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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 TeleServices, Inc.
("SmarTalk"), SmarTel Communications, Inc. ("SmarTel"), GTI Telecom, Inc.
("GTI") and ConQuest Telecommunication Services Corp. ("ConQuest") 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 nine month
period ended September 30, 1997 give effect to (i) the merger of ConQuest and
SmarTalk (the "Merger"), (ii) the September 1997 issuance by SmarTalk of
$150,000,000 of Convertible Subordinated Notes, (iii) the acquisitions of GTI
and SmarTel and (iv) the September 1997 settlement of $25,970,000 in
subordinated notes issued by SmarTalk in connection with the GTI Acquisition as
if they occurred on January 1, 1996. The unaudited pro forma combined balance
sheet as of September 30, 1997 gives effect to the Merger. 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
Merger in a transaction to be accounted 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 SmarTalk and ConQuest. 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 SmarTalk had such events actually occurred on the dates
specified, nor is it indicative of SmarTalk's future results or financial
position. The results of operations for interim periods are not necessarily
indicative of the results for the full year.
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UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
PRO FORMA
ADJUSTMENTS AS ADJUSTED
FOR THE PRO FORMA
HISTORICAL HISTORICAL MERGER (NOTE WITH THE
SMARTALK CONQUEST 1) MERGER
Current assets:
Cash and cash equivalents...... $150,817,327 $ -- $ -- $150,817,327
Trade accounts receivable,
net......................... 11,664,768 9,974,958 -- 21,639,726
Inventories.................... 1,487,296 349,262 -- 1,838,558
Prepaid expenses............... 2,023,768 399,076 -- 2,422,844
Other current assets........... 4,270,655 541,136 -- 4,811,791
------------ ----------- ----------- ------------
Total current assets........ 170,263,814 11,264,432 -- 181,528,246
------------ ----------- ----------- ------------
Non-current assets:
Property and equipment, net.... 4,338,795 4,886,111 -- 9,224,906
Note receivable................ -- -- -- --
Debt issuance cost............. 4,664,997 -- -- 4,664,997
Other non-current assets....... 881,025 3,807,388 -- 4,688,413
Goodwill, net.................. 93,012,218 1,046,055 67,040,803(b) 161,099,076
------------ ----------- ----------- ------------
Total assets........... $273,160,829 $21,003,986 $ 67,040,803 $361,205,618
============ =========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............... $ 6,287,733 $ 3,002,385 $ -- $ 9,290,118
Deferred revenue............... 18,060,812 5,008,920 -- 23,069,732
Customer deposits.............. -- 24,530 -- 24,530
Excise, sales and use taxes
payable...................... 3,638,229 440,438 -- 4,078,667
Accrued marketing costs........ -- 223,369 -- 223,369
Other accrued expenses......... 3,752,826 551,370 3,350,000(b) 7,654,196
Line of credit................. -- 1,901,452 -- 1,901,452
Current portion of long-term
debt......................... -- -- -- --
Current portion of capital
lease obligations............ 60,249 -- -- 60,249
------------ ----------- ----------- ------------
Total current liabilities.... 31,799,849 11,152,464 3,350,000 46,302,313
------------ ----------- ----------- ------------
Long-term debt, less current
portion........................ 150,951,111 5,144,025 -- 156,095,136
------------ ----------- ----------- ------------
Total liabilities............ 182,750,960 16,296,489 3,350,000 202,394,449
------------ ----------- ----------- ------------
Shareholders' equity:
Preferred stock................ -- -- -- --
Common stock................... 97,879,224 4,941,188 (4,941,188)(a)
68,398,300(b) 166,277,524
Retained earnings (accumulated
deficit)..................... (7,469,355) (202,891) 202,891(a) (7,469,355)
Treasury stock, at cost........ -- (30,800) 30,800(a) --
------------ ----------- ----------- ------------
Total shareholders' equity... 90,409,869 4,707,497 63,690,803 158,808,169
------------ ----------- ----------- ------------
Total liabilities and
shareholders' equity....... $273,160,829 $21,003,986 $ 67,040,803 $361,205,618
============ =========== =========== ============
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UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
CONVERTIBLE
PRO FORMA SUBORDINATED AS ADJUSTED
