<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1996
REGISTRATION NO. 333-10391
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2 TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
SMARTALK TELESERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
CALIFORNIA 4899 95-4502740
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER ID NO.)
JURISDICTION OF CLASSIFICATION CODE NO.)
INCORPORATION OR
ORGANIZATION)
1640 SOUTH SEPULVEDA BOULEVARD, SUITE 500
LOS ANGELES, CALIFORNIA 90025
(310) 444-8800
(310) 444-8822 (FAX)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
ROBERT H. LORSCH
SMARTALK TELESERVICES, INC.
1640 SOUTH SEPULVEDA BOULEVARD, SUITE 500
LOS ANGELES, CALIFORNIA 90025
(310) 444-8800
(310) 479-3297 (FAX)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
ROBERT M. SMITH ROBERT B. KNAUSS
DEWEY BALLANTINE SANDRA A. SEVILLE-JONES
333 SOUTH HOPE STREET, SUITE 3000 MUNGER, TOLLES & OLSON
LOS ANGELES, CALIFORNIA 90071 355 SOUTH GRAND AVENUE, 35TH FLOOR
(213) 626-3399 LOS ANGELES, CALIFORNIA 90071
(213) 625-0562 (FAX) (213) 683-9100
(213) 687-3702 (FAX)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
OCTOBER 10, 1996
PROSPECTUS
4,200,000 SHARES
LOGO
SMARTALK TELESERVICES, INC.
COMMON STOCK
(NO PAR VALUE)
Of the 4,200,000 shares of Common Stock, no par value per share (the "Common
Stock"), of SmarTalk TeleServices, Inc. ("SmarTalk" or the "Company") offered
hereby, 4,000,000 shares are being sold by the Company and 200,000 shares are
being sold by certain shareholders of the Company (the "Selling Shareholders").
See "Principal and Selling Shareholders." The Company will not receive any of
the proceeds from the sale of the shares of Common Stock by the Selling
Shareholders.
Prior to this offering (the "Offering"), there has been no public market for
the Common Stock. It is currently estimated that the initial public offering
price will be between $13 and $15 per share. For a discussion relating to the
factors to be considered in determining the initial public offering price, see
"Underwriting."
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the proposed symbol "SMTK."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2) SELLING SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share........................... $ $ $ $
Total(3)............................ $ $ $ $
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</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses of the Offering estimated at $1,225,000, all of
which will be paid by the Company.
(3) The Selling Shareholders have granted to the Underwriters a 30-day option
to purchase up to 630,000 additional shares of Common Stock at the Price to
Public, less Underwriting Discount, solely to cover over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discount and Proceeds to Selling Shareholders will be
$ , $ and $ , respectively. See "Underwriting" and
"Principal and Selling Shareholders."
The shares are offered subject to receipt and acceptance by the Underwriters,
to prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the shares will be made at the office of Salomon Brothers Inc,
Seven World Trade Center, New York, New York or through the facilities of The
Depository Trust Company, on or about , 1996.
SALOMON BROTHERS INC
CS FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
The date of this Prospectus is , 1996.
<PAGE>
Omitted is a photograph of a business woman making a phone call from a
public telephone. To the right of this woman the following text appears: "An
Emerging Market. The Prepaid Phone Card Industry is Expected to Reach A
Billion Dollars In Sales in 1996.*" In smaller print at the bottom of the page
the following text appears: "*Source: ATLANTIC-ACM Report, 1996 Calling and
Prepaid Card Products: Trends and Opportunities." Superimposed over the page
are six SMARTALK TELESERVICES CARDS.
Omitted is a photograph of a woman holding a SMARTALK TELESERVICES CARD
making a phone call from a public telephone. Along the left side of the page
the following text appears: "Helping Marketers Build Brand Equity. Air Touch
Cellular, Cellular One, Janna Systems, Kodak & Hallmark Cards with American
Stores, Hello Direct, JVC, Smart & Final Iris, Software Publishing Company,
The Stiffel Company, and more." Along the right side of the page the following
text appears: "National Distribution through Leading Retailers. Acme, Best
Buy, Bradlees, Builders Square, Dayton's, Fedco, Foley's, The Good Guys, Good
Neighbor Pharmacies, Hills, Hudson's, Jewel/Osco Combo Stores, Marshall
Field's, Office Depot, Office 1 Superstores, Osco Drug, Penn Daniels,
Price/Costco, Robinsons-May, Sav-on Drug, Thrifty Oil, Venture Stores and
more."
Omitted are two paragraphs: On the left side of the page is a photograph of
a businessman making a phone call and holding up the SMARTALK TELESERVICES
CARD. On the right side is a photograph of a young child making a call from a
public telephone and holding up the SMARTALK TELESERVICES CARD. Down the
center of the page the following text appears: "Strategic Alliances Enhance
Distribution Channels. The Douglas Stewart Company, MCI, West Interactive."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN
THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN SHARES OF THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM
RULES 10b-6, 10b-7 AND 10b-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements, including the Notes thereto, appearing
elsewhere in this Prospectus. Investors should also carefully consider the
information set forth under the heading "Risk Factors" and are urged to read
this Prospectus in its entirety. Unless otherwise indicated, all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
SmarTalk provides convenient, easy to use, cost-effective telecommunications
products and services to individuals and businesses primarily through its
SmarTalk TeleServices Card (the "SmarTalk 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 and outbound international long distance calling to
more than 150 countries, as well as enhanced features such as sequential
calling, speed dial and message delivery. The SmarTalk Card may also be
recharged on-line with a major credit card, allowing the user to add minutes as
needed. The Company expects to offer other enhanced services, including
conference calling, voice mail, fax mail, content delivery and selected
international calling services. The Company's long distance calls are carried
primarily through MCI and AT&T. For the six months ended December 31, 1995 and
June 30, 1996, the number of minutes decremented from SmarTalk cards or
otherwise used by SmarTalk customers were approximately 2,576,000 and
15,901,000, respectively.
The domestic prepaid phone card industry has grown significantly in recent
years. Prepaid phone card revenues in the U.S. have grown from an estimated $20
million in 1990 to an estimated $1 billion in 1996, making prepaid phone
services one of the fastest growing segments of the telecommunications
industry. Industry sources project the total U.S. prepaid phone card market to
reach $2.5 billion in 2000.
SmarTalk's primary marketing and distribution focus is to target individuals
and small businesses through major national and regional retailers. Currently,
the SmarTalk Card is sold at selected retail locations throughout the U.S.,
including locations operated by the following leading retailers: American Drug
Stores (which includes Jewel/Osco Combo Stores, Osco Drug Stores and Sav-On
Drug Stores), Office Depot, Thrifty Oil, Builders Square, Hills Department
Stores, Bradlees, Bergen Brunswig Drug Company (Good Neighbor Pharmacy),
Venture Stores, Foley's Department Stores, Marshall Field's, Fred W. Albrecht
Grocery Company, Office 1 Superstores, Price/Costco, Acme, Best Buy, Dayton's,
Fedco, The Good Guys, Hudson's, Penn Daniels, Pamida and Robinsons-May. The
Company believes its success to date in rapidly expanding its retail network is
attributable to management's ability to increase retailers' awareness of the
profit potential of offering telecommunications services at retail, the minimal
space involved in offering the SmarTalk Card at retail and the ability of the
SmarTalk Card to generate ongoing residuals for retailers through participation
in recharge revenues. SmarTalk also is exploring the opportunity of offering
retailers a co-branded, pre-subscribed "1+" long distance service. This new
product, if successfully introduced, would afford retailers the ability to
offer residential and small business customers long distance services that are
designed to generate ongoing revenue streams while requiring virtually no shelf
space or inventory cost. SmarTalk also markets its services directly to
customers through direct response sales which include recharge sales, and sales
generated through print, direct mail, and, in the future, Internet and
television advertising.
The Company has developed additional marketing and distribution avenues,
including the Company's Corporate Advantage Program and corporate promotional
programs. Under the Corporate
3
<PAGE>
Advantage Program, employees who are away from their offices can utilize
SmarTalk services, thereby enabling businesses to lower telecommunications
costs and monitor call activity to better allocate long distance costs.
Corporate promotional programs allow the Company's corporate customers to
provide co-branded prepaid phone cards for use in corporate or product
promotions.
SmarTalk services are delivered through proprietary switching, application
and database access software which run on two interactive call processing
platforms (the "SmarTalk Platforms"), one of which was recently acquired from
Pacific Bell Information Services (the "VoiceChoice Platform"). The acquisition
of the VoiceChoice Platform provides the Company with the opportunity to reduce
its costs while providing the Company with the flexibility to customize and add
features. The Company has also developed a proprietary in-house data reporting
and tracking system (the "SmarTrac System"), which tracks inventory, controls
fraud, monitors usage by card and retailer and allows the Company to provide
certain customer and usage information to its retailers and business customers.
The Company believes that its principal competitive advantages are its (i)
well-established presence among major retailers, (ii) advanced
telecommunications infrastructure, and (iii) management team, which has
extensive marketing and merchandising expertise. The Company believes its
competitive advantages will assist it in achieving its growth objective through
implementation of the following strategies:
Increase Penetration of Retailers. SmarTalk plans to increase penetration of
retailers by expanding the number of stores in which the SmarTalk Card is sold
and the points of sale at which a customer can purchase the SmarTalk Card
within each store. The Company also intends to leverage its relationships with
retailers to market additional telecommunications services such as "1+" long
distance.
Further Develop Direct Response Channels. SmarTalk plans to stimulate the
growth of its existing direct response sales through, for example, volume
discounts and on-line advertising. The Company plans to continue to develop new
and innovative means of marketing its telecommunications products and services
directly to customers to complement its retail distribution network, including
television advertising, catalogue and other direct marketing methods.
Broaden Corporate Advantage and Promotional Programs. SmarTalk intends to
expand the Corporate Advantage Program and corporate promotional programs by
(i) expanding its sales force to include representatives that focus on business
customers, (ii) capitalizing on the Company's strategic relationships, and
(iii) leveraging its existing relationships with retailers by promoting its
corporate programs to retailers already familiar with SmarTalk services.
Target the Business Customer. SmarTalk plans to introduce additional enhanced
features in an effort to attract both small businesses at retail and
corporations as subscribers to its Corporate Advantage Program. Such planned
enhanced features include voice mail, fax mail, conference calling and selected
international calling services.
Leverage Existing Strategic Relationships. SmarTalk plans to leverage its
existing network of strategic relationships to gain access to new business
opportunities and a wider customer base. The Company has recently entered into
strategic alliances, including those with MCI, West Interactive, and Douglas
Stewart, which the Company believes will expand its distribution channels. The
Company also plans to develop additional strategic relationships with partners
whose customers are prospective users of SmarTalk services.
4
<PAGE>
Expand International Services. SmarTalk plans to expand its business to
international markets in order to market prepaid phone cards to U.S. travelers
and foreign customers who frequently call the U.S. SmarTalk believes that it
can market to foreign customers who frequently call the U.S. by establishing a
sales force abroad and by providing turnkey merchandising materials to
retailers abroad which are customized for foreign markets.
SmarTalk TeleServices, Inc. was incorporated in California in October 1994.
As used in this Prospectus, the term "SmarTalk" or the "Company" refers to
SmarTalk TeleServices, Inc. and its subsidiary, unless the context otherwise
requires. All information in this Prospectus gives effect for all periods to a
3,500 for 1 stock split effected on February 13, 1996, a 2.51 for 1 stock split
effected on May 23, 1996, and a 0.5625 for 1 reverse stock split effected on
August 15, 1996. The Company's principal executive offices are located at 1640
South Sepulveda Boulevard, Suite 500, Los Angeles, California 90025, and its
telephone number is (310) 444-8800.
THE OFFERING
Common Stock Offered By:
<TABLE>
<S> <C>
The Company ............ 4,000,000 shares
The Selling
Shareholders........... 200,000 shares(1)
Total................. 4,200,000 shares(1)
===================
Common Stock Outstanding
after the Offering....... 12,824,834 shares(2)
Use of Proceeds........... To repay indebtedness, to fund capital expenditures,
marketing, new business development opportunities
and the expansion of the Company's business
internationally, and for additional working capital
and general corporate purposes including possible
acquisitions.
Proposed Nasdaq National
Market Symbol............ SMTK
</TABLE>
- --------
(1) Excludes 630,000 shares of Common Stock that may be sold by the Selling
Shareholders pursuant to the Underwriters' over-allotment option.
(2) Excludes 510,514 shares of Common Stock reserved for issuance upon exercise
of outstanding options granted by the Company. See "Dilution" and
"Management -- Stock Option Plans."
5
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(OCTOBER 28, SIX MONTHS ENDED
1994) TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ----------------------
1994 1995 1995 1996
------------ ------------ --------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1):
Revenue.................... $ 444 $ 453,916 $ 41,738 $ 3,678,020
Gross profit (loss)........ (272) 135,230 11,828 935,905
Operating expenses......... 65,200 1,466,544 297,265 3,102,719
--------- ----------- --------- -----------
Loss from operations....... (65,472) (1,331,314) (285,437) (2,166,814)
Net loss................... $ (65,472) $(1,329,302) $(285,437) $(2,271,186)
========= =========== ========= ===========
Net loss per share(2)...... $ (.01) $ (.14) $ (.03) $ (.24)
========= =========== ========= ===========
Weighted average number of
common shares and common
equivalent shares(2)...... 9,333,348 9,333,348 9,333,348 9,333,348
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------
ACTUAL AS ADJUSTED(3)
----------- --------------
<S> <C> <C>
BALANCE SHEET DATA(1):
Working capital................................... $(3,256,069) $44,313,929
Total assets...................................... 4,782,822 52,322,822
Deferred revenue(4)............................... 4,127,919 4,127,919
Total debt........................................ 3,825,000 510,000
Total shareholders' equity (deficit).............. (5,814,988) 45,040,012
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
------------- ------------ --------- ----------
<S> <C> <C> <C> <C>
SELECTED QUARTERLY OPERATING
DATA:
Number of PINs activated(5).. 15,811 52,800 117,212 196,259
Number of minutes
decremented(6).............. 640,320 1,935,247 5,152,179 10,748,914
Number of recharge minutes
purchased................... 154,974 312,390 666,030 1,112,130
</TABLE>
- --------
(1) This data should be read in connection with the Financial Statements and
Notes thereto included elsewhere in this Prospectus.
(2) See Note 2 of Notes to Financial Statements for a discussion of net loss
per share and shares used in computing net loss per share.
(3) Adjusted to reflect $510,000 borrowed under a $1,000,000 line of credit
established in September 1996 and to give effect to the application of the
estimated net proceeds of the Offering based upon as assumed initial public
offering price of $14 per share. See "Use of Proceeds."
(4) Deferred revenue represents amounts for products shipped to retailers and
recharged minutes that the Company has invoiced, which, as of the date
presented, have not been used by customers. Upon customer usage, the
Company recognizes revenue and reduces the deferred revenue account. At the
time the revenue is recognized, the costs to which that revenue
specifically relates are also recognized.
(5) "PINs" are personal identification numbers used by each customer to access
the SmarTalk system. PINs are printed on the back of each SmarTalk Card or
provided separately to customers.
(6) "Minutes decremented" include minutes used by customers purchasing SmarTalk
services and minutes used as a result of the distribution of free
promotional goods.
6
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained under "Management's Discussion and Analysis of
Financial Condition and Results of Operations," such as statements concerning
the Company's ability to increase gross margins and decrease expenses, certain
statements under "Business," such as statements concerning future services,
proposed efforts to increase brand awareness, the future of the
telecommunications industry and SmarTalk's plans to expand its retail
distribution network and develop additional distribution channels and other
statements contained herein regarding matters that are not historical facts,
are forward-looking statements (as such term is defined in the Securities Act
of 1933, as amended (the "Securities Act")). Because such forward-looking
statements include risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially include, but are
not limited to, those discussed under "Risk Factors."
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus.
LIMITED OPERATING HISTORY; NET LOSSES; ACCUMULATED DEFICIT
The Company was formed in October 1994 and has had only a limited operating
history upon which investors may base an evaluation of its performance. As a
result of operating expenses and development expenditures, the Company has
incurred significant operating and net losses to date. Net losses for the
period ended December 31, 1994 and for the year ended December 31, 1995 and
for the six months ended June 30, 1996 were approximately $65,000, $1.3
million, and $2.3 million, respectively. At June 30, 1996, the Company had an
accumulated deficit of approximately $6.1 million. In addition, the Company
plans to significantly increase its operating expenses in order to expand its
sales and marketing efforts, fund a greater level of product development and
marketing and otherwise support the growth of the Company. Given these planned
expenditures, the Company anticipates that it will continue to incur losses
for the foreseeable future and there can be no assurance that the Company will
ever achieve or sustain profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
INTENSE COMPETITION
The telecommunications services industry is intensely competitive, rapidly
evolving and subject to constant technological change. In 1994, there were
approximately 75 companies marketing prepaid calling cards. Today there are
more than 500 companies selling prepaid calling cards, and the Company expects
competition to increase in the future. Other providers currently offer one or
more of each of the services offered by the Company. As a service provider in
the long distance telecommunications industry, the Company competes with three
dominant providers, AT&T, MCI and Sprint, all of which are substantially
larger and have: greater financial, technical, engineering, personnel and
marketing resources; longer operating histories; greater name recognition; and
larger customer bases than the Company. These advantages afford the Company's
competitors pricing flexibility. Telecommunications services companies may
compete for customers based on price, with the dominant providers conducting
extensive advertising campaigns to capture market share. Competitors with
greater financial resources may also be able to provide more attractive
incentive packages to retailers to encourage them to carry products that
compete with SmarTalk services. In addition, competitors with greater
resources than the Company may be better situated to negotiate favorable
contracts with retailers. The Company believes that existing competitors are
likely to continue to expand their service offerings to appeal to retailers
and their customers. Moreover, since there are few, if any, substantial
barriers to entry, the Company expects that new competitors are likely to
enter the
7
<PAGE>
telecommunications market and attempt to market telecommunications services
similar to the Company's services which would result in greater competition.
The ability of the Company to compete effectively in the telecommunications
services industry will depend upon the Company's continued ability to provide
high quality SmarTalk services at prices generally competitive with, or lower
than, those charged by its competitors. Certain of the Company's competitors
dominate the telecommunications industry and have the financial resources to
enable them to withstand substantial price competition, which is expected to
increase significantly, and there can be no assurance that the Company will be
able to compete successfully in the future. Moreover, there can be no
assurance that certain of the Company's competitors will not be better
situated to negotiate contracts with suppliers of telecommunications services
which are more favorable than contracts negotiated by the Company. In
addition, there can be no assurance that competition from existing or new
competitors or a decrease in the rates charged for communications services by
the major long distance carriers or other competitors would not have a
material adverse effect on the Company's business, operating results or
financial condition (a "Material Adverse Effect").
Recent changes in the regulation of the telecommunications industry may
impact the Company's competitive position. The Telecommunications Act of 1996
(the "Telecommunications Act") was signed by President Clinton on February 8,
1996, effectively opening the long distance market to competition from the
Regional Bell Operating Companies (the "RBOCs"). The entry of these well-
capitalized and well-known entities into the long distance market will likely
increase competition for long distance customers. The Telecommunications Act
also grants the FCC the authority to deregulate other aspects of the
telecommunications industry, which in the future may, if authorized by the
FCC, facilitate the offering of telecommunications services by regulated
entities, including the RBOCs, in competition with the Company. See
"Business -- Competition."
LIMITED PROTECTION OF PROPRIETARY RIGHTS; RISKS OF INFRINGEMENT
The Company relies on a combination of copyright and trade secret laws and
contractual confidentiality provisions to protect its proprietary rights.
These laws and contractual provisions provide only limited protection of the
Company's proprietary rights. The Company to date has no registered
servicemarks, trademarks, patents or copyrights. The Company's application for
the servicemark "SmarTalk" was initially denied by the Patent and Trademark
Office of the U.S. Department of Commerce on the ground that there is another
company in the telecommunications industry using the name "Smartalk." The
Company is presently appealing such determination. The Company's appeal is
based on its belief that (i) the two companies are in different segments of
the telecommunications industry and do not compete against each other and
therefore consumer confusion is unlikely, and (ii) the other company will not
suffer any indirect harm or loss of goodwill due to confusion regarding the
source of products because customers of the other company are sophisticated
about the source of their purchases. There can be no assurance that the
Company will be successful in such appeal. While the Company believes that
registering the servicemark is important to its business to further protect
its existing common law right to use such servicemark, the Company does not
believe that the failure thus far to register its servicemark is dispositive
of whether the Company has the right to use such servicemark. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's software or services or to obtain and
use information that the Company regards as proprietary. There can be no
assurance that the Company's efforts to protect its proprietary rights will be
successful, or that the Company's competitors will not independently develop
similar technology. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the extent of the laws of the U.S.
See "Business -- The SmarTrac System" and "Business -- The SmarTalk
Platforms."
The Company is aware of other companies that use variations of the term
"Smart" in their name or in describing their products or services, including
telecommunications products and services. Three
8
<PAGE>
companies have written letters challenging the Company's use of the SmarTalk
name. There can be no assurance that SmarTalk will achieve a satisfactory
resolution of these disputes. If such claims are not satisfactorily resolved,
the other parties may pursue additional avenues to address the dispute,
including filing claims against the Company. The loss of the use of the name
SmarTalk would have a Material Adverse Effect. The Company currently is
incorporated or registered as a foreign corporation under the SmarTalk
TeleServices, Inc. name in all fifty states and the District of Columbia. The
Company does not believe that the use of "SmarTalk" as its name or with
respect to SmarTalk services is improper, and no actions have been filed to
date with respect to either patent, servicemark, trademark or copyright
claims. However, no assurance can be given that actions or claims alleging
patent, servicemark, trademark or copyright infringement will not be brought
against the Company with respect to its name or current or future SmarTalk
services, or that, if such actions are brought, the Company will ultimately
prevail. Any such claiming parties may have significantly greater resources
than the Company to pursue litigation of such claims. Any such claims, whether
with or without merit, could be time consuming, result in costly litigation,
cause delays in introducing new or improved services, require the Company to
enter into royalty or licensing agreements, or cause the Company to
discontinue use of the challenged tradename, servicemark or technology,
potentially giving rise to the significant expense associated with the
marketing of a new name or the development or purchase of replacement
technology, all of which could have a Material Adverse Effect.
NEW INDUSTRY; UNCERTAINTY OF MARKET ACCEPTANCE
The prepaid phone card industry segment is an emerging business
characterized by an increasing and substantial number of new market entrants
who have introduced or are developing an array of new products and services.
Each of these entrants is seeking to market, advertise and position its
products and services as the preferred method for accessing long distance
telephone services, including providing enhanced service features. As is
typically the case in an emerging industry, demand and market acceptance for
newly introduced products and services are subject to a high level of
uncertainty. There can be no assurance that substantial markets will continue
to develop for prepaid phone cards or that the Company will be able to meet
its current marketing objectives, succeed in positioning its cards and
services as a preferred method for accessing long distance telephone services
or achieve significant market acceptance for its products. See "Business --
Industry Overview."
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SERVICES
The telecommunications services industry is characterized by rapid
technological change, new product introduction and evolving industry
standards. The Company's success will depend, in significant part, on its
ability to make timely and cost-effective enhancements and additions to its
technology and introduce new services that meet customer demands. The Company
expects new products and services, and enhancements to existing products and
services, to be developed and introduced to compete with SmarTalk services.
The proliferation of new telecommunication technology, including personal
communication services and voice communication over the Internet, may reduce
demand for long distance services, including prepaid phone cards. There can be
no assurance that the Company will be successful in developing and marketing
new SmarTalk services or enhancements to SmarTalk services that respond to
these or other technological changes or evolving industry standards. In
addition, there can be no assurance that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of its existing SmarTalk services or that its new
SmarTalk services or enhancements thereto, will adequately meet the
requirements of the marketplace and achieve market acceptance. Delay in the
introduction of new SmarTalk services or enhancements, the inability of the
Company to develop such new SmarTalk services or enhancements or the failure
of such SmarTalk services or enhancements to achieve market acceptance could
have a Material Adverse Effect. See "Business -- Competition" and "Business --
Products and Telecommunications Services."
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DEPENDENCE ON MAJOR RETAILERS
Currently, the SmarTalk Card is sold at selected retail locations throughout
the U.S., including locations operated by the following leading retailers:
American Drug Stores (which includes Jewel/Osco Combo Stores, Osco Drug Stores
and Sav-On Drug Stores), Office Depot, Thrifty Oil, Builders Square, Hills
Department Stores, Bradlees, Bergen Brunswig Drug Company (Good Neighbor
Pharmacy), Venture Stores, Foley's Department Stores, Marshall Field's, Fred
W. Albrecht Grocery Company, Office 1 Superstores, Price/Costco, Acme, Best
Buy, Dayton's, Fedco, The Good Guys, Hudson's, Penn Daniels, Pamida and
Robinsons-May. The Company's arrangements with retailers are generally
pursuant to short-term arrangements. If the Company is unsuccessful in
providing competitive pricing, meeting the requirements of its retailers,
developing new products that are attractive to such retailers, or complying
with the terms of its arrangements with such retailers, such retailers may
fail to market aggressively the Company's services or may terminate their
relationship with the Company, either of which could have a Material Adverse
Effect. Substantially all of the Company's revenue to date has been derived
from the sale of the SmarTalk Card to retailers. Certain of those retailers
have, from time to time, accounted for a significant percentage of the
Company's revenue. See "Business -- General." The inability of any such
retailer to pay the Company for SmarTalk cards shipped or the loss of any such
retailer could have a Material Adverse Effect.
SEASONALITY; FACTORS AFFECTING OPERATING RESULTS; POTENTIAL FLUCTUATIONS IN
PERIOD-TO-PERIOD RESULTS
The Company's sales have been, and the Company expects that its sales will
continue to be, somewhat seasonal, due to holiday purchases of the SmarTalk
Card. In addition, the Company's operating results have varied significantly
in the past and may vary significantly in the future. Factors that may cause
the Company's operating results to vary include (i) changes in operating
expenses, (ii) the timing of the introduction of SmarTalk services, (iii)
market acceptance of new and enhanced versions of SmarTalk services, (iv)
potential acquisitions, (v) changes in legislation and regulation which affect
the competitive environment for SmarTalk services, and (vi) general economic
factors. Moreover, for many of the Company's retailers, SmarTalk services
represent a new merchandising category, with the attendant concerns regarding
shelf space positioning, sales force education and effective marketing and,
with respect to arrangements with certain retailers requiring customized
SmarTalk services, there may be significant leadtime to provide such SmarTalk
services following receipt of the customers' orders. As a result of these
factors, the Company believes that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
an indication of future performance. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
ABILITY TO MANAGE GROWTH AND IMPLEMENT NEW ACCOUNTING SYSTEM; NEED TO HIRE
ADDITIONAL EMPLOYEES
Although SmarTalk has experienced substantial growth in revenue in the last
year and intends to continue to grow rapidly, there can be no assurance that
the growth experienced by the Company will continue or that the Company will
be able to achieve the growth contemplated by its business strategy. The
Company's ability to continue to grow may be affected by various factors, many
of which are not within the Company's control, including competition and
federal and state regulation of the telecommunications industry. This growth
has placed, and is expected to continue to place, significant demands on all
aspects of the Company's business, including its administrative, technical and
financial personnel and systems. The Company's future operating results will
substantially depend on the ability of its officers and key employees to
manage such anticipated growth, to attract and retain additional highly
qualified management, technical and financial personnel, and to implement
and/or improve its technical, administrative, financial control and reporting
systems. The Company's financial controls and reporting systems will require
enhancement and substantial investment in the future to accommodate
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the Company's anticipated growth. There can be no assurance that the Company
will not encounter difficulties in expanding its financial controls and
reporting systems to meet the Company's future needs. If the Company is unable
to respond to and manage changing business conditions, then the quality of
SmarTalk services, its ability to retain key personnel and its results of
operations could be materially adversely affected. Difficulties in managing
continued growth could have a Material Adverse Effect. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company recently revised its method of revenue recognition from the
method originally utilized for internal financial reporting purposes. The
financial information contained herein reflects this revised method, the
principal effects of which are to decrease the level of current revenue
recognition and to create a deferred revenue account. Under this method of
revenue recognition, the Company recognizes revenue and reduces the deferred
revenue account as the customer utilizes calling time and upon expiration of
cards containing unused calling time. In response to these changes and in
order to upgrade its management information systems, the Company is currently
implementing a new accounting system with control and tracking applications
not present in the previous system. In connection with the implementation of
the new system, the Company will contract with outside consultants to review
the controls and administrative protocols associated with the new system.
Although the Company believes that the newly installed system will be adequate
to keep pace with the growth in the Company's business and the revised method
of revenue recognition, there can be no assurance that the newly installed
system will function properly or that the Company will not experience
financial control difficulties in future periods. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL
SmarTalk's success is largely dependent upon its executive officers, the
loss of one or more of whom could have a Material Adverse Effect. The Company
believes that its continued success will depend to a significant extent upon
the efforts and abilities of Robert H. Lorsch, Chairman of the Board,
President and Chief Executive Officer and Richard Teich, Executive Vice
President. Although the Company believes that it would be able to locate
suitable replacements for these executives if their services were lost, there
can be no assurance it would be able to do so. Accordingly, the loss of
services of any of these individuals could have a Material Adverse Effect. See
"Management." The Company maintains, and is the sole beneficiary of, "key man"
life insurance on Mr. Lorsch in the amount of $3,000,000.
DEPENDENCE UPON TELECOMMUNICATIONS PROVIDERS; NO GUARANTEED SUPPLY
The Company does not own a transmission network and, accordingly, depends
primarily on AT&T (accessed through West Interactive) and MCI for transmission
of its long distance calls. The Company obtains its MCI long distance
telecommunications services pursuant to a Preferred Carrier Agreement with MCI
which obligates the Company to utilize a specified number of minutes to
receive favorable pricing. The Company's failure to utilize the required
minutes within the periods specified in the agreement with MCI would require
the Company to pay an underutilization charge to MCI. While the Company
anticipates that it will fulfill its minimum usage requirements, any material
failure to meet such minimum usage requirements could have a Material Adverse
Effect. In the future, the Company may determine that it is desirable to enter
into additional agreements containing minimum usage requirements. Further, the
Company is dependent upon local exchange carriers for call origination and
termination. The Company's ability to maintain and expand its business
depends, in part, on its ability to continue to obtain telecommunications
services on favorable terms from long distance carriers and other such
suppliers, as well as the cooperation of both interexchange and local exchange
carriers in originating and terminating service for its customers in a timely
manner. The Company has not experienced significant losses in the past because
of interruptions of service at any of its carriers, but
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no assurance can be made in this regard with respect to the future. In
addition, no assurance can be given that the Company will be able to obtain
long distance services in the future at favorable prices, and a material
increase in the price at which the Company obtains long distance service could
have a Material Adverse Effect. See "-- Intense Competition" and "Business --
Products and Telecommunications Services."
POSSIBLE INABILITY TO RECOGNIZE A PORTION OF DEFERRED REVENUE
The sale of long distance domestic and outbound international telephone
service through prepaid phone cards may be subject to "escheat" laws in
various states. These laws generally provide that payments or deposits
received in advance or in anticipation of the provision of utility (including
telephone) services that remain unclaimed for a specific period of time after
the termination of such services are deemed "abandoned property" and must be
submitted to the state. Although the Company is not aware of any case in which
such laws have been applied to the sale of prepaid phone cards, and does not
believe that such laws are applicable, in the event that such laws are deemed
applicable, the Company may be unable to recognize the portion of its deferred
revenue remaining upon the expiration of SmarTalk cards with unused calling
time. In such event, the Company may be required to deliver such amounts to
certain states in accordance with these laws, which could have a Material
Adverse Effect. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
UNCERTAINTY OF STRATEGIC RELATIONSHIPS
A principal element of the Company's strategy is the creation and
maintenance of relationships with wholesale distributors and other
organizations with whom the Company has strategic alliances that will enable
the Company to offer its services to a wider customer base than the Company
could reach solely through direct marketing efforts. The Company has entered
into strategic alliances, including those with MCI, West Interactive and
Douglas Stewart, and the Company plans to aggressively develop additional
strategic relationships. These relationships were formed recently and the
Company is unable to predict the success or failure of these relationships due
to limited operating experience with these organizations. The Company's
success depends in part on the ultimate success of these relationships to
effectively aid in the marketing and distribution of SmarTalk services. See
"Business -- Strategic Partners."
The ability of the Company's strategic partners to incorporate the Company's
services into successful commercial ventures will require the Company, among
other things, to continue to successfully enhance its existing SmarTalk
services and develop new services. The Company's inability to meet the
requirements of such strategic partners, or to comply with the terms of its
arrangements with such parties, could result in such parties failing to market
the Company's services, seeking alternative providers of telecommunications
services or cancelling their contracts with the Company, any of which could
have a Material Adverse Effect. See "Business -- The SmarTalk Strategy" and
"Business -- Marketing and Distribution."
