from financing activities Stock options exercised........................................................... 7,692,802 594,093 Second issuance of Worldwide Direct preferred..................................... 3,045,600 -- Repayment of note payable to WorldCom............................................. -- (6,383,691) Long-term debt.................................................................... (652,874) -- Capital lease payments............................................................ (96,352) -- Repayment of Star Bank line of credit............................................. (7,193,575) -- Payment on Century Bank line of credit............................................ (13,442) -- ------------ ----------- Net cash provided (used) by financing activities................................... 2,782,159 (5,789,598) ------------ ----------- Effect of currency exchange rate.................................................. (83,254) -- ------------ ----------- Decrease in cash and cash equivalents.............................................. (31,360,712) (12,737,705) Cash and cash equivalents at beginning of period................................... 63,066,576 44,830,487 ------------ ----------- Cash and cash equivalents at end of period......................................... $ 31,705,864 $ 32,092,782 ============ ============ Supplemental disclosure of cash flow information Cash paid for interest........................................................... $ 4,314,583 $ 3,915 ============ ============ Issuance of stock for acquisitions............................................... $ 6,190,863 $ 44,205,004 ============ ============ Issuance of stock for litigation settlement...................................... $ 4,500,003 $ -- ============ ============ Issuance of debt for acquisitions................................................ $ 5,500,000 $ 26,500,000 ============ ============ Issuance of stock for licensing agreement........................................ $ 3,056,300 $ -- ============ ============ Debt assumed at acquisition...................................................... $ 1,304,828 $ 6,383,691 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 5 SMARTALK TELESERVICES, INC. NOTES TO FINANCIAL CONSOLIDATED STATEMENTS (UNAUDITED) 1. BASIS OF INTERIM PRESENTATION The accompanying interim period consolidated financial statements are unaudited, pursuant to certain rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The financial statements should be read in conjunction with the financial statements and the notes thereto for the year ended December 31, 1997 and other information included in SmarTalk's Forms 10-K, Forms 10-Q and Forms 8-K, as filed with the Securities and Exchange Commission and as each such report may be amended. As publicly announced on August 10, 1998, the Company has been informed by PwC that significant issues exist with regard to the Company's accounting treatment for deferred revenue recorded in conjunction with acquisitions that occurred during 1997 and with respect to certain components of the restructuring reserve taken at the end of 1997. In communications to date with the Company regarding the foregoing issues, PwC has informed the Company that its 1997 and 1998 financial statements will require adjustment upon completion of the review process. The amounts of such adjustments have yet to be determined. Subject to the foregoing, in the opinion of Company's management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 2. NOTE RECEIVABLE FROM ACMI, L.L.C. On June 19, 1998, the Company received payment for the ACMI, L.L.C. note receivable. The note receivable had a net book value of $2,234,763 on such date and the repayment amount was $1,000,000 in cash. Since this note was acquired through the ConQuest acquisition, the devaluation of the note was recorded as a reduction of goodwill. Additionally, the Company was required to release 106,816 shares of its Common Stock that was held in escrow and used as collateral to secure the note. The value of these shares was recorded as an increase to goodwill. 3. LICENSING AGREEMENT On March 30, 1998, the Company entered into a new licensing agreement with AudioFax IP LLC to license certain voice-fax mailbox technology. The Company paid a one-time fee to license the technology until the patents expire in 2008. The fee is being amortized over the remaining life of the patent. Prior to this agreement, the Company licensed this technology by paying a per card fee for cards containing voice-fax mailbox services. 4. ACQUISITIONS On March 23, 1998, the Company acquired USA Telecommunication Services, Inc. (dba Debit Cellular Network ("DCN")), a North Carolina based prepaid cellular card company, for 81,302 shares of common stock and $1,500,000 in cash. This acquisition has been accounted for using the purchase method of accounting. Accordingly, the operating results of the acquired business are included in the Company's consolidated results since the date of acquisition. On April 30, 1998, the Company acquired the outstanding shares of Canada Telecom Network Inc. ("CTN") for $3,000,000 in cash and $5,500,000 in a subordinated, 7.5% per annum note which matures April 30, 2000. This acquisition has been accounted for using the purchase method of accounting. Accordingly, the results of the acquired business are included in the Company's consolidated results since the date of acquisition. On June 10, 1998, the Company acquired 100% of the outstanding stock of Worldwide Direct, Inc. ("WWD") by virtue of a merger of a wholly-owned subsidiary of the Company with and into WWD for 2.7 million shares of Common Stock. This business combination has been accounted for herein as a pooling-of- interests combination. While the Company has consulted with PwC regarding certain pooling-related matters, PwC has not reached a conclusion at present that the combination qualifies for pooling of interest accounting. Accordingly, the financial information for periods prior to June 10, 1998 as included herein have been restated to reflect this accounting. The financial position and results of operations of the Company have been restated for all periods prior to the combination to give retroactive effect to the WWD combination. The results of operations previously reported by the separate enterprises and the combined amounts presented in the accompanying supplemental consolidated financial statements are summarized in the table below:
Three Months Ended June 30, Six Months Ended June 30, -------------------------- ------------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Revenue: SmarTalk $47,032,600 $11,796,890 $86,645,121 $19,165,223 WWD 4,797,677 -- 7,590,320 -- ----------- ----------- ----------- ----------- Combined $51,830,277 $11,796,890 $94,235,441 $19,165,223 =========== =========== =========== =========== Net Income (Loss) before income taxes and discontinued operations: SmarTalk $ 3,072,753 $ (666,345) $ 2,979,724 $ (976,642) WWD 21,857 -- (3,019,268) -- ----------- ----------- ----------- ----------- Combined $ 3,094,610 $ (666,345) $ (39,544) $ (976,642) =========== =========== =========== ===========
WWD was incorporated on May 12, 1997 and commenced operations on July 1, 1997. 5. REVENUE RECOGNITION The Company's revenue originates from: (i) Company and co-branded prepaid calling cards sold through retailers; (ii) recharges on existing calling cards; (iii) cards sold for promotional marketing campaigns; (iv) corporate sales to businesses; (v) prepaid calling card services provided to one of the Company's strategic partners, West Teleservices, Inc. ("WIC"); (vi) call processing; (vii) sales of prepaid cellular phones, accessories and services and (viii) sales commissions from postpaid cellular activations. Under the majority of agreements with retailers, the Company sells cards to the retailer at a fixed price with normal credit terms. When the retailer is invoiced, deferred revenue is recorded. The Company recognizes revenue and reduces the deferred revenue account as the end user utilizes calling time or upon expiration of cards containing unused calling time, as applicable. The Company also records deferred revenue upon recharge of existing phone cards and recognizes such revenue upon usage or expiration of the recharge minutes. Substantially all prepaid phone cards sold by the Company have expiration dates and expire as of that date, if never activated, or six months after the initial activation unless recharged. For cards that have no printed expiration date, revenue for unused minutes is recognized when cards have been dormant for greater than 12 months. Revenue for prepaid cellular phones, accessories, and services is recognized upon shipment. For postpaid cellular sales the Company recognizes a sales commission upon activation of individual customer accounts by the ultimate carrier. In a postpaid cellular sale, the Company remains liable to refund commissions paid by carriers for varying periods of time after activation in the event a customer discontinues service. The Company records a reserve for these returns at the time the related revenue is recognized. 6. RESTRUCTURING The company recorded a $25,000,000 restructuring charge in December 1997. Utilization against this reserve is as follows:
December 31, March 31, June 30, Total 1997 1998 1998 Activity ------------ --------- -------- ---------- Personnel reductions $ 250,672 $ 494,079 $332,204 $1,076,955 Facilities and equipment realignment 703,040 324,269 50,983 1,078,292 Product conformity and sole branding 103,218 395,653 337,653 836,524 ---------- ---------- -------- ---------- Total charges $1,056,930 $1,214,001 $720,840 $2,991,771 ========== ========== ======== ==========
7. DISCONTINUED OPERATIONS On February 28, 1998 (the "Measurement Date"), the Board adopted a plan to sell the Company's call center business located in Butler, Pennsylvania. In the first quarter of 1998, the Company recorded a charge for the losses associated with operating this business up to the Measurement Date and an estimated charge for operating this business from the Measurement Date through the anticipated disposition date plus the transaction costs associated with the sale of the business. On June 12, 1998 (the "Disposal Date"), the Company sold the assets of the call center business for $1,000,000 in cash and a note receivable (the "Note") of $19,067,995. Interest on the Note is 12% per annum and is payable quarterly beginning September 12, 1998. The principal on the note is due on June 12, 1999 (unless this date is extended to June 12, 2000 by the obligor) or upon completion of a financing transaction in excess of $50,000,000 by the obligor. This business was acquired in conjunction with the ConQuest acquisition on December 3, 1997. Therefore, a pro-rata portion of the goodwill associated with the ConQuest acquisition was allocated to the call center business and accordingly no sales gain or loss was recognized on the disposal. Operations for the business from January 1, 1998 to the Disposal Date and transaction costs associated with the disposal have been recorded against the reserve for discontinued operations. Revenue from the discontinued operations was $4,507,300 for the quarter ended June 30, 1998 and $0 for the quarter ended June 30, 1997. Summarized financial information for the discontinued operations is as follows:
For the period January 1, 1998 to June 12, 1998 ------------------ Revenues $10,065,127 Loss before income taxes 3,028,148 Net loss 3,028,148 As of June 12, 1998 --------- Current assets $ 5,502,442 Total assets 20,502,442 Current liabilities 434,447 Total liabilities 434,447 ----------- Net assets of discontinued operations $20,067,995 ===========
SmarTalk did not own the call center business at June 30, 1997. 8. DIVIDENDS There were no dividends declared or paid during the six months ended June 30, 1998 or 1997. 9. SUBSEQUENT EVENTS Private Placement On July 9, 1998, the Company completed a private placement of approximately 1.8 million shares of its common stock, realizing proceeds before transaction costs of approximately $30 million. In the event that the Company's Common Stock trades below the initial purchase price during specified periods, the Company will be obligated to issue up to $10 million of additional Common Stock for no additional consideration. In addition, the Company granted an option in connection with the private placement pursuant to which an additional $20 million of the Company's Common Stock may be purchased. In the event the aggregate amount of Common Stock issued by the Company pursuant to the private placement would exceed 20% of the Company's total outstanding shares as of July 9, 1998 (the "20% Threshold"), as a result of either the exercise of the option or the initial purchase price adjustment, the Company would be required to obtain shareholder approval of the private placement or issue a note in a principal amount equal to the value of the Common Stock that otherwise would exceed the 20% Threshold. The proceeds from this placement are to be used to accelerate the Company's entry into the prepaid cellular market and for general corporate purposes. Shareholder Litigation and Accounting Issues Since July 23, 1998, certain putative class actions have been filed against the Company and certain current and former members of its management and Board of Directors in state and Federal courts alleging violations of state and Federal Securities laws with respect to certain alleged misrepresentations and/or omissions in regard to the Company's projected and actual revenues and earnings. These lawsuits seek unspecified damages on behalf of a class of persons who purchased the Company's securities from July 31, 1997 to August 10, 1998. The complaints allege that the Company made material misrepresentations and omissions in regard to the Company's projected and actual revenues and earnings. While management believes that the description given above is an accurate description of the lawsuits which have been filed against the Company, lawsuits may have been filed of which the Company is not aware. While it is not feasible to predict or determine the final outcome of these proceedings, an adverse outcome with respect to such proceedings could have a material adverse impact on the Company's results of operations, financial position and statements of cash flow. On August 10, 1998, the Company announced that it was postponing the release of its quarterly results for the quarter ended June 30, 1998 to permit PwC to review potentially significant issues which may exist with regard to the Company's accounting practices. The Company has recently learned from PwC that significant issues exist with regard to the Company's accounting treatment for deferred revenue recorded in conjunction with acquisitions that occurred during 1997 and with respect to certain components of the restructuring reserve taken at the end of 1997. Other issues may be identified as PwC completes its review. The Company, together with a committee comprised of certain outside Board members, is working with PwC to review and resolve these issues. The financial information set forth herein for the quarter and the six month periods ended June 30, 1998, and for all periods during 1997, is based on SmarTalk's internal accounting records and presented in a manner consistent with SmarTalk's previous financial reports. Because PwC has not concluded its review, none of this financial information has been adjusted to reflect any changes that may be suggested by PwC as a result of its review of the Company's accounting practices. In communications to date with the Company regarding the foregoing issues, PwC has informed the Company that its 1997 and 1998 financial statements will require adjustment upon completion of the review process. The amounts of such adjustments have yet to be determined. SMARTALK TELESERVICES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION GENERAL The Company was formed in October 1994 and had limited operations until June 1995. On October 23, 1996, the Company completed the sale of 4,000,000 shares of its stock in a public offering on the NASDAQ National Market. SmarTalk provides convenient, easy-to-use, telecommunications products and services to individuals and businesses primarily through the SmarTalk prepaid phone card. The SmarTalk card provides customers with a single point of access to prepaid telecommunications services at a fixed rate charge per minute regardless of the time of day or, in the case of domestic calls, the distance of the call. The Company's services currently include domestic calling, inbound and outbound international long distance calling, as well as enhanced features such as sequential calling, content delivery, speed dial and message delivery and on selected cards, voice and fax mail services. The SmarTalk Card may also be recharged on-line with a major credit card, allowing the user to add minutes as needed. SmarTalk services are delivered through proprietary switching, application and database access software which run on interactive call processing platforms. The SmarTalk platforms and the Company's proprietary software allow users in the system to access SmarTalk services, and provide the Company with the flexibility to customize and add features to SmarTalk services on a platform-wide basis. The Company's revenue originates from: (i) Company and co-branded prepaid calling cards sold through retailers; (ii) recharges on existing calling cards; (iii) cards sold for promotional marketing campaigns; (iv) corporate sales to businesses; (v) prepaid calling card services provided to WIC; (vi) call processing; (vii) sales of prepaid cellular phones, accessories and services; and (viii) sales commissions from postpaid cellular activations. The Company operates in a highly competitive market. Future revenues and earnings may be impacted by, among other factors, the Company's ability to address competition, its ability to sign new accounts, its ability to introduce new products, such as its prepaid cellular product offering, and its ability to integrate its operations successfully. Under sales agreements with the majority of its retailers, the Company sells cards to the retailer at a set price. The Company generally invoices the retailer upon shipment of the cards. The Company also offers pay-on-sale and pay-on-activation programs to certain retailers whereby the retailers are invoiced upon sale to or activation by a retailer's customer, respectively. The Company anticipates that its pay-on-sale and pay-on-activation programs will be increasingly utilized by its retail customers. Deferred revenue is recorded when the retailer is invoiced. The Company recognizes revenue and reduces deferred revenue as the customer utilizes calling time or upon expiration of cards containing unused calling time ("breakage"). The Company also records deferred revenue upon recharge of existing prepaid calling cards and recognizes such revenue upon the usage or expiration of the recharge minutes. Call processing revenues are recognized as these services are rendered. SmarTalk's cost of revenue consists primarily of the cost of providing long distance services and related enhanced services, as well as the cost of manufacturing and delivering the cards, excise taxes, Universal Service Fund fees and the costs of cellular phones and accessories. The cost of providing long distance services represents obligations to carriers that provide minutes of long distance over their networks in order to facilitate use of SmarTalk's product. SmarTalk seeks to leverage its competitive advantages in implementing the key elements of its growth strategy, which include: (i) increasing penetration of retailers; (ii) developing new products and services; and (iii) continuing to pursue selected acquisitions. Sales and marketing expenses consist primarily of commissions and advertising costs. The Company pays commissions to its sales representatives based on sales to retailers. The Company also pays commissions to its sales representatives and retailers based on the number of minutes recharged on the SmarTalk cards sold by each retailer. These commissions are capitalized and amortized based on customer usage. Advertising consists primarily of trade, consumer, cooperative advertising ("co-op"), and Manufacturer's Development Funds ("MDF"). Under the typical co-op advertising program, the Company provides advertising funds to retailers to promote sales of SmarTalk products and services. The amount of funds the Company provides in co-op advertising is based on a percentage of sales of SmarTalk products to retailers. As a result of the Company's acquisition of WWD the Company advertises its prepaid cellular product and brand directly to consumers by running advertisements on television. MDF consists of promotional and marketing funds to access shelf space. Corporate advertising expense includes trade and consumer advertising, trade show expenses, promotional goods and the costs of providing to retailers the Company's turnkey merchandising materials and services. General and administrative expenses consist primarily of salaries and related benefits, sales and use taxes, rent, insurance, bank card processing fees, and other general expenses including depreciation and amortization. Sales and use taxes for the SmarTalk platforms are incurred based on customer usage of long distance minutes which are processed through the Company's platforms. The Company completed the following acquisitions from January 1, 1997 to June 30, 1998 (the "Acquisitions"): Worldwide Direct, Inc. ("WWD"). On June 10, 1998, the Company acquired the outstanding stock of WWD for 2.7 million shares of common stock. This business combination has been accounted for as a pooling-of-interests combination. Canada Telecom Network Inc. ("CTN"). On April 30, 1998 the Company acquired the outstanding shares of CTN for $3,000,000 in cash and $5,500,000 in a subordinated 7.5% note which matures April 30, 2000. The note is payable in 24 monthly blended installments of principal and interest. USA Telecommunications, Inc. (dba Debit Cellular Network)("DCN"). On March 23, 1998 the Company acquired DCN, a North Carolina-based prepaid cellular card company for $1,500,000 in cash and 81,302 shares of common stock. American Express Telecom, Inc. ("Amex Telecom"). On December 31, 1997, SmarTalk acquired Amex Telecom, a provider of prepaid calling products, including the FirstClass Phonecard(TM) sold through the U.S. Postal Service and the PhoneFunds(TM) card sold through the National Park Foundation, American Express Travel Service Offices ("AmEx TSOs"), and certain foreign exchange offices. In consideration for the outstanding shares of Amex Telecom, SmarTalk paid $44 million in cash, which was provided from SmarTalk's working capital with a portion thereof held in escrow pending regulatory approval to Amex Telecom's sole stockholder, American Express Travel Related Services, Inc. Additionally, SmarTalk purchased the profit and cost sharing agreement between Amex Telecom and the U.S. Postal Service. The Amex Telecom acquisition secured for SmarTalk distribution rights to certain AmEx TSOs, distribution through the U.S. Postal Service and the National Park Foundation and an agreement with American Express to be the exclusive provider of a co-branded prepaid calling card for American Express. In addition, SmarTalk was granted exclusive access to the American Express point-of-sale system for activation and recharge of prepaid phone cards. Under the purchase agreement American Express Company agreed to reimburse SmarTalk for the estimated unused minutes as of December 31, 1997. ConQuest Telecommunication Service Corp. ("ConQuest"). On December 3, 1997, SmarTalk entered into an interim operating agreement which transferred all risks and rewards from ConQuest to SmarTalk. SmarTalk assumed responsibility for operating the ConQuest business and the employees of ConQuest became employees of SmarTalk on this date. On December 31, 1997, SmarTalk acquired 100% of ConQuest's outstanding common stock. In consideration for each outstanding share of ConQuest common stock, ConQuest stockholders received 7.63 shares of SmarTalk Common Stock (approximately 4.5 million shares of Common Stock in total). SmarTalk also assumed $6,139,679 of ConQuest's debt. Additionally, in connection with this acquisition SmarTalk paid $350,000 in cash in 1997 and issued 215,569 shares of Common Stock in January 1998 to obtain an agreement and mutual release from a group of individuals that had brought a lawsuit against ConQuest prior to the acquisition. ConQuest was a developer and marketer of prepaid calling cards and other enhanced telecommunication services and technology, including domestic and international calling services for the tour and travel industry. The acquisition of ConQuest added significantly to SmarTalk's technological infrastructure, customer base, platform operations and management infrastructure. Selected Assets of Frontier Corporation. On December 9, 1997, SmarTalk acquired selected assets (the "Frontier Selected Assets") of the retail prepaid phone card business of Frontier Corporation, a New York corporation ("Frontier"). In consideration for the Frontier Selected Assets, SmarTalk paid $35 million in cash and 65,568 shares of common stock. The acquisition of the Frontier Selected Assets added to SmarTalk's size, scale and scope, and helped establish SmarTalk's presence on the East Coast. Cardinal VoiceCard, Ltd. On August 13, 1997, SmarTalk issued 115,000 shares of Common Stock to purchase this Toronto, Ontario based company. This acquisition provided the Company with access to the Canadian marketplace and added to the Company's international distribution. GTI Telecom, Inc. ("GTI"). On May 31, 1997, SmarTalk issued 2,580,001 shares of Common Stock and $26,500,000 in subordinated 10% per annum term notes which mature June 1, 2001 (the "GTI Notes") to purchase this Florida based company. $25,970,000 of the GTI Notes were repaid in September 1997 at $20,614,686. The difference of $5,355,314 was recorded as a reduction to goodwill. This acquisition expanded the Company's distribution and added human resource, technical and manufacturing infrastructure. SmarTel Communications, Inc. ("SmarTel"). On May 28, 1997, the Company acquired SmarTel, a Boston-based prepaid promotions phone card company, for 714,286 shares of Common Stock. Many computer systems in use today were designed and developed using two digits, rather than four, to specify the year. As a result, such systems will recognize the year 2000 as "OC" (the "Year 2000 Issue"). This could cause many computer applications to fail completely or create erroneous results unless corrective measures are taken. The Company utilizes some software and related computer hardware technologies in its operations that will be affected by the Year 2000 Issue. The Company is currently reviewing what actions will be necessary to make its computer systems Year 2000 compliant. The expense associated with these actions has yet to be fully determined, but could be material. 6 RESULTS OF OPERATIONS QUARTER ENDED JUNE 30, 1998 COMPARED WITH QUARTER ENDED JUNE 30, 1997 Revenue. Revenue for the quarter ended June 30, 1998 was $51,830,277 compared to $11,796,890 for the quarter ended June 30, 1997. The substantial increase in revenue reflects an increase in usage of SmarTalk services by users of the SmarTalk card, the effect of the Acquisitions, an increase in the number of retail storefronts in which the Company's product is distributed, greater brand awareness and consumer acceptance and revenue attributable to a distribution and processing agreement entered into on June 1, 1996 with West Interactive Corporation. Revenue attributable to the distribution and processing agreement was $4,390,939 for the quarter ended June 30, 1998 and $4,769,342 for the same period in 1997. In addition, 9.4% of total revenue for the quarter ended June 30, 1998 consisted of revenue recognized on the unused portion of expired cards (breakage revenue) as compared to 8.9% for the quarter ended June 30, 1997. Recharge revenue for the quarters ended June 30, 1998 and 1997 was $2,198,338 and $745,667, respectively. Cost of Revenue. Cost of revenue increased to $29,200,682 for the quarter ended June 30, 1998 from $7,204,054 for the quarter ended June 30, 1997. The substantial increase was primarily attributable to greater use of the Company's services, the Acquisitions and an increase in taxes and fees. The gross profit percentage for the quarter ended June 30, 1998 was 43.7% as compared to 38.9% for the quarter ended June 30, 1997. The gross margin percentage increased primarily due to lower transport and card costs and the increase in breakage revenue which has minimal cost of revenues associated with it. Sales and Marketing Expenses. Sales and marketing expenses increased to $8,051,458 (15.5% of revenue) for the quarter ended June 30, 1998 from $2,996,050 (25.4% of revenue) for the quarter ended June 30, 1997. The increased dollar amount was primarily due to the Acquisitions and the continued expansion of the Company's marketing activities, which include co-op advertising, consumer advertising, MDF and promotional goods. The decrease as a percentage of revenue was due to revenue growth in 1998. General and Administrative Expenses. General and administrative expenses increased to $10,192,605 (19.7% of revenue) for the quarter ended June 30, 1998 from $2,619,144 (22.2% of revenue) for the quarter ended June 30, 1997. The increase in dollar amount was primarily due to the Acquisitions, which include intangible assets and goodwill amortization, depreciation expense and the addition of personnel and costs associated with the growth in the Company's business. The decrease as a percentage of revenue was due to revenue growth in 1998. Interest Income and Expense. Interest income increased to $1,220,792 for the second quarter of 1998 from $580,761 for the second quarter of 1997. Interest expense increased to $2,511,714 for the second quarter of 1998 from $224,748 for the second quarter of 1997. The interest income increase resulted primarily from the Company having more funds to invest. The interest expense increase resulted primarily from the Company's issuance of subordinated debt on September 17, 1997. Income Tax. The Company has provided for income taxes of $1,175,951 (an effective rate of 38%) and $0 for the quarters ended June 30, 1998 and 1997, respectively. Discontinued Operations. On February 28, 1998 (the "Measurement Date"), the Company's board of directors adopted a plan to sell the Company's call center business located in Butler, Pennsylvania. The call center operations up to the Measurement Date have been classified as a loss from discontinued operations. The estimated loss from operations after the measurement date until the date of sale have been recorded as a loss on disposal of discontinued operations. This estimate was decreased by $250,000 in the second quarter of 1998. Net Income (Loss). As a result of the above items, net income increased to $2,168,659 for the quarter ended June 30, 1998 from $(666,345) for the quarter ended June 30, 1997. Decremented Minutes and PIN Activations. Decremented minutes, which represent actual call traffic over the SmarTalk platforms, were 218,432,499 for the quarter ended June 30, 1998 as compared to 54,824,541 for the quarter ended June 30, 1997. PIN activations were 4,391,777 and 693,447 for the quarters ended June 30, 1998 and 1997, respectively. These increases are due to increased usage of the Company's services and the Acquisitions. SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997 Revenue. Revenue increased to $94,235,441 for the six months ended June 30, 1997 from $19,165,223 for the six months ended June 30, 1998. The substantial increase in revenue reflects an increase in usage of SmarTalk services by users of the SmarTalk card, the effect of the Acquisitions, an increase in the number of retail storefronts in which the Company's product is distributed, greater brand awareness and consumer acceptance and revenue attributable to a distribution and processing agreement entered into on June 1, 1996 with West Interactive Corporation. Revenue attributable to the distribution and processing agreement was $8,951,486 and $8,619,391 for the six months ended June 30, 1998 and June 30, 1997, respectively. In addition, 11.5% of total revenue for the six months ended June 30, 1998 consisted of breakage revenue as compared to 9.69% for the six months ended June 30, 1997. Recharge revenue for the six months ended June 30, 1998 and 1997 was $3,299,837 and $1,182,722, respectively. Cost of Revenue. Cost of revenue increased to $54,761,037 for the six months ended June 30, 1998 from $11,964,802 for the six months ended June 30, 1997. The increase was primarily attributable to greater use of the Company's services, the Acquisitions, and an increase taxes and fees. The gross profit percentage for the six months ended June 30, 1998 was 41.9% as compared to 37.6% for the six months ended June 30, 1997. The gross margin percentage increased primarily due to lower transport and card costs and the increase in breakage revenue which has minimal cost of revenue associated with it. Sales and Marketing Expenses. Sales and marketing expenses increased to $15,553,386 (or 16.5% of revenue) for the six months ended June 30, 1998 from $5,541,464 (or 28.9% of revenue). The decrease as a percentage of revenue was due to revenue growth in 1998. The increased dollar amount was primarily due to the Acquisitions and the continued expansion of the Company's marketing activities, which include co-op, consumer advertising, MDF and promotional goods. General and Administrative Expenses. General and administrative expenses increased to $21,371,823 (or 22.7% of revenue) for the six months ended June 30, 1998 from $3,520,375 (or 18.4% of revenue) for the six months ended June 30, 1997. The increase in dollar amount was primarily due to the Acquisitions, which includes intangible assets and goodwill amortization, depreciation expense, and the addition of personnel and costs associated with the growth of the Company's business. Interest Income and Expense. Interest income increased to $2,349,798 for the six months ended June 30, 1998 from $1,109,524 for the six months ended June 30, 1997. Interest expense increased to $4,938,537 for the six months ended June 30, 1998 from $224,748 for the six months ended June 30, 1997. The interest income increase resulted primarily from the Company having more funds to invest. The interest expense increase resulted primarily from the Company's issuance of subordinated debt on September 17, 1997. Income tax. The Company has recorded income tax expense and an associated liability of $1,175,951 for the six months ended June 30, 1998. The Company had a loss for the six months ended June 30, 1997, and accordingly had made no provision for federal and state income taxes for that period. Discontinued Operations. On the Measurement Date, the Board adopted a plan to sell the Company's call center business located in Butler, Pennsylvania. The call center operations up to the Measurement Date have been classified as a loss from discontinued operations. The estimated loss from operations after the Measurement Date until the date of sale has been recorded as a loss on disposal of discontinued operations. This estimate was decreased by $250,000 in the second quarter of 1998. Net Income (Loss). As a result of the above items, net loss increased to $4,243,643 for the six months ended June 30, 1998 as compared to $976,642 for the six months ended June 30, 1997. Decremented Minutes and Pin Activations. Decremented minutes, which represent actual call traffic over the SmarTalk platforms, were 378,509,142 for the six months ended June 30, 1998 as compared to 90,045,627 for the six months ended June 30, 1997. PIN activations were 7,874,900 for the six months ended June 30, 1998 as compared to 1,130,502 for the six months ended June 30, 1997. These increases are due to increased usage of the Company's services and the Acquisitions. 7 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- On July 9, 1998 the Company completed a private placement of approximately 1.8 million shares of Common Stock, realizing proceeds before transaction costs of approximately $30 million. The proceeds from this placement are to be used to accelerate the Company's entry into the prepaid cellular market and for general corporate purposes. On September 17, 1997, SmarTalk issued 5 3/4% per annum convertible subordinated notes due September, 2004, in an aggregate principal amount of $150,000,000. The net proceeds to SmarTalk from the convertible subordinated notes offering (after deducting the underwriting discounts and other expenses) was $144,946,319. Interest on the Notes is payable semi-annually on March 15 and September 15 of each year commencing March 15, 1998. On August 6, 1997, ConQuest entered into a revolving credit facility with Star Bank, N.A. ("Star Line of Credit"). Pursuant to the terms of the Star Line of Credit, ConQuest could borrow up to $9,500,000 as secured by various accounts receivable. Interest is based on the ninety-day LIBOR plus one percent. This credit facility was assumed by SmarTalk upon the acquisition of ConQuest. The credit facility balance of $7,193,575 was paid on April 27, 1998. The line of credit facility was closed on April 27, 1998. In December 1996, the Company entered into a revolving credit facility with Southern California Bank ("SCB Line of Credit"). Pursuant to the terms of the SCB Line of Credit, the Company can borrow up to $1,000,000 secured by an assignment of a deposit account with Southern California Bank. Interest on the outstanding principal balance, calculated from the date of each advance to the repayment of each advance is at a fixed rate of 7.12%. The credit facility was undrawn at June 30, 1998. Throughout 1997 to June 30, 1998, the Company has paid approximately $96,000,000 in cash, paid $26,644,686 for acquisition indebtedness, and has issued approximately 11,000,000 shares of Common Stock for the Acquisitions, distribution and licensing agreements. From inception through June 30, 1998, the Company has funded operations primarily from borrowings under its debt agreements and the sale of its Common Stock. The Company's operating activities provided net cash of $2,206,661 for the six months ended June 30, 1998. The cash used by operating activities is primarily attributable to the Company's continued efforts to increase its penetration of the retail and alternate distribution channels. Additionally, the Company believes that the net proceeds from the common stock private placement and the notes offering, together with existing sources of liquidity, will be sufficient to fund its capital expenditures, working capital, selected acquisitions, and other cash requirements through the next 12 months. Short-term and long-term funding needs for SmarTalk relate principally to acquisitions, additional market penetration, liquidity, operations and capital expenditures. These requirements principally have been met through the proceeds of the initial public offering in October 1996 and the notes offering in September 1997. The following table sets forth selected financial data from the consolidated statements of cash flows.
CASH (USED IN) PROVIDED BY: ------------------------------------------------- SIX MONTHS ENDED JUNE 30, OPERATIONS INVESTING FINANCING ------------------------- ------------ ----------- ----------- 1998.................................. $(19,304,711) $(14,754,906) $ 2,782,159 1997.................................. $ (4,849,583) $ (2,098,524) $(5,789,598)
Working capital current assets and current liabilities are illustrated in the table below:
CURRENT CURRENT WORKING ASSETS LIABILITIES CAPITAL ------------ ----------- ---------- June 30, 1998......................... $114,921,082 $108,148,692 $6,772,390 December 31, 1997..................... $113,334,126 $110,464,883 $2,869,243
The increase in working capital from December 31, 1997 to June 30, 1998 is primarily attributable to the Company's growth and financing activities. IMPACT OF INFLATION SmarTalk does not consider inflation to have had a material impact on the results of operations for the six months ended June 30, 1998 and 1997. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II. OTHER INFORMATION Item 1. Legal Proceedings Since July 23, 1998, certain putative class actions have been filed against the Company and certain current and former members of its management and Board in state and Federal courts alleging violations of state and Federal Securities laws with respect to certain alleged misrepresentations and/or omissions in regard to the Company's projected and actual revenues and earnings. These lawsuits seek unspecified damages on behalf of a class of persons who purchased the Company's securities from July 31, 1997 to August 10, 1998. The complaints allege that the Company made material misrepresentations and omissions in regard to the Company's projected and actual revenues and earnings. While management believes that the description given above is an accurate description of the lawsuits which have been filed against the Company, lawsuits may have been filed of which the Company is not aware. While it is not feasible to predict or determine the final outcome of these proceedings, an adverse outcome with respect to such proceedings could have a material adverse impact on the Company's results of operations, financial position, and statements of cash flow. Item 2. Changes in Securities and Use of Proceeds In June 1998, the Company issued 2,715,000 shares of its Common Stock in connection with a merger. The shares were issued in reliance upon the exemption from registration provided for under Section 4(2) of the Securities Act of 1933, as amended (the "Act"). In May 1998, the Company granted an option to purchase 500,000 shares of its Common Stock in connection with a strategic alliance agreement. The Company made the sale of these unregistered securities in reliance upon Section 4(2) of the Act. In April, May, and June of 1998, the Company granted 370,000 options to purchase its Common Stock to certain officers and employees of the Company and certain other persons in consideration for their services and as an inducement to join the Company. The Company made all of the sales of these unregistered securities in reliance upon Section 4(2) of the Act. Item 3. Default Upon Senior Securities. Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders.
Annual Meeting dated June 18, 1998 - ------------------------------------------------------------------------------------------------------------------------ yes % no % abstain Broker Non-Votes % - ------------------------------------------------------------------------------------------------------------------------ Appointment of the Board of Directors - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Erich L. Spangenberg 12,628,746 56 0 0 113,015 0 0 - ------------------------------------------------------------------------------------------------------------------------ Robert H. Lorsch 12,628,646 56 0 0 113,115 0 0 - ------------------------------------------------------------------------------------------------------------------------ Robert M. Smith 12,628,546 56 0 0 113,215 0 0 - ------------------------------------------------------------------------------------------------------------------------ Fred F. Fielding 12,628,846 56 0 0 112,915 0 0 - ------------------------------------------------------------------------------------------------------------------------ Kenneth A. Viellieu 12,627,446 56 0 0 114,315 0 0 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Appointment of 12,731,139 56 4,923 0 5,699 0 0 Pricewaterhouse LLP as Independent Auditors - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
Item 5. Other Information. Not Applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits required by Item 601 of Regulation S-K. 27.1 Financial Data Schedule (b) Reports on Form 8-K SmarTalk filed a Form 8-K on June 10, 1998 pertaining to the consummation of the acquisition of Worldwide Direct, Inc. containing item 2 and item 7(c) exhibits 2.1 and 99.1 SmarTalk filed a Form 8-K on July 8, 1998 pertaining to the consummation of the acquisition of Fletcher International Limited, containing item 5 and item 7(c) exhibits 99.1 and 99.2. SmarTalk filed a Form 8-K on August 13, 1998 pertaining to its press release dated August 10, 1998, containing item 5 and item 7(c) exhibit 99.1. 8 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SMARTALK TELESERVICES, INC. (Registrant) Date: August 19, 1998 /s/ Glen Andrew Folck --------------------------------- (Signature) Name: Glen Andrew Folck Title: Chief Financial Officer 9 EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS 12-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 JUN-30-1998 DEC-31-1997 31,705,864 63,066,576 0 0 45,934,488 34,203,477 1,445,932 669,206 7,257,901 4,441,521 9,512,410 7,637,849 19,529,891 15,379,018 3,316,027 894,760 381,721,252 363,922,884 108,148,692 110,464,883 0 0 0 0 0 0 199,906,341 175,420,772 (77,459,600) (73,132,703) 381,721,252 363,922,884 0 0 94,235,441 19,165,223 54,761,037 11,964,802 36,925,209 9,061,839 0 0 0 0 4,938,537 224,748 (39,544) (976,642) 1,175,951 0 (1,215,495) (976,642) (3,028,148) 0 0 0 0 0 (4,243,643) (976,642) (0.17) (.07) 0 0
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