ADJUSTMENTS NOTES PRO FORMA
FOR COMPLETED OFFERING COMBINED FOR
HISTORICAL HISTORICAL ACQUISITIONS ADJUSTMENTS COMPLETED
SMARTALK SMARTEL HISTORICAL GTI (NOTE 1) (NOTE 1) ACQUISITIONS
Revenue.......................... $39,730,845 $1,946,606 $ 9,175,357 $ -- $ -- $ 50,852,808
Cost of revenue.................. 23,761,289 935,860 7,434,075 -- -- 32,131,224
----------- ----------- ----------- ----------- ----------- ------------
Gross profit................... 15,969,556 1,010,746 1,741,282 -- -- 18,721,584
Sales and marketing.............. 10,213,879 861,917 1,000,630 -- -- 12,076,426
General and administrative....... 7,188,175 867,013 3,427,372 1,830,561(a) -- 13,313,121
----------- ----------- ----------- ----------- ----------- ------------
Operating (loss) income........ (1,432,498) (718,184) (2,686,720) 1,830,561 -- (6,667,963)
Interest income.................. 1,899,666 1,461 -- -- -- 1,901,127
Interest expense................. (965,173) -- (405,181) 220,833(b) (9,024,990) (c)(d) (10,174,511)
----------- ----------- ----------- ----------- ----------- ------------
(Loss)/Income before income
taxes........................ (498,005) (716,723) (3,091,901) (1,609,728) (9,024,990) (14,941,347)
Provision for income taxes....... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ------------
Net/(loss) income.............. $ (498,005) $ (716,723) $ (3,091,901) $(1,609,728) $(9,024,990) $(14,941,347)
=========== =========== =========== =========== =========== ============
Net loss per share............... $ (0.92)
============
Weighted average number of common
shares outstanding............. 16,253,644
============
PRO FORMA AS ADJUSTED
ADJUSTMENTS PRO FORMA
FOR THE COMBINED
HISTORICAL MERGER WITH THE
CONQUEST (NOTE 1) MERGER
Revenue.......................... $36,384,544 $ -- $ 87,237,352
Cost of revenue.................. 26,054,289 -- 58,185,513
----------- ----------- ------------
Gross profit................... 10,330,255 -- 29,051,839
Sales and marketing.............. 3,941,940 -- 16,018,366
General and administrative....... 5,959,815 2,514,030 (e) 21,786,966
----------- ----------- ------------
Operating (loss) income........ 428,500 (2,514,030) (8,753,493)
Interest income.................. 83,267 -- 1,984,394
Interest expense................. (270,808) -- (10,445,319)
----------- ----------- ------------
(Loss)/Income before income
taxes........................ 240,959 (2,514,030) (17,214,418)
Provision for income taxes....... (93,974) 93,974 (f) --
----------- ----------- ------------
Net/(loss) income.............. $ 146,985 $(2,420,056) $(17,214,418)
=========== =========== ============
Net loss per share............... $ (0.83)
============
Weighted average number of common
shares outstanding............. 20,741,244
============
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UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
CONVERTIBLE
PRO FORMA SUBORDINATED AS ADJUSTED
ADJUSTMENTS NOTES PRO FORMA
FOR COMPLETED OFFERING COMBINED FOR
HISTORICAL HISTORICAL HISTORICAL ACQUISITIONS ADJUSTMENTS COMPLETED
SMARTALK SMARTEL GTI (NOTE 1) (NOTE 1) ACQUISITIONS
Revenue.................... $15,021,060 $ 5,034,192 $ 21,264,323 $ $ -- $ 41,319,575
Cost of revenue............ 10,198,971 4,100,955 18,294,789 -- 32,594,715
----------- ----------- ----------- ----------- ----------- ------------
Gross profit........... 4,822,089 (933,237) 2,969,534 -- -- 8,724,860
Sales and marketing........ 4,511,291 1,306,635 6,575,261 -- -- 12,393,187
General and
administrative........... 3,615,070 2,205,883 639,819 4,555,128(a) -- 11,015,900
Write-down of assets....... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ------------
Operating loss......... (3,304,272) (2,579,281) (4,245,546) (4,555,128) -- (14,684,227)
Interest income............ 443,352 7,241 -- -- -- 450,593
Interest expense........... (251,628) -- (559,362) (9,317,857)(c)(d) (10,128,847)
----------- ----------- ----------- ----------- ----------- ------------
Loss before income
taxes................ (3,112,548) (2,572,040) (4,804,908) (4,555,128) (9,317,857) (24,362,481)
Provision for income
taxes.................... -- -- -- --
----------- ----------- ----------- ----------- ----------- ------------
Net loss............... $(3,112,548) $(2,572,040) $ (4,804,908) $(4,555,128) $(9,317,857) $(24,362,481)
=========== =========== =========== =========== =========== ============
Net loss per share......... $ (1.82)