DEPENDENCE ON FACILITIES AND PLATFORMS; DAMAGE, FAILURE AND DOWNTIME
The Company currently owns the VoiceChoice Platform, a call processing
platform site located in San Francisco, California, and utilizes additional
call processing platform services at a facility located in San Antonio, Texas
which is backed up by a facility in Omaha, Nebraska. The Company's network
service operations are dependent upon its ability to protect the equipment and
data at such facilities against damage that may be caused by fire, power loss,
technical failures, unauthorized intrusion, natural disasters, sabotage and
other similar events. Although the Company has taken precautions to protect
itself and its customers from events that could interrupt delivery of SmarTalk
services, there can be no assurance that a fire, act of sabotage, technical
failure, human error, natural disaster or a
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similar event would not cause the failure of a significant technical
component, thereby resulting in an outage. Such an outage could have a
Material Adverse Effect. The Company believes that technical failures have not
resulted in any material downtime of the SmarTalk Platforms since the
Company's inception.
Although the Company maintains business interruption insurance providing for
aggregate coverage of approximately $1.0 million per occurrence, there can be
no assurance that the Company will be able to maintain its business
interruption insurance, that such insurance would continue to be available at
reasonable prices, that such insurance would cover all such losses or that
such insurance would be sufficient to compensate the Company for losses it
experiences due to the Company's inability to provide services to its
customers. See "Business -- The SmarTalk Platforms."
DEPENDENCE UPON SOFTWARE
The Company has developed, and depends on, its own proprietary in-house data
reporting and tracking system, the SmarTrac System, that provides a series of
database query and report capabilities that are used to track inventory,
control fraud and monitor system usage by card and retailer. The Company also
depends on its software, as well as software developed by or on behalf of
Pacific Bell Information Services, West Interactive and others, to provide
services to its customers. While the Company is presently negotiating
agreements to license certain software to operate the VoiceChoice Platform,
there can be no assurance that such negotiations will be successfully
completed. The software utilized by the Company in providing its services may
contain undetected errors. Although the Company engages in extensive testing
of its software prior to introducing the software onto its network, there can
be no assurance that errors will not be found in software after commencement
of use of such software. Any such error may result in partial or total failure
of the Company's network, requiring the Company to commit additional and
unanticipated funds for further product development, including the retention
of additional programming personnel. In addition, such failure may result in a
loss of customers and a corresponding decrease in revenue which would have a
Material Adverse Effect. See "Business -- The SmarTrac System" and
"Business -- The SmarTalk Platforms."
REGULATION
The Company is currently subject to federal and state government regulation
of its long distance telephone services. The Company is regulated at the
federal level by the FCC and is currently required to maintain both domestic
and international tariffs for its services containing the currently effective
rates, terms, and conditions of service. The FCC has proposed, however, to
eliminate the tariffing requirement for domestic interstate non-dominant
carriers. In addition, the Company is required to maintain a certificate,
issued by the FCC, in connection with its international services. The
intrastate long distance telecommunications operations of the Company are also
subject to various state laws and regulations, including prior certification,
notification or registration requirements. The Company generally must obtain
and maintain certificates of public convenience and necessity from regulatory
authorities in most states in which it offers service. In most of these
jurisdictions, the Company must file and obtain prior regulatory approval of
tariffs for intrastate services. In addition, the Company must update or amend
the tariffs and, in some cases, the certificates of public convenience and
necessity when rates are adjusted or new products are added to the long
distance services offered by the Company. The FCC and numerous state agencies
also impose prior approval requirements on transfers of control, including
transfers of control and corporate reorganizations, and assignments of certain
regulatory authorizations. As a result, the Company has filed or will file
certain notices and applications relating to the Offering. While the Company
expects to receive all such approvals that have been requested and believes
that it is or shall soon be otherwise in compliance with the applicable state
and federal regulations governing telecommunications service, there can be no
assurance that the FCC or the regulatory authorities in one or more states
will not raise material issues with regard to the Company's compliance with
applicable regulations, including transfer, stock
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issuance and similar regulations, or that state and federal regulatory
activities will not have a Material Adverse Effect.
If the federal and state regulations requiring the local exchange carriers
to provide equal access for the origination and termination of calls by long
distance subscribers (such as the Company's customers) change or if the
regulations governing the fees to be charged for such access services change,
particularly if such regulations are changed to allow variable pricing of such
access fees based upon volume, such changes could have a Material Adverse
Effect. See "Business -- Industry Overview," "Business -- Competition" and
"Business -- Government Regulation."
RISK OF LOSS FROM RETURNED TRANSACTIONS; FRAUD; BAD DEBT; THEFT OF SERVICES
The Company utilizes national credit card clearance systems for electronic
credit card settlement. The Company generally bears the same credit risks
normally assumed by other users of these systems arising from returned
transactions caused by closed accounts, frozen accounts, unauthorized use,
disputes, theft or fraud. The Company's relationships with providers of
merchant card services such as VISA and MasterCard could be adversely affected
by excessive uncollectibles or chargebacks, which are generally higher in the
telephone industry than in other industries, particularly with respect to
recharges because the transaction typically is not on a face to face basis in
which a cardholder signature is captured. Termination of the Company's ability
to offer recharge through merchant card services would have a Material Adverse
Effect. To minimize its financial exposure, the Company limits the amount that
customers can recharge within specified timeframes and generally charges a
higher rate for recharge services than for the initial purchase. From time to
time, persons have obtained services without rendering payment to the Company
by unlawfully utilizing the Company's access numbers and PINs. Although to
date the Company has not experienced material losses due to such unauthorized
use of access numbers and customized PINs, no assurance can be given that
future losses due to unauthorized use will not be material. The Company
attempts to manage these credit, theft and fraud risks through its internal
controls, monitoring and blocking systems. The Company also maintains reserves
which it deems adequate for such risks. Past experience in estimating and
establishing reserves and the Company's historical losses are not necessarily
accurate indications of the Company's future losses or the adequacy of the
reserves established by the Company in the future. Although the Company
believes that its risk management and bad debt reserve practices are adequate,
there can be no assurance that the Company's risk management practices or
reserves will be sufficient to protect the Company from unauthorized or
returned transactions or thefts of services which could have a Material
Adverse Effect. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Business -- The SmarTrac System."
SUBSTANTIAL DISCRETION OF MANAGEMENT CONCERNING USE OF PROCEEDS
The Company has allocated approximately $39 million of the net proceeds of
the Offering for specific identified purposes, with the remainder of
approximately $12 million to be used for working capital and general corporate
purposes, including possible acquisitions. Accordingly, management will have
substantial discretion in spending a large percentage of the proceeds to be
received by the Company. See "Use of Proceeds."
The Company in the future may pursue acquisitions of complementary services,
products, technologies or businesses, although the Company currently has no
agreements or understandings with respect to any acquisition, and no portion
of the net proceeds has been allocated to specific acquisitions. Future
acquisitions may result in the potentially dilutive issuance of equity
securities, the incurrence of additional debt, the writing off of software
development costs, or the amortization of expenses related to goodwill and
other intangible assets, any of which could have a Material Adverse Effect.
Future acquisitions would involve numerous additional risks, including (i)
difficulties in the
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assimilation of the operations, services, products and personnel of the
acquired company, (ii) the diversion of management's attention from other
business concerns, (iii) entry into markets in which the Company has limited
or no prior experience, and (iv) the potential loss of key employees of the
acquired company.
CONTROL OF COMPANY
Upon completion of the Offering and without giving effect to the
Underwriters' over-allotment option, the present directors, executive officers
and their respective affiliates will beneficially own 6,191,505 shares
(approximately 48.2%) of the outstanding Common Stock, of which 5,868,515
shares (approximately 45.8%) will be beneficially owned by Mr. Lorsch. In
addition to the shares included in the calculation of beneficial ownership,
the present directors, executive officers and their respective affiliates hold
options to acquire an additional 81,851 shares of Common Stock not exercisable
within 60 days of the date of this Prospectus, which together with shares
currently beneficially owned would represent approximately 48.6% of the Common
Stock outstanding after consummation of the Offering, after giving effect to
the exercise of those options. As a result, these shareholders in general, and
Mr. Lorsch in particular, will be able to exercise significant influence over
all matters requiring shareholder approval, including the election of
directors and approval of significant corporate transactions. Such
concentration of ownership may also have the effect of delaying or preventing
a change in control of the Company. See "Principal and Selling Shareholders"
and "Description of Capital Stock -- Certain Provisions of the Company's
Articles and Bylaws."
ANTI-TAKEOVER CONSIDERATIONS
The board of directors has authority to issue up to 10,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of the preferred stock without further
vote or action by the Company's shareholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the future. See
"Description of Capital Stock -- Preferred Stock." The Company's Amended and
Restated Articles of Incorporation (the "Articles") and Amended and Restated
Bylaws (the "Bylaws") require that any action required or permitted to be
taken by shareholders of the Company must be effected at a duly called annual
or special meeting of shareholders of the Company and may not be effected by
written consent. In addition, the Company's charter documents eliminate
cumulative voting, which may make it more difficult for a third party to gain
control of the Company's Board of Directors. Moreover, the Board of Directors
has the authority, without action by, or consent of, the shareholders, to fix
the rights and preferences of and issue shares of Preferred Stock. These and
other charter provisions may deter a third party who would propose to acquire
the Company or to engage in a similar transaction affecting control of the
Company in which the shareholders might receive a premium for their shares
over the then current market value. See "Management," "Principal and Selling
Shareholders" and "Description of Capital Stock -- Certain Provisions of the
Company's Articles and Bylaws."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active market will develop upon
consummation of the Offering. The initial public offering price will be
determined by negotiations among the Company, the Selling Shareholders and the
Representatives of the Underwriters. See "Underwriting" for a description of
the factors to be considered in determining the initial public offering price.
There is no assurance that the market price of the Common Stock after the
Offering will not decline below the initial public offering price. The market
price of the Common Stock is likely to be volatile. The Company believes
factors such as actual or anticipated quarterly fluctuations in financial
results, changes in earnings estimates by securities analysts and
announcements of material events by the Company, its retail customers or its
competitors
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may cause the market price for the Common Stock to fluctuate, perhaps
substantially. In addition, in recent years the stock market has experienced
extreme price and volume fluctuations which have affected the market price for
many companies in industries similar to the phone card industry and which have
often been unrelated to the operating performance of these companies. These
fluctuations, as well as general economic conditions, may have a material
adverse effect on the price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial shares of Common Stock by existing shareholders
could adversely affect the market price of the Common Stock. The 4,200,000
shares offered hereby will be eligible for immediate sale in the public market
without restriction. Of the remaining 8,624,834 shares of Common Stock which
will be outstanding upon the completion of this Offering, 8,501,286 will be
subject to 180-day lock-up agreements between the Company's current
shareholders and the Underwriters. After the expiration of such agreements,
pursuant to Rule 144 under the Securities Act, such shareholder(s) may sell
such shares without registration, subject to certain holding requirements and
volume limitations. In addition, SmarTalk Partners, LLC ("SmarTalk Partners")
is entitled to certain rights with respect to the registration of its shares
of Common Stock under the Securities Act. A decision by any such
shareholder(s) to publicly sell a significant number of shares of the Common
Stock will have the potential to cause a material decrease in the trading
price of the Common Stock and may impair the future ability of the Company to
raise capital at prices or on terms favorable to the Company. See "Shares
Eligible for Future Sale," "Description of Capital Stock -- Registration
Rights" and "Underwriting."
BENEFITS OF OFFERING TO EXISTING SHAREHOLDERS
The existing shareholders of the Company will receive certain benefits from
the sale of the Common Stock offered hereby. The Offering will establish a
public market for the Common Stock and provide increased liquidity to the
existing shareholders for the shares of Common Stock they will own after the
Offering, subject to certain limitations. See "Shares Eligible For Future
Sale." SmarTalk Partners, an existing shareholder of the Company, will sell
200,000 shares of Common Stock in the Offering and, at an assumed public
offering price of $14 per share, would receive approximately $2.5 million in
net proceeds. If the Underwriters' over-allotment option is exercised in full,
SmarTalk Partners and the other Selling Shareholders will sell 630,000 shares
of Common Stock and, at an assumed public offering price of $14 per share,
would receive approximately $10.5 million. See "Principal and Selling
Shareholders." Of the net proceeds of the Offering to be received by the
Company, approximately $2 million will be used to repay indebtedness to
SmarTalk Partners, and approximately $2 million will be used to repay
indebtedness to Lorsch Creative Network, Inc., of which Robert H. Lorsch,
President and Chief Executive Officer of the Company, is the sole shareholder.
See "Use of Proceeds" and "Certain Transactions." Additionally, immediately
following the Offering existing shareholders, assuming a public offering price
of $14 per share, would have an average unrealized gain over the original cost
of the shares that will continue to be held by them of $13.96 per share or an
aggregate unrealized gain of approximately $120.4 million (approximately
$111.6 million if the Underwriters' over-allotment option is exercised in
full). See "Dilution."
IMMEDIATE AND SUBSTANTIAL DILUTION TO NEW INVESTORS
Purchasers of shares of Common Stock in the Offering will experience
immediate and substantial dilution of the net tangible book value per share of
Common Stock in the amount of $10.49 per share. To the extent options to
purchase the Company's Common Stock are exercised in the future, there will be
further dilution. See "Dilution."
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USE OF PROCEEDS
The net proceeds from the sale of the shares of Common Stock offered hereby
by the Company at an assumed initial offering price of $14 per share are
estimated to be approximately $50,855,000, after deducting the underwriting
discount and estimated offering expenses payable by the Company. The Company
intends to use the net proceeds of the Offering as follows: (i) approximately
$1.2 million to repay term loan indebtedness to SmarTalk Partners (which bears
interest at 7% per annum and has a maturity date of July 31, 2000), (ii)
approximately $500,000 to repay existing borrowings under a revolving line of
credit with SmarTalk Partners (which bears interest at a floating rate equal
to the prime rate plus 2% per annum which equaled 10.25% at September 20, 1996
and has a maturity date of January 31, 1998), (iii) approximately $250,000 to
repay term loan indebtedness to SmarTalk Partners (which bears interest at a
floating rate equal to the prime rate which was 8.25% at September 20, 1996
and has a maturity date of January 31, 1997), (iv) approximately $2 million to
repay term loan indebtedness to Lorsch Creative Network, Inc. ("LCN") (which
bears interest at 7% per annum and has a maturity date of June 20, 2000),
(v) approximately $10 million to fund certain capital expenditures, including
upgrades to the SmarTalk Platforms, the possible acquisition of new platforms
and purchases of point of sale equipment, (vi) approximately $20 million to
fund marketing and new business development opportunities, (vii) approximately
$5 million to fund the expansion of the Company's business internationally,
and (viii) for additional working capital and general corporate purposes,
including acquisitions, although the Company currently has no agreements or
understandings with respect to any acquisition, and no portion of the net
proceeds has been allocated to specific acquisitions. The aggregate amount of
the net proceeds to the Company that will flow to affiliates is approximately
$4 million.
In addition, the Company is raising such monies at this time in order to
create a market for the Company's Common Stock, to facilitate future access by
the Company to the public equity markets and to enhance the Company's public
image and credibility to support its marketing efforts, particularly with
current or potential retailers and strategic partners. The Company has used
proceeds from the indebtedness to SmarTalk Partners for working capital and
general corporate purposes, including securing office space, expanding the
Company's retail distribution network, and acquiring the VoiceChoice Platform.
The indebtedness to LCN was incurred in connection with a transaction by the
Company. See "Certain Transactions." The Company will not receive any of the
proceeds from the sale of shares of Common Stock by the Selling Shareholders.
Prior to the application of the net proceeds of the Offering as described
above, such funds will be invested in short-term, interest bearing securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock, and the
current policy of the Company's board of directors is to retain any available
earnings for use in the operation and expansion of the Company's business.
Therefore, the payment of cash dividends on the Common Stock is unlikely in
the foreseeable future. Currently, the Company's line of credit prohibits the
Company from paying cash dividends without the lender's prior approval. See
the Financial Statements and Notes thereto included elsewhere in this
Prospectus. However, the Company will use the proceeds from the Offering to
pay off and terminate the line of credit with SmarTalk Partners. Any future
determination to pay cash dividends will be at the discretion of the board of
directors and will depend upon the Company's earnings, capital requirements,
financial condition and any other factors deemed relevant by the board of
directors.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996, and as adjusted to reflect the sale of the 4,000,000 shares of
Common Stock offered by the Company hereby at an assumed initial public
offering price of $14 per share and the application of the estimated net
proceeds therefrom as described in "Use of Proceeds." This table should be
read in conjunction with the Financial Statements and the related Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------
ACTUAL(1) AS ADJUSTED(1)(2)
----------- -----------------
<S> <C> <C>
Short-term debt................................. $ 1,299,998 $ 510,000
Long-term debt.................................. 3,285,002 0
----------- -----------
Total debt...................................... 4,585,000 510,000
----------- -----------
Shareholders' equity (deficit):
Preferred stock, no par value; 10,000,000
shares authorized; no shares issued and
outstanding(3)............................... -- --
Common stock, no par value; 100,000,000 shares
authorized; 8,824,834 shares issued and
outstanding; 12,824,834 shares issued and
outstanding as adjusted(3)................... 315,000 51,170,000
Retained earnings (accumulated deficit)......... (6,129,988) (6,129,988)
----------- -----------
Total shareholders' equity (deficit)............ (5,814,988) 45,040,012
----------- -----------
Total capitalization.......................... $(1,229,988) $45,550,012
=========== ===========
</TABLE>
- --------
(1) Actual June 30, 1996 amounts have been adjusted to reflect a $250,000 loan
from SmarTalk Partners obtained in August 1996, and $510,000 borrowed
under a $1,000,000 line of credit established in September 1996. See "Use
of Proceeds."
(2) Adjusted to reflect the application of the estimated net proceeds to the
Company from the sale of Common Stock offered hereby. See "Use of
Proceeds."
(3) Excludes 510,514 shares of Common Stock reserved for issuance upon
exercise of outstanding options granted by the Company. See "Management --
Stock Option Plans."
18
<PAGE>
DILUTION
The net tangible book value (deficit) of the Company's Common Stock as of
June 30, 1996 was $(5.8) million or $(0.66) per share. "Net tangible book
value (deficit)" per share represents the amount of total tangible net assets
less total liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of 4,000,000 shares of Common
Stock offered by the Company hereby, and after deducting underwriting
discounts and estimated offering expenses payable by the Company and receipt
of the net proceeds by the Company in the Offering, the pro forma net tangible
book value (deficit) of the Company as of June 30, 1996 would have been
$45 million, or $3.51 per share, representing an immediate increase in net
tangible book value of $4.17 per share to existing shareholders and an
immediate dilution of $10.49 per share to new investors purchasing shares in
the Offering. The following table illustrates the resulting per share dilution
with respect to the shares of Common Stock to be sold by the Company in the
Offering:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $14.00
Net tangible book value (deficit) per share before the
Offering................................................... $(0.66)
Increase per share attributable to new investors............ 4.17
------
Pro forma net tangible book value (deficit) per share after
the Offering................................................. 3.51
------
Dilution per share to new investors........................... $10.49
======
</TABLE>
The foregoing computations assume no exercise of stock options prior to
completion of the Offering. Options to purchase an aggregate of 510,514 shares
of Common Stock at exercise prices ranging from $1.77 to $4.44 per share, with
a weighted average exercise price of approximately $3.72 per share, will be
outstanding and unexercised upon completion of the Offering. If all of such
stock options had been exercised at June 30, 1996, the pro forma net tangible
book value per share after the Offering would be $3.52, representing an
increase in pro forma net tangible book value of $3.94 per share and dilution
to new investors of $10.48 per share.
The following table summarizes the difference between existing shareholders
and new investors with respect to the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company before
deduction of underwriting discounts and estimated offering expenses and the
average price paid per share.
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
New Investors........... 4,000,000 31.2% $56,000,000 99.4% $14.00
Existing
Shareholders(1)........ 8,824,834 68.8 315,000 0.6 0.04
---------- ----- ----------- -----
Total................. 12,824,834 100.0% $56,315,000 100.0%
</TABLE>
- --------
(1) Excludes 510,514 shares of Common Stock reserved for issuance upon
exercise of outstanding options granted by the Company. See "Management --
Stock Option Plans."
19
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company. The
Statement of Operations Data for the period from inception (October 28, 1994)
to December 31, 1994 and for the year ended December 31, 1995 and the Balance
Sheet Data as of December 31, 1994 and 1995 have been derived from the
Company's audited Financial Statements, which are included elsewhere in this
Prospectus. The selected financial data for the six months ended June 30, 1995
and 1996 are derived from the unaudited Financial Statements of the Company,
which are included elsewhere in this Prospectus. In the opinion of management,
the unaudited Financial Statements have been prepared on the same basis as the
audited Financial Statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
financial position and results of operations for such periods. The results for
the six months ended June 30, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996 or any
other future period. The selected financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
PERIOD FROM INCEPTION YEAR ENDED JUNE 30,
(OCTOBER 28, 1994) TO DECEMBER 31, ----------------------
DECEMBER 31, 1994 1995 1995 1996
--------------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue............... $ 444 $ 453,916 $ 41,738 $ 3,678,020
Cost of revenue....... 716 318,686 29,910 2,742,115
--------- ----------- --------- -----------
Gross profit (loss). (272) 135,230 11,828 935,905
Operating expenses
Sales and marketing. 1,980 842,306 173,242 1,643,426
General and
administrative..... 63,220 624,238 124,023 1,459,293
--------- ----------- --------- -----------
Loss from operations.. (65,472) (1,331,314) (285,437) (2,166,814)
Net interest expense
(income)............. -- (2,012) -- 104,372
--------- ----------- --------- -----------
Loss from operations
before income tax
expense.............. (65,472) (1,329,302) (285,437) (2,271,186)
Provision for income
taxes................ -- -- -- --
--------- ----------- --------- -----------
Net loss............ $ (65,472) $(1,329,302) $(285,437) $(2,271,186)
--------- ----------- --------- -----------
Net loss per
share(1)........... $ (.01) $ (.14) $ (.03) $ (.24)
========= =========== ========= ===========
Weighted average
number of common
shares and common
equivalent
shares(1).......... 9,335,348 9,335,348 9,335,348 9,335,348
========= =========== ========= ===========
Supplemental loss
per common
share(2)........... $ (.23)
===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1994 1995 1996
-------- ----------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $(60,472) $(1,400,360) $(3,256,069)
Total assets.............................. 4,023 3,841,752 4,782,822
Deferred revenue(3)....................... 431 3,696,515 4,127,919
Total debt................................ -- -- 3,825,000
Total shareholders' equity (deficit)...... (60,472) (1,379,774) (5,814,988)
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
------------- ------------ --------- ----------
<S> <C> <C> <C> <C>
SELECTED QUARTERLY OPERATING
DATA:
Number of PINs activated(4).. 15,811 52,800 117,212 196,259
Number of minutes
decremented(5).............. 640,320 1,935,247 5,152,179 10,748,914
Number of recharge minutes
purchased................... 154,974 312,390 666,030 1,112,130
</TABLE>
- -------
(1) See Note 2 of Notes to Financial Statements for a discussion of net loss
per share and shares used in computing net loss per share.
(2) Supplemental loss per share has been calculated as if $4,075,000 of the
proceeds from the Offering were used to retire debt totaling $4,075,000.
Only the incremental shares necessary to retire this debt, based upon
assumed net proceeds of $12.71 per share, have been included in the
calculation. See "Use of Proceeds."
(3) Deferred revenue represents amounts for products shipped to retailers and
recharged minutes that the Company has invoiced, which as of the date
presented have not been used by customers. Upon customer usage, the
Company recognizes revenue and reduces the deferred revenue account. At
the time the revenue is recognized, the costs to which that revenue
specifically relates are also recognized.
(4) "PINs" are personal identification numbers used by each customer to access
the SmarTalk system. PINs are printed on the back of each SmarTalk Card or
provided separately to customers.
(5) "Minutes decremented" include minutes used by customers purchasing
SmarTalk services and minutes used as a result of the distribution of free
promotional goods.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Financial Statements and the related Notes thereto included elsewhere in this
Prospectus.
OVERVIEW
SmarTalk provides convenient, easy to use, cost-effective long distance
telecommunications products and services to customers primarily through the
SmarTalk Card. The SmarTalk Card provides customers with a single point of
access to telecommunications services at a favorable rate on a per minute
prepaid basis. The SmarTalk Card may also be recharged on-line using a major
credit card which allows the customer to add minutes as needed.
The Company was formed in October 1994 and had limited operations until June
1995. From its date of inception until September 1995, SmarTalk had no
employees. Certain functions currently performed by the Company's employees
were performed during 1994 and 1995 by employees of LCN for which the Company
was subsequently billed by LCN. SmarTalk contracted, on a project by project
basis, with LCN and other independent contractors to perform substantially all
operational activities, including sales management, marketing services, and
general and administrative functions. See "Certain Transactions."
Since the Company's inception, revenues have continued to increase. Over the
period since July 1995, when the Company began shipping its product to
retailers, through June 1996, total revenues were $4,090,198. The Company
believes this amount is attributable to customers' acceptance of SmarTalk
services and similar products, and management's unique marketing strategy of
targeting the retail distribution channel.
SmarTalk's revenue originates from (i) Company and co-branded phone card
sales through retailers, (ii) recharges of existing phone cards, (iii) cards
sold for promotional marketing campaigns, (iv) corporate sales to businesses
(Corporate Advantage Program) and (v) certain services provided to one of the
Company's strategic partners.
Under sales agreements with the majority of retailers, the Company sells
cards to the retailer at a set price with normal credit terms. The Company
generally invoices the retailer upon shipment, recognizing deferred revenue.
The Company recognizes revenue and reduces the deferred revenue account as the
customer utilizes calling time or upon expiration of cards containing unused
calling time. The Company also recognizes deferred revenue upon recharge of
existing phone cards and recognizes the revenue upon the usage or expiration
of the recharge minutes. Revenue recognized upon expiration of calling cards
containing unused calling time and upon expiration of recharge minutes was
insignificant for the year ended December 31, 1994 and the six months ended
June 30, 1995 and less than 7.9% and 5.7%, respectively, of total revenues for
the year ended December 31, 1995 and the six months ended June 30, 1996. The
Company believes that its policy of recognizing revenue at the time its
products and services are used by the customer or expire rather than upon sale
to retailers or, in the case of recharges, at the time of the recharge, is a
conservative method of revenue recognition.
SmarTalk's cost of revenue consists primarily of the cost of providing the
long distance service and related enhanced services as well as the cost of
manufacturing and delivering the cards. The cost of providing long distance
service represents obligations to carriers that provide minutes of long
distance over their networks and the services associated with the Company's
product. The Company expects its cost of revenue as a percentage of sales to
decrease in the future due to the acquisition of the VoiceChoice Platform,
economies of scale and volume discounts.
21
<PAGE>
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 a commission to its sales
representatives and retailers based on the number of minutes recharged on
SmartTalk cards sold by each retailer. These commissions are capitalized and
amortized into expense based on minutes used by the customer. Advertising
consists primarily of co-op advertising and Manufacturers Development Funds
("MDF"). Under the typical co-op advertising program, the Company matches
advertising expenditures by retailers to promote sales of SmarTalk services.
The amount of funds the Company matches through its co-op advertising program
is based on a percentage of sales of SmarTalk services by retailers. MDF
consists of promotional and marketing programs to access shelf space.
Advertising expense includes trade and consumer advertising, trade show
expenses, promotional goods and the costs of providing to retailers the
Company's turnkey merchandising supplies. The Company expects sales and
marketing expenses to increase in the future, but expects that sales and
marketing expenses as a percentage of revenue will decrease. Other sales and
marketing expenses include a provision for bad debt expense.
General and administrative expenses consist primarily of salaries and other
general expenses. Sales taxes for the SmarTalk Platforms are incurred based on
customer usage of long distance minutes which are processed through each of
the individual platforms. Other general expenses include rent, insurance, VISA
and MasterCard processing fees and other operating expenses. The Company also
includes in general and administrative expenses the costs related to the
development of the Company's proprietary switching, application and database
access software. The Company expects general and administrative expenses to
increase in the future as it adds the personnel and infrastructure necessary
to meet its planned growth in sales, but expects that general and
administrative expenses as a percentage of revenue will decrease.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995
Revenue. Revenue increased to $3,678,020 for the six months ended June 30,
1996 from $41,738 for the six months ended June 30, 1995. The substantial
increase in revenue reflects an increase in usage of SmarTalk services by
users of the SmarTalk Card as well as Corporate Advantage customers, an
increase in the number of retail storefronts in which the Company's product is
distributed and greater brand awareness and consumer acceptance. Revenue
generated from recharges comprised approximately 14% of total revenue for the
six months ended June 30, 1996 and was insignificant for the comparable period
in 1995. This increase in recharge revenue is due to a greater number of
SmarTalk cards eligible for recharge in the marketplace. In addition,
$460,000, or approximately 13% of revenue for the six months ended June 30,
1996, was attributable to a distribution and processing agreement entered into
on June 1, 1996 with West Interactive (see "Business -- Strategic Partners").
The agreement provides that the Company will provide prepaid phone card and
certain related services for customers of West Interactive. The Company
recognizes revenue under this agreement based on minute usage, which is
consistent with the manner in which the Company recognizes revenue on cards
sold to retailers.
Cost of Revenue. Cost of revenue increased to $2,742,115 for the six months
ended June 30, 1996 from $29,910 for the six months ended June 30, 1995. The
increase was primarily attributable to greater use of the Company's services,
which increased transport costs and card costs. The gross profit percentage
for the six months ended June 30, 1996 was 25.5% as compared to 28.3% for the
six months ended June 30, 1995. Gross margin decreased primarily due to the
lower gross margin associated with the above-mentioned distribution and
processing agreement. Transport costs comprised approximately 82% of cost of
revenue for the six months ended June 30, 1996 compared to approximately 69%
for the six months ended June 30, 1995. The remainder of cost of revenue was
distributed between card costs and cost of fulfillment. Transport costs
constituted a greater percentage of cost of revenue in the 1996 period as cost
of fulfillment was essentially constant.
22
<PAGE>
Sales and Marketing Expenses. Sales and marketing expenses increased to
$1,643,426 (or 44.7% of revenue) for the six months ended June 30, 1996 from
$173,242 (or 415.1% of revenue) for the six months ended June 30, 1995. The
increase in dollar amount was primarily due to commissions paid to sales
representatives generally and to retailers on recharges, as well as the
continued expansion of the Company's marketing activities, which include co-op
advertising, MDF and free promotional goods. The decrease as a percentage of
revenue was due to increased revenue growth in 1996. For the six months ended
June 30, 1995, LCN provided certain sales and marketing services for which the
Company was subsequently billed by LCN. Such expenses billed by LCN are
reflected in total sales and marketing expenses.
Commissions paid to the Company's sales representatives and retailers
increased to 16.5% of sales and marketing expenses for the six months ended
June 30, 1996 from 1.8% for the six months ended June 30, 1995 and bad debt
expense increased to 10.4% of sales and marketing expenses for the six months
ended June 30, 1996 from 0.6% for the six months ended June 30, 1995. These
increases reflect the greater sales volume experienced during the six months
ended June 30, 1996. Expenses for promotional activities, including co-op
advertising, MDF and free promotional goods, were 56% of sales and marketing
expenses for the six months ended June 30, 1996 as compared to 24% for the six
months ended June 30, 1995. The increase in expenses related to promotional
activities reflects the Company's emphasis on generating revenue during the six
months ended June 30, 1996 as compared to the emphasis during the six months
ended June 30, 1995 on design and development of marketing and advertising
materials in the early stage of its growth. There were no creative and
consulting expenses during the six months ended June 30, 1996 as compared to
the same period in 1995 during which creative and consulting expenses,
primarily incurred by LCN and subsequently billed to the Company, represented
65% of sales and marketing expenses.
General and Administrative Expenses. General and administrative expenses
increased to $1,459,293 (or 39.7% of revenue) for the six months ended June 30,
1996 from $124,023 (or 297.1% of revenue) for the six months ended June 30,
1995. The increase in dollar amount was primarily due to 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 increased revenue growth in
1996. General and administrative costs for the six months ended June 30, 1996
included rent associated with the Company's move into a new office, VISA and
MasterCard processing fees associated with the Company's on-line recharge
feature, as well as increased general operating expenses. General and
administrative costs for the six months ended June 30, 1995 primarily included
expenses related to establishing regulatory compliance in all 50 states, the
cost of developing the Company's product and packaging concept, and costs to
file documentation related to the procurement of corporate servicemarks and
patents. Certain of these general and administrative expenses incurred by
SmarTalk during the six months ended June 30, 1995 were incurred by LCN and the
Company was subsequently billed by LCN. There were no payroll expenses for the
six months ended June 30, 1995 as the Company had no employees during the
period. Certain functions performed during 1996 by the Company's employees were
performed during 1995 by employees of LCN for which the Company paid fees to
LCN aggregating less than $50,000, which fees are included as general and
administrative expenses.
