Even as SmarTalk TeleServices' accounting discrepancy augurs a decrease in earnings and a barrage of shareholder settlements, analysts assert that core business for the company remains strong.
SmarTalk's stock prices fell 57 percent as the company last month announced a delay in 1997 and 1998 earnings reports because of questions a new group of independent accountants from PriceWaterhouseCoopers LLP raised about how the company accounted for its $30 million in acquisitions completed in 1997 and the subsequent restructuring charge.
The company, a leading provider of prepaid calling card products, recently moved from Los Angeles to its new headquarters in Columbus, Ohio.
“The deferred revenue issue does not affect the core business of the company,” said Mike Petsky, president of Delta Partners LLC, Manorville, NY, an industry consultant. “Auditors are merely having a debate about how to account for the company's revenue.”
“These issues have obscured the fact that SmarTalk is dedicated to achieving our mission of being the leader in the prepaid telecommunications industry,” said Erich Spangenberg, CEO, SmarTalk. “These issues identified by PWC do not relate to SmarTalk's operations or the company's current cash position.”
As of press time, a completion date for this process had not been set. No further announcements are expected prior to resolution of the issue.
Analysts are confident in the strength of the company, however, as proved by the upgrade to “strong buy” from “buy” last month after released reports said there was no fraud, deception or gross mismanagement by the company and that the review did not relate to SmarTalk's operations or the company's current cash position. Credit Suisse First Boston Corp. said questions raised by the company's accountants have little bearing on the company's fundamentals.
Analysts expect the stock to at least double in the next 12 months from its lows of recent days.
“Shareholders still own the same company, with the same growth prospects and the same value,” said Credit Suisse analyst Frank Governali in a statement.
The accounting changes, however, could take a toll on current and future earnings, he said. The issues could lead to higher costs or lower revenue, a result of a distracted management team. The drop in share price, as well, could force the company to issue additional shares, diluting estimated 1999 earnings by as much as nine cents a share if the stock remains low.
Last month the company raised $30 million through a private placement of equity. If the stock stays low through the fall, the investor would be entitled to an additional 1.4 million shares, increasing shares outstanding by about 4.6 percent.
The company could be forced to move a $6 million pretax write-off to 1998, cutting an estimated 12 cents from earnings, but raising 1997 earnings because the write-off would no longer weigh on them.
Depending on how the matter is handled, the impact on earnings could be anywhere from 10 cents per share to 63 cents per share, Governali said. But this, he added, will not affect the ongoing business of SmarTalk.
News of the review has prompted several shareholder suits against the company, which allege it issued a series of false and misleading statements regarding the company's financial condition and improperly accounted for several acquisitions during a period between Aug. 13, 1997 and Aug. 10, 1998.
A class action lawsuit has been filed in the U.S. District Court for the Eastern District of New York by the law firm of Weiss & Yourman on behalf of purchasers of the company's common stock to recover damages caused by defendants' alleged violations of securities laws.
The complaint alleges that defendants, while amassing more than $50 million in proceeds from insider sales of the SmarTalk stock, concealed from the investing public that they artificially recognized the sales figures announced during the class Period; they were recognizing revenues prematurely and improperly; SmarTalk's distributors were not selling prepaid cards at the levels represented; SmarTalk's management was encountering severe difficulties in integrating the companies acquired; and defendants were not controlling costs.
A class action suit has been commenced, as well, in the U. S. District Court for the Southern District of Ohio on behalf of all purchasers of the company's common stock for the period.
The complaint charges SmarTalk with issuing a series of materially false and misleading statements and improper accounting, which inflated the price of SmarTalk common stock from Aug. 13, 1997 through Aug. 10, 1998. Plaintiff also alleges that certain defendants took advantage of this price inflation by selling their personal holdings of SmarTalk common stock for proceeds of more than $52 million.