NEW YORK-SmarTalk TeleServices Inc., a Columbus, Ohio, prepaid calling card distributor, saw its stock price dip by 60 percent to a record low of $6.37 per share Aug. 11. The company canceled its second-quarter earnings release conference scheduled for that day and said results would be delayed indefinitely.
“(Our) independent accountants, PriceWaterhouseCoopers L.L.P., have recently informed management about potential significant issues with (SmarTalk’s) accounting treatment for acquisitions that occurred during 1997 and certain other items relating to 1997,” the company said.
“The accounting treatment of these transactions was previously reviewed by PWC in connection with the company’s annual audit.”
SmarTalk said it had expected to announce Aug. 11 earnings for the quarter ending June 30 of $51.8 million, net income from continuing operations of $1.9 million and earnings per share from continuing operations of 8 cents.
“These results reflect the proposed treatment of SmarTalk’s recent acquisition of Worldwide Direct on a pooling-of-interests basis,” the company said.
“(Our) anticipated second-quarter, year-end and prior quarterly results could be materially affected by any adjustments resulting from this accounting review.”
In April, the company said it expected a loss of 5 cents per share on $40 million in revenues.
Erich Spangenberg, chief executive officer of SmarTalk, said in an April 13 announcement: “The estimated revenues and earnings for the quarter and the year will be impacted by a number of factors, including the classification of the call center acquired in connection with the ConQuest transaction as a discontinued operation, delays and costs associated with the launch of alternative distribution (channels), promotional revenues not achieving expected levels, the timing of revenue recognition from certain key accounts and costs associated with the anticipated launch of prepaid cellular and international expansion.”
The timing of the company’s revenue recognition practices is at issue in at least three of the handful of publicly announced class-action shareholder lawsuits filed in California state and federal courts between July 23 and Aug. 12. Each covers slightly different time periods, but collectively they extend between last May and this August.
“The complaint alleges that during the class period, defendants materially misrepresented SmarTalk’s results and prospects, claiming it would be profitable in 1997, would have earnings per share of $1.30 in 1998 and $2 in 1999,” said a lawsuit filed Aug. 12 in the U.S. District Court for the Central District of California by the Philadelphia law firm of Barrack, Rodos & Bacine.
“SmarTalk later reported `record’ revenues and earnings, which were false (because it) had achieved them only by prematurely recognizing revenue on unused prepaid phone cards and (by) improperly capitalizing marketing expenses in violation of generally accepted accounting principals.”
This lawsuit and at least one other also allege the company and its officers and directors misrepresented SmarTalk’s prospects in order to inflate share price so insiders could sell 2.3 million of their shares for $52 million. These equity sales, the lawsuits charge, facilitated a successful $125 million debt sale. The new debt and a portion of the equity sale proceeds were used to purchase prepaid calling-card operations from ConQuest and Frontier Corp.
The insider sales challenged in the lawsuits occurred before SmarTalk’s announcement July 16 it had raised about $30 million through the private sale of 1.8 million shares of newly issued common stock at $17.12 each. SmarTalk went public in October 1996 at a common stock share price of $14.50.