Payroll costs were 41.0% of total general and administrative expenses for the
six months ended June 30, 1996. There was no payroll expense for the six months
ended June 30, 1995 as the Company had no employees during the period. Sales
taxes increased to 10.6% of total general and administrative expenses for the
six months ended June 30, 1996 from 1.2% for the comparable period in 1995.
This increase is due to the increased usage of the Company's product by
consumers. Legal, accounting and consulting costs as a percentage of total
general and administrative expenses decreased to 19.6% for the six months ended
June 30, 1996 from 74% for the 1995 period reflecting the Company's transition
in 1996 to selling its services from its activities in 1995 when it was in its
early stage of growth.
23
<PAGE>
Interest Expense. Interest expense, net of interest income, increased to
$104,372 for the six months ended June 30, 1996. There was no interest expense
or income for the six months ended June 30, 1995. Interest income for the six
months ended June 30, 1996 was earned from returns on short-term cash
investments. Interest expense for the six months ended June 30, 1996 was
attributable to the Company's debt financing funded in January, 1996. See " --
Liquidity and Capital Resources".
Income Taxes. The Company had losses for tax purposes for the six months
ended June 30, 1996 and 1995. Accordingly, there was no provision for income
taxes in these periods.
Net Loss. As a result of the above items, the Company's net loss increased to
$2,271,186 for the six months ended June 30, 1996 from $285,437 for the six
months ended June 30, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE PERIOD ENDED DECEMBER 31, 1994
Revenue. Revenue increased to $453,916 for the year ended December 31, 1995
from $444 for the period ended December 31, 1994. The increase in revenue
reflects an increase in usage of SmarTalk services in 1995, including usage by
customers under the Corporate Advantage Program, as well as an increase in the
number of retail storefronts in which the Company's products were distributed.
During the period ended December 31, 1994, the Company was primarily engaged in
establishing its corporate identity and regulatory compliance in all 50 states
and had limited sales of its products.
Cost of Revenue. Cost of revenue increased to $318,686 for the year ended
December 31, 1995 from $716 for the period ended December 31, 1994. The
increase in cost of revenue was primarily attributable to greater use of the
Company's services, which increased transport costs and card costs. The gross
profit percentage for the year ended December 31, 1995 was 29.8%. The gross
profit percentage and the amount for the period ended December 31, 1994 were
not meaningful as the Company had insignificant revenue during this period.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$842,306 for the year ended December 31, 1995 from $1,980 for the period ended
December 31, 1994, reflecting increased promotional activity and marketing
support to retailers. The increase also reflects an increase in creative and
consulting expenses as the Company developed its product advertising as well as
its packaging concept. There were no significant promotional expenses or
creative and consulting expenses during the period ended December 31, 1994.
Certain of these sales and marketing expenses incurred by SmarTalk during the
year ended December 31, 1995 and period ended December 31, 1994 were incurred
by LCN and the Company was billed by LCN. The limited revenue during the period
ended December 31, 1994 makes comparisons to the comparable period in 1995 not
meaningful.
Expenses for promotional activities, including co-op advertising and point of
sale displays, were 32.7% of total sales and marketing expense for the year
ended December 31, 1995. During the year ended December 31, 1995, creative and
consulting expenses were 42.1% of total sales and marketing expenses, due to
the Company's efforts to develop its product advertising as well as its
packaging concept. Commissions paid to the Company's sales representatives and
bad debt expenses were not material components of sales and marketing expenses
for either period.
General and Administrative Expenses. General and administrative expenses
increased to $624,238 for the year ended December 31, 1995 from $63,220 for the
period ended December 31, 1994. This increase was primarily due to the addition
of administrative personnel, the associated costs required to manage the growth
in the Company's business and nonrecurring startup costs. There were no payroll
expenses in the period ended December 31, 1994. Certain of these general and
administrative expenses, including expenses related to functions performed by
LCN employees, were
24
<PAGE>
incurred by LCN during the year ended December 31, 1995 and period ended
December 31, 1994 and the Company was billed by LCN.
Payroll costs were 27.4% of total general and administrative expenses for the
year ended December 31, 1995. Sales taxes were 3.3% of total general and
administrative expenses for the year ended December 31, 1995 and immaterial for
the comparable period in 1994. Legal and accounting expenses decreased to 34.0%
of total general and administrative expenses for the year ended December 31,
1995 from 54.5% for the comparable period in 1994 when the Company was in its
initial stage of development.
Interest Income. Net interest income, net of interest expense, for the year
ended December 31, 1995 was $2,012. Interest income for the year ended December
31, 1995 was derived from returns on short-term cash investments. Interest
expense for the year ended December 31, 1995 consisted of interest on
intraperiod debt which the Company utilized during 1995. There was no interest
expense or income for the period ended December 31, 1994.
Income Taxes. The Company had losses for tax purposes for the year ended
December 31, 1995 and the period ended December 31, 1994. Accordingly, there
was no provision for income taxes in these periods.
Net Income. As a result of the above items, net loss increased to
$(1,329,302) for the year ended December 31, 1995 from $(65,472) for the period
ended December 31, 1994.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited quarterly financial data for
each of the quarters since inception (October 28, 1994). In the opinion of
management, the unaudited quarterly financial information has been prepared on
the same basis as the audited Financial Statements and includes all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the information for the periods presented. The unaudited
quarterly information should be read in conjunction with the audited Financial
Statements and Notes thereto included elsewhere in this Prospectus. The
unaudited quarterly operating results are not necessarily indicative of results
of operations for any future period.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------------------------------------------------------
DECEMBER JUNE SEPTEMBER DECEMBER MARCH JUNE
31, MARCH 31, 30, 30, 31, 31, 30,
1994 1995 1995 1995 1995 1996 1996
-------- --------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................ $ 444 $ 2,564 $ 39,174 $ 185,900 $ 226,278 $ 1,139,365 $ 2,538,655
Cost of revenue........ 716 1,793 28,118 129,858 158,917 812,877 1,929,238
-------- --------- --------- --------- --------- ----------- -----------
Gross profit (loss).. (272) 771 11,056 56,042 67,361 326,488 609,417
Operating expenses
Sales and marketing.. 1,980 8,448 164,794 194,671 474,393 657,105 986,321
General and
administrative...... 63,220 104,861 19,161 46,249 453,967 701,242 758,051
-------- --------- --------- --------- --------- ----------- -----------
Loss from operations... (65,472) (112,538) (172,899) (184,878) (860,999) (1,031,859) (1,134,955)
Net interest expense
(income).............. -- -- -- 1,531 (3,543) 44,813 59,559
-------- --------- --------- --------- --------- ----------- -----------
Loss from operations
before income tax
expense............... (65,472) (112,538) (172,899) (186,409) (857,456) (1,076,672) (1,194,514)
Provision for income
taxes................. -- -- -- -- -- -- --
-------- --------- --------- --------- --------- ----------- -----------
Net loss............. $(65,472) $(112,538) $(172,899) $(186,409) $(857,456) $(1,076,672) $(1,194,514)
======== ========= ========= ========= ========= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE
31, 31, 30, 30, 31, 31, 30,
1994 1995 1995 1995 1995 1996 1996
-------- ------ ------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET
DATA:
Deferred revenue...... $431 $2,389 $89,505 $535,865 $3,696,515 $3,783,917 $4,127,919
</TABLE>
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The Company's sales have been, and the Company expects that its sales will
continue to be, somewhat seasonal, due to holiday purchases of the SmarTalk
Card. Factors that may cause the Company's operating results to vary include
(i) changes in operating expenses, (ii) the timing of the introduction of
SmarTalk services, (iii) market acceptance of new and enhanced versions of
SmarTalk services, (iv) potential acquisitions, (v) changes in legislation and
regulation which affect the competitive environment for SmarTalk services, and
(vi) general economic factors.
LIQUIDITY AND CAPITAL RESOURCES
From inception through June 30, 1996, the Company has funded operations
primarily from cash generated by operations and borrowings under its debt
agreements. The Company's operating activities used net cash of $2,395,916 in
the six months ended June 30, 1996. The cash used by operating activities is
primarily attributable to the Company's continued efforts to penetrate the
retail distribution channel. As of October 8, 1996, the Company's cash and cash
equivalents were approximately $530,000.
In December 1995, the Company negotiated a financing package with SmarTalk
Partners under which SmarTalk Partners agreed to loan $1,200,000 to the Company
through a term loan and paid $300,000 to purchase a portion of the Company's
Common Stock. The term loan is collateralized by substantially all assets of
the Company and bears interest at 7% per annum. Interest accrues daily and is
payable monthly beginning January 31, 1996 and ending December 31, 1996.
Beginning January 31, 1997, monthly payments of principal and accrued interest
are required until July 31, 2000, when all amounts are due and payable. The
funds from this transaction were received in January 1996. See "Certain
Transactions."
In addition, the Company obtained a revolving loan facility from SmarTalk
Partners, collateralized by substantially all assets of the Company. The
facility provides for borrowings up to $500,000. Interest accrues daily at a
floating rate equal to the prime rate plus 2% and is payable monthly in arrears
beginning January 31, 1996. The principal portion of the loan is due and
payable January 31, 1998. The Company may draw funds under the revolving loan
at its discretion. At June 30, 1996, the Company had no funds available under
this facility. See "Certain Transactions."
In January 1996, the Company entered into an agreement to purchase certain of
the assets of LCN. Mr. Lorsch, LCN's sole shareholder, is the Company's
majority shareholder and its President and Chief Executive Officer. The
purchase was consummated in January 1996 for $500,000 cash plus a $2,000,000
principal amount subordinated promissory note which bears interest at 7% per
annum. Interest on the note is payable monthly through July 31, 1996. Beginning
August 31, 1996, the Company is obligated to make a payment of $35,000 a month,
with all amounts due and payable in full on June 30, 2000. Because the assets
were purchased from a related party, the assets are reflected on the Company's
balance sheet at LCN's cost less depreciation as of the date of acquisition.
The excess of acquisition cost over the historical cost less depreciation of
the assets acquired of approximately $2,464,028 was recorded as a charge to the
Company's accumulated deficit. See "Certain Transactions."
In June 1996, the Company acquired the VoiceChoice Platform from Pacific Bell
Information Services for total consideration of $325,000, plus other
consideration including the release of certain of its contractual obligations
to the Company. The purchase price was recorded at $325,000, comprised of
$200,000 in cash and a $125,000 note. $100,000 of the $125,000 note is to be
paid through six equal monthly installments, beginning July 1, 1996. A final
payment due January 1, 1997 will include the remaining $25,000 principal amount
of the note and an additional sum equal to the interest accrued on the
declining balance paid in installments at 9% interest per annum calculated on a
day-to-day basis. All amounts become due and payable upon completion of the
Offering.
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In August 1996, the Company entered into a loan agreement with SmarTalk
Partners pursuant to which the Company obtained a loan of $250,000. This term
loan is collateralized by substantially all of the assets of the Company and
accrues interest at the prime rate. Interest on the loan is due the last day of
each month, commencing August 31, 1996, with the loan maturing on January 31,
1997. All amounts become due and payable upon completion of the Offering.
Payments of principal and interest on the $1,200,000 term loan, the $500,000
revolving loan facility, and the $2,000,000 term note (collectively, the
"Original Indebtedness") are subordinated to, and may not be made prior to the
repayment of, the $250,000 term loan. See "Certain Transactions."
In September 1996, the Company entered into a revolving line of credit with
Southern California Bank (the "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 a
first priority lien on substantially all of the Company's assets. Interest on
the outstanding principal balance, calculated from the date of each advance to
the repayment of each advance, is at the prime rate (as published in the Wall
Street Journal) plus 2.375%. Interest payments are due monthly with the Company
being required to make a minimum interest payment of $4,429 per month for one
year. If the line of credit is paid off prior to one year, the remaining
minimum monthly payments become due and payable. The SCB Line of Credit will
become due and payable September 1, 1997. As of October 8, 1996, there was
$510,000 outstanding pursuant to the SCB Line of Credit.
The proceeds of the Offering will be used, in part, to repay the Original
Indebtedness, the indebtedness to Pacific Bell Information Services and the
$250,000 term loan. See "Use of Proceeds."
The Company believes that the proceeds from the Offering, together with the
funds anticipated to be generated from operations, will be sufficient to
finance the Company's operations for the next 18 months.
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BUSINESS
GENERAL
SmarTalk provides convenient, easy to use, cost-effective telecommunications
products and services to individuals and businesses primarily through its
SmarTalk 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 and outbound international long distance calling to more than 150
countries, as well as enhanced features such as sequential calling, speed dial
and message delivery. The SmarTalk Card may also be recharged on-line with a
major credit card, allowing the user to add minutes as needed. The Company
expects to offer other enhanced features, including conference calling, voice
mail, fax mail, content delivery (including news, sports and weather
information) and selected international calling services. The Company's long
distance calls are carried primarily through MCI and AT&T. For the six months
ended December 31, 1995 and June 30, 1996, the number of minutes decremented
from SmarTalk cards or otherwise used by SmarTalk customers were approximately
2,576,000 and 15,901,000, respectively.
SmarTalk's primary marketing and distribution focus is to target individuals
and small businesses through major national and regional retailers. Currently,
the SmarTalk Card is sold at selected retail locations throughout the U.S.,
including locations operated by the following leading retailers: American Drug
Stores (which includes Jewel/Osco Combo Stores, Osco Drug Stores and Sav-On
Drug Stores), Office Depot, Thrifty Oil, Builders Square, Hills Department
Stores, Bradlees, Bergen Brunswig Drug Company (Good Neighbor Pharmacy),
Venture Stores, Foley's Department Stores, Marshall Field's, Fred W. Albrecht
Grocery Company, Office 1 Superstores, Price/Costco, Acme, Best Buy, Dayton's,
Fedco, The Good Guys, Hudson's, Penn Daniels, Pamida and Robinsons-May.
Certain of those retailers have, from time to time, accounted for a
significant percentage of the Company's revenue. Based upon the value of
shipments of SmarTalk cards to retailers ("Retailer Shipment Value"), American
Drug Stores accounted for approximately 78% and 11%, respectively, and Office
Depot accounted for 0% and approximately 21%, respectively, of the total
Retailer Shipment Value for the year ended December 31, 1995 and the six
months ended June 30, 1996. No other retailer accounted for more than 10% of
Retailer Shipment Value in more than one quarter during either such period.
The Company believes its success to date in rapidly expanding its retail
network is attributable to management's ability to increase retailers'
awareness of the profit potential of offering telecommunications services at
retail, the minimal space involved in offering the SmarTalk Card at retail and
the ability of the SmarTalk Card to generate ongoing residuals for retailers
through participation in recharge revenues. The Company is exploring the
opportunity of offering retailers a co-branded, pre-subscribed "1+" long
distance service. This new product, if successfully introduced, would afford
retailers the ability to offer residential and small business customers long
distance services that are designed to generate ongoing revenue streams while
requiring virtually no shelf space or inventory cost. SmarTalk also markets
its services directly to customers through direct response sales which include
recharge sales, and sales generated through print, direct mail, and, in the
future, Internet and television advertising.
The Company has developed additional marketing and distribution avenues,
including the Company's Corporate Advantage Program and corporate promotional
programs. Under the Corporate Advantage Program, employees who are away from
their offices can utilize SmarTalk services, thereby enabling businesses to
lower telecommunications costs and monitor call activity to better allocate
long distance costs. Corporate promotional programs allow the Company's
corporate customers to provide co-branded prepaid phone cards for use in
corporate or product promotions, direct marketing programs, warranty
registration, customer service programs and premium rewards for customers.
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SmarTalk has created promotional programs for JVC, Smart & Final Iris,
Cellular One, AirTouch Cellular and, in conjunction with Kodak and Hallmark
Cards, American Stores.
SmarTalk services are delivered through proprietary switching, application
and database access software which run on two interactive call processing
SmarTalk Platforms, one of which, the VoiceChoice Platform, was recently
acquired from Pacific Bell Information Services. 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
acquisition of the VoiceChoice Platform provides the Company with the
opportunity to reduce its costs. The Company has also developed a proprietary
in-house data reporting and tracking system, the SmarTrac System, which tracks
inventory, controls fraud, monitors usage by card and retailer and allows the
Company to provide certain marketing information to its retailers and business
customers.
The Company believes that its principal competitive advantages are its (i)
well-established presence among major retailers, (ii) advanced
telecommunications infrastructure, and (iii) management team, which has
extensive marketing and merchandising expertise.
INDUSTRY OVERVIEW
The $67.4 billion U.S. long distance industry is dominated by the nation's
three largest long distance providers, AT&T, MCI and Sprint, which together
generated approximately 82.7% of the aggregate revenues of all U.S. long
distance interexchange carriers in 1994. While industry revenues have grown at
a compound annual rate of 5.6% since 1984, the revenues of carriers other than
AT&T, MCI and Sprint have grown at a compound annual rate of 27.8% during the
same period. As a result, the aggregate market share of all interexchange
carriers other than AT&T, MCI and Sprint has grown from 2.6% in 1984 to 17.3%
in 1994. During the same period, the market share of AT&T declined from 90.1%
to 55.2%.
The changing market for telecommunications services created an opportunity
for the growth of alternative long distance and telecommunications services
providers, including prepaid phone card sales. The domestic prepaid phone card
industry has grown significantly in recent years. Prepaid phone card revenues
in the U.S. have grown from an estimated $20 million in 1990 to an estimated
$1 billion in 1996, making prepaid phone services one of the fastest growing
segments of the telecommunications industry. Industry sources project the
total U.S. prepaid phone card market to reach $2.5 billion in 2000. The
Company believes that the affordable pricing, convenience and enhanced
features of prepaid phone cards have attracted price sensitive customers,
business travelers, international callers and other users of long distance
services. Although prepaid phone cards are relatively new in the U.S., prepaid
phone cards have been a widely used and accepted way of making telephone calls
in Europe and Asia since the 1970s.
Recently, the prepaid calling card industry has expanded substantially.
According to industry sources, the number of companies marketing prepaid phone
cards has grown from approximately 75 companies in 1994 to over 500 companies
in 1996. In addition, companies have begun to couple long distance services
with other enhanced features. In contrast to producers of prepaid phone cards
that were established to serve the collectible or promotional market only or
that provide long distance service only, the Company markets and distributes
the SmarTalk Card and services with specific focus on retail distribution
channels. SmarTalk believes that it is well positioned to capitalize upon the
expanding prepaid phone card market due to its focus on national retail
distribution channels, as well as the other components of the SmarTalk
strategy.
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THE SMARTALK STRATEGY
SmarTalk's objective is to become a leading provider of quality, convenient,
easy to use and cost-effective telecommunications products and services to
individuals and businesses, primarily sold through retailers. The Company's
strategy for achieving that objective includes the following key elements:
Increase Penetration of Retailers.
SmarTalk markets and distributes the SmarTalk Card to individuals and small
businesses through major national and regional retailers. The SmartTalk Card
generally is sold in 30, 60 and 120 minute denominations at a price to
retailers averaging approximately $0.22 per minute. The Company intends to
continue to focus on the penetration of retailers by increasing the number of
retailers at which the SmarTalk Card is sold, expanding the number of stores
among retailers selling the SmarTalk Card and adding points of sale at which
customers can purchase the SmarTalk Card within each store. In addition,
SmarTalk plans to leverage its relationship with retailers to market
additional telecommunications services such as "1+" long distance service.
SmarTalk believes that it can continue to grow its network of major national
and regional retailers by increasing awareness among retailers as to the
profit potential of telecommunications services. This potential exists with
regard to the SmarTalk Card because of the limited space utilized to offer the
SmarTalk Card, as well as the ability to generate ongoing residuals through
participation in recharge revenues. In addition, the SmarTrac System provides
the retailer with certain marketing information about its customers. Moreover,
the Company believes that it can increase the points of sale within a retail
store by continuing to provide retailers with turnkey merchandising materials,
which include customized retail packaging and complete display and signage
systems, co-op advertising and MDF to access shelf space.
SmarTalk also intends to capitalize upon its retail distribution network by
offering new products and services and creating innovative marketing
opportunities. For example, the Company is exploring the concept of selling a
co-branded, pre-subscribed "1+" long distance service to customers through
retailers at favorable rates. If successfully introduced, the program would
allow patrons to purchase traditional long distance services directly from the
retailer. Customers would receive a monthly statement itemizing the calls made
and the amount due for that month. The monthly statement would afford
retailers and the Company an additional direct advertising opportunity for
their respective products and services.
Further Develop Direct Response Channels.
SmarTalk plans to stimulate the growth of its existing direct response
sales. For example, the Company has developed on-line recharge of the SmarTalk
Card which allows customers to increase the number of minutes available on the
SmarTalk Card without purchasing a new SmarTalk Card by using a major credit
card, generally at a rate of $0.35 per minute. On-line recharge is designed to
enable the Company to make direct sales to customers, to provide incentives to
retailers to maintain SmarTalk as the exclusive supplier to the retailer and
to create brand loyalty. With respect to recharge sales, the Company plans to
(i) continue to offer volume discounts, whereby, for example, customers from
time to time receive "free minutes" when recharging for the maximum time
permitted and (ii) utilize on-line advertising, in which, for example, a
customer is prompted to recharge his or her card.
The Company will continue to utilize print, broadcast and other means of
direct marketing, including direct response advertising in magazines and
publications, such as in-flight magazines, that appeal to the business
traveler. The Company plans to continue to develop new and innovative means of
marketing its telecommunications products and services directly to customers
to complement its retail distribution network. Such means include television
advertising, catalogue and other direct
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marketing methods. The Company is also developing a home page on the Internet
through which it intends to provide the customer with information on the
benefits of the SmarTalk Card, as well as to direct market SmarTalk services.
Broaden Corporate Advantage and Promotional Programs.
SmarTalk intends to expand the Corporate Advantage Program and corporate
promotional programs which are directed towards business customers. Under the
Corporate Advantage Program, employees who are away from their offices can
utilize SmarTalk's services, thereby enabling businesses to lower
telecommunications costs, monitor call activity and allocate long distance
costs. Businesses enrolled in the Corporate Advantage Program may request
detailed monthly reports generated by the SmarTalk System for use in
controlling expenses and in recapturing costs from clients. SmarTalk also has
established corporate promotional programs which allow the Company's business
customers to provide co-branded prepaid phone cards for use in corporate or
product promotions, direct marketing programs, warranty registration, customer
service programs and premium rewards for customers. SmarTalk plans to broaden
the Corporate Advantage Program and corporate promotional programs by (i)
expanding its sales force to include representatives that focus on business
customers, (ii) capitalizing on the Company's strategic relationships, and
(iii) leveraging its existing relationships with retailers by promoting its
corporate programs to retailers already familiar with SmarTalk services such
as Office Depot, Office 1 Superstores and Hello Direct Catalog that market to
commercial clients.
Target the Business Customer.
SmarTalk plans to introduce additional enhanced features to the SmarTalk
Card in an effort to attract both the small business customer at retail and
corporations as subscribers to its Corporate Advantage Program. In response to
the increasing demand, primarily by business users, for more bundled, single
point of access telecommunications services, the Company plans to expand its
telecommunications features to offer voice mail, fax mail, conference calling
and selected international calling services. These services will be accessible
from almost any touchtone phone, and will be provided on a prepaid and/or a
monthly recurring charge basis at a flat rate per minute without operator as-
sistance, coins, collect or third party billed calls. See "-- Products and
Telecommunications Services."
Leverage Existing Strategic Relationships.
SmarTalk plans to leverage its existing network of strategic relationships
to gain access to new business opportunities and a wider customer base. The
Company has recently entered into strategic alliances, including those with
MCI, West Interactive, and Douglas Stewart, which the Company believes will
expand its distribution channels. The Company also plans to develop additional
strategic relationships with partners whose customers are prospective users of
SmarTalk services. The Company believes that by developing additional
strategic relationships, it will increase awareness of SmarTalk services. The
Company anticipates that, as it continues to develop new and innovative
products and services, it will attract additional strategic partners.
Expand International Services.
SmarTalk plans to expand its business to international markets in order to
market prepaid phone cards to U.S. travelers and foreign customers who
frequently call the U.S. The Company believes that by providing competitive
rates for inbound international service and by advertising in travel locations
such as airports and hotels, SmarTalk can attract U.S. customers traveling
abroad. SmarTalk also believes that it can market to foreign customers who
frequently call the U.S. by establishing a sales force abroad and by providing
turnkey merchandising materials to retailers abroad which are customized for
foreign markets.
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PRODUCTS AND TELECOMMUNICATIONS SERVICES
The SmarTalk Card provides customers with a single point of access to
convenient, easy to use, cost-effective telecommunications products and
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 SmarTalk Card
enables customers to place long distance and international calls from
virtually any touchtone phone, without the need for coins, operator
assistance, collect or other third party billed calls. Card users access these
services by dialing a toll free "800" number and entering a PIN printed on the
back of the card. The system explains the service on a user's first call and
guides callers through all of the features. Prior to any call being processed,
the system informs the caller of the time remaining on the card. The customer
is also notified when there are five minutes and again when there are two
minutes of calling time remaining on the SmarTalk Card. Time spent on a call
or on the Company's enhanced features is automatically deducted from the
remaining time on the card or billed to a pre-authorized corporate account.
Unlike telephone or credit calling cards which usually impose surcharges on
long distance services, SmarTalk's services are typically paid for in advance
and are issued in specified time increments, typically 30, 60, and
120 minutes, at favorable per minute rates. A SmarTalk Card expires on the
earlier to occur of six months after the date such SmarTalk Card is first
activated or the expiration date printed on such SmarTalk Card.
Customers' calls are carried primarily through AT&T (accessed through West
Interactive) and MCI. The Company obtains long distance telecommunications
services pursuant to supply agreements with MCI and West Interactive. The
Company's Preferred Carrier Agreement with MCI obligates SmarTalk to utilize a
specified number of minutes over a period of four years. If the Company
utilizes a certain number of minutes, the price per minute paid by the Company
for all long distance minutes decreases. The Company's agreement with West
Interactive provides for the Company to be charged a flat rate per minute and
includes no minimum commitment.
Should users have questions about the use of their SmarTalk cards when
inside the system, a customer service representative is available for
assistance on-line at the touch of a button. This on-line customer service
differentiates SmarTalk from most of its competitors whose cards generally
require users to hang up and call a second number to reach customer service.
The SmarTalk customer service representative has access to real time call
records which allow the representative to trace the customer's system usage.
See " -- SmarTalk Customer Service."
Customers access the Company's services through one of the SmarTalk
Platforms. The SmarTalk Platforms are designed in a manner which allows
SmarTalk to customize or add features and services to the SmarTalk Card on a
platform-wide basis. Generally, calls accessing enhanced telephonic features
are charged for such access as disclosed by computerized voice prompts at the
time such features are being accessed. SmarTalk attempts to design and develop
enhanced teleservices in order to increase the marketability of the SmarTalk
Card and satisfy customer requirements. The Company believes that offering
enhanced services will attract additional customers to the SmarTalk services,
promote brand loyalty and result in additional product usage. To date, these
services have been utilized on a limited basis. See " -- The SmarTalk
Platforms."
Customers are currently provided with the option of accessing the following
services:
International Outbound Long Distance.
Customers can use the SmarTalk Card to place international long distance
calls from anywhere in the U.S. at rates that are generally lower than the
standard card plan rates currently charged by AT&T, MCI and Sprint or the rate
charged for a direct call from a payphone or hotel room. A connection through
the SmarTalk Platforms costs less than a typical operator assisted connection,
a collect call, and most major carrier calling card calls, including AT&T,
MCI, and the RBOCs.
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Speed Dial.
Customers can create their own personal speed dial directory which can then
be accessed each time the customer uses the PIN on which the directory has
been created. This feature permits customers to place calls to any of nine
frequently dialed numbers by pressing two buttons. Currently, the Company
provides a first-time user of a particular PIN with a limited amount of free
time to set up their personal speed dial directory. The personal speed dial
directory created by the customer is inaccessible to the customer once all of
the prepaid minutes on the SmarTalk Card associated with the directory have
been utilized. The Company believes that the speed dial feature increases the
likelihood that customers will recharge their SmarTalk cards in order to
retain their personal speed dial directory.
Message Delivery.
Customers can record a message for the recipient of a call if the recipient
does not answer or if the line is busy. The SmarTalk system will make multiple
attempts to deliver the message over a period of six hours, and then notify
the customer the next time that the customer accesses the SmarTalk system
whether the message was delivered and, if so, the time at which it was
delivered.
Sequential Calling.
Customers can make additional calls without the necessity of exiting the
platform and entering it again. The Company believes that this feature
encourages users to place multiple phone calls each time they use their
SmarTalk cards.
The Company is currently testing and anticipates offering the following
additional features by the end of 1996:
Conference Calling.
Customers will be able to initiate conference calls from virtually any
touchtone phone by adding a third party to the call. The conference calling
feature will be automated and will not require operator assistance. Voice
prompts will assist the customer through the procedure to establish the
conference call. A customer using the conference calling feature will be
deducted time on two outbound calls, therefore leveraging the cost to the
Company of one inbound call. See " -- The SmarTalk Platforms."
Content Delivery.
Customers will be able to access financial news, headline news, sports
updates, weather reports and other information updates, provided by SmarTalk
through a digital feed from several selected on-line suppliers. These services
will be frequently updated, and the information will be accessible by a series
of menus presented to the user via voice prompts. Information will first be
presented in a general format, with the consumer then being given the option
to retrieve more detailed information on the topic selected.
The following additional services are under development and are expected to be
offered by SmarTalk in 1997:
Voice Mail.
SmarTalk plans to offer customers a secure, personalized voice mailbox which
will allow them to receive, retrieve, save and delete voice mail messages from
virtually any touchtone phone. Each time the customer accesses their voice
mailbox, the customer will be notified if there are any new voice mail
messages. The customer will also have the ability to elect to be notified of
messages by instructing the system to send a message to their pagers or
calling them at a designated number.
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Fax Mail.
SmarTalk plans to offer customers fax mail capability which will allow
customers to receive, store and retrieve facsimile transmissions at any time
by forwarding the faxed information to any fax machine or personal computer in
the U.S. and certain parts of the world. The fax mailbox will provide
customers with the convenience of controlling the time and location of receipt
of facsimile transmissions, enhancing the customer's ability to receive
confidential facsimiles and receive facsimiles at multiple or changing
locations. Each time the customer accesses their fax mailbox, the customer
will be notified if there are any new faxes. The customer will also have the
ability to elect to be notified of waiting faxes.
International Long Distance.
The Company expects that customers will be able to utilize the SmarTalk Card
to make international calls to the U.S. from more than 25 foreign countries,
with additional originating countries being added thereafter. The Company
eventually expects to enable customers to place country to country
international calls from most countries in the world to virtually any country
in the world.
MARKETING AND DISTRIBUTION
The Company markets its services through multiple distribution channels
which include (i) sales to retailers, (ii) direct response sales (which
include recharge sales, sales generated by payphone marketing and sales
generated through print, mail, and in the near future, Internet and television
advertising), and (iii) direct corporate programs and promotions.
Retail Channel.
SmarTalk's primary marketing and distribution focus is to target individuals
and small businesses through major national and regional retailers. The
Company currently derives most of its revenues from sales to retailers. The
Company's retail distribution channel encompasses diverse categories of
retailers ranging from convenience stores to food and drug stores, department
stores, mass merchandisers, office superstores and consumer electronics
retailers. SmarTalk markets and distributes the SmarTalk Card nationwide to
retailers both through a direct sales force and through its national sales
organization of independent manufacturers' representatives which utilizes its
relationships with retailers to introduce the SmarTalk Card and its services.
The Company believes that its broad retail distribution has resulted in
SmarTalk becoming a leading brand at the retail level.
Currently, the SmarTalk Card is sold at selected retail locations throughout
the U.S., including locations operated by the following leading retailers:
American Drug Stores (which includes Jewel/Osco Combo Stores, Osco Drug Stores
and Sav-On Drug Stores), Office Depot, Thrifty Oil, Builders Square, Hills
Department Stores, Bradlees, Bergen Brunswig Drug Company (Good Neighbor
Pharmacy), Venture Stores, Foley's Department Stores, Marshall Field's, Fred
W. Albrecht Grocery Company, Office 1 Superstores, Price/Costco, Acme, Best
Buy, Dayton's, Fedco, The Good Guys, Hudson's, Penn Daniels, Pamida and
Robinsons-May.