============
Weighted average number of
common shares
outstanding.............. 13,394,662
============
AS ADJUSTED
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
HISTORICAL FOR THE MERGER WITH THE
CONQUEST (NOTE 1) MERGER
Revenue.................... $ 37,821,061 -- $ 79,140,636
Cost of revenue............ 28,926,051 -- 61,520,766
----------- ----------- ------------
Gross profit........... 8,895,010 17,619,870
Sales and marketing........ 2,856,212 -- 15,249,399
General and
administrative........... 6,883,849 3,352,040(e) 21,251,789
Write-down of assets....... 918,445 -- 918,445
----------- ----------- ------------
Operating loss......... (1,763,496) (3,352,040) (19,799,763)
Interest income............ -- -- 450,593
Interest expense........... (402,378) (10,531,225)
----------- ----------- ------------
Loss before income
taxes................ (2,165,874) (3,352,040) (29,880,395)
Provision for income
taxes.................... 766,000 (766,000)(f) --
----------- ----------- ------------
Net loss............... (1,399,874) $ (4,118,040) $(29,880,395)
=========== =========== ============
Net loss per share......... $ (1.67)
============
Weighted average number of
common shares
outstanding.............. 17,882,262
============
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NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
NOTE 1
The Unaudited Pro Forma Combined Balance Sheet has been prepared to reflect
the effect of the Merger as if it occurred on September 30, 1997 for an
aggregate purchase price of $63,948,300 and estimated transaction costs of
approximately $7,800,000. Pro forma adjustments are made to reflect:
(a) The elimination of the equity of ConQuest on acquisition.
(b) The adjustment to allocate the excess purchase price over the fair
value of ConQuest's net assets at September 30, 1997 to goodwill.
SEPTEMBER 30, 1997
------------------
Purchase price (4,487,600(1) shares at $14.25 per
share)............................................. $ 63,948,300
Estimated transaction costs to be settled in SmarTalk
Common Stock....................................... 4,450,000
Estimated cash transaction costs..................... 3,350,000
-----------
Total purchase price (including transaction costs)... 71,748,300
Less: Net assets acquired............................ 4,707,497
-----------
Goodwill............................................. $ 67,040,803
===========
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(1) Shares calculated as follows:
ConQuest common shares outstanding............................ 588,152
Conversion rate............................................... 7.63
---------
Total SmarTalk common stock to be issued...................... 4,487,600
=========
Management has not yet allocated any of the excess purchase price to
identifiable intangible assets such as intellectual property, in-process
research and development, customer relationships or specific contracts as
valuations of any potential intangible assets are not currently available.
Should management identify such assets in the future, the useful life of
any individual asset may differ from the goodwill amortization period of 20
years currently reflected in the Pro Forma Combined Statements of
Operations.
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NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
NOTE 1
The Unaudited Pro Forma Combined Statements of Operations give effect to
the following pro forma adjustments necessary to reflect (i) the pending Merger;
(ii) the Convertible Subordinated Notes Offering; (iii) the acquisitions of GTI
and SmarTel; and (iv) settlement of $25,970,000 in subordinated notes issued in
connection with the GTI Acquisition as if all of the transactions occurred on
January 1, 1996:
(a) To record amortization of goodwill on the SmarTel and GTI
acquisitions on a straight line basis over 20 years.
(b) To exclude substantially all interest expense recorded on the
subordinated notes issued on acquisition of GTI.
(c) To record interest expense on the $150,000,000 principal amount of
the Convertible Subordinated Notes.
(d) Amortization of debt issuance costs over the life of the
Convertible Subordinated Notes.
(e) Amortization of goodwill on the Merger on a straight line basis
over 20 years.
(f) To adjust the tax benefit/(expense) for ConQuest given the
continuing operating losses of SmarTalk.
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