The Company believes its success to date in rapidly expanding its retail
network is attributable to management's ability to increase retailers'
awareness of the profit potential of offering telecommunications services, the
minimal space involved in offering the SmarTalk Card at retail and the ability
of the SmarTalk Card to generate ongoing residuals for retailers through
participation in recharge revenues. In furtherance of its strategy, the
Company provides (i) turnkey merchandising materials which include the
availability of customized cards and retail packaging and complete display and
signage systems which make display of the SmarTalk Card easy, (ii) retail
promotion programs in which SmarTalk and the retailer share the costs of the
promotion, and (iii) access to marketing information from the SmarTrac System.
Unlike most products sold by retailers, the SmarTalk Card allows retailers
to generate revenues beyond the initial sale of the SmarTalk Card by allowing
an ongoing revenue stream based on the
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number of minutes recharged on any SmarTalk Card sold by that retailer, so
long as the retailer continues to offer the SmarTalk Card. SmarTalk encourages
the customer to utilize the recharge option by computerized voice prompts. The
Company believes that this program increases retailer loyalty to SmarTalk and
creates a barrier for the retailer to try other prepaid phone cards. The
Company expects recharge revenues to increase as more SmarTalk Cards are sold
and used and the Company introduces additional enhanced services.
In addition, SmarTalk assists retailers in promoting the SmarTalk Card at
retail points of sale at each retail location by providing turnkey
merchandising materials to retailers. SmarTalk's turnkey merchandising and
marketing program includes the availability of customized retail packaging and
customized display and signage systems. The Company also provides promotional
supplies to the retailer, to assist the retailer in making the SmarTalk Card
immediately available at various retail locations.
SmarTalk's retail promotional programs include various forms of co-op
advertising programs and other incentive programs to access shelf space. The
Company believes that these programs, together with the residual revenues from
recharge and the Company's turnkey merchandising and marketing program, create
ongoing retailer involvement in support of marketing the SmarTalk Card.
Retailers also benefit from the SmarTrac System which enables the Company to
provide certain demographic information to a retailer of its customers that
utilize SmarTalk services. This information provides the retailer with
information which it can use in formulating its marketing strategy. See "--
The SmarTrac System." In addition, the SmarTrac System provides the retailer
with the ability to deliver custom audio information, such as store openings
or store advertisements, to the retailer's customers when they access the
SmarTalk system.
Direct Response.
The Company also markets its services directly to customers through direct
response sales, which include recharge sales, and sales generated through
print, direct mail, and in the future, Internet and television advertising,
generally at a rate of $0.35 per minute and without requiring the issuance of
a new SmarTalk Card.
The Company offers on-line recharge, generally at a rate of $0.35 per
minute, which provides customers with the convenience of being able to add
minutes to an existing SmarTalk Card with a major credit card while using the
service. This allows the customer to purchase minutes without having to return
to a retailer and allows the customer to continue using features already
programmed into their SmarTalk Card, currently the speed dial directory. See
"-- Products and Telecommunications Services." The Company generally pays
credit card providers a service fee of 3% on recharge sales and other direct
response sales. See "Risk Factors -- Risk of Loss from Returned Transactions;
Fraud; Bad Debt; Theft of Services."
The Company is developing a home page on the Internet through which it
intends to provide the customer with information as to the benefits of the
SmarTalk Card. The Company believes that the Internet home page will give the
SmarTalk Card exposure in the rapidly growing electronic commerce marketplace.
The Company intends to use its Internet presence to provide the customer with
information on the benefits of SmarTalk services, as well as to direct market
the SmarTalk Card. Additionally, the Internet home page will provide the
Company with a unique medium for providing interactive promotional programs to
the Company's retailers and direct customers.
Direct Corporate Programs and Promotions.
Corporate sales of SmarTalk services generate revenue primarily in two
areas: (i) sales to corporations for employee use through the Corporate
Advantage Program and (ii) sales to corporations for promotional distribution.
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SmarTalk markets SmarTalk services through the Corporate Advantage Program
to businesses as a means to reduce long distance costs and better monitor long
distance usage. Businesses enrolled in the Corporate Advantage Program have
access to detailed monthly reports generated by the SmarTrac System for use in
controlling expenses and allocating costs. The Corporate Advantage Program
enables employees to access the SmarTalk system through a customized PIN and
to track the cost of any service to a particular client or matter by dialing
an additional two digit customized code. Businesses that enroll in the
Corporate Advantage Program can be billed on either a prepaid or monthly
basis. Use of SmarTalk services may result in substantial savings to business
travelers by eliminating access and other surcharges that are typically added
to calls made from a payphone or hotel room. In addition, the Company believes
its enhanced services will be attractive to its corporate customers because
they allow the caller to access long distance, speed dial, message delivery
and future services.
The Company also markets the SmarTalk Card and co-branded prepaid cards for
use in promotional marketing, including sales for corporate or product
promotional campaigns, direct marketing programs, warranty registration or
customer service programs and premium rewards for consumers. For example, a
corporate promotional customer can provide custom designed cards featuring its
logo or customized advertisement to consumers and can use the SmarTalk Card to
reward consumers for purchasing a product, using a service or providing
information. In these ways, corporate clients can use the SmarTalk Card to
reward consumers. In addition, the SmarTrac System allows corporate
promotional customers to learn the habits of those same consumers for future
marketing strategies. SmarTalk has created promotional programs for JVC, Smart
& Final Iris, Cellular One, AirTouch Cellular and, in conjunction with Kodak
and Hallmark Cards, American Stores. Similarly, corporate customers can
utilize SmarTalk for warranty registration programs by inviting consumers to
phone in their information to a dedicated "800" number rather than completing
a warranty registration card. Information about the consumer can then be
provided to the corporate customer from the SmarTrac System.
The Company identifies potential corporate clients through its direct sales
force, as well as its nationwide network of sales representatives and
retailers. SmarTalk plans to capitalize upon its existing relationships by
promoting its Corporate Advantage Program to retailers already familiar with
the SmarTalk Card such as Office Depot, Office 1 Superstores and Hello Direct
Catalog that market to commercial clients. Following completion of the
Offering, the Company intends to expand its sales force to significantly build
upon its corporate programs and promotions distribution channel.
STRATEGIC PARTNERS
SmarTalk has recently entered into strategic alliances with several major
telecommunications and other companies which the Company believes will further
expand each of its distribution channels.
MCI.
On July 10, 1996, the Company entered into a Prepaid Carrier Referral
Program Agreement whereby MCI has agreed to refer potential clients to the
Company. Currently, SmarTalk is one of three companies to which MCI refers
certain potential clients. The Company has agreed to pay MCI a referral fee
for any new clients that the Company develops as a result of such referrals
from MCI. MCI has no obligation to refer any potential clients to SmarTalk. In
addition, the Company has agreed to service these clients exclusively through
inbound and outbound service provided by MCI.
West Interactive.
On June 1, 1996, the Company entered into a Wholesale Distribution Agreement
with West Interactive whereby West Interactive, a national telemarketing
corporation, will purchase prepaid
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calling card services from SmarTalk for sale to West Interactive's clients.
The agreement provides that prepaid cards sold by West Interactive to its
clients and any related promotional literature distributed will denote
SmarTalk as the service provider.
Douglas Stewart.
The Company has an arrangement with Douglas Stewart, one of the nation's
largest distributors to college bookstores, whereby Douglas Stewart
distributes the SmarTalk Card to college bookstores across the nation. The
Company believes that its relationship with Douglas Stewart provides it with
the ability to target college students, whom the Company believes will be
prime users of SmarTalk services. In addition, the Company believes that
college students represent an opportunity to create brand loyalty among
younger customers.
THE SMARTRAC SYSTEM
The Company has developed the SmarTrac System, a proprietary in-house data
reporting and tracking system that provides a series of database query and
report capabilities that are used to track inventory, control fraud and
monitor usage by card and retailer. The Company markets the SmarTrac System's
ability to provide customer and usage information to the Company's retailers
and business customers. Data generated through the SmarTrac System also helps
the Company to minimize unauthorized use of the SmarTalk Card. For example,
SmarTalk personnel can determine whether multiple PINs are being used from any
single telephone number, whether the same PIN is being used from many
different parts of the country within a short period of time, or whether an
unreasonable number of invalid PINs are being entered from any given telephone
number. This data allows the Company to monitor activity in an effort to limit
fraudulent use of the Company's services. The Company believes that by
providing a marketing tool as well as a measure of fraud control, the SmarTrac
System provides the Company with a competitive advantage.
THE SMARTALK PLATFORMS
Customers access the SmarTalk network through the SmarTalk Platforms. The
SmarTalk Platforms are accessible from virtually any touchtone telephone in
the U.S. and can communicate with telephones, PCs, facsimile machines and
pagers. The SmarTalk Platforms feature multiple switches, thousands of inbound
and outbound access ports for prepaid and corporate calling services, as well
as voice response applications, high-speed database servers, voice recording
capability and credit card verification software, among other capabilities.
This structure provides SmarTalk customers with high capacity, reliable
telecommunications products and services.
The SmarTalk Platforms are controlled by proprietary database access
software that was developed by the Company. The Company designed its
proprietary software to be versatile and adaptable, and to work with the
SmarTalk Platforms to provide users with efficient and reliable services. The
SmarTalk proprietary software allows the SmarTalk Platforms to be easily
expandable so that, as usage increases or new SmarTalk services are developed,
the SmarTalk Platforms may evolve with the rest of the SmarTalk services. The
Company believes that the SmarTalk Platforms will be capable of processing all
of the Company's anticipated usage requirements. The modular and scalable
design of the SmarTalk Platforms and the related software allows expansion of
network capacity without requiring replacement of existing hardware or
software or interrupting service.
SmarTalk recently acquired the VoiceChoice Platform from Pacific Bell
Information Services. Located in San Francisco, the VoiceChoice Platform was
configured by Pacific Bell Information Services and supports the SmarTalk Card
as well as other interactive voice response applications. The VoiceChoice
Platform is an integrated call processing system, in which calls are carried
on the VoiceChoice Platform by T1 circuits from MCI and are presented to
either of two Summa Four switches. Traffic is split evenly between the Summa
switches to provide redundancy. Incoming calls to
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the VoiceChoice Platform are answered by a Summa Four switch, which is
connected to voice response units ("VRUs"). The VRUs, in turn, interact with
an Oracle database server that stores all user information. Resident on the
switch is the software and hardware necessary to allow the switch to interact
with, and accept input from, customers. The VoiceChoice Platform software
prompts customers for their PIN. The software validates this information by
querying the database of active PINs, and verifying that only one customer is
connected to the SmarTalk Platform using this PIN. Once the customer has been
identified, the software instructs the switch to present the customer with
various options, which the customer can access by responding to voice prompts.
If the customer chooses to place an outbound telephone call, the software
transmits the call over lines provided by the resident long distance provider.
The voice response boxes are connected directly to the Company's outbound long
distance services, again providing SmarTalk customers fast processing of their
telephone calls. The system is monitored by on-site analysts 24 hours a day
with numerous "heartbeat" programs in place to detect any potential problem.
The acquisition of the VoiceChoice Platform provides the Company with the
opportunity to reduce its costs while giving the Company a stronger
technological infrastructure. This infrastructure enables the Company to
customize and add features, such as stand-alone interactive voice services
which the Company can market to corporate clients.
The San Antonio call processing platform and back-up Omaha call processing
platform are owned and operated by West Interactive and are similarly
configured for high-speed, high-capacity and high-reliability. West
Interactive provides interstate and international long distance services to
the Company through its agreement with AT&T. In addition, the Company has the
ability to add access to MCI service to the platforms maintained by West
Interactive. The Company's call processing centers are redundant within
themselves and, in certain instances, with each other. Despite this fact, the
Company intends to develop database portability between the different
platforms, thus ensuring redundancy in the event of a major technical or
network problem at any of the facilities.
SMARTALK CUSTOMER SERVICE
SmarTalk believes that effective and convenient customer service is
essential to attracting and retaining customers. SmarTalk's customer service
department is responsible for assisting customers in using SmarTalk services,
answering questions about usage, resolving billing related issues and
resolving any technical problems. SmarTalk provides on-line customer support
that is available 24 hours a day at the touch of a button. In addition,
SmarTalk can identify calling activity by originating or destination phone
number or other parameters. Customer service representatives can access
detailed usage records through the SmarTrac System in order to efficiently
answer customers' questions or resolve customers' concerns. SmarTalk also
maintains a secondary corporate level customer service organization in the
Company's offices to address unique customer service requests which are not
handled while a caller is in the system.
COMPETITION
The telecommunications services industry is intensely competitive, rapidly
evolving and subject to constant technological change. In 1994, there were
approximately 75 companies marketing prepaid calling cards. Today there are
more than 500 companies selling prepaid calling cards, and the Company expects
competition to increase in the future. Other providers currently offer one or
more of each of the services offered by the Company. As a service provider in
the long distance telecommunications industry, the Company competes with three
dominant providers, AT&T, MCI and Sprint, all of which are substantially
larger and have: greater financial, technical, engineering, personnel and
marketing resources; longer operating histories; greater name recognition; and
larger customer bases than the Company. These advantages afford the Company's
competitors pricing flexibility. Telecommunications services companies may
compete for customers based on price, with
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the dominant providers conducting extensive advertising campaigns to capture
market share. Competitors with greater financial resources may also be able to
provide more attractive incentive packages to retailers to encourage them to
carry products that compete with SmarTalk services. In addition, competitors
with greater resources than the Company may be better situated to negotiate
favorable contracts with retailers. The Company believes that existing
competitors are likely to continue to expand their service offerings to appeal
to retailers and their customers. Moreover, since there are few, if any,
substantial barriers to entry, the Company expects that new competitors are
likely to enter the telecommunications market and attempt to market
telecommunications services similar to the Company's services which would
result in greater competition for the Company.
The ability of the Company to compete effectively in the telecommunications
services industry will depend upon the Company's continued ability to provide
high quality SmarTalk services at prices generally competitive with, or lower
than, those charged by its competitors. Certain of the Company's competitors
dominate the telecommunications industry and have the financial resources to
enable them to withstand substantial price competition, which is expected to
increase significantly, and there can be no assurance that the Company will be
able to compete successfully in the future. Moreover, there can be no
assurance that certain of the Company's competitors will not be better
situated to negotiate contracts with suppliers of telecommunications services
which are more favorable than contracts negotiated by the Company. In
addition, there can be no assurance that competition from existing or new
competitors or a decrease in the rates charged for communications services by
the major long distance carriers or other competitors would not have a
Material Adverse Effect.
The Company attempts to differentiate itself from its competitors by
offering an integrated bundle of communications services through advanced
telecommunications hardware and proprietary software and distributing these
services primarily through retail channels, as well as a growing number of
additional distribution channels. The Company believes that its principal
competitive advantages are its (i) well-established presence among major
national and regional retailers, (ii) advanced telecommunications
infrastructure including the SmarTalk Platforms and proprietary SmarTrac
System, and (iii) management team, which has extensive marketing and
merchandising expertise. The Company believes that the principal competitive
factors affecting the market for telecommunications services are price,
quality of service, reliability of service, degree of service integration,
ease of use, service features and name recognition. The Company believes that
it competes effectively in these areas.
Recent changes in the regulation of the telecommunications industry may
impact the Company's competitive position. The Telecommunications Act has
effectively opened the long distance market to competition from the RBOCs. The
entry of these well-capitalized and well-known entities into the long distance
market will likely increase competition for long distance customers. The
Telecommunications Act also grants the FCC the authority to deregulate other
aspects of the telecommunications industry, which in the future may, if
authorized by the FCC, facilitate the offering of telecommunications services
by regulated entities, including the RBOCs, in competition with the Company.
GOVERNMENT REGULATION
The terms and conditions under which the Company provides its services are
subject to regulation by the state and federal governments of the U.S. Various
international authorities may also seek to regulate the services provided or
to be provided by the Company. Federal laws and FCC regulations apply to
interstate telecommunications, while state regulatory authorities have
jurisdiction over telecommunications that originate and terminate within the
same state.
Federal. On February 8, 1996, President Clinton signed into law the
Telecommunications Act which will allow local exchange carriers, including the
RBOCs, to provide inter-LATA long distance telephone service and which also
grants the FCC the authority to deregulate other aspects of the
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telecommunications industry. The new legislation may result in increased
competition in the industry, including from the RBOCs, in the future. See " --
Competition." The Company is classified by the FCC as a non-dominant carrier.
The FCC has jurisdiction to act upon complaints against any common carrier for
failure to comply with its statutory obligations. The FCC also has the
authority to impose more stringent regulatory requirements on the Company and
to change its regulatory classification. The Company has applied for and
received all necessary authority from the FCC to provide domestic interstate
and international telecommunications service. The Company has been granted
authority by the FCC to provide international telecommunications services
through the resale of switched services of U.S. facilities-based carriers. The
FCC reserves the right to condition, modify or revoke such international
authority for violations of the Federal Communications Act or its rules.
Both domestic and international non-dominant carriers currently must
maintain tariffs on file with the FCC. Although the tariffs of non-dominant
carriers, and the rates and charges they specify, are subject to FCC review,
they are presumed to be lawful and are seldom contested. Prior to a recent
court decision, domestic non-dominant carriers were permitted by the FCC to
file tariffs with a "reasonable range of rates" instead of the detailed
schedules of individual charges required of dominant carriers. In reliance on
the FCC's past practice of allowing relaxed tariff filing requirements for
non-dominant domestic carriers, the Company filed reasonable range of rates
schedules in its FCC tariff. As an international non-dominant carrier, the
Company will be required to include detailed rate schedules in its
international tariffs. Resale carriers are also subject to a variety of
miscellaneous regulations that, for instance, govern the documentation and
verifications necessary to change a consumer's long distance carriers, limit
the use of "800" numbers for pay-per-call services, require disclosure of
operator services and restrict interlocking directors and management.
On March 21, 1996, the FCC initiated a rulemaking proceeding in which it
proposed to eliminate the requirement that non-dominant interstate carriers
such as the Company maintain tariffs on file with the FCC for domestic
interstate services. The FCC's proposed rules are pursuant to authority
granted to the FCC in the Telecommunications Act to "forbear" from regulating
any telecommunications service provider if the FCC determines that the public
interest will be served. The FCC also requested public comment on whether any
other regulations currently imposed on non-dominant carriers should be
eliminated pursuant to the FCC's "forbearance" authority. It is not known when
the FCC will take final action on this proposal.
State. The intrastate long distance telecommunications operations of
SmarTalk are subject to various state laws and regulations, including prior
certification, notification and/or registration requirements. In certain
states, prior regulatory approval may be required for changes in control of
telecommunications operations. The Company is currently subject to varying
levels of regulation in the states in which it provides card services (which
are generally considered "1+" services by the states). The vast majority of
states require SmarTalk to apply for certification to provide
telecommunications services, or at least to register or to be found exempt
from regulation, before commencing intrastate service. The vast majority of
the states require SmarTalk to file and maintain detailed tariffs listing
rates for intrastate service. Many states also impose various reporting
requirements and/or require prior approval for transfers of control of
certified carriers and assignments of carrier assets, including customer
bases, carrier stock offerings and incurrence by carriers of significant debt
obligations. Certificates of authority can generally be conditioned, modified,
canceled, terminated or revoked by state regulatory authorities for failure to
comply with state law and/or the rules, regulations and policies of the state
regulatory authorities. Fines and other penalties, including, for example, the
return of all monies received for intrastate traffic from residents of a
state, may be imposed for such violations.
SmarTalk has made the filings and taken the actions it believes are
necessary to become certified or tariffed to provide intrastate card services
to customers throughout the U.S. The Company is certified to do business as a
foreign corporation in the 49 states outside of its state of incorporation,
and has received authorization to provide intrastate telecommunications
services in all states where
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certification is required. There can be no assurance that the Company's
provision of services in states where it is not licensed or tariffed to
provide such services will not have a Material Adverse Effect. See "Risk
Factors -- Regulation."
EMPLOYEES
As of October 1, 1996, the Company employed 39 persons on a full-time basis.
None of the Company's employees are members of a labor union or are covered by
a collective bargaining agreement. The Company believes that its relations
with its employees are good. The Company believes that its future success will
depend on its ability to attract and retain highly skilled and qualified
employees to meet management and other requirements from time to time.
FACILITIES
SmarTalk's principal executive offices are located in approximately 8,524
square feet of office space in Los Angeles, California under a lease expiring
January 10, 2002. SmarTalk also subleases from Pacific Bell Information
Services space to house the VoiceChoice Platform located in San Francisco. The
Company is currently engaged in negotiations to have the lease assigned to it
by Pacific Bell. In addition, the Company has commenced negotiations with the
landlord of the space to enter into a lease to replace the Company's
arrangements with Pacific Bell. The Company believes that other space is
available at a comparable monthly rent if its negotiations are unsuccessful.
The Company believes its facilities are suitable for the Company's current
needs.
LEGAL PROCEEDINGS
The Company is not aware of any pending legal proceedings against the
Company which, individually or in the aggregate, the Company expects to have a
Material Adverse Effect. The Company is, from time to time, involved in
regulatory proceedings before various public utilities commissions, as well as
before the FCC. See also "Risk Factors -- Limited Protection of Proprietary
Rights; Risk of Infringement."
PLAN OF OPERATION
SmarTalk intends to devote a majority of its efforts toward retail
distribution, expanding the number of retailers at which the SmarTalk Card is
sold, increasing the number of stores among retailers selling the SmarTalk
Card and adding points of sale at which customers can purchase the SmarTalk
Card within each store. In the next 12 months the Company expects to increase
its staff by adding employees to help manage the planned growth of the
Company. SmarTalk intends to develop an Internet home page and produce
television advertising in an effort to pursue additional direct response
opportunities. The Company plans to expand its sales force to include
representatives to focus on businesses. As part of its efforts to attract
businesses, SmarTalk plans to introduce voice mail, fax mail, conference
calling and international calling services by the end of 1997. The Company
anticipates that it will spend approximately $5 to $10 million to increase
capacity of the SmarTalk Platforms required to handle anticipated usage volume
and to provide enhanced features.
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MANAGEMENT
OFFICERS AND DIRECTORS
The executive and certain other key officers and directors of the Company
and their ages as of October 1, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Robert H. Lorsch(1)........................ 46 Chairman of the Board of
Directors, President and
Chief Executive Officer
Richard M. Teich........................... 43 Executive Vice President
Glen Andrew Folck.......................... 32 Chief Financial Officer and
Vice President,
Finance/Operations
William H. Mackall......................... 64 Vice President, Sales and
Marketing
Ahmed O. Alfi(2)........................... 40 Director
Fred F. Fielding........................... 57 Director
Jeffrey I. Scheinrock...................... 45 Director
Lloyd S. Zeiderman(3)...................... 60 Director
</TABLE>
- --------
(1) Mr. Lorsch serves as a director of the Company pursuant to his own
designation under the Shareholders Agreement dated as of December 28, 1995
among the Company, Robert H. Lorsch and SmarTalk Partners (the
"Shareholders Agreement"). The Shareholders Agreement shall terminate upon
the consummation of the Offering.
(2) Mr. Alfi serves as a director of the Company pursuant to SmarTalk
Partners' designation under the Shareholders Agreement. The Shareholders
Agreement shall terminate upon consummation of the Offering.
(3) Mr. Zeiderman serves as a director of the Company pursuant to the
designation of a voting trust set forth in the Shareholders Agreement. The
Shareholders Agreement shall terminate upon consummation of the Offering.
Robert H. Lorsch co-founded the Company and has served as Chairman of the
Board of Directors, President and Chief Executive Officer of the Company since
its inception in October 1994. Prior to forming the Company, Mr. Lorsch served
as President of LCN, a full service advertising and sales promotion agency
formed by Mr. Lorsch in 1986 which specialized in interactive marketing on
behalf of corporate clients. On December 28, 1995, the Company purchased
certain of the assets of LCN. See "Certain Transactions."
Richard M. Teich co-founded the Company and has served as the Company's
Executive Vice President since January 1, 1996. From 1993 through 1995, Mr.
Teich designed, developed and implemented various advertising and teleservices
programs, including the implementation of interactive telephone sampling and
promotion programs for consumer products companies, while serving as a
consultant to LCN. From 1991 through 1992, Mr. Teich served as Vice President
of LCN.
Glen Andrew Folck has been the Company's Chief Financial Officer and Vice
President, Finance/Operations since January 15, 1996. From December 1993,
until joining the Company, Mr. Folck served as Director of Strategic Planning
for Harvard Industries, Inc., an automotive components manufacturer. From
March 1992 through December 1993, he was Manager, Corporate Accounting and
Financial Reporting, for Sonoco Products Company, a paper packaging
manufacturer. He served as Manager, Branch Accounting, for Premark
International, Inc., a diversified products manufacturer, from May 1990
through March 1992.
William H. Mackall has served as the Company's Vice President, Sales and
Marketing since June 1, 1996. Prior to joining the Company, from 1994 through
May 1996, Mr. Mackall was a private
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marketing and sales promotion consultant. From 1991 through 1994, he co-
founded and served as President of William Mackall & Associates, a full
service sales promotion agency.
Ahmed O. Alfi has been a director of the Company since 1996. Mr. Alfi has
served as the Chairman of the Board of Directors and Chief Executive Officer
of Alfigen, Inc., a prenatal diagnostic company, since January 1992. He also
co-manages Delphi Investments, Ltd., an investment management company which he
founded in 1987. Mr. Alfi currently serves as a director of Creative
Computers, Inc., a direct marketer of computer products. He is a member of
SmarTalk Partners. See "Principal and Selling Shareholders."
Fred F. Fielding has served as a director of the Company since 1996. Mr.
Fielding has been a Senior Partner with Wiley, Rein & Fielding in Washington
D.C. since 1986. From January 1981 to April 1986, Mr. Fielding was counsel to
the President of the United States. Currently, Mr. Fielding serves as a
director for USAir Shuttle, Inc.
Jeffrey I. Scheinrock has served as a director of the Company since 1996.
From March 1989 until June 1996, Mr. Scheinrock was the Vice Chairman of
Finance and Strategic Planning for Packard Bell Electronics Inc. As of July
1996, Mr. Scheinrock is the Vice Chairman of Kistler Aerospace.
Lloyd S. Zeiderman has served as a director of the Company since 1995. Since
1991, Mr. Zeiderman has managed New Vest Capital Corporation, a mortgage
portfolio firm, Nelson Equities, Inc., a real estate acquisitions and
management firm, and HCS Specialized Training Centers, LLC, a computer
training center. Additionally, he has managed three business management firms,
Zeiderman Management Corporation, Zeiderman, Friedman & LaRosa, Inc., and ZFL
Management, Inc.
BOARD OF DIRECTORS AND COMMITTEES
All directors hold office until the next annual meeting of the shareholders
or until their successors have been elected, subject to a director's earlier
death, resignation, retirement, disqualification or removal. There are no
family relationships between any of the directors or the executive officers of
the Company.
The Company's board of directors has established Audit and Compensation
Committees. The Audit Committee is responsible for reviewing and making
recommendations regarding the appointment of the Company's independent
auditors, the annual audit of the Company's financial statements and the
Company's internal accounting practices and policies. The current members of
the Audit Committee are Messrs. Alfi, Scheinrock and Zeiderman. The
Compensation Committee is responsible for making recommendations to the board
of directors regarding compensation arrangements for key employees and key
consultants of the Company and for administering the Company's stock option
plans. The current members of the Compensation Committee are Messrs. Fielding,
Scheinrock and Zeiderman.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to July 1996, there was no Compensation Committee, and the entire
board of directors participated in deliberations regarding executive officer
compensation. During the fiscal year ended December 31, 1995, Mr. Lorsch was
an executive officer of the Company. During such period, no member of the
board of directors served as a director or a member of the Compensation
Committee of any other company of which any executive officer served as a
member of the board of directors.
Mr. Lorsch, the Company's Chairman of the Board, President and Chief
Executive Officer, is the sole shareholder of LCN, which was a marketing and
consulting firm. SmarTalk was formed in October 1994 and had no employees
until September 1995. From October 1994 through December 1995 LCN
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provided the Company with consulting and operational assistance. All of the
services of Mr. Lorsch and certain of the services of Mr. Teich (the Company's
present Executive Vice President) were provided to SmarTalk through LCN and
SmarTalk was billed on an hourly basis for their services. In addition, LCN
provided SmarTalk with assistance with product, platform, billing and software
development. For a limited period through the end of 1995, SmarTalk employees
were covered under LCN's benefit programs. The total amount paid by SmarTalk
to LCN for all these services was approximately $25,000 in 1994 and $415,000
in 1995.
In January 1996 the Company assumed a lease from LCN of office space owned
by Mr. Lorsch. Under this lease the Company paid rent to LCN totalling $11,226
in 1996. The Company no longer utilizes such space and the lease has been
terminated. The Company has paid $5,000 of a $10,000 lease cancellation fee to
LCN.
From February 17, 1995 to November 30, 1995, Mr. Lorsch advanced funds, from
time to time, to the Company. At no time during this period did the amount
owed by the Company to Mr. Lorsch exceed $42,200. These loans were repaid in
full by November 30, 1995. In addition, Mr. Lorsch was loaned $4,500 by the
Company in October 1994, which amount was repaid by the end of 1994.
On December 28, 1995, pursuant to a Loan and Investment Agreement among
SmarTalk Partners, the Company and Robert H. Lorsch, SmarTalk Partners agreed
to loan the Company $1,200,000, provide the Company with a $500,000 line of
credit and purchase shares of Common Stock of the Company representing 30% of
the outstanding shares for a purchase price of $300,000. The number of shares
purchased was 2,647,449, as adjusted for subsequent stock splits, and the
purchase price was determined on the basis of arms' length negotiations. This
loan, evidenced by a promissory note and secured by substantially all of the
assets of the Company, bears interest at 7% per annum. Interest only is
payable on the last day of the month through December 31, 1996 and thereafter
principal and interest shall be payable in equal fully amortizable monthly
installments until July 31, 2000, when all amounts are due and payable. The
line of credit, also evidenced by a promissory note and secured by
substantially all of the assets of the Company, bears interest at a floating
rate equal to prime rate plus 2%, payable monthly in arrears. All amounts
become due and payable in full on January 31, 1998. SmarTalk Partners is a
significant shareholder of the Company. Mr. Alfi, a director of the Company,
is a member of SmarTalk Partners. The Company intends to repay the loan and
the line of credit with the proceeds from the Offering. See "Principal and
Selling Shareholders" and "Use of Proceeds."
SmarTalk purchased certain of the office furniture and equipment fixed
assets of LCN (the "LCN Assets") pursuant to an agreement dated December 28,
1995 between SmarTalk and LCN. The purchase was consummated in January 1996
for $500,000 cash plus a $2,000,000 principal amount subordinated promissory
note which bears interest at 7% per annum, payable $35,000 a month beginning
August 31, 1996, with all amounts due and payable in full on June 30, 2000.
The LCN Assets were originally purchased by LCN for approximately $106,000 and
had a net book value of approximately $36,000 at the time of their purchase by
the Company. Notwithstanding the substantial excess in the cost to the Company
over the net book value to LCN of the LCN Assets, the transaction was
determined by the board of directors of the Company to be (i) at a purchase
price that was a fair value and (ii) favorable to the Company's shareholders
due in part to the perceived benefit to the Company and the lost opportunity
costs to LCN relating to the Company securing the exclusive services of
certain former LCN employees, including Mr. Lorsch. The Company did not seek
nor obtain a fairness opinion from an independent financial advisor with
respect to its purchase of the LCN Assets, but rather agreed upon the purchase
price thereof following negotiations with SmarTalk Partners, which was then
contemplating an investment in the Company. In addition, the shareholders of
the Company unanimously consented to the transaction. The Company intends to
repay the promissory note with the proceeds from the Offering. LCN is party to
a subordination agreement with
44
<PAGE>
the Company and SmarTalk Partners pursuant to which LCN has agreed that no
payments shall be made under the promissory note unless all amounts under the
$250,000 SmarTalk Partners loan (referred to below) have been repaid in full.
LCN received a security interest in substantially all assets of the Company for
agreeing to subordinate its promissory note. See "Use of Proceeds" and "Certain
Transactions."
On August 9, 1996, the Company entered into a loan agreement with SmarTalk
Partners pursuant to which the Company obtained a loan of $250,000. This loan
is collateralized by substantially all of the assets of the Company and accrues
interest at the prime rate. Interest on the loan is due the last day of each
month, commencing August 31, 1996, with the loan maturing on January 31, 1997.
Payments of principal and interest on the $1,200,000 loan, the line of credit,
and the $2,000,000 term note are subordinated to, and may not be made prior to
the repayment of, the $250,000 term loan. The Company intends to repay the
$250,000 term loan with the proceeds from the Offering. See "Use of Proceeds,"
"Certain Transactions" and "Principal and Selling Shareholders."
The Company has agreed to pay certain expenses of the Selling Shareholders,
including Mr. Lorsch and Mr. Zeiderman, a director of the Company, in
connection with this Offering. See "Principal and Selling Shareholders" and
"Underwriting."
DIRECTORS' COMPENSATION
All non-employee directors receive a directors fee of either $1,000 for each
board or committee meeting attended in person or $500 for each telephonic
meeting thereof. Non-employee directors are reimbursed for reasonable out-of-
pocket expenses incurred in connection with their attendance at board and
committee meetings. In addition, options to purchase 28,240 shares of Common
Stock for $3.56 per share were granted to each of Fred F. Fielding and Jeffrey
I. Scheinrock on June 11, 1996 pursuant to the Non-Qualified Plan (as defined
below). See "-- Stock Option Plans." With respect to the options granted to
each of Messrs. Fielding and Scheinrock, options to purchase 9,413 shares of
Common Stock will vest on June 11, 1997, options to purchase 9,413 shares of
Common Stock will vest on June 11, 1998 and options to purchase 9,414 shares of
Common Stock will vest on June 11, 1999. For the year ended December 31, 1995,
Mr. Lorsch received directors' fees aggregating $5,500 for attending eleven
meetings of the board of directors.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
earned for services rendered in all capacities to the Company by the Company's
Chairman of the Board, President and Chief Executive Officer (the "named
executive officer"). No other officer of the Company had a total annual salary
and bonus which exceeded $100,000 during the year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME SALARY
---- -------
<S> <C>
Robert H. Lorsch............................... $73,750
</TABLE>
This amount represents compensation for the final three months of 1995, the
payment of which was deferred until the first quarter of 1996. In addition, Mr.
Lorsch's services were provided to SmarTalk by LCN from October 1994 through
September 1995, and thereafter certain of Mr. Lorsch's services were provided
by LCN through the end of the year. SmarTalk paid LCN certain amounts including
consulting fees for Mr. Lorsch's services. See "-- Directors' Compensation" and
"Certain Transactions."
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement (the "Lorsch Employment
Agreement") with Robert H. Lorsch to serve as the President and Chief Executive
Officer. The Lorsch Employment Agreement provides for an initial term of three
years commencing on the date of the closing of the
45
<PAGE>
Offering and contains a two year "evergreen" provision pursuant to which the
employment period will automatically be extended for consecutive periods of
two years unless the Company gives Mr. Lorsch written notice, no later than
one year prior to the expiration of the then applicable employment period,
that employment will terminate upon the expiration of that period.
Under the Lorsch Employment Agreement, Mr. Lorsch is entitled to an annual
base salary of $345,000 for each calendar year of the agreement and is to
receive a bonus based on the Company's operating results in the discretion of
the Compensation Committee. Pursuant to the Lorsch Employment Agreement, the
Company will provide Mr. Lorsch with certain other benefits, including life
and disability insurance, an automobile allowance and reimbursement for
ordinary business expenses. Mr. Lorsch is entitled to participate in benefits
available to employees and executive officers of the Company. Under the terms
of the Lorsch Employment Agreement, Mr. Lorsch has agreed not to compete with
the Company nor solicit SmarTalk employees on behalf of another person, firm
or entity in competition with the Company, during the term of his employment
and for one year after the effective date of termination.
If Mr. Lorsch's employment is terminated by the Company following a "change
in control" or "without cause" or by Mr. Lorsch for "good reason" (as such
terms are defined in the Lorsch Employment Agreement), Mr. Lorsch is entitled
to receive a payment equal to the then effective base salary for the longer of
(a) the remainder of the term of the Lorsch Employment Agreement and (b) 24
months (the "Lorsch Severance Period"), and the Company shall continue to
maintain Mr. Lorsch's benefits during the Lorsch Severance Period until
comparable benefits are obtained from another employer. In addition, Mr.
Lorsch's employment may be terminated by the Company "for cause" (as defined
in the Lorsch Employment Agreement), in which case Mr. Lorsch would not be
entitled to any further payments under the Lorsch Employment Agreement other
than amounts already earned.
The Company has entered into an employment agreement (the "Teich Employment
Agreement") with Richard M. Teich to serve as the Executive Vice President.
The Teich Employment Agreement provides for an initial term of two years
commencing on the date of the closing of the Offering and contains a one year
"evergreen" provision pursuant to which the employment period will be
automatically extended for consecutive periods of one year unless the Company
gives Mr. Teich written notice, no later than three months prior to the
expiration of the then applicable employment period, that employment will
terminate upon the expiration of that period.
Under the Teich Employment Agreement, Mr. Teich is entitled to an annual
base salary of $185,000 for each calendar year of the agreement and is to
receive a bonus based on the Company's operating results in the discretion of
the Compensation Committee. Pursuant to the Teich Employment Agreement, the
Company will provide Mr. Teich with certain other benefits, including life and
disability insurance, an automobile allowance and reimbursement for ordinary
business expenses. Mr. Teich is entitled to participate in benefits available
to employees and executive officers of the Company. Under the terms of the
Teich Employment Agreement, Mr. Teich has agreed not to compete with the
Company nor solicit SmarTalk employees on behalf of another person, firm or
entity in competition with the Company during the term of his employment and
for one year after the effective date of termination.
If Mr. Teich's employment is terminated by the Company following a "change
in control" or "without cause" or by Mr. Teich for "good reason" (as such
terms are defined in the Teich Employment Agreement), Mr. Teich is entitled to
receive a payment equal to the then effective base salary for the longer of
(a) the remainder of the term of the Teich Employment Agreement and (b) 24
months (the "Teich Severance Period"), and the Company shall continue to
maintain Mr. Teich's benefits during the Teich Severance Period until
comparable benefits are obtained from another employer. In addition,
46
<PAGE>
Mr. Teich's employment may be terminated by the Company "for cause" (as
defined in the Teich Employment Agreement), in which case Mr. Teich would not
be entitled to any further payments under the Teich Employment Agreement other
than amounts already earned.
STOCK OPTION PLANS
1996 NONQUALIFIED STOCK OPTION PLAN. In March 1996, the board of directors
adopted the Company's 1996 Nonqualified Stock Option Plan (the "Nonqualified
Plan"). The Nonqualified Plan provides for the granting of nonstatutory stock
options to employees, officers, directors, consultants, advisors or agents of
the Company. Pursuant to the Nonqualified Plan, an amount equal to (a) the
lesser of (i) 7,087,991 shares of Common Stock and (ii) the number of shares
of Common Stock equal to 9% of the then total issued and outstanding shares of
Common Stock minus (b) the number of shares of Common Stock issued or issuable
pursuant to options exercised or outstanding under the 1996 Plan (referred to
below) are reserved for issuance upon the exercise of options granted under
the Nonqualified Plan. The board of directors may amend, suspend or terminate
the Nonqualified Plan at any time. Upon completion of the Offering, however,
any amendment which would materially (1) increase the benefits accruing to
participants under the Nonqualified Plan, (2) increase the number of shares
which may be issued under the Nonqualified Plan, or (3) modify the
requirements for eligibility for participation in the Nonqualified Plan, must
be approved by the Company's shareholders. The number of shares available for
issuance under the Nonqualified Plan and the exercise price of options granted
may be adjusted to reflect certain corporate reorganizations and
recapitalizations in order to prevent an inequitable dilution or enlargement
of the rights of the participants in the Nonqualified Plan. The Nonqualified
Plan automatically terminates in March 2006 unless terminated earlier by the
board of directors. It is anticipated that the Nonqualified Plan will be
terminated upon consummation of the Offering.
The Nonqualified Plan is administered by the Compensation Committee. Subject
to the conditions of the Nonqualified Plan, the Compensation Committee, in its
discretion, selects the recipient of each option grant and the number of
shares of Common Stock each such option represents, as well as the terms and
conditions of each grant, including the vesting schedule, the exercise price,
the expiration or termination and the transferability of the options granted.
As of June 30, 1996, options to purchase 508,514 shares of Common Stock had
been granted. Of such amount, since January 1, 1996, options to purchase an
aggregate of 103,031 shares were granted under the Nonqualified Plan to
officers and directors at exercise prices ranging from $1.77 per share to
$4.44 per share. The Company anticipates that it will not issue any additional
options under the Nonqualified Plan.
1996 STOCK INCENTIVE PLAN. In August 1996, the board of directors adopted
and the shareholders of the Company approved the 1996 Stock Incentive Plan
(the "1996 Plan" and together with the Nonqualified Plan, the "Stock Option
Plans"). The 1996 Plan permits the Compensation Committee of the board of
directors to make awards to directors, employees, advisors and consultants of
the Company and its subsidiaries. The 1996 Plan provides for the grant of
stock options, including both incentive stock options and nonqualified
options, as well as stock appreciation rights, restricted stock, performance
shares and phantom stock, as described below. All awards under the 1996 Plan
are nontransferable by the participant, except upon the participant's death in
accordance with his will or applicable law. As of October 8, 1996, options to
purchase 2,000 shares of Common Stock had been granted. The total number of
shares of Common Stock or units or other rights that may be subject to options
and other types of awards granted in the future under the 1996 Plan to
officers, employees, advisors and consultants of the Company is not
determinable at this time.
Stock Options. The 1996 Plan authorizes the grant of nonqualified stock
options to employees, consultants and advisors of the Company and its
subsidiaries. Incentive stock options may only be granted to employees of the
Company and its subsidiaries. The exercise price of a nonqualified stock
option may be determined by the Compensation Committee in its discretion. The
exercise price of an
47
<PAGE>
incentive stock option may not be less than the fair market value of the
Common Stock on the date of grant. The value of Common Stock (determined at
the time of grant) that may be subject to incentive stock options that become
exercisable by any one employee in any one year is limited by the Internal
Revenue Code of 1986, as amended, to $100,000. The maximum term of stock
options granted under the 1996 Plan is 10 years from the date of grant. The
Compensation Committee shall determine the extent to which an option shall
become and/or remain exercisable in the event of the termination of employment
or service of a participant under certain circumstances, including retirement,
death or disability, subject to certain limitations for incentive stock
options. Under the 1996 Plan, the exercise price of an option is payable by
the participant in cash or, in the discretion of the Compensation Committee,
in Common Stock or a combination of cash and Common Stock.
Stock Appreciation Rights. A stock appreciation right may be granted in
connection with an option, either at the time of grant or at any time
thereafter during the term of the option. A stock appreciation right granted
in connection with an option entitles the holder, upon exercise, to surrender
the related option and receive a payment based on the difference between the
exercise price of the related option and the fair market value of the
Company's Common Stock on the date of exercise. A stock appreciation right
granted in connection with an option is exercisable only at such time or times
as the related option is exercisable and expires no later than the related
option expires. A stock appreciation right also may be granted without
relationship to an option and will be exercisable as determined by the
Compensation Committee, but in no event after 10 years from the date of grant.
A stock appreciation right granted without relationship to an option entitles
the holder, upon exercise, to a payment based on the difference between the
base price assigned to the stock appreciation right by the Compensation
Committee on the date of grant and the fair market value of the Company's
Common Stock on the date of exercise. Payment to the holder in connection with
the exercise of a stock appreciation right may be in cash or shares of Common
Stock or in a combination of cash and Common Stock.
Restricted Stock Awards. The Compensation Committee may award shares of
Common Stock to participants under the 1996 Plan, subject to such restrictions
on transfer and conditions of forfeiture as it deems appropriate. Such
conditions may include requirements as to the continued service of the
participant with the Company, the attainment of specified performance goals or
any other conditions determined by the Compensation Committee. Subject to the
transfer restrictions and forfeiture restrictions relating to the restricted
stock award, the participant will otherwise have the rights of a shareholder
of the Company, including all voting and dividend rights, during the period of
restriction.
Performance Awards. The Compensation Committee may grant performance awards
denominated in specified dollar units ("Performance Units") or in shares of
Common Stock. Performance awards are payable upon the achievement of
performance goals established by the Compensation Committee at the beginning
of the performance period, which may not exceed ten years from the date of
grant. At the time of grant, the Compensation Committee establishes the number
of units or shares, the duration of the performance period, the applicable
performance goals and, in the case of Performance Units, the potential payment
or range of payments for the performance awards. At the end of the performance
period, the Compensation Committee determines the payment to be made based on
the extent to which the performance goals have been achieved. The Compensation
Committee may consider significant unforeseen events during the performance
period when making the final award. Payments may be made in cash or shares of
Common Stock or in a combination of cash and shares.
Phantom Stock. An award of phantom stock gives the participant the right to
receive cash at the end of a fixed vesting period based on the value of a
share of Common Stock at that time. Phantom stock units are subject to such
restrictions and conditions to payment as the Compensation Committee
determines are appropriate. At the time of grant, the Compensation Committee
determines, in its sole discretion, the number of units and the vesting period
of the units, and it may also set a maximum
48
<PAGE>
value of a unit. If the participant remains employed by the Company throughout
the applicable vesting period, he is entitled to receive payment of a cash
amount for each phantom stock unit equal in value to the fair market value of
one share of Common Stock on the last day of the vesting period, subject to
any maximum value limitation.
Administration. The 1996 Plan shall be administered by the Compensation
Committee of the board of directors, or such other Compensation Committee as
may be appointed by the board. Subject to the limitations set forth in the
1996 Plan, the Compensation Committee has the authority to determine the
persons to whom awards will be granted, the time at which awards will be
granted, the number of shares, units or other rights subject to each award,
the exercise, base or purchase price of an award (if any), the time or times
at which the award will become vested, exercisable or payable and the duration
of the award. The Compensation Committee may provide for the acceleration of
the vesting or exercise period of an award at any time prior to its
termination or upon the occurrence of specified events. With the consent of
the affected participant, the Compensation Committee has the authority to
cancel and replace awards previously granted with new options for the same or
a different number of shares and having a higher or lower exercise or base
price, and may amend the terms of any outstanding awards to provide for an
exercise or base price that is higher or lower than the current exercise or
base price.
Reservation of Shares. The Company has authorized and reserved a number of
shares of Common Stock for issuance under the 1996 Plan equal to (a) the
lesser of (i) 7,087,991 shares of Common Stock and (ii) the number of shares
of Common Stock equal to 9% of the then total issued and outstanding shares of
Common Stock minus (b) the number of shares of Common Stock issued or issuable
pursuant to options exercised or outstanding under the Nonqualified Plan. If
any shares of Common Stock that are the subject of an award are not issued or
transferred and cease to be issuable or transferable for any reason, such
shares will no longer be charged against such maximum share limitation and may
again be made subject to awards under the 1996 Plan. In the event of certain
corporate reorganizations, recapitalizations, or other specified corporate
transactions affecting the Company or the Common Stock, proportionate
adjustments may be made to the number of shares available for grant and to the
number of shares and prices under outstanding awards made before the event.
Term and Amendment. The 1996 Plan has a term of 10 years, subject to earlier
termination or amendment by the board of directors. All awards granted under
the 1996 Plan prior to its termination remain outstanding until exercised,
paid or terminated in accordance with their terms. The board of directors may
amend the 1996 Plan at any time, except that shareholder approval is required
for certain amendments to the extent necessary for purposes of Rule 16b-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act.")
Tax Consequences. The following is a general description of the current
federal income tax consequences to participants and the Company relating to
options and other awards that may be granted under the 1996 Plan. This
discussion does not purport to cover all tax consequences relating to options
or other awards.
The grant of a stock option under the 1996 Plan will not generally result in
taxable income for the participant, nor in a deductible compensation expense
for the Company, at the time of grant. The participant will have no taxable
income upon exercising an incentive stock option (except that the alternative
minimum tax may apply), and the Company will receive no deduction when an
incentive stock option is exercised. Upon exercising a nonqualified option,
the participant will recognize ordinary income in the amount by which the fair
market value of the Common Stock on the date of exercise exceeds the exercise
price, and the Company will generally be entitled to a corresponding
deduction. The treatment of a participant's disposition of shares of Common
Stock acquired upon the exercise of an option is dependent upon the length of
time the shares have been held and on whether such shares
49
<PAGE>
were acquired by exercising an incentive stock option or a nonqualified
option. Generally, there will be no tax consequence to the Company in
connection with the disposition of shares acquired under an option except that
the Company may be entitled to a deduction in the case of a disposition of
shares acquired upon exercise of an incentive stock option before the
applicable incentive stock option holding period has been satisfied.
The current federal income tax consequences of other awards authorized under
the 1996 Plan generally follow certain basic patterns: stock appreciation
rights are subjected to income tax upon exercise in substantially the same
manner as nonqualified stock options; restricted stock subject to a
substantial risk of forfeiture results in income recognition equal to the
excess of the fair market value of the stock over the purchase price (if any)
only at the time the restrictions lapse, unless the recipient elects to
accelerate recognition as of the date of grant; performance awards and phantom
stock generally are subject to tax at the time of payment. In each of the
foregoing cases, the Company generally has a corresponding tax deduction at
the time the participant recognizes taxable income.
CERTAIN TRANSACTIONS
Mr. Lorsch, the Company's Chairman of the Board, President and Chief
Executive Officer, is the sole shareholder of LCN, which was a marketing and
consulting firm. SmarTalk was formed in October 1994 and had no employees
until September 1995. From October 1994 through December 1995 LCN provided the
Company with consulting and operational assistance. All of the services of
Mr. Lorsch and certain of the services of Mr. Teich (the Company's present
Executive Vice President) were provided to SmarTalk through LCN and SmarTalk
was billed on an hourly basis for their services. In addition, LCN provided
SmarTalk with assistance with product, platform, billing and software
development. For a limited period through the end of 1995, SmarTalk employees
were covered under LCN's benefit programs. The total amount paid by SmarTalk
to LCN for all these services was approximately $25,000 in 1994 and $415,000
in 1995.
In January 1996, the Company assumed a lease from LCN of office space owned
by Mr. Lorsch. Under this lease the Company paid rent to LCN totalling $11,226
in 1996. The Company no longer utilizes such space and the lease has been
terminated. The Company has paid $5,000 of a $10,000 lease cancellation fee to
LCN.
From February 17, 1995 to November 30, 1995, Mr. Lorsch advanced funds, from
time to time, to the Company. At no time during this period did the amount
owed by the Company to Mr. Lorsch exceed $42,200. These loans were repaid in
full by November 30, 1995. In addition, Mr. Lorsch was loaned $4,500 by the
Company in October 1994, which amount was repaid by the end of 1994.
On December 28, 1995, pursuant to a Loan and Investment Agreement among
SmarTalk Partners, the Company and Robert H. Lorsch, SmarTalk Partners agreed
to loan the Company $1,200,000, provide the Company with a $500,000 line of
credit and purchase shares of Common Stock of the Company representing 30% of
the outstanding shares for a purchase price of $300,000. The number of shares
purchased was 2,647,449, as adjusted for subsequent stock splits, and the
purchase price was determined on the basis of arm's length negotiations. This
loan, evidenced by a promissory note and secured by substantially all of the
assets of the Company, bears interest at 7% per annum. Interest only is
payable on the last day of the month through December 31, 1996 and thereafter
principal and interest shall be payable in equal fully amortizable monthly
installments until July 31, 2000, when all amounts are due and payable. The
line of credit, also evidenced by a promissory note and secured by
substantially all of the assets of the Company, bears interest at a floating
rate equal to prime rate plus 2%, payable monthly in arrears. All amounts
become due and payable in full on January 31, 1998. SmarTalk Partners is a
significant shareholder of the Company. Mr. Alfi, a director of the Company,
is a member of SmarTalk Partners. The Company intends to repay
50
<PAGE>
the loan and the line of credit with the proceeds from the Offering. See
"Principal and Selling Shareholders," "Management -- Compensation Committee
Interlocks and Insider Participation" and "Use of Proceeds."
SmarTalk purchased the LCN Assets pursuant to an agreement dated December 28,
1995 between SmarTalk and LCN. The purchase was consummated in January 1996,
for $500,000 cash plus a $2,000,000 principal amount subordinated promissory
note which bears interest at 7% per annum, payable $35,000 a month, with all
amounts due and payable in full on June 30, 2000. The LCN Assets were
originally purchased by LCN for approximately $106,000 and had a net book value
of approximately $36,000 at the time of their purchase by the Company.
Notwithstanding the substantial excess in the cost to the Company over the net
book value to LCN of the LCN Assets, the transaction was determined by the then
board of directors of the Company to be (i) at a purchase price that was a fair
value and (ii) favorable to the Company's shareholders due in part to the
perceived benefit to the Company and the lost opportunity costs to LCN relating
to the Company securing the exclusive services of certain former LCN employees,
including Mr. Lorsch. The Company did not seek nor obtain a fairness opinion
from an independent financial advisor with respect to its purchase of the LCN
Assets, but rather agreed upon the purchase price thereof following
negotiations with SmarTalk Partners, which was then contemplating an investment
in the Company. In addition, the shareholders of the Company unanimously
consented to the transaction. The Company intends to repay the promissory note
with the proceeds from the Offering. LCN is party to a subordination agreement
with the Company and SmarTalk Partners pursuant to which LCN has agreed that no
payments shall be made under the promissory note unless all amounts under the
$250,000 SmarTalk Partners loan (referred to below) have been repaid in full.
LCN received a security interest in substantially all assets of the Company for
agreeing to subordinate its promissory note. See "Use of Proceeds" and
"Management -- Compensation Committee Interlocks and Insider Participation."
On August 9, 1996, the Company entered into a loan agreement with SmarTalk
Partners pursuant to which the Company obtained a loan of $250,000. This loan
is collateralized by substantially all of the assets of the Company and accrues
interest at the prime rate. Interest on the loan is due the last day of each
month, commencing August 31, 1996, with the loan maturing on January 31, 1997.
Payments of principal and interest on the $1,200,000 loan, the line of credit,
and the $2,000,000 term note are subordinated to, and may not be made prior to
the repayment of, the $250,000 term loan. The Company intends to repay the
$250,000 term note with the proceeds from the Offering. See "Use of Proceeds,"
"Management -- Compensation Committee Interlocks and Insider Participation" and
"Principal and Selling Shareholders."
The Company has agreed to pay certain expenses of the Selling Shareholders,
including Mr. Lorsch, Mr. Zeiderman, Mr. Teich and SmarTalk Partners, in
connection with this Offering. See "Principal and Selling Shareholders" and
"Underwriting."
51
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of October 1, 1996, the number of shares being
offered hereby and the beneficial ownership of the Common Stock upon
consummation of the Offering by: (i) the named executive officer, (ii) each
person known to the Company to be the beneficial owner of more than 5% of the
Common Stock, (iii) each director, (iv) all directors and executive officers
of the Company as a group and (v) the Selling Shareholders. The following
table assumes that the Underwriters' over-allotment option will be exercised
in full.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1)(2) NUMBER OFFERING
----------------------- OF SHARES -----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OFFERED(3) NUMBER PERCENT
------------------------------------ ------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Robert H. Lorsch(4)
1640 South Sepulveda Boulevard, Suite 500
Los Angeles, CA 90025................................. 5,868,515 66.5% 429,750 5,438,765 42.4%
SmarTalk Partners, LLC(5)(6)
3 Civic Plaza, Suite 17D
Newport Beach, CA 92660............................... 2,647,449 30.0% 380,000 2,267,449 17.7%
Ahmed O. Alfi(6)......................................... -- -- -- -- --
Fred F. Fielding(7)...................................... -- -- -- -- --
Jeffrey I. Scheinrock(8)................................. -- -- -- -- --
Lloyd S. Zeiderman(9).................................... 477,632 5.4% 20,250 457,382 3.6%
Bruce Bielinski(10)...................................... 308,870 3.5% 20,250 288,620 2.3%
Richard M. Teich(10)..................................... 308,870 3.5% 20,250 288,620 2.3%
Robert H. Thau(10)(11)................................... 123,548 1.4% 4,625 118,923 0.9%
Bernard D. Walter(10)(12)................................ 123,548 1.4% 4,625 118,923 0.9%
All directors and executive officers as a group
(8 persons)(4)(6)(7)(8)(9)(10)(13)...................... 6,191,505 70.0% 450,000 5,741,505 44.7%
</TABLE>
- -------
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed
to be a "beneficial owner" of a security if he or she has or shares the
power to vote or direct the voting of such security or the power to
dispose or direct the disposition of such security. A person is also
deemed to be a beneficial owner of any securities of which that person
has the right to acquire beneficial ownership within 60 days. More than
one person may be deemed to be a beneficial owner of the same securities.
(2) This table is based upon information supplied by directors, executive
officers and principal shareholders. Unless otherwise indicated in the
footnotes to this table, each of the shareholders named in this table has
sole voting and investment power with respect to the shares shown as
beneficially owned.
(3) The Selling Shareholders have granted the Underwriters an over-allotment
option to purchase up to 630,000 shares of Common Stock. See
"Underwriting." Of the 380,000 shares to be offered by SmarTalk Partners,
200,000 shares are to be offered as part of the Offering and up to an
aggregate of 180,000 shares will be offered in the event the
Underwriters' over-allotment option is exercised. If the Underwriters'
over-allotment option is not exercised, then SmarTalk Partners would
beneficially own 2,447,449 shares, representing 19.1% of the Common Stock
after consummation of the Offering.
(4) Includes 926,610 shares prior to the consummation of the Offering and
876,860 shares after the consummation of the Offering as to which
Mr. Lorsch, pursuant to certain proxy agreements, has sole voting power,
but not investment power. These proxy agreements expire on November 1,
1996. Includes 168,762 shares held by the 1996 JBL Trust, the beneficiary
of which is Mr. Lorsch's son. Mr. Lorsch disclaims beneficial ownership
of the shares.
(5) Amre Youness may be deemed the beneficial owner of the shares owned by
SmarTalk Partners by virtue of his status as its sole manager. His
business address is c/o SmarTalk Partners, 3 Civic Plaza, Suite 17D,
Newport Beach, CA 92660.
(6) Mr. Alfi, a director of the Company, is a member of SmarTalk Partners.
Mr. Alfi disclaims beneficial ownership of the shares owned by SmarTalk
Partners.
(7) Mr. Fielding was granted options to purchase 28,240 shares of Common
Stock, at an exercise price of $3.56 per share, pursuant to the
Nonqualified Plan. Such options will not vest within 60 days of this
Offering. See "Management -- Directors' Compensation."
(8) Mr. Scheinrock was granted options to purchase 28,240 shares of Common
Stock, at an exercise price of $3.56 per share, pursuant to the
Nonqualified Plan. Such options will not vest within 60 days of this
Offering. See "Management -- Directors' Compensation."
(9) Includes 168,762 shares held by the 1996 JBL Trust, of which Mr.
Zeiderman is trustee. Accordingly, Mr. Zeiderman may be deemed to
beneficially own such shares.
(10) Represents shares subject to proxy agreements which grant Mr. Lorsch sole
voting power with respect to such shares. The proxy agreements expire
November 1, 1996.
(11) Includes 61,774 shares held by Rosenfeld, Meyer & Susman, LLP, of which
Mr. Thau is a partner. Accordingly, Mr. Thau may be deemed to
beneficially own such shares.
(12) Includes 92,660 shares held by Walter and Associates, of which Mr. Walter
is a principal. Accordingly, Mr. Walter may be deemed to beneficially own
such shares.
(13) Two of the Company's executive officers were granted options to purchase
11,251 and 14,120 shares of Common Stock, at exercise prices of $4.44 per
share and $1.77 per share, respectively, pursuant to the Nonqualified
Plan. Such options will not vest within 60 days of this Offering.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, no par value, and 10,000,000 shares of Preferred Stock, no
par value. As of October 1, 1996, there were 8,824,834 shares of Common Stock
issued and outstanding held by 11 shareholders of record and no shares of
Preferred Stock issued and outstanding. As of October 1, 1996, there were
510,514 shares of Common Stock subject to stock options.
The following statements are brief summaries of certain provisions with
respect to the Company's capital stock contained in its Articles and Bylaws,
copies of which have been filed as exhibits to the Registration Statement. The
following is qualified in its entirety by reference thereto.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders and have cumulative voting rights with
respect to the election of directors. Subject to the prior rights of holders
of Preferred Stock, if any, the holders of Common Stock are entitled to
receive such dividends, if any, as may be declared from time to time by the
board of directors in its discretion from funds legally available therefor.
Upon liquidation or dissolution of the Company, the remainder of the assets of
the Company will be distributed ratably among the holders of Common Stock
after payment of liabilities and the liquidation preferences of any
outstanding shares of Preferred Stock. The Common Stock has no preemptive or
other subscription rights and there are no conversion rights or redemption or
sinking fund provisions with respect to such shares. All of the outstanding
shares of Common Stock are, and the shares to be sold in this Offering will
be, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of undesignated
Preferred Stock. The board of directors has the authority to issue the
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend
rates, conversion rights, voting rights, preemption rights, terms of
redemption, redemption prices, sinking fund provisions, liquidation
preferences and the number of shares constituting a series or the designation
of such series, without further vote or action by the shareholders. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
shareholders and may adversely effect the market price of, and the voting and
other rights of, the holders of Common Stock. At present, the Company has no
shares of Preferred Stock outstanding and has no plans to issue any shares of
the Preferred Stock.
REGISTRATION RIGHTS
SmarTalk Partners, the holder of 2,447,449 shares of Common Stock following
the Offering (the "Registrable Shares"), is entitled to certain rights with
respect to the registration of such shares of Common Stock under the
Securities Act. If the Company proposes to register any of its securities
under the Securities Act for its own account, the Company must notify SmarTalk
Partners of the Company's intent to register such Common Stock and allow
SmarTalk Partners an opportunity to include the Registerable Shares in the
Company's registration. SmarTalk Partners also has the right, from and after
such time as the Company has closed an initial public offering of its Common
Stock, to require the Company to prepare and file a registration statement
under the Securities Act pertaining to the Registerable Shares. The Company is
required to use its best efforts to effect such registration so long as such
request relates to Registrable Shares constituting 5% or more of the Company's
issued and outstanding Common Stock. The Company need only cause one such
registration to become
53
<PAGE>
effective during any one year period. These registration rights are subject to
certain limitations and restrictions including the right of the underwriters
of any offering of the Company's Common Stock to limit the number of
Registerable Shares included in the registration. Generally, the Company is
required to pay all registration expenses in connection with each registration
of Registrable Shares pursuant to these registration rights. SmarTalk Partners
has agreed that, in any registration in which it is participating effected
pursuant to an underwritten public offering, it will not effect any public
sale or distribution of any Registerable Shares or any other equity security
of the Company within seven days prior to and for 120 days after the effective
date of such registration. SmarTalk Partners has agreed to a limitation on its
ability to sell or distribute shares of Common Stock and other securities for
180 days after the date of this Prospectus, without the prior written consent
of Salomon Brothers Inc. See "Underwriting."
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES AND BYLAWS
Certain provisions of the Company's Articles and Bylaws may have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. Such
provisions could limit the price that certain investors might be willing to
pay in the future for shares of the Common Stock. Certain of these provisions
allow the Company to issue Preferred Stock without any vote or further action
by the shareholders, to eliminate the right of shareholders to act by written
consent without a meeting and to eliminate cumulative voting in the election
of directors. The authorization of undesignated Preferred Stock makes it
possible for the board of directors to issue Preferred Stock with voting or
other rights or preferences that could impede the success of any attempt to
change control of the Company. These provisions may also make it more
difficult for shareholders to take certain corporate actions.
LIMITATION ON LIABILITY AND INDEMNIFICATION
The Company has adopted provisions in its Articles that eliminate, to the
fullest extent permissible under California law, the liability of its
directors to the Company for monetary damages. Such limitation of liability
does not affect the availability of equitable remedies such as injunctive
relief or rescission. The Company's Bylaws provide that the Company shall
indemnify its directors and officers to the fullest extent permitted by
California law, including in circumstances in which indemnification is
otherwise discretionary under California law. The Company has entered into
indemnification agreements with its officers and directors containing
provisions which may require the Company, among other things, to indemnify the
officers and directors against certain liabilities that may arise by reason of
their status or service as directors or officers (other than liabilities
arising from willful misconduct of a culpable nature), and to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified.
TRANSFER AGENT
The transfer agent and registrar for the Company's Common Stock is U. S.
Stock Transfer Corporation.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 12,824,834 shares of
Common Stock outstanding. Of these shares, the 4,200,000 shares sold in this
Offering will be freely tradeable without restriction or further registration
under the Securities Act, except for shares purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act (which
may generally be sold only in compliance with Rule 144).
The remaining 8,624,834 shares are deemed "Restricted Shares" under Rule 144
in that they were originally issued and sold by the Company in private
transactions in reliance upon exemptions from the registration provisions of
the Securities Act. Upon the expiration of the 180-day lock-up agreements
described below, none of the Restricted Shares will be eligible for sale
pursuant to Rule 144 until the expiration of two years from the date such
Restricted Shares were acquired.
In addition to the Restricted Shares described in the preceding paragraph,
the approximately 14,120 shares of Common Stock which may be acquired 180 days
after the effective date of this Offering upon the exercise of currently
outstanding stock options are subject to the 180-day lock-up agreements but
may be eligible for resale following the expiration of the 180-day lock-up
agreements (subject, in the case of affiliates, to certain limitations)
pursuant to Rule 701 under the Securities Act. See "Management -- Stock Option
Plans" and "Underwriting." Additional options will continue to vest and may be
exercised and sold from time to time by option holders following the
expiration of the 180-day lock-up agreements.
The Company, its directors and officers and substantially all of the other
shareholders of the Company, who upon completion of the Offering will own in
the aggregate 8,624,834 shares of Common Stock, as well as the holder of
currently outstanding options to purchase 14,120 additional shares of Common
Stock, have entered into "lock-up" agreements with the Underwriters, providing
that they will not offer, sell, loan, pledge, grant any option to purchase or
otherwise dispose of any of their shares of Common Stock, or any securities
exercisable for or convertible into shares of Common Stock or request the
registration to any of the foregoing, for a period of 180 days after the date
of this Prospectus without the prior written consent of Salomon Brothers Inc,
except that the Company may issue and may grant options to purchase and
register shares of Common Stock under the Stock Option Plans. See
"Underwriting."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be affiliates, whose
Restricted Shares have been fully paid for and held for at least two years
from the date of issuance by the Company may sell such securities in brokers'
transactions or directly to market makers, provided the number of shares sold
in any three month period does not exceed the greater of (i) 1% of the then
outstanding shares of the Common Stock (128,244 shares based on the number of
shares to be outstanding after this Offering) or (ii) the average weekly
trading volume in the public market during the four calendar weeks immediately
preceding the filing of the seller's Form 144. Sales under Rule 144 are also
subject to certain notice requirements and the availability of current public
information concerning the Company. After three years have elapsed from the
issuance of Restricted Shares by the Company, such shares generally may be
sold without limitation by persons who have not been affiliates of the Company
for at least three months. Rule 144 also provides that affiliates who are
selling shares which are not Restricted Shares must nonetheless comply (with
the exception of the holding period requirements) with the same restrictions
applicable to Restricted Shares.
In general, under Rule 701 as currently in effect, any employee, officer,
director, consultant or advisor of the Company who purchased shares from the
Company pursuant to a written compensatory benefit plan or written contract
relating to compensation is eligible to resell such shares 90 days after the
effective date of this Offering in reliance upon Rule 144, but without the
requirement to comply
55
<PAGE>
with certain restrictions contained in such rule. Shares obtained pursuant to
Rule 701 may be sold by non-affiliates without regard to the holding period,
volume limitations, or information or notice requirements of Rule 144, and by
affiliates without regard to the holding period requirements.
The Company intends to file Form S-8 registration statements under the
Securities Act to register all shares of Common Stock issuable under its Stock
Option Plans, as well as certain of the shares of Common Stock previously
issued under its Stock Option Plans. These registration statements are
expected to be filed as soon as practicable after the date of this Prospectus
and are expected to become effective immediately upon filing. Shares covered
by these registration statements will be eligible for sale in the public
market after the effective date of such registration statements subject to
Rule 144 limitations applicable to affiliates of the Company. See
"Management -- Stock Option Plans."
The Company has granted registration rights to certain of its shareholders.
See "Description of Capital Stock -- Registration Rights."
Prior to the Offering, there has been no public market for the Common Stock
and it is impossible to predict with certainty the effect, if any, that market
sales of shares or the availability of such shares for sale will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts
of Common Stock in the public market may have an adverse impact on such market
price and could impair the Company's ability to raise capital through the sale
of its equity securities.
56
<PAGE>
UNDERWRITING
Subject to the terms and the conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters named
below (the "Underwriters"), for whom Salomon Brothers Inc ("Salomon"), CS
First Boston Corporation and Donaldson, Lufkin & Jenrette Securities
Corporation are acting as representatives (the "Representatives"), and each of
the Underwriters has severally agreed to purchase from the Company, the
respective number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
------------ ----------------
<S> <C>
Salomon Brothers Inc.....................................
CS First Boston Corporation..............................
Donaldson, Lufkin & Jenrette Securities Corporation......
-----------
Total.................................................... 4,200,000
===========
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the shares
of Common Stock offered hereby (other than those subject to the over-allotment
option described below) if any such shares are purchased. In the event of a
default by any Underwriter, the Underwriting Agreement provides that, in
certain circumstances, purchase commitments of the non-defaulting Underwriters
may be increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Representatives that the several
Underwriters propose initially to offer such stock to the public at the public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $ per share. The
Underwriters may allow and such dealers may reallow a concession not in excess
of $ per share to other dealers. After the public offering, the public
offering price and such concessions may be changed.
The Selling Shareholders have granted to the Underwriters an option,
exercisable within 30 days of the date of the Prospectus, to purchase up to
630,000 additional shares of Common Stock at the price to public less the
underwriting discounts set forth on the cover page of this Prospectus to cover
over-allotments, if any. To the extent that the Underwriters exercise such
option, in whole or part, each of the Underwriters will be committed, subject
to certain conditions, to purchase the same proportion of such additional
shares of Common Stock as the number of shares of Common Stock to be purchased
and offered by such Underwriter in the above table bears to the total number
of shares of Common Stock initially offered by the Underwriters hereby.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or contribute to
payments the Underwriters may be required to make in respect thereof.
The Company, the Selling Shareholders and the Company's directors and
executive officers have agreed not to offer, sell or contract to sell, or
otherwise dispose of, directly or indirectly, or announce the offering of any
other shares of Common Stock or any securities convertible into, or
exchangeable for, shares of Common Stock for a period of 180 days after the
date of this Prospectus, without the prior written consent of Salomon.
57
<PAGE>
The Representatives have informed the Company and the Selling Shareholders
that they do not expect discretionary sales by the Underwriters to exceed 5%
of the shares offered hereby.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock offered hereby will be
determined by negotiation among the Company, the Selling Shareholders and the
Representatives. Among the factors to be considered in determining the initial
public offering price will be the earnings and certain other financial and
operating information of the Company in recent periods, the future prospects
of the Company and its industry in general, the general condition of the
securities market at the time of the Offering and the market prices of
securities and certain financial and operating information of companies
engaged in activities similar to those of the Company. There can, however, be
no assurance that the prices at which the Common Stock will sell in the public
market after the Offering will not be lower than the price at which it is sold
by the Underwriters.
The Company has applied to list its Common Stock on the Nasdaq National
Market System under the trading symbol "SMTK."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Dewey Ballantine, Los Angeles, California. Certain
legal matters will be passed upon for the Underwriters by Munger, Tolles &
Olson, Los Angeles, California.
EXPERTS
The financial statements as of December 31, 1994 and December 31, 1995 and
for the period from inception and year ended, respectively, included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
Certain items are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and to
the exhibits and schedules filed as part thereof. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and in each instance, reference is made to the
copy of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
As a result of the Offering, the Company will be subject to the
informational requirements of the Exchange Act, and in accordance therewith,
will file reports and other information with the Commission. A copy of the
Registration Statement, including the exhibits and schedules thereto, and the
reports and other information filed by the Company in accordance with the
Exchange Act, may be inspected without charge at the principal office of the
Commission in Washington, D.C. and copies may be obtained from the Public
Reference Section at the Commission's principal office, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and are also available for inspection
and copying at the Commission's regional offices at Seven World Trade Center,
13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 upon payment of the fees
prescribed by the Commission. Such material may also be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov.
58
<PAGE>
SMARTALK TELESERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Price Waterhouse LLP, Independent Accountants.................. F-2
Balance Sheets as of December 31, 1994, December 31, 1995 and June 30,
1996.................................................................... F-3
Statements of Operations for the period ended December 31, 1994, the year
ended December 31, 1995 and the six months ended June 30, 1995 and June
30, 1996................................................................ F-4
Statements of Shareholders' Equity (Deficit) for the period ended
December 31, 1994, the year ended December 31, 1995 and the six months
ended June 30, 1996..................................................... F-5
Statements of Cash Flows for the period ended December 31, 1994, the year
ended December 31, 1995 and the six months ended June 30, 1995 and June
30, 1996................................................................ F-6
Notes to Financial Statements for December 31, 1994 and 1995 and
Unaudited June 30, 1996................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of SmarTalk TeleServices, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, shareholders' equity (deficit) and of cash flows, present
fairly, in all material respects, the financial position of SmarTalk
TeleServices, Inc. at December 31, 1994 and 1995, and the results of its
operations and its cash flows for the period from inception to December 31,
1994 and for the year ended December 31, 1995 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.
PRICE WATERHOUSE LLP
August 15, 1996
Century City, California
F-2
<PAGE>
SMARTALK TELESERVICES, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1994 1995 1996
-------- ----------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $ 391 $ 2,115,351 $ 763,078
Trade accounts receivable (less allowance
for doubtful accounts of $35, $11,460,
$89,724, respectively).................. 232 224,974 1,914,970
Inventories.............................. -- 718,045 629,900
Receivable from related party............ 3,400 -- --
Other current assets..................... -- 759,718 696,004
Prepaid expenses......................... -- 3,078 52,787
-------- ----------- -----------
Total current assets................... 4,023 3,821,166 4,056,739
Non-current assets:
Deposits................................. -- 16,100 69,129
Other non-current assets................. -- -- 53,325
Net property and equipment............... -- 4,486 603,629
-------- ----------- -----------
Total assets........................... $ 4,023 $ 3,841,752 $ 4,782,822
======== =========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable......................... $ 27,002 $ 923,900 $ 1,981,444
Deferred revenue......................... 431 3,696,515 4,127,919
Accrued marketing costs.................. 37,062 381,429 164,897
Other accrued expenses................... -- 219,682 498,550
Note payable and current portion of long-
term debt............................... -- -- 539,998
-------- ----------- -----------
Total current liabilities.............. 64,495 5,221,526 7,312,808
Long-term debt payable to related parties
less current portion...................... -- -- 3,285,002
-------- ----------- -----------
Total liabilities...................... 64,495 5,221,526 10,597,810
Commitments (See Notes 6 and 8)
Shareholders' deficit:
Common stock, no par value; authorized
35,000,000 shares; issued and
outstanding 4,941,904, 8,824,834, and
8,824,834 shares, respectively.......... 5,000 315,000 315,000
Common stock subscribed.................. -- (300,000) --
Accumulated deficit...................... (65,472) (1,394,774) (6,129,988)
-------- ----------- -----------
Total shareholders' deficit............ (60,472) (1,379,774) (5,814,988)
-------- ----------- -----------
Total liabilities and shareholders'
deficit............................... $ 4,023 $ 3,841,752 $ 4,782,822
======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SMARTALK TELESERVICES, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FROM INCEPTION
(OCTOBER 28, 1994) SIX MONTHS ENDED
THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ----------------------
1994 1995 1995 1996
------------------ ------------ --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................. $ 444 $ 453,916 $ 41,738 $ 3,678,020
Cost of revenue......... 716 318,686 29,910 2,742,115
--------- ----------- --------- -----------
Gross profit (loss)... (272) 135,230 11,828 935,905
Sales and marketing..... 1,980 842,306 173,242 1,643,426
General and
administrative......... 63,220 624,238 124,023 1,459,293
--------- ----------- --------- -----------
Operating loss........ (65,472) (1,331,314) (285,437) (2,166,814)
Interest income......... -- 5,290 -- 25,072
Interest expense........ -- 3,278 -- 129,444
--------- ----------- --------- -----------
Loss before income
taxes................ (65,472) (1,329,302) (285,437) (2,271,186)
Provision for income
taxes.................. -- -- -- --
--------- ----------- --------- -----------
Net loss.............. $ (65,472) $(1,329,302) $(285,437) $(2,271,186)
========= =========== ========= ===========
Net loss per share...... $ (.01) $ (.14) $ (.03) $ (.24)
========= =========== ========= ===========
Weighted average number
of shares.............. 9,335,348 9,335,348 9,335,348 9,335,348
========= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SMARTALK TELESERVICES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
------------------ STOCK ACCUMULATED
SHARES AMOUNT SUBSCRIPTION DEFICIT TOTAL
--------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Inception (October 28,
1994)
Shares issued........... 4,941,904 $ 5,000 $ -- $ -- $ 5,000
Net loss................ -- -- -- (65,472) (65,472)
--------- -------- -------- ----------- -----------
December 31, 1994....... 4,941,904 5,000 -- (65,472) (60,472)
Shares issued........... 1,235,481 310,000 -- -- 310,000
Stock subscribed........ 2,647,449 -- (300,000) -- (300,000)
Net loss................ -- -- -- (1,329,302) (1,329,302)
--------- -------- -------- ----------- -----------
December 31, 1995....... 8,824,834 315,000 (300,000) (1,394,774) (1,379,774)
--------- -------- -------- ----------- -----------
Funds received from
stock subscription..... -- -- 300,000 -- 300,000
Purchase of assets of
related entity (See
Note 6)................ -- -- -- (2,464,028) (2,464,028)
Net loss................ -- -- -- (2,271,186) (2,271,186)
--------- -------- -------- ----------- -----------
June 30, 1996
(unaudited)............ 8,824,834 $315,000 $ -- $(6,129,988) $(5,814,988)
========= ======== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SMARTALK TELESERVICES, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FROM INCEPTION SIX MONTHS ENDED
(OCTOBER 28, 1994) YEAR ENDED JUNE 30,
THROUGH DECEMBER 31, ----------------------
DECEMBER 31, 1994 1995 1995 1996
------------------ ------------ --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............. $(65,472) $(1,329,302) $(285,437) $(2,271,186)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Depreciation......... -- -- -- 18,186
Provision for bad
debt................ 35 11,425 1,119 78,264
Changes in assets and
liabilities which
increase (decrease)
cash:
Accounts
receivable........ (267) (236,167) (90,919) (1,768,260)
Inventories........ -- (718,045) (161,228) 88,145
Receivable from
related party..... (3,400) 3,400 3,400 --
Other current
assets............ -- (759,718) (10,147) 63,714
Prepaid expenses... -- (3,078) (1,437) (49,709)
Deposits........... -- (16,100) -- (53,029)
Other non-current
assets............ -- -- -- (53,325)
Accounts payable... 27,002 896,898 197,058 1,057,544
Deferred revenue... 431 3,696,084 89,074 431,404
Accrued marketing
costs............. 37,062 344,367 (37,062) (216,532)
Other accrued
expenses.......... -- 219,682 33,939 278,868
-------- ----------- --------- -----------
Net cash provided
(used) by
operating
activities...... (4,609) 2,109,446 (261,640) (2,395,916)
-------- ----------- --------- -----------
Cash flows from
investing activities:
Capital expenditures. -- (4,486) -- (456,357 )
-------- ----------- --------- -----------
Cash flows from
financing activities:
Common stock
proceeds............ 5,000 10,000 -- 300,000
Note payable to
related party....... -- -- 272,000 1,200,000
Revolving line of
credit with related
party............... -- -- -- 500,000
Payment to LCN....... -- -- -- (500,000)
-------- ----------- --------- -----------
Net cash from
financing
activities...... 5,000 10,000 272,000 1,500,000
-------- ----------- --------- -----------
Increase (decrease) in
cash and cash
equivalents........... 391 2,114,960 10,360 (1,352,273)
Cash and cash
equivalents at
beginning of period... -- 391 391 2,115,351
-------- ----------- --------- -----------
Cash and cash
equivalents at end of
period................ $ 391 $ 2,115,351 $ 10,751 $ 763,078
======== =========== ========= ===========
Supplemental disclosure
of cash flow
information:
Cash paid for interest. $ -- $ 3,278 $ -- $ 129,444
======== =========== ========= ===========
Note payable issued for
LCN purchase (see Note
6).................... $ -- $ -- $ -- $ 2,000,000
======== =========== ========= ===========
Purchase of VoiceChoice
Platform through
issuance of note
payable (see Note 9).. $ -- $ -- $ -- $ 125,000
======== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SMARTALK TELESERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR DECEMBER 31, 1994 AND 1995 AND UNAUDITED JUNE 30, 1996
- -------------------------------------------------------------------------------
1. THE COMPANY
SmarTalk TeleServices, Inc. (the "Company") is a provider of prepaid long
distance services. The Company primarily sells its products to retailers who
in turn sell to customers. The customer can add minutes to the SmarTalk Card
by use of a major credit card. The Company has developed additional avenues to
market and distribute its services, including through its Corporate Advantage
Program and corporate promotional programs. The Company was incorporated in
October 1994. As shown in the accompanying financial statements, the Company
has incurred net losses of $65,472 in 1994, $1,329,302 in 1995 and $2,271,186
through June 30, 1996. Management believes it has adequate capital resources
available to fund operations through June 30, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Results
The accompanying balance sheet at June 30, 1996, the statements of
operations and of cash flows for the six months ended June 30, 1995 and 1996,
and the statement of shareholders' equity (deficit) for the six months ended
June 30, 1996 are unaudited. In the opinion of management, these statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the results of the interim periods. The
Company's results of operations and cash flows for the interim period are not
necessarily indicative of the results to be expected for any other interim
period or the full year. The data disclosed in these notes to financial
statements at such date and for such periods are also unaudited.
Accounting 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
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are composed of highly liquid investments with an
original maturity of three months or less. In accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the investments, which consist solely of money
market funds, are stated at market value, which approximates cost.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
principally the straight-line method over the estimated useful lives of the
related assets. Depreciation expense and accumulated depreciation was $0 as
of, and for the periods ended December 31, 1994 and 1995, respectively. For
the six months ended June 30, 1996, depreciation expense and accumulated
depreciation was $18,186.
F-7
<PAGE>
SMARTALK TELESERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR DECEMBER 31, 1994 AND 1995 AND UNAUDITED JUNE 30, 1996
- -------------------------------------------------------------------------------
Other Current Assets
Other current assets include the cost of cards which have been shipped to
retailers but not yet sold to customers. These costs are reclassified from
inventory at the time of shipment and are amortized into expense as the
revenue to which they specifically relate is recognized.
Accrued Marketing Costs
Accrued marketing costs include printed and electronic advertising. These
costs are accrued and expensed as incurred. Marketing expenses were $870,
$251,676 and $991,409 for the periods ended December 31, 1994 and 1995 and
June 30, 1996, respectively. The cost of co-op advertising undertaken in
connection with co-op programs with retailers is expensed at the earlier of
when the advertising takes place or the related revenue is recognized.
Other Accrued Expenses
Other accrued expenses include the cost of sales commissions and sales and
use taxes. These obligations are accrued and capitalized upon shipment of
SmarTalk cards to retailers and capitalized amounts are amortized into expense
as the revenue to which they specifically relate is recognized.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" requires the determination of fair value for
certain of the Company's assets and liabilities. The Company estimates that
the carrying value of its financial instruments approximates fair value at
December 31, 1994 and 1995.
Revenue Recognition and Deferred Revenue
The Company's revenue is generated from: (i) sales of Company and co-branded
phone cards to customers through retailers, (ii) recharges of existing phone
cards, (iii) cards sold for promotional marketing campaigns, and
(iv) corporate sales to businesses. Under the majority of agreements with
retailers, the Company sells cards to the retailer at a fixed price with
normal credit terms. The Company invoices the retailer upon shipment,
recognizing deferred revenue. The Company recognizes revenue and reduces the
deferred revenue account as the customer utilizes the calling time and upon
expiration of cards containing unused calling time, subject to applicable
escheat laws, if any. The Company also recognizes deferred revenue upon
recharge of existing phone cards and recognizes revenue upon usage or
expiration of the recharge minutes. Revenue recognized upon expiration of
calling cards containing unused calling time and upon expiration of recharge
minutes was insignificant for the year ended December 31, 1994 and the six
months ended June 30, 1995 and less than $36,000 and $209,000, respectively,
for the year ended December 31, 1995 and the six months ended June 30, 1996.
Internally Developed Software
The Company has incurred costs associated with developing and testing its
proprietary software system. These costs, which are considered immaterial,
consisted of amounts paid to consultants and salaries paid to employees, and
have been expensed as incurred and are included in General and Administrative
expense.
F-8
<PAGE>
SMARTALK TELESERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR DECEMBER 31, 1994 AND 1995 AND UNAUDITED JUNE 30, 1996
- --------------------------------------------------------------------------------
Regulation
The Company is subject to regulation by the Federal Communications Commission
and by various state public service and public utility commissions. The
Company's management and regulatory legal counsel believe the Company is in
compliance with regulations in all states.
Stock Split
On February 15, 1996, the board of directors declared a 3,500 for 1 stock
split distributable on February 13, 1996 to shareholders of record on February
13, 1996. Further, on May 23, 1996, the board of directors declared a 2.51 for
1 stock split distributable on May 23, 1996 to shareholders of record on that
date. Further, on August 15, 1996, the Company effected a 0.5625 reverse stock
split distributable on August 15, 1996 to shareholders of record on that date.
In this report, per share amounts and numbers of shares have been restated to
reflect the stock splits.
Net Loss per Share
Net loss per share is based on the weighted average number of common shares
and common stock equivalents outstanding during each period, after retroactive
adjustment for the stock splits (see above). Pursuant to requirements of the
Staff of the Securities and Exchange Commission, shares related to stock sold
and options issued subsequent to August 15, 1995 have been shown as outstanding
for all periods presented.
Long-Lived Assets
In 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
establishes accounting standards for the measurement and recognition of
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. The adoption of SFAS No.
121 had no effect on the Company's financial statements.
3. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
Inventories
Inventories are valued at the lower of cost (using the first-in, first-out
(FIFO) method) or market. Inventories consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1994 1995 1996
------ -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Phone cards................................... $ -- $582,110 $492,974
Displays...................................... -- 135,935 136,926
------ -------- --------
Total..................................... $ -- $718,045 $629,900
====== ======== ========
</TABLE>
F-9
<PAGE>
SMARTALK TELESERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR DECEMBER 31, 1994 AND 1995 AND UNAUDITED JUNE 30, 1996
- --------------------------------------------------------------------------------
Other Current Assets
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
JUNE 30,
1994 1995 1996
------ -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Pre-paid sales commissions.................... $ -- $285,391 $337,533
Cards shipped................................. -- 243,557 147,695
Other......................................... -- 230,770 210,776
------ -------- --------
Total other current assets................ $ -- $759,718 $696,004
====== ======== ========
</TABLE>
Property and Equipment
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
JUNE 30,
1994 1995 1996
------ -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computers..................................... $ -- $ 3,661 $ 96,844
Telephone switching equipment................. -- -- 325,000
Office equipment and furniture................ -- 825 199,971
Less: Accumulated depreciation............ -- -- (18,186)
------ -------- --------
$ -- $ 4,486 $603,629
====== ======== ========
</TABLE>
4. NOTE PAYABLE AND LONG-TERM DEBT PAYABLE TO RELATED PARTIES
At June 30, 1996, note payable and long-term debt payable to related parties
consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
(UNAUDITED)
<S> <C>
9% Term loan payable, interest accrues daily on the outstanding
balance and is payable January 1, 1997. Principal payable in six
monthly installments of $16,667 beginning July, 1996 with
$25,000 due January 1, 1997 (see Note 9)........................ $ 125,000
Revolving loan with SmarTalk Partners, LLC, interest at prime
plus 2% payable monthly beginning January 31, 1996, principal
due January 31, 1998 (see Note 6)............................... 500,000
7% Term loan, with SmarTalk Partners, LLC, interest only is
payable monthly from January 31, 1996 through December 31, 1996.
Interest plus principal totaling $31,634 is payable monthly
beginning January 1, 1997 through July, 2000 (see
Note 6)......................................................... 1,200,000
7% Subordinated Term loan, payable to LCN, principal and interest
payable in monthly installments of $35,000 beginning August 31,
1996 with the balance due
June 20, 2000 (see Note 6)...................................... 2,000,000
Less: Current maturities....................................... (539,998)
----------
Long-term debt, less current maturities.......................... $3,285,002
==========
</TABLE>
At June 30, 1996 future maturities of long-term debt are: 1997 -- $539,998,
1998 -- $1,125,279, 1999 -- $670,155, 2000 -- $1,460,674, 2001 -- $28,894.
F-10
<PAGE>
SMARTALK TELESERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR DECEMBER 31, 1994 AND 1995 AND UNAUDITED JUNE 30, 1996
- -------------------------------------------------------------------------------
5. INCOME TAXES
The difference between the statutory federal income tax rate and the
Company's effective income tax rate applied to loss before income taxes was as
follows for the period ended December 31, 1994, and the year ended December
31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- --------- --- ---
<S> <C> <C> <C> <C>
Statutory federal tax rate on loss........... (34)% (34)%
State income tax provision, net of federal
benefit .................................... (6)% (6)%
Increase in valuation reserve against
deferred tax asset.......................... 40 % 40 %
-------- --------- ---
Income taxes at the Company's effective rate. 0 % 0 %
======== ========= ===
The major components of deferred tax assets arising from temporary
differences at December 31, 1994 and 1995 are as follows:
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- ---------
<S> <C> <C> <C> <C>
Deferred revenue............................. $ -- $ 417,000
Net operating loss carryforwards............. 17,000 68,000
Other........................................ 14,000 115,000
-------- ---------
Subtotal..................................... 31,000 600,000
Valuation allowance.......................... (31,000) (600,000)
-------- ---------
Total deferred taxes......................... $ -- $ --
======== =========
</TABLE>
The Company had net operating loss carryforwards of approximately $65,472
and $1,396,786 as of December 31, 1994 and 1995, respectively. To the extent
not used, net operating loss carryforwards expire in varying amounts beginning
in the year 2002. If substantial changes in the Company's ownership should
occur, there will be an annual limitation on the amount of the carryforwards
which can be utilized.
Under SFAS No. 109, the Company has recorded valuation allowances against
the realization of the deferred tax assets. Based on available evidence,
including the Company's history of operating losses, the uncertainty of future
profitability and the impact of tax laws which may limit the Company's ability
to utilize such loss carryforwards, management has concluded that it is more
likely than not that deferred tax assets will not be realized.
6. RELATED PARTIES
Transactions With Related Entities
At December 31, 1994 the Company had a receivable due from its majority
shareholder in the amount of $3,400. On December 28, 1995 the Company entered
into an agreement with SmarTalk Partners, LLC ("SP") under which SP agreed to
loan $1,200,000 to the Company and to purchase 2,647,449 shares of the
Company's Common Stock for $300,000. The term loan is collateralized by
substantially all assets of the Company. Interest accrues daily and is payable
monthly beginning January 31, 1996 and ending December 31, 1996. Beginning
January 1, 1997 interest accrues daily and is payable monthly along with
principal payments through July 2000. The $1,500,000 was received in January
1996.
F-11
<PAGE>
SMARTALK TELESERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR DECEMBER 31, 1994 AND 1995 AND UNAUDITED JUNE 30, 1996
- -------------------------------------------------------------------------------
In addition, the Company obtained a revolving loan facility from SP,
collateralized by substantially all assets of the Company. The facility
provides for borrowings up to $500,000. The principal portion of the loan is
due and payable January 31, 1998. The facility was fully drawn at June 30,
1996.
Payment in Excess of Book Value of Assets Purchased From a Related Entity
(Unaudited)
In January 1996, the Company entered into an agreement to purchase certain
of the office furniture and equipment fixed assets of Lorsch Creative Network,
Inc. ("LCN") that had historical net book value of $35,972. LCN's sole
shareholder is the majority shareholder of the Company's Common Stock.
Minority shareholders of the Company consented to the transaction. The
purchase was consummated in January 1996 for $500,000 cash plus a $2,000,000
subordinated term note which bears interest at 7% per annum (see Note 4).
Because the assets were purchased from a related party, the assets are
reflected on the Company's balance sheet at LCN's historical depreciated cost
as of the date of the acquisition. The excess of acquisition cost over the
historical cost less depreciation of the assets acquired of approximately
$2,464,028 was recorded as a charge to the Company's accumulated deficit in a
manner similar to a capital distribution. In addition, prior to the purchase,
LCN provided consulting and other services to the Company for which it billed
approximately $25,000 and $415,000 in 1994 and 1995, respectively. Amounts
were billed on an hourly basis for consulting and other services performed by
LCN employees on behalf of SmarTalk.
Amounts billed and services rendered by LCN are as follows:
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Marketing and product development.......................... $25,000 $ 85,000
Software development....................................... 70,000
Management consulting...................................... 200,000
Other...................................................... 60,000
------- --------
Total.................................................... $25,000 $415,000
======= ========
</TABLE>
All costs incurred by LCN on the Company's behalf have been appropriately
reflected in the accompanying financial statements.
7. STOCK COMPENSATION PLANS
The Company had two stock based compensation plans at June 30, 1996. The
programs are described as follows:
1996 NONQUALIFIED STOCK OPTION PLAN:
In March 1996, the board of directors adopted the Company's 1996
Nonqualified Stock Option Plan (the "Nonqualified Plan"), whereby nonstatutory
stock options may be granted to employees, officers, directors, consultants,
advisors, or agents of the Company. Options to purchase the Company's Common
Stock are exercisable at a price not less than the fair market value of the
stock at the date of grant and for a term not to exceed 10 years. Further, the
options vest over a period ranging from grant date to 3 years from the
anniversary of the grant. Pursuant to the Nonqualified Plan, an amount equal
to (a) the lesser of (i) 7,087,991 shares of Common Stock, and (ii) the number
of shares of Common Stock equal to 9% of the total issued and outstanding
shares of Common Stock minus (b) the number of shares of Common Stock issued
or issuable pursuant to options exercised or
F-12
<PAGE>
SMARTALK TELESERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR DECEMBER 31, 1994 AND 1995 AND UNAUDITED JUNE 30, 1996
- -------------------------------------------------------------------------------
outstanding under the 1996 Stock Incentive Plan are reserved for issuance
under this plan. The Company accounts for the fair value of its grants under
this plan in accordance with APB Opinion 25 Accounting for Stock Issued to
Employees. Fair value of stock options granted was determined by the board of
directors, who considered, among other factors, an independent valuation. The
following table summarizes the activity in shares of Common Stock subject to
options for the quarter ended June 30, 1996:
<TABLE>
<CAPTION>
OPTION PRICE NUMBER OF
PER SHARE SHARES
------------ ---------
<S> <C> <C>
Balance at December 31, 1995....................... -- --
Options granted.................................. $1.77-$4.44 508,514
Options exercised................................ -- --
Options canceled or expired...................... -- --
Balance at June 30, 1996........................... $1.77-$4.44 508,514
</TABLE>
At June 30, 1996 no options had been exercised. 285,730 shares remain
reserved for issuance under the plan.
1996 STOCK INCENTIVE PLAN:
In August 1996, the board of directors adopted and the shareholders of the
Company approved the 1996 Stock Incentive Plan, whereby the Compensation
Committee may make awards to directors, employees, advisors and consultants of
the Company and its subsidiaries. Pursuant to the Stock Incentive Plan, the
Company has authorized and reserved a number of shares of Common Stock for
issuance equal to (a) the lesser of (i) 7,087,991 shares of Common Stock and
(ii) a number of shares of Common Stock equal to 9% of the total issued and
outstanding shares of Common Stock minus (b) the number of shares of Common
Stock issued or issuable pursuant to options exercised or outstanding under
the Nonqualified Plan.
Stock Options
Nonqualified stock options may be granted to employees, consultants and
advisors of the Company and its subsidiaries and incentive stock options may
only be granted to employees of the Company and its subsidiaries. The exercise
price of a nonqualified stock option may be determined by the Compensation
Committee in its discretion. The exercise price of an incentive stock option
may not be less than the fair market value of the Common Stock on the date of
grant. The value of Common Stock (determined at the time of grant) that may be
subject to incentive stock options that become exercisable by any one employee
in any one year is limited by the Internal Revenue Code to $100,000. The
maximum term of stock options granted under the 1996 Plan is 10 years from the
date of grant. In September 1996, the Company granted an option to acquire
2,000 shares at an exercise price of $2.50 per share in settlement of an
employment dispute.
Stock Appreciation Rights
A stock appreciation right may be granted in connection with an option,
either at the time of grant or at any time thereafter during the term of the
option. A stock appreciation right granted in connection with an option
entitles the holder, upon exercise, to surrender the related option and
receive a payment based on the difference between the exercise price of the
related option and the fair market value of the Company's Common Stock on the
date of exercise. A stock appreciation right granted in
F-13
<PAGE>
SMARTALK TELESERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR DECEMBER 31, 1994 AND 1995 AND UNAUDITED JUNE 30, 1996
- -------------------------------------------------------------------------------
connection with an option is exercisable only at such time or times as the
related option is exercisable and expires no later than when the related
option expires. At June 30, 1996, no stock appreciation rights had been
granted.
Restricted Stock Awards
The Compensation Committee may award shares of Common Stock to participants
under this plan, subject to such restrictions on transfer and conditions of
forfeiture as it deems appropriate. Such conditions may include requirements
as to the continued service of the participant with the Company, the
attainment of specified performance goals or any other conditions determined
by the Compensation Committee. Subject to the transfer restrictions and
forfeiture restrictions relating to the restricted stock award, the
participant will otherwise have the rights of a shareholder of the Company,
including all voting and dividend rights, during the period of restriction. At
June 30, 1996, no restricted stock had been granted.
Performance Awards
The Compensation Committee may grant performance awards denominated in
specified dollar units or in shares of Common Stock. Performance awards are
payable upon the achievement of performance goals established by the
Compensation Committee at the beginning of the performance period, which may
not exceed ten years from the date of grant. Payments may be made in cash or
shares of Common Stock or in a combination of cash and shares. At June 30,
1996, no performance awards had been granted.
Phantom Stock
An award of phantom stock gives the participant the right to receive cash at
the end of a fixed vesting period based on the value of a share of Common
Stock at that time. Phantom stock units are subject to such restrictions and
conditions to payment as the Compensation Committee determines are
appropriate. At June 30, 1996, no phantom stock had been awarded.
8. COMMITMENTS
Telecommunications Service Agreements
The Company has a minute volume commitment with one of its service providers
which, if not met, could require the Company to make payments to such
provider. If the Company fails to meet this commitment operating results could
be adversely impacted. As of June 30, 1996, the Company anticipates that it
will fulfill this commitment.
Operating Leases
The Company entered into a lease agreement on January 10, 1996 to lease
office space. Lease payments commenced March 1, 1996 and end March 1, 2002.
The future minimum annual rentals under this lease as of June 30, 1996 are
as follows: 1996-$59,225, 1997-$164,684, 1998-$194,347, 1999-$194,347, 1999
and thereafter--$242,934.
F-14
<PAGE>
SMARTALK TELESERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR DECEMBER 31, 1994 AND 1995 AND UNAUDITED JUNE 30, 1996
- -------------------------------------------------------------------------------
9. PURCHASE OF VOICECHOICE PLATFORM
In June 1996, the Company acquired an interactive voice response platform
facility known as the VoiceChoice Platform from Pacific Bell Information
Services for total consideration of $325,000, plus other consideration
including the release of certain contractual obligations of Pacific Bell
Information Services to the Company. The purchase price was recorded at
$325,000, comprised of $200,000 in cash and a $125,000 note. $100,000 of the
$125,000 note is to be paid through six equal monthly installments beginning
July 1, 1996 (see Note 4). A final payment due January 1, 1997 will include
the remaining $25,000 principal amount of the note and an additional sum equal
to the interest accrued on the declining balance paid in installments at 9%
interest per annum calculated on a day-to-day basis. The Company was informed
by Pacific Bell Information Services that the platform facility was
constructed in 1994 at an original cost of approximately $1,648,000. The
assets acquired include multiple switches, thousands of inbound and outbound
access ports for prepaid and corporate calling services, voice response
applications, high-speed database servers, voice recording capability and
credit card verification software. The Company acquired the VoiceChoice
Platform to enable it to provide additional services, such as stand-alone
interactive voice services, and to reduce call handling costs.
In conjunction with the purchase, the Company is negotiating a sublease from
Pacific Bell Information Services for the building space housing the platform.
At August 15, 1996 the sublease had not been finalized. Management believes
its lease obligation under the sublease will approximate $5,000 per month for
a period of three years.
10. SUBSEQUENT EVENTS
On August 13, 1996, the Company obtained a loan from SmarTalk Partners, LLC
for $250,000. The note bears interest at a floating rate equal to the prime
rate, which was 8.25% at September 20, 1996, and has a maturity date of
January 31, 1997.
On September 20, 1996, the Company obtained a $1,000,000 revolving line of
credit from a financial institution. Borrowings under the line, which totaled
$510,000 at October 8, 1996, bear interest monthly at a floating rate equal to
the prime rate plus 2.375%, with minimum monthly interest charges of $4,429
for one year from date of the note.
F-15
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR ANY OF THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH
INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH SOLICITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Cautionary Statement Regarding Forward-Looking Statements................. 7
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 17
Capitalization............................................................ 18
Dilution.................................................................. 19
Selected Financial Data................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 28
Plan of Operation......................................................... 41
Management................................................................ 42
Certain Transactions...................................................... 50
Principal and Selling Shareholders........................................ 52
Description of Capital Stock.............................................. 53
Shares Eligible for Future Sale........................................... 55
Underwriting.............................................................. 57
Legal Matters............................................................. 58
Experts................................................................... 58
Additional Information.................................................... 58
Index to Financial Statements............................................. F-1
</TABLE>
---------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,200,000 SHARES
SMARTALK TELESERVICES, INC.
COMMON STOCK
(NO PAR VALUE)
[LOGO OF SMARTALK TELESERVICES, INC.(SM)]
SALOMON BROTHERS INC
CS FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PROSPECTUS
DATED , 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the approximate amount of fees and
expenses (other than underwriting discounts and commissions) payable by the
Registrant in connection with the issuance and distribution of the securities
registered hereby. No portion of such expenses will be borne by the Selling
Shareholders.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 24,983
NASD filing fee............................................... 7,745
Nasdaq National Market listing fee............................ 29,150
Printing and engraving........................................ 125,000
Accountants' fees and expenses................................ 200,000
Blue sky fees and expenses.................................... 10,000
Counsel fees and expenses..................................... 720,000
Transfer Agent's fees......................................... 2,000
Miscellaneous................................................. 106,122
----------
Total..................................................... $1,225,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Under California Law, a California corporation may eliminate or limit the
personal liability of directors for monetary damages in an action brought by
or in the right of a corporation for breach of a director's duty of care to
the corporation and its shareholders. However, such a provision may not
eliminate or limit a director's liability for (1) acts or omissions that
involve intentional misconduct or a knowing and culpable violation of the law,
(2) acts or omissions that a director believes to be contrary to the best
interests of the corporation or its shareholders, or that involve the absence
of good faith on the part of the director, (3) receipt of an improper personal
benefit, (4) acts or omissions that show a reckless disregard for the
director's duty to the corporation or its shareholders in circumstances in
which the director was aware, or should have been aware, in the ordinary
course of performing a director's duties, of a risk of serious injury to the
corporation or its shareholders, (5) acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the
director's duty to the corporation or its shareholders, (6) interested
transactions between the corporation and a director or a corporation, firm or
association in which the director has a material financial interest or (7)
improper loans, distributions or guarantees.
The Company has adopted provisions in its Articles that eliminate, to the
fullest extent permissible under California law, the liability of its
directors to the Company for monetary damages. Such limitation of liability
does not affect the availability of equitable remedies such as injunctive
relief or rescission. The Company's Bylaws provide that the Company shall
indemnify its directors and officers to the fullest extent permitted by
California law, including in circumstances in which indemnification is
otherwise discretionary under California law. The Company has entered into
indemnification agreements with its officers and directors containing
provisions which may require the Company, among other things, to indemnify the
officers and directors against certain liabilities that may arise by reason of
their status or service as directors or officers (other than liabilities
arising from willful misconduct of a culpable nature), and to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified.
The Company maintains directors' and officers' liability insurance covering
such persons in their official capacities with the Company and its
subsidiaries.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since the Registrant's inception on October 28, 1994, the Registrant has
issued and sold (without payment of any selling commission to any person) the
following unregistered securities. The numbers of shares reflect (i) a 3,500
for 1 stock split of the Company's Common Stock effected on February 13, 1996,
(ii) a 2.51 for 1 stock split of the Company's Common Stock effected on May
23, 1996 and (iii) a 0.5625 reverse stock split of the Company's Common Stock
effected on August 15, 1996.
1. From January 1, 1996 to June 24, 1996, Registrant granted stock options
under the 1996 Nonqualified Stock Option Plan covering an aggregate of 508,514
shares of Registrant's Common Stock, at exercise prices ranging from $1.77 to
$4.44 per share. None of such options have been exercised.
On September 18, 1996, Registrant granted a stock option under the 1996
Stock Incentive Plan covering 2,000 shares of Registrant's Common Stock at an
exercise price of $2.50 per share. Such option has not been exercised.
2. On December 1, 1994, the Registrant issued and sold 4,941,905 shares of
Common Stock to the Company's founder for an aggregate purchase price of
$5,000.
3. On December 1, 1995, the Registrant issued and sold 1,235,480 shares to
seven investors for an aggregate purchase price of $10,000. Such shares were
purchased upon the exercise of options granted to the investors by the
Company.
4. On December 28, 1995, the Registrant issued and sold 2,647,449 shares of
Common Stock to an investor for an aggregate purchase price of $300,000.
The sales and issuance of securities described above were deemed to be
exempt from registration under the Securities Act by virtue of Section 4(2)
thereof, as transactions not involving a public offering, or, with respect to
Common Stock issued to employees upon the exercise of stock options, in
reliance upon the exemption from registration provided by Rule 701 of the
Commission. The purchasers in such private offerings represented their
intention to acquire the securities for investment only and not with a view to
the distribution thereof, and appropriate legends were affixed to the stock
certificates issued in such transactions. All purchasers had adequate access,
through their employment or other relationships, to sufficient information
about the Registrant to make an informed investment decision. No underwriter
was employed with respect to any such sales.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.(1)
2.1 Agreement between SmarTalk TeleServices, Inc. and Lorsch Creative
Network, Inc. dated December 28, 1995.(1)
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Amended and Restated Bylaws.(1)
4.1 Registration Rights Agreement.(1)
4.2 Specimen Stock Certificate.(1)
5.1 Opinion of Dewey Ballantine, counsel to the Registrant, as to the
legality of the shares being registered.(1)
10.1 Loan and Investment Agreement dated December 28, 1995 among
SmarTalk TeleServices, Inc., SmarTalk Partners, LLC and Robert H.
Lorsch.(1)
10.2 Promissory Note in the amount of $1,200,000 dated December 28,
1995 made by SmarTalk TeleServices, Inc. in favor of SmarTalk
Partners, LLC.(1)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.3 Security Agreement dated December 28, 1995 between SmarTalk
TeleServices, Inc. and SmarTalk Partners, LLC.(1)
10.4 Revolving Line of Credit Note in the amount of $500,000 dated
December 28, 1995 made by SmarTalk TeleServices, Inc. in favor
of SmarTalk Partners, LLC.(1)
10.5 Subordinated Promissory Note in the amount of $2,000,000 dated
January 1, 1996 by SmarTalk TeleServices, Inc. in favor of
Lorsch Creative Network, Inc.(1)
10.6 Subordination Agreement dated January 1, 1996 between SmarTalk
TeleServices, Inc. and Lorsch Creative Network, Inc.(1)
10.7 Security Agreement dated August 9, 1996 between SmarTalk
TeleServices, Inc. and Lorsch Creative Network, Inc.(1)
10.8A Employment Agreement between SmarTalk TeleServices, Inc. and
Robert H. Lorsch.(1)
10.8B Employment Agreement between SmarTalk TeleServices, Inc. and
Richard M. Teich.(1)
10.9 Form of Indemnification Agreement dated October 28, 1994 between
SmarTalk TeleServices, Inc. and certain management personnel.(1)
10.10 1996 Nonqualified Stock Option Plan.(1)
10.11 1996 Stock Incentive Plan.(1)
10.12 Standard Office Lease by and between LAOP IV, LLC and SmarTalk
TeleServices, Inc., dated January 10, 1996, as amended on
January 16, 1996, February 7, 1996 and April 19, 1996.(1)
10.13 Carrier Agreement dated November 9, 1995 between the Registrant
and MCI Telecommunications Corporation.*
10.14A First Amendment to Carrier Agreement dated April 3, 1996 between
SmarTalk TeleServices, Inc. and MCI Telecommunications
Corporation.*
10.14B Second Amendment to Carrier Agreement dated September 10, 1996
between SmarTalk TeleServices, Inc. and MCI Telecommunications
Corporation.*
10.15 Agreement dated October 4, 1995 between SmarTalk TeleServices,
Inc. and West Interactive Corporation.*
10.16 Security Agreement dated August 9, 1996 between SmarTalk
TeleServices, Inc. and SmarTalk Partners, LLC.(1)
10.17 Subordination Agreement dated August 9, 1996 among Lorsch
Creative Network, Inc., SmarTalk TeleServices, Inc. and
SmarTalk Partners, LLC.(1)
10.18 Promissory Note in the amount of $250,000 dated August 9, 1996
between SmarTalk TeleServices, Inc. and SmarTalk Partners,
LLC.(1)
10.19 Exhibit withdrawn.
10.20 Prepaid Carrier Referral Program Agreement between MCI
Telecommunications Corporation and SmarTalk TeleServices, Inc.,
dated July 10, 1996.*
10.21 Wholesale Distribution Agreement between West Interactive
Corporation and SmarTalk TeleServices, Inc., dated June 1,
1996.*
10.22 Loan Agreement dated September 18, 1996, between Southern
California Bank and SmarTalk TeleServices, Inc.(1)
10.23 Promissory Note in the amount of $1,000,000 dated September 18,
1996 between Southern California Bank and SmarTalk
TeleServices, Inc.(1)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.24 Commercial Security Agreement in the amount of $1,000,000 dated
September 18, 1996 between Southern California Bank and SmarTalk
TeleServices, Inc.(1)
21.1 Subsidiary of the Registrant.(1)
23.1 Consent of Price Waterhouse LLP.(1)
23.2 Consent of Dewey Ballantine (included as part of Exhibit 5.1).(1)
24.1 Power of Attorney.(1)
27.1 Financial Data Schedule.(1)
</TABLE>
- --------
* Confidential treatment has been requested. The copy filed as an exhibit
omits information subject to the confidentiality request.
(1) Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Los Angeles, State of California, on October 9, 1996.
SmarTalk TeleServices, Inc.
By /s/ Robert H. Lorsch
___________________________________
Name: Robert H. Lorsch
Title: Chairman of the Board of
Directors, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Robert H. Lorsch Chairman of the Board of October 9, 1996
____________________________________ Directors, President and
Robert H. Lorsch Chief Executive Officer
* Chief Financial Officer October 9, 1996
____________________________________ and Vice President
Glen Andrew Folck Finance/Operations
* Director October 9, 1996
____________________________________
Ahmed O. Alfi
* Director October 9, 1996
____________________________________
Fred F. Fielding
* Director October 9, 1996
____________________________________
Jeffrey I. Scheinrock
* Director October 9, 1996
____________________________________
Lloyd S. Zeiderman
</TABLE>
*By /s/ Robert H. Lorsch
_____________________________
Robert H. Lorsch
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGES
------- ----------- --------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.(1)
2.1 Agreement between SmarTalk TeleServices, Inc. and
Lorsch Creative Network, Inc. dated December 28,
1995.(1)
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Amended and Restated Bylaws.(1)
4.1 Registration Rights Agreement.(1)
4.2 Specimen Stock Certificate.(1)
5.1 Opinion of Dewey Ballantine, counsel to the
Registrant, as to the legality of the shares being
registered.(1)
10.1 Loan and Investment Agreement dated December 28, 1995
among SmarTalk TeleServices, Inc., SmarTalk
Partners, LLC and Robert H. Lorsch.(1)
10.2 Promissory Note in the amount of $1,200,000 dated
December 28, 1995 made by SmarTalk TeleServices,
Inc. in favor of SmarTalk Partners, LLC.(1)
10.3 Security Agreement dated December 28, 1995 between
SmarTalk TeleServices, Inc. and SmarTalk Partners,
LLC.(1)
10.4 Revolving Line of Credit Note in the amount of
$500,000 dated December 28, 1995 made by SmarTalk
TeleServices, Inc. in favor of SmarTalk Partners,
LLC.(1)
10.5 Subordinated Promissory Note in the amount of
$2,000,000 dated January 1, 1996 by SmarTalk
TeleServices, Inc. in favor of Lorsch Creative
Network, Inc.(1)
10.6 Subordination Agreement dated January 1, 1996 between
SmarTalk TeleServices, Inc. and Lorsch Creative
Network, Inc.(1)
10.7 Security Agreement dated August 9, 1996 between
SmarTalk TeleServices, Inc. and Lorsch Creative
Network, Inc.(1)
10.8A Employment Agreement between SmarTalk TeleServices,
Inc. and Robert H. Lorsch.(1)
10.8B Employment Agreement between SmarTalk TeleServices,
Inc. and Richard M. Teich.(1)
10.9 Form of Indemnification Agreement dated October 28,
1994 between SmarTalk Teleservices, Inc. and certain
management personnel.(1)
10.10 1996 Nonqualified Stock Option Plan.(1)
10.11 1996 Stock Incentive Plan.(1)
10.12 Standard Office Lease by and between LAOP IV, LLC and
SmarTalk TeleServices, Inc., dated January 10, 1996,
as amended on January 16, 1996, February 7, 1996 and
April 19, 1996.(1)
10.13 Carrier Agreement dated November 9, 1995 between the
Registrant and MCI Telecommunications Corporation.*
10.14A First Amendment to Carrier Agreement dated April 3,
1996 between SmarTalk Teleservices, Inc. and MCI
Telecommunications Corporation.*
10.14B Second Amendment to Carrier Agreement dated September
10, 1996 between SmarTalk TeleServices, Inc. and MCI
Telecommunications Corporation.*
10.15 Agreement dated October 4, 1995 between SmarTalk
TeleServices, Inc. and West Interactive
Corporation.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGES
------- ----------- --------------
<C> <S> <C>
10.16 Security Agreement dated August 9, 1996 between
SmarTalk TeleServices, Inc. and SmarTalk Partners,
LLC.(1)
10.17 Subordination Agreement dated August 9, 1996 among
Lorsch Creative Network, Inc., SmarTalk
TeleServices, Inc. and SmarTalk Partners, LLC.(1)
10.18 Promissory Note in the amount of $250,000 dated
August 9, 1996 between SmarTalk TeleServices, Inc.
and SmarTalk Partners, LLC.(1)
10.19 Exhibit withdrawn.
10.20 Prepaid Carrier Referral Program Agreement between
MCI Telecommunications Corporation and SmarTalk
TeleServices, Inc., dated July 10, 1996.*
10.21 Wholesale Distribution Agreement between West
Interactive Corporation and SmarTalk TeleServices,
Inc., dated June 1, 1996.*
10.22 Loan Agreement dated September 18, 1996, between
Southern California Bank and SmarTalk TeleServices,
Inc.(1)
10.23 Promissory Note in the amount of $1,000,000 dated
September 18, 1996 between Southern California Bank
and SmarTalk TeleServices, Inc.(1)
10.24 Commercial Security Agreement in the amount of
$1,000,000 dated September 18, 1996 between Southern
California Bank and SmarTalk TeleServices, Inc.(1)
21.1 Subsidiary of the Registrant.(1)
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Dewey Ballantine (included as part of
Exhibit 5.1).(1)
24.1 Power of Attorney.(1)
27.1 Financial Data Schedule.(1)
</TABLE>
- --------
* Confidential treatment has been requested. The copy filed as an exhibit
omits information subject to the confidentiality request.
(1)Previously filed.
<PAGE>
*
EXHIBIT 10.13
Portions of this exhibit for which confidential treatment
has been requested are marked by brackets [ ] and the
pages on which they appear contain an asterisk (*) in the
upper right hand corner. The confidential information
omitted has been filed separately with the Securities and
Exchange Commission.
CARRIER AGREEMENT
T E R M S A N D C O N D I T I O N S
This Carrier Agreement (the "Agreement"), is between MCI TELECOMMUNICATIONS
CORPORATION ("MCI") and SMARTALK TELESERVICES, INC. ("Customer") a resale common
carrier subject to the Communications Act of 1934, as amended.
1. Scope Of Agreement.
-------------------
(a) MCI shall provide to Customer certain specified domestic interstate
service(s) and international services pursuant to this Agreement, and
intrastate common carriage service pursuant to MCI's tariffs governing such
service. This Agreement incorporates by reference the terms of MCI Tariff
FCC No. 1 ("Tariff"), which is on file with the Federal Communications
Commission and which may be modified from time to time by MCI in accordance
with law and thereby affect the service(s) furnished Customer, except that
the following terms and conditions shall supplement or, to the extent
inconsistent, supersede Tariff terms and conditions and shall remain in
effect throughout the Service Term.
(b) Capitalized terms not otherwise defined in this Agreement shall have
the meanings assigned to them in the Tariff.
2. Term Commitment.
---------------
(a) After the first eight (8) months of the Service Term (as defined
below), Customer's Total Usage shall equal or exceed [ ]
(the "Total Commitment"). "Total Usage" shall refer to the total number
of minutes of Customer's usage after the first eight (8) months of the
Service Term of MCI PRISM I Service and MCI 800 DAL Service at the rates
set forth in this Agreement.
(b) After the eight (8) months of the Service Term, Customer's
International Usage shall equal or exceed [ ] (the
"International Commitment"). "International Usage" shall refer to the
number of minutes of Customer's usage after the first eight (8) months of
the Service Term of international MCI PRISM I Service and international MCI
800 DAL Service at the rates set forth in this Agreement.
1
-- MCI CONFIDENTIAL --
<PAGE>
*
(c) Customer's International Usage shall apply toward both of the Total
Commitment and International Commitment.
(d) If Customer's Total Usage is less than the Total Commitment but greater
than [ ],
then Customer will pay all outstanding charges for MCI services utilized by
Customer, as set forth in this Agreement. In such case, Customer shall also
pay an underutilization charge (which Customer agrees is reasonable) of
[ ] for each minute that Customer's Total Usage
is less than the Total Commitment.
(e) If Customer's Total Usage is less than or equal to [ ],
then Customer will pay all outstanding charges for MCI services utilized
by Customer, as set forth in this Agreement. In such case, Customer shall
also pay an underutilization charge (which Customer agrees is reasonable)
of: (1) [
]; plus (2) [
].
(f) If Customer's International Usage is less than the International
Commitment, then Customer will pay all outstanding charges for
international MCI services utilized by Customer, as set forth in this
Agreement. In such case, Customer shall also pay an underutilization
charge (which Customer agrees is reasonable) of [ ] for each
minute that Customer's International Usage is less than the International
Commitment.
3. Rates.
------
Subject to Paragraph 2 herein, Customer shall receive the following rates
during the Service Term for MCI services which terminate at a switch leased
by Customer.
Rates set forth in this Paragraph 3 do not include charges for
installation, taxes, tax-related surcharges, any other applicable
surcharges, charges for access and access-related charges. Rates are in
lieu of any discounts, promotions and credits otherwise applicable pursuant
to the Tariff.
(a) Domestic Interstate MCI PRISM I Service.
----------------------------------------
For domestic interstate switched outbound service originating via
dedicated access from a Customer-owned location to an MCI point of presence
(including such service
2
-- MCI CONFIDENTIAL --
<PAGE>
*
to locations in Alaska, Hawaii, Puerto Rico and the U.S. Virgin Islands),
Customer will pay the non-distance sensitive ("postalized") rate per minute
of [ ] for Peak usage and the postalized
rate per minute of [ ] for non-Peak usage.
(b) Domestic Interstate MCI 800 DAL Service.
----------------------------------------
(1) For domestic interstate inbound services terminating via
dedicated access from an MCI point of presence to Customer owned
location(s) (including such service from locations in Alaska, Hawaii,
Puerto Rico and the U.S. Virgin Islands), Customer will pay the postalized
rate per minute of [ ] for Peak
usage and the postalized rate per minute of [ ]
for non-Peak usage.
(2) The above rates for MCI 800 DAL Service do not include any Feature
Charges described in the Tariff. MCI will charge Customer [
] per call for the Automatic Number Identification Delivery
Feature Charges. All other Feature Charges will be as set forth in the
Tariff.
(c) International MCI PRISM I Service.
---------------------------------
Customer shall receive the rates and discounts set forth in Exhibit A
for international MCI PRISM I Service to locations in the countries set
forth in Exhibit A. Where rates or discounts are not provided for specific
countries in Exhibit A, Customer will receive Tariffed rates less the
discounts set forth in Paragraph 3(d) below.
(d) MCI VIP, VIP Plus, MCI 800 MOD, and MCI CAS and MCI CAS Plus Service.
---------------------------------------------------------------------
(1) For MCI International PRISM I Service, excluding MCI International
Service terminating in Canada or Mexico, and for MCI Services other than
those for which a postalized rate is provided herein:
(a) Customer is entitled to enroll for the discounts associated with
the thirty-six (36) month term commitment and maximum volume commitment
under the MCI PRISM I Service Value Insurance Plan ("VIP") or the MCI 800
Service VIP Plus subject to the terms and conditions set forth in the
Tariff for such plan except that the volume commitment requirement will not
apply.
3
-- MCI CONFIDENTIAL --
<PAGE>
*
(b) Customer is entitled to subscribe to and receive the discounts
associated with MCI Corporate Account Service ("CAS") and CAS Plus plans
subject to the terms and conditions set forth in the Tariff for such
service except that the volume commitment requirement will not apply. For
MCI International PRISM I Service (excluding MCI International PRISM I
Service Terminating in Canada and Mexico, and any other countries for which
CAS Plus discounts are not provided pursuant to the Tariff), CAS Plus
discounts will be applied to all time periods.
(c) Customer is entitled to subscribe to and receive the discounts
associated with MCI 800 Service Multi-Option Discount ("800 MOD") subject
to the terms and conditions set forth in the Tariff for such service except
as modified by this Agreement.
(2) In the event the amount of the domestic discount provided under
VIP, VIP Plus, CAS, CAS Plus and/or 800 MOD is greater than the charges for
Customer's usage of domestic interstate MCI Services after application of
any of the discounts earned under this Agreement, the difference will not
be credited to Customer or carried forward.
(3) Customer is not entitled to enroll in any other Tariffed discount
plans other than the MCI Network Pricing Plan ("NPP") and those contained
in this Section 3.
(e) Combined Service.
----------------
(1) For purposes of this Agreement, "Combined Service" shall consist
of MCI 800 DAL Service traffic terminating at Customer's locations that is
then routed as domestic MCI PRISM I Service traffic from Customer's
location and terminates at the traffic's ultimate destination.
(2) For each consecutive three (3) month period beginning after the
first eight (8) months of the Service Term (each, a "Quarter"), Customer
will pay one (1) of the following applicable postalized rates for Combined
Service, as determined by: (A) the amount of Customer's usage of MCI PRISM
I and MCI 800 DAL Services (in the aggregate) ("Quarterly Usage"); and (B)
the percentage of Customer's total Combined Service that is international
Combined Service during such Quarter. MCI shall bill Customer per the zero
(0) to [
] minute level during the first
eight (8) months of the Service Term and during the first Quarter. MCI
shall bill Customer per the previous Quarterly
4
-- MCI CONFIDENTIAL --
<PAGE>
*
Usage level during each Quarter after the first Quarter. MCI shall conduct
a true-up at the conclusion of each Quarter and appropriately credit or
debit Customer's account.
International Combined Service %
<TABLE>
<CAPTION>
Quarterly Usage [ ] [ ] [ ] [ ]
- --------------------- - - - - - - - -
<S> <C> <C> <C> <C>
[
] [ ] [ ] [ ] [ ]
[
] [ ] [ ] [ ] [ ]
[
] [ ] [ ] [ ] [ ]
[
] [ ] [ ] [ ] [ ]
[ ] [ ] [ ] [ ] [ ]
</TABLE>
(3) Customer will pay [ ] of the rates set forth in
this Agreement for each Uncompleted Combined Service Call. For purposes of
this Agreement, an "Uncompleted Combined Service Call" shall refer to any
end user MCI 800 DAL Service call to Customer's location that is thereafter
unsuccessfully routed to the call's ultimate destination, including but not
limited to unanswered calls, busy signals and network announcements.
(4) To ensure that MCI billing recognizes the appropriate
jurisdictional nature of all of Customer's Combined Service usage, MCI
agrees to charge Customer's MCI 800 Service and MCI Prism I Service usage
at interstate or intrastate rates based on the interstate/intrastate
traffic distribution for these services reflected by the percentage
interstate usage ("PIU") reported by Customer to all local exchange
carriers from whom Customer purchases access services (LECs), pursuant to
the LECs' Tariff requirements, on a quarterly basis. Customer shall
provide to MCI in writing on a quarterly basis the PIU described above and
shall certify in such writing that the PIU given to MCI for billing
purposes is true and correct.
5
-- MCI CONFIDENTIAL --
<PAGE>
4. Credits.
-------
(a) Customer shall receive credits of up to [ ]
for the one-time installation and other one-time non-recurring charges
associated with the implementation of MCI service under this Agreement.
Such credits will be issued from time to time throughout the Service Term
as MCI services are installed.
(b) Customer is eligible to elect one (1) of the following options,
provided that Customer provides written notice to MCI of such election
--------
within ten (10) days after the Effective Date and Customer's site is
located such that no LEC mileage-sensitive charges will be incurred in
connection with connection:
(1) [
] or
(2) [
]
5. Payment; Security.
-----------------
(a) As set forth in this Section, Customer shall pay MCI for approximately
[ ] of MCI Services provided during the usage month before
the last day of the usage month. Because Customer will not have received
MCI's invoice for the services provided prior to the date when Customer
must pay MCI, Customer will pay MCI an amount equal to [
] of the amount estimated to be billed for services provided
during the prior month ("Estimated Payment"). At the initiation of this
Agreement, the Estimated Payment will be equal to [ ] of
Customer's reasonable estimate of the first month's usage. For each month
thereafter, the Estimated Payment will be equal to [ ] of the
amount of the prior MCI invoice, or invoices received by Customer.
(b) Upon Customer's receipt of MCI's invoice, MCI and Customer will
reconcile the Estimated Payment with the MCI invoice amount for such month.
Immediately after reconciliation, Customer shall pay to MCI any amount that
the Estimated Payment was less than the MCI invoice amount for
6
-- MCI CONFIDENTIAL --
<PAGE>
such month.
(c) Customer's failure to pay the invoiced amount in full within said usage
period may result in the exercise by MCI of its rights under the security
provisions contained in this Agreement.
(d) If Customer pays the amount invoiced within said period described above
for the initial fifteen (15) months of the Service Term, then upon written
request to MCI, Customer may convert the payment plan set forth in
Paragraphs 5(a) - (c) above to a plan whereby Customer shall pay MCI for
all MCI service(s) provided in a usage period upon receipt of invoice.
Customer's failure to pay the invoiced amount in full upon receipt of
invoice may result in the exercise by MCI of its rights under the security
provisions contained in this Agreement, including but not limited to the
payment plan set forth in Paragraphs 5(a) - (c) above. Nothing contained
herein shall limit or be interpreted to limit MCI's right, as provided for
in Section B-7.04 of the Tariff. The security arrangements provided for in
this Agreement shall survive the expiration of the Service Term.
6. Dispute Resolution.
------------------
(a) Any dispute arising out of or related to this Agreement, which cannot
be resolved by negotiation, shall be settled by binding arbitration in
accordance with the rules contained in MCI Tariff FCC No. 1 ("Arbitration
Rules"). Neither party may seek injunctive relief of any kind prior to the
confirmation of an arbitration award.
(b) Either MCI or Customer may initiate arbitration by providing written
demand for arbitration, a copy of this Agreement and the administrative fee
required by the Arbitration Rules to the Endispute office located in Los
Angeles, California. A copy of such notice shall also be provided to the
other party. The remaining cost of the arbitration, including the fees and
expenses of the arbitrator, shall be shared equally by the parties unless
the arbitration award provides otherwise. Each party shall bear the cost of
preparing and presenting its case.
(c) Three (3) arbitrators shall be appointed in accordance with the
Arbitration Rules within sixty (60) days of the submission of the demand
for arbitration, unless both parties otherwise agree in writing. The
Arbitrators shall designate the time and place for the hearing within
thirty (30) days of his or her appointment. MCI and the Customer agree that
the
7
-- MCI CONFIDENTIAL --
<PAGE>
Arbitrators' authority to grant relief shall be subject to the provisions
of this Agreement, the United States Arbitration Act, 9 U.S.C. 1-16 et.
seq. ("USAA"), the ABA-AAA Code of Ethics for Arbitrators in Commercial
Disputes, MCI Tariff FCC No. 1, substantive law, and the Communications Act
of 1934, 47 U.S.C. 151 et. seq. The Arbitrators' decision shall follow the
plain meaning of the relevant documents, and shall be final and binding.
(d) Customer agrees to place fifty percent (50%) of any invoiced sums it
disputes at the time the arbitration demand is filed, into an interest-
bearing escrow account pending completion of the arbitration. MCI and the
Customer agree to undertake all reasonable steps to expedite the
arbitration process.
(e) Notwithstanding any other provision of this Agreement, interpretation
and construction of this Paragraph shall be governed by the USAA. MCI and
the Customer further agree that judgment may be entered upon the award in
any court having jurisdiction thereof, and that all post-award proceedings
shall be governed by the USAA.
7. Termination For Insolvency.
--------------------------
In the event Customer becomes or is declared insolvent or bankrupt, is
the subject of any proceedings related to its liquidation, insolvency or
for the appointment of a receiver or similar officer for it, makes an
assignment for the benefit of all or substantially all of its creditors, or
enters into an agreement for the composition, extension, or readjustment of
all or substantially all of its obligations, MCI may, by giving written
notice thereof to Customer, terminate this Agreement without liability or
obligation, in whole or in part, as of a date specified in such notice of
termination.
8. Term.
----
The Service Term shall begin on the first (1st) day of the first full
month following the execution of this Agreement ("Effective Date") and will
continue for a period of fifty-six (56) months therefrom. Nothing
contained herein, however, shall modify or be deemed to modify MCI's right
to terminate this Agreement either as provided herein, or as authorized in
Section B-11.01, immediately upon notice to Customer if Customer fails or
refuses to provide alternative or additional security requested pursuant to
Section B-7.04 of the Tariff, or to terminate provision of service for any
other cause as provided for in Section B-11.01 of the Tariff.
8
-- MCI CONFIDENTIAL --
<PAGE>
9. Expiration Of Term.
------------------
Upon expiration of the Service Term, Customer shall be fully subject
to all the terms and conditions, including standard Tariffed rates, set
forth in the Tariff for MCI service(s) received by Customer after such
expiration.
10. Termination Liability.
---------------------
If Customer terminates this Agreement during the Service Term or MCI
terminates this Agreement during the Service Term for Customer's breach,
customer will pay MCI within thirty (30) days of the effective date of such
termination an amount equal to one hundred percent (100%) of the cost of
the difference between Customer's remaining actual Total Commitment and
Customer's Total Usage, measured at the then-current Combined Service per
minute postalized rate.
11. Nondisclosure.
-------------
Neither party shall disclose to any third party during the Service
Term, or during the three (3) year period thereafter, any of the terms and
conditions set forth in this Agreement unless such disclosure is lawfully
required by any federal governmental agency or is otherwise required to be
disclosed by law or is necessary in any proceeding establishing rights and
obligations under this Agreement. Each party reserves the right to
terminate this Agreement immediately upon delivering written notice to the
other party of any unpermitted third party disclosure hereunder.
12. Use of MCI Name and Property.
----------------------------
Customer may not use MCI's trade name or service marks without the
prior written approval of MCI. Customer may print the phrase "Long
distance provided by MCI" on the face of customer's long distance service
debit cards, point of sale materials and advertising materials.
13. Notices.
-------
Notices to be given pursuant to this Agreement shall be in writing,
delivered personally or by facsimile, telex, telegram, professional courier
or certified, registered or express mail, postage prepaid to the respective
addresses set forth herein (or at such other addresses as shall be given in
writing by either party to the other). All notices, requests, demands or
communications shall be deemed effective upon the earlier of: (a) the date
such notice has been received; or
9
-- MCI CONFIDENTIAL --
<PAGE>
(b) the next calendar day if sent by facsimile, telex or telegram, the
third calendar day after delivery to a professional courier service or five
(5) calendar days after deposit with the United States Postal Service if
sent by certified or registered mail, return receipt requested.
If to MCI:
MCI Telecommunications Corporation
201 Spear Street, Ninth Floor
San Francisco, CA 94105
ATTN: Legal Department
FAX: 415/978-1220
with copy to:
MCI Telecommunications Corporation
700 South Flower Street
Los Angeles, CA 90017
ATTN: Branch Manager
If to Customer:
Smartalk Teleservices, Inc.
4470 West Sunset Blvd., Ste. 250
Hollywood, CA 90027
ATTN: Robert Lorsch
with copy to:
Robert Thau, Esq.
Rosenfeld, Meyer, Sussman
9601 Wilshire Blvd.
Beverly Hills, CA 90210
14. Letter of Agency.
----------------
Customer shall appoint MCI as its agent in the Letter of Agency
attached hereto and incorporated herein as Exhibit B.
15. Surcharge Exemption.
-------------------
When applicable, Customer shall certify that any special access lines
used in connection with services under this Agreement terminate in a device
not capable of interconnecting MCI's service with the local exchange
network and thus are surcharge exempt from the special access surcharge.
10
-- MCI CONFIDENTIAL --
<PAGE>
*
16. Tax Exemption.
-------------
When applicable, Customer shall certify that it is exempt from
federal, state, and/or local taxes.
17. Preferred Carrier.
-----------------
(a) Customer agrees to designate MCI as its preferred carrier for
Customer's needs for long distance telecommunications services, [
] provided that this condition shall not: (i) require any
--------
termination of an existing contract not terminable by Customer; (ii)
require Customer to use MCI where Customer's customer(s) insist in writing
that MCI services not be used; or (iii) prevent Customer from obtaining
service necessary to be reasonably competitive in the marketplace and/or
service not available from MCI at certain locations. Customer shall use
best efforts to direct new traffic to MCI.
(b) After the Effective Date of this Agreement, but not more than once
annually, MCI may request, and Customer shall promptly provide to MCI in
writing or in a machine readable format as specified by MCI, Customer
records, data and invoices pertaining to its total long distance
telecommunications usage for the most recent twelve (12) month period
preceding the request. MCI may review this information for the sole
purpose of determining Customer's compliance with the predominant carrier
provision herein, or as it may be amended by the parties.
(c) In each monthly billing period of the Service Term in which Customer
fails to satisfy the predominant carrier requirement set forth herein,
Customer shall not be entitled to any of the postalized rates set forth in
this Agreement and Customer's use of MCI service(s) shall be discounted
that month solely pursuant to the applicable Tariffed MCI discount rate, if
any, associated with Customer's actual usage level for that monthly billing
period.
18. Governing Law.
-------------
This Agreement, including all matters relating to the validity,
construction, performance and enforcement thereof, shall be governed by the
laws of the State of New York without giving reference to its principles of
conflicts of law, except to the extent the Communications Act of 1934, as
amended, and as interpreted and applied by the Federal Communications
Commission, applies.
11
-- MCI CONFIDENTIAL --
<PAGE>
19. Assignment.
----------
This Agreement shall be binding on Customer and its respective
successors and assigns. Neither party may assign this Agreement, whether
by operation of law or otherwise, without the prior written consent of the
other party, which consent may not be unreasonably withheld. Either party
may terminate this Agreement in the event of a change in control of the
other party which occurred without such other party's prior written
consent.
20. No Waiver.
---------
No waiver of any of the provisions of this Agreement shall be binding
unless it is in writing and signed by both parties. The failure of either
party to insist on the strict enforcement of any provision of this
Agreement shall not constitute a waiver of any provision and all terms
shall remain in full force and effect.
21. Length of Offer; Entire Agreement; Amendments.
---------------------------------------------
This offer shall remain open and be capable of being accepted by
Customer until November 1, 1995. Any and all prior or contemporaneous
offers, agreements, representations and understandings made to Customer,
whether written or oral, shall be superseded by this offer. Exclusive of
any Tariff modifications initiated by MCI, once this Agreement has been
12
-- MCI CONFIDENTIAL --
<PAGE>
executed, any amendments hereto must be made in writing and signed by both
parties.
IN WITNESS WHEREOF, the parties hereto each acting with proper authority have
executed this Agreement.
MCI TELECOMMUNICATIONS CORPORATION
By : /s/Gordon T. Bouska
-----------------------
Name : Gordon T. Bouska
-----------------------
Title: Director
-----------------------
Date : 11/9/95
-----------------------
SMARTALK TELESERVICES, INC.
By : /s/ Robert H. Lorsch
-----------------------
Name : Robert H. Lorsch
-----------------------
Title: President
-----------------------
Date : 10/20/95
-----------------------
13
-- MCI CONFIDENTIAL --
<PAGE>
*
EXHIBIT A
International MCI PRISM I Service Rates and Discounts
-----------------------------------------------------
Customer shall pay the following for international MCI PRISM Service
to the following countries, in lieu of standard Tariffed rates:
<TABLE>
<S> <C>
Australia [ ] per minute
Bahamas [ ] per minute
British V.I. [ ] per minute
Canada [ ] per minute
Colombia [ ] per minute
El Salvador [ ] per minute
Egypt [ ] per minute
France [ ] per minute
Germany [ ] per minute
India [ ] per minute
Jamaica [ ] per minute
Japan [ ] per minute
Korea [ ] per minute
Philippines [ ] per minute
Russia [ ] per minute
Saudi Arabia [ ] per minute
United Kingdom [ ] per minute
Venezuela [ ] per minute
Mexico per minute rates per the following:
</TABLE>
<TABLE>
<CAPTION>
Range Standard Economy
----- -------- -------
<S> <C> <C>
1 [ ] [ ]
2 [ ] [ ]
3 [ ] [ ]
4 [ ] [ ]
5 [ ] [ ]
6 [ ] [ ]
7 [ ] [ ]
8 [ ] [ ]
</TABLE>
A-1
-- MCI CONFIDENTIAL --
<PAGE>
EXHIBIT B
LETTER OF AGENCY
----------------
ATTENTION: Concerned Local Operating Companies, AT&T and other Common
Carriers and All Equipment Vendors
The undersigned appoints MCI Telecommunications Corporation or any of its
affiliated companies ("MCI") as agent for the purpose of ordering, in connection
with MCI's provision of service to the undersigned, changes in and/or
maintenance on specific telecommunications service that you provide to the
undersigned including, without limitation, removing, adding to or rearranging
such telecommunications service.
You are hereby released from any and all liability for making pertinent
information available to MCI and for following MCI's instructions with respect
to any changes to or maintenance on the undersigned's telecommunications
service. You may deal directly with MCI on all matters pertaining to
telecommunications service and should follow instructions with respect thereto.
This authorization will remain in effect until modified or rescinded in writing
by the undersigned.
Signed this 20th day of October, 1995.
BY:
/s/ Robert H. Lorsch
- ---------------------------------
Authorized Customer Signature
President
- ---------------------------------
Title
SmarTalk TeleServices, Inc.
- ---------------------------------
Company Name
B-1
<PAGE>
*
Portions of this exhibit for which confidential treatment
has been requested are marked by brackets [ ] and the
pages on which they appear contain an asterisk (*) in the
upper right hand corner. The confidential information
omitted has been filed separately with the Securities and
Exchange Commission.
EXHIBIT 10.14A
FIRST AMENDMENT
TO CARRIER AGREEMENT
This is the first amendment (the "Amendment") to the Carrier Agreement by
and between MCI Telecommunications Corporation ("MCI") and Smartalk
Teleservices, Inc. ("Customer"), dated November 9, 1995 (the "Original
Agreement"). For good and valuable consideration, the receipt of which is
acknowledged by each of the parties, the parties agree as follows:
1. Survival of Original Agreement. Except as otherwise expressly modified or
------------------------------
amended herein, all terms and conditions contained in the Original
Amendment shall remain in full force and effect and shall not be altered or
changed by this Amendment. The Original Amendment including this Amendment
shall be referred to as the "Agreement".
2. Paragraph 2(b) Modification. Paragraph 2(b) of the Original Amendment is
---------------------------
deleted in its entirety and replaced with the following new Paragraph 2(b):
"2. Term Commitment.
---------------
(b) After the first eight (8) months of the Service Term, Customer's
International Usage shall equal or exceed [
] (the "International Commitment"). "International Usage" shall refer
to the number of minutes of Customer's usage after the first eight (8)
months of the Service Term of international MCI PRISM I Service and
international MCI 800 DAL Service (which includes inbound
international 800) at the rates set forth in this Agreement."
3. Paragraph 3(a) Modification. Paragraph 3(a) of the Original Agreement is
---------------------------
deleted in its entirety and replaced with the following new Paragraph 3(a):
"3. Rates.
-----
(a) Domestic Interstate MCI PRISM I Service.
---------------------------------------
For domestic interstate switched outbound service originating via
dedicated access from a Customer-owned location to an MCI point-of-
presence (including such service to locations in Alaska, Hawaii,
Puerto Rico and the U.S. Virgin Islands), Customer will pay the non-
distance sensitive ("postalized") rate per minute of [ ]
for Peak usage and the postalized rate per minute of [ ]
for non-Peak usage."
1
-MCI CONFIDENTIAL-
<PAGE>
*
4. Paragraph 3(b)(1) Modification. Paragraph 3(b)(1) of the Original
------------------------------
Agreement is deleted in its entirety and replaced with the following new
Paragraph 3(b)(1):
"3. Rates.
-----
(b) Domestic Interstate MCI 800 DAL Service.
---------------------------------------
(1) For domestic interstate inbound service terminating via
dedicated access from an MCI point-of-presence to Customer-owned
location(s) (including such service from locations in Alaska, Hawaii,
Puerto Rico and the U.S. Virgin Islands). Customer will pay the
postalized rate per minute of [
] for Peak usage and the postalized rate per minute of [
] for non-Peak usage."
5. Section 3(c) Modification. Section 3(c) of the Original Amendment is
-------------------------
deleted in its entirety and replaced with the following new Paragraph 3(c):
"3. Rates.
-----
(c) International MCI PRISM I Service and International MCI 800
-----------------------------------------------------------
Service.
-------
(1) Customer shall receive the rates and discounts set forth in
Exhibit A for international MCI PRISM I Service to locations in the
countries set forth in Exhibit A. Where rates or discounts are not
provided for specific countries in Exhibit A, Customer will receive
Tariffed rates less the discounts set forth in Paragraph 3(d) below.
(2) Customer shall receive a discount of [ ]
off of MCI's standard Tariffed rates for international MCI 800 Service
(which includes inbound international 800)."
6. VIP and CAS Enrollment. Customer is hereby enrolled in the MCI PRISM I
----------------------
Service Value Insurance Plan, the MCI 800 Service VIP Plus (the "VIPs") and
the MCI Corporate Account Service and CAS CAS Plus plans (the "CASs"),
according to the terms of Section 3(d) of the Agreement.
7. Paragraph 3(e)(2) Modification. Paragraph 3(e)(2) of the Original
------------------------------
Agreement is deleted in its entirety and replaced with the following new
Paragraph 3(e)(2):
2
-MCI CONFIDENTIAL-
<PAGE>
*
"3. Rates.
-----
(e) Combined Service.
----------------
(2) For each consecutive three (3) month period beginning after
the first eight (8) months of the Service Term (each, a "Quarter"),
Customer will pay one (1) of the following applicable postalized rates
for Combined Service, as determined by: (A) the aggregate amount of
Customer's usage of MCI PRISM I and MCI 800 DAL Services (which
includes inbound international 800) ("Quarterly Usage"); and (B) the
percentage of Customer's total Combined Service that is international
Combined Service during such Quarter. MCI shall bill Customer per the
[ ] minute level during the first eight
(8) months of the Service Term and during the first Quarter. MCI
shall bill customer per the previous Quarterly Usage level during each
Quarter after the first Quarter. MCI shall conduct a true-up at the
conclusion of each Quarter and appropriately credit or debit
Customer's account.
INTERNATIONAL COMBINED SERVICE %
<TABLE>
<CAPTION>
Quarterly Usage [______] [______] [______] [______] [______] [______]
---------------
<S> <C> <C> <C> <C> <C> <C>
[ [ ] [ ] [ ] [ ] [ ] [ ]
]
[ [ ] [ ] [ ] [ ] [ ] [ ]
]
[ [ ] [ ] [ ] [ ] [ ] [ ]
]
[ [ ] [ ] [ ] [ ] [ ] [ ]
]
[ ] [ ] [ ] [ ] [ ] [ ] [ ]
</TABLE>
8. Exhibit A Modification. Exhibit A of the Original Agreement is deleted in
----------------------
its entirety and replaced with the attached new Exhibit A.
9. Effectiveness. This Amendment is binding upon execution by MCI and
-------------
Customer and shall be effective as of March 1, 1996.
3
-MCI CONFIDENTIAL-
<PAGE>
*
10. Complete Agreement. The Agreement, together with the tariff, is the
------------------
complete agreement of the parties and supersedes all other prior agreements
and representations concerning its subject matter. Once this Amendment has
been fully executed, any further amendments must be in writing and signed
by both parties.
This offer shall remain open and be capable of being accepted by Customer until
March 15, 1996.
Accepted and Agreed:
MCI Telecommunications Corporation Smarttalk Teleservices, Inc.
By : /s/ Tom Schilling By : /s/ Robert H. Lorsch, Pres.
------------------------- ---------------------------
Name : Tom Schilling Name : Robert H. Lorsch
------------------------- ---------------------------
Title: Director Title : President
------------------------- ---------------------------
Date : 4/3/96 Date : 3/1/96
------------------------- ---------------------------
4
-MCI CONFIDENTIAL-
<PAGE>
*
EXHIBIT A
International MCI PRISM I Service Rates
---------------------------------------
Customer shall pay the following rates per minute for international
MCI PRISM I Service to locations in the following countries, in lieu of standard
Tariffed rates and discounts:
Anguilla [ ]
Argentina [ ]
Australia [ ]
Austria [ ]
Bahamas [ ]
Bangladesh [ ]
Barbados [ ]
Belgium [ ]
Bermuda [ ]
Bolivia [ ]
British V.I. [ ]
Brazil [ ]
Canada [ ]
Cayman Islands [ ]
Chile [ ]
Columbia [ ]
Costa Rica [ ]
Czech [ ]
Dominica [ ]
Ecuador [ ]
Egypt [ ]
El Salvador [ ]
Ethiopia [ ]
Finland [ ]
France [ ]
Germany [ ]
Grenada [ ]
Guatemala [ ]
Honduras [ ]
Hong Kong [ ]
India [ ]
Ireland [ ]
Israel [ ]
Italy [ ]
Jamaica [ ]
Japan [ ]
Korea [ ]
Contrast [ ]
EXA-1
-MCI CONFIDENTIAL-
<PAGE>
*
Netherlands [ ]
Nevis [ ]
Nicaragua [ ]
Nigeria [ ]
Norway [ ]
Panama [ ]
Paraguay [ ]
Peru [ ]
Philippines [ ]
Portugal [ ]
Russia [ ]
Saudi Arab. [ ]
Slovakia [ ]
South Africa [ ]
Spain [ ]
St. Kitts [ ]
St. Lucia [ ]
St. Vincent [ ]
Sweden [ ]
Switzerland [ ]
Syria [ ]
Taiwan [ ]
Tanzania [ ]
Trinidad [ ]
Turks [ ]
United Arab [ ]
United Kingdom [ ]
Uruguay [ ]
Venezuela [ ]
Mexico per minute rates per the following:
<TABLE>
<CAPTION>
Range Standard Economy
<S> <C> <C>
1 [ ] [ ]
2 [ ] [ ]
3 [ ] [ ]
4 [ ] [ ]
5 [ ] [ ]
6 [ ] [ ]
7 [ ] [ ]
8 [ ] [ ]
</TABLE>
EXA-2
-MCI CONFIDENTIAL-
<PAGE>
*
Portions of this exhibit for which confidential treatment has been
requested are marked by brackets [ ] and the pages on which
they appear contain an asterisk (*) in the upper right hand corner.
The confidential information omitted has been filed separately with
the Securities and Exchange Commission.
EXHIBIT 10.14B
SECOND AMENDMENT
TO CARRIER AGREEMENT
This is the second amendment (the "Amendment") to the Carrier Agreement by
and between MCI Telecommunications Corporation ("MCI") and Smartalk
Teleservices, Inc. ("Customer"), dated November 9, 1995, amended by the First
Amendment, dated April 3, 1996 (the "Original Agreement"). For good and valuable
consideration, the receipt of which is acknowledged by each of the parties, the
parties agree as follows:
1. Survival of Original Agreement. Except as otherwise expressly modified or
------------------------------
amended herein, all terms and conditions contained in the Original
Agreement shall remain in full force and effect and shall not be altered or
changed by this Amendment. The Original Agreement including this Amendment
shall be referred to as the "Agreement".
2. Paragraph 2(a) Modification. Paragraph 2(a) of the Original Agreement is
---------------------------
deleted in its entirety and replaced with the following new Paragraph 2(a):
"2. Term Commitment.
---------------
(a) After the first eight (8) months of the Service Term,
Customer's Total Usage shall equal or exceed [ ] (the
"Total Commitment"). "Total Usage" shall refer to the number of
minutes of Customer's usage after the first eight (8) months of the
Service Term of MCI PRISM I Service and MCI 800 DAL Service (which
includes inbound international 800) at the rates set forth in this
Agreement."
3. Section 2 Addition. The following new Paragraphs 2(g), 2(h) and 2(i) are
------------------
added to the Agreement:
"2. Term Commitment.
---------------
(g) Within the period beginning June 30, 1996 through September
30, 1997, Customer's "Incremental Usage" shall equal or exceed
[ ] (the "Incremental Commitment"). "Incremental Usage"
shall refer to the total number of minutes of Customer's usage
between June 30, 1996 through September 30, 1997 of MCI service at
the rates set forth in this Agreement which originates via inbound
ANI(s) designated by Customer for purposes of tracking Incremental
Usage.
(h) Customer's Incremental Usage shall apply toward the Total
Commitment, the Incremental Commitment and the International
Commitment, where applicable.
1
-MCI CONFIDENTIAL-
<PAGE>
*
(i) If Customer's Incremental Usage is less than or equal to the
Incremental Commitment, Customer shall pay all outstanding charges
for MCI Services utilized by Customer, as set forth in this
Agreement. In such case, Customer shall also pay an underutilization
charge (which Customer agrees is reasonable) of [ ] for
each minute that Customer's actual Incremental Usage is less than
the Incremental Commitment."
4. Section 4 Addition. The following new Paragraphs 4(c), 4(d), 4(e) and 4(f)
------------------
are added to the Agreement:
"4. Credits.
-------
(c) Customer shall receive a credit of [ ] to be
applied by MCI to Customer's interstate usage charges for MCI
Services appearing on Customer's July 1996 invoice.
(d) Customer shall receive a credit of [ ] to be
applied by MCI to Customer's interstate usage charges for MCI
Services appearing on Customer's September 1996 invoice.
(e) Customer shall receive a credit of [ ] to be
applied by MCI to Customer's interstate usage charges for MCI
Services appearing on Customer's November 1996 invoice.
(f) If Customer has achieved the Total Commitment, Customer shall
receive a credit equal to [ ] of any underutilization
charges paid by Customer to MCI pursuant to Paragraph 3(i) above."
5. Exhibit A Modification. Exhibit A of the Original Agreement is deleted in
----------------------
its entirety and replaced with the attached new Exhibit A.
6. Delivery of Unused Cards. On or before August 15, 1996, Customer shall
------------------------
deliver to MCI a total of three hundred fifty-seven thousand (357,000)
unused debit cards which indicate that the long distance service is
provided by AT&T. MCI shall have no further obligation to Customer with
respect to such cards.
7. Effectiveness. This Amendment is binding upon execution by MCI and
-------------
Customer and shall be effective as of June 30, 1996.
2
-MCI CONFIDENTIAL-
<PAGE>
8. Complete Agreement. The Agreement, together with the tariff, is the
------------------
complete agreement of the parties and supersedes all other prior agreements
and representations concerning its subject matter. Once this Amendment has
been fully executed, any further amendments must be in writing and signed
by both parties.
This offer shall remain open and be capable of being accepted by Customer until
August 19, 1996.
Accepted and Agreed:
MCI Telecommunications Corporation Smartalk Teleservices, Inc.
By : /s/ Edward W. Smith By : /s/ Robert H. Lorsch
Name : Edward W. Smith Name : Robert H. Lorsch
Title : Director Title : President
Date : 9/10/96 Date : 8/20/96
3
-MCI CONFIDENTIAL-
<PAGE>
*
EXHIBIT A
International MCI PRISM I Service Rates
---------------------------------------
Customer shall pay the following rates per minute for international MCI
PRISM I Service to locations in the following countries, in lieu of standard
Tariffed rates and discounts:
Anguilla [ ]
Argentina [ ]
Australia [ ]
Austria [ ]
Bahamas [ ]
Bangladesh [ ]
Barbados [ ]
Belgium [ ]
Bermuda [ ]
Bolivia [ ]
British V.I. [ ]
Brazil [ ]
Canada [ ]
Cayman Islands [ ]
Chile [ ]
Columbia [ ]
Costa Rica [ ]
Czech [ ]
Dominicia [ ]
Ecuador [ ]
Egypt [ ]
El Salvador [ ]
Ethiopia [ ]
Finland [ ]
France [ ]
Germany [ ]
Grenada [ ]
Guatemala [ ]
Haiti [ ]
Honduras [ ]
Hong Kong [ ]
India [ ]
Ireland [ ]
Israel [ ]
Italy [ ]
Jamaica [ ]
Japan [ ]
EXA-1
-MCI CONFIDENTIAL-
<PAGE>
*
Korea [ ]
Netherlands [ ]
Nevis [ ]
Nicaragua [ ]
Nigeria [ ]
Norway [ ]
Panama [ ]
Paraguay [ ]
Peru [ ]
Philippines [ ]
Portugal [ ]
Russia [ ]
Saudi Arab. [ ]
Slovakia [ ]
South Africa [ ]
Spain [ ]
St. Kitts [ ]
St. Lucia [ ]
St. Vincent [ ]
Sweden [ ]
Switzerland [ ]
Syria [ ]
Taiwan [ ]
Trinidad [ ]
Turks [ ]
United Arab [ ]
United Kingdom [ ]
Uruguay [ ]
Venezuela [ ]
Vietnam [ ]
Mexico per minute rates per the following:
<TABLE>
<CAPTION>
Range Standard Economy
<S> <C> <C>
1 [ ] [ ]
2 [ ] [ ]
3 [ ] [ ]
4 [ ] [ ]
5 [ ] [ ]
6 [ ] [ ]
7 [ ] [ ]
8 [ ] [ ]
</TABLE>
EXA-2
-MCI CONFIDENTIAL-
<PAGE>
Portions of this exhibit for which confidential treatment
has been requested are marked by brackets [ ] and the
pages of which they appear contain an asterisk(*) in the
upper right hand corner. The confidential information omitted
has been filed separately with the Securities and Exchange
Commission.
EXHIBIT 10.15
AGREEMENT
Agreement Number 526015
-------
This Agreement entered into this 4th day of October, 1995, by and between West
Interactive Corporation, 9223 Bedford Avenue, Omaha, Nebraska 68134, ("WIC")
and SMARTALK TELESERVICES, INC., 2934 1/2 Beverly Glen Circle, Suite 390, Los
Angeles, CA 90077 ("Client").
1. SERVICES
WIC agrees to provide an interactive 800 number audiotex service for Client
utilizing its user-interactive system (the "Service").
2. TERM
This Agreement will be effective the 4th day of October, 1995, and shall
continue for a minimum period of two (2) years. Upon completion of the initial
period, either party may terminate this Agreement upon thirty (30) days prior
written notice by either party to the other. WIC will provide Client with
written notification if payments are more than ten (10) days in arrears. If
Client has not brought account current within ten (10) days of notification, WIC
may terminate this Agreement and discontinue service.
3. FEES
Client shall pay a fee set forth in Attachments for all indicated and accepted
Services. Each prepaid calling card programs will have its own service
confirmation. New programs will be undertaken only upon agreement of a mutually
acceptable fee schedule for each anticipated program. Call minutes will be
billed based on WIC system reports. Call minute reports will be provided to
Client on a daily basis. All fees will be due on the 15th of the month
following the thirty (30) days after the month in which charges are incurred.
Prices quoted are valid for sixty (60) days providing long distance carrier fee
structures remain the same for services utilized by WIC.
4. MAINTENANCE OF SERVICE
WIC agrees to use its best efforts to provide and maintain the system operating
the Service in accordance with the operating specifications and to ensure
adequate facilities are available. WIC assumes, however, no responsibility to
Client for any interruption of Service which is caused by malfunction or failure
of equipment or circumstances beyond the control of WIC.
5. WARRANTY
WIC warrants that it will provide the Service as described in this Agreement.
In no event shall WIC be liable to Client for any damages, lost profits, or
consequential damages of the Client or for any claims or demands against Client
by a third party as a result of the use of the Service.
6. SOFTWARE SYSTEM
CONFIDENTIALITY
The confidential information protected under this Agreement shall consist of the
computer system software operating the Service and all information and
proprietary data related thereto, and any derivative works thereof as well as
research, development, trade secrets or business affairs of WIC, its employees,
subsidiaries, affiliates or agents. Confidential information shall be kept in
strictest confidence and shall be protected by all reasonable and necessary
security measures. The confidential information shall not be released except to
employees utilizing this Service in the ordinary course of their employment.
Client is prohibited from using any portion of the computer system or Service
for any purposes other than those provided for under this Agreement.
7. DATA CONFIDENTIALITY
WIC shall hold in strictest confidence all information relating to the
transactions processed and business affairs of Client. Nothing in this
paragraph, however, shall prevent or prohibit WIC from providing access to such
information upon request for purpose of regulation, program approval
examination, or investigation upon order by applicable state or federal
regulatory agencies and authorities as may be required by law or judicial or
administrative process.
8. TRANSPORTABILITY OF NUMBER
WIC agrees to release to the Client, upon request, the 800 number(s) assigned to
the Client's program. WIC will use its best efforts to execute all necessary
documents to effect transfer as quickly as possible assuming the following
conditions are met.
A. Prior to release, Client's account must be current.
B. Client agrees to pay WIC for all current and anticipated charges associated
with the 800 number prior to transfer.
<PAGE>
9. INDEMNIFICATION
Client shall indemnify and hold harmless WIC from any and all claims, actions,
suits, proceedings, costs, expenses, damages, and liabilities including
attorneys' fees arising out of, connected with, or resulting from the use of the
Service provided by WIC. Client assumes complete responsibility for all tariffs
and sales taxes due and associated with the prepaid calling card program.
10. MISCELLANEOUS
A. When the cardholder renews or recharges the card by telephone and with the
use of a credit card, WIC will, upon receipt of payment from the credit card
issuer, pay to SMARTALK monies due less charges set forth in the attached
service confirmation. WIC may, at its option, hold a portion of such payments
in a reserve account against future chargebacks or adjustments from the credit
card processor or any other outstanding balances.
B. This Agreement, including all Attachments, constitute the complete
Agreement superseding any previous agreements or understanding. It may be
modified only in writing and signed by both parties.
C. All notices required hereunder shall be in writing and shall be deemed duly
given on the date mailed, if sent by registered or certified mail, return
receipt requested, as follows:
(1) If to Client:
Attn: Robert H. Lorsch
President
SMARTALK TELESERVICES, INC.
2934 1/2 Beverly Glen Circle, Suite 390
Los Angeles, CA 90077
(2) If to WIC:
Attn: Nancee Berger
Executive Vice President
WIC Corporation
9223 Bedford Avenue
Omaha, NE 68134
or to such other addresses as either party may designate from time to time by
written notice to the other party hereto.
D. Either party, at its option, may assign this Agreement, with the consent of
the other party, which consent will not unreasonably be withheld, to any other
party.
E. No waiver by either party hereto of any breach of this Agreement by the
other shall be deemed to be a waiver of any preceding or succeeding breach
thereof.
F. This Agreement is not a joint venture or partnership, and each party is
entering the relationship as a principal and not as an agent of the other.
G. If any portion of this Agreement shall be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision thereof, and this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
H. This Agreement shall be construed in accordance with the laws of the State
of Nebraska.
I. Client agrees that any legal action involving this Agreement in any way
will be instituted in the State of Nebraska, and the Client consents to
jurisdiction of the courts of the State of Nebraska over his person for purpose
of such legal action.
IN WITNESS WHEREOF, the parties have signed this Agreement the date above
written.
West Interactive Corporation
By /s/
------------------------------
Executive Vice President
Date:
---------------------------
SMARTALK TELESERVICES, INC.
By /s/ Robert H. Lorsch
------------------------------
President
------------------------------
Title
Date: 10/6/96
---------------------------
<PAGE>
ATTACHMENT A
SMARTALK INTERNATIONAL RATES
<TABLE>
<CAPTION>
COUNTRY/
AREA PRICE
COUNTRY CLASS CODE PER MIN
======= ===== ==== =======
<S> <C> <C> <C>
Algeria AFRICA 213 [
Angola AFRICA 244
Ascension Islands AFRICA 247
Benin AFRICA 229
Botswana AFRICA 267
Burkina Faso AFRICA 266
Burundi AFRICA 257
Cameroon AFRICA 237
Central African Rep. AFRICA 236
Chad AFRICA 235
Comoros AFRICA 269
Congo AFRICA 242
Djibouti AFRICA 253
Egypt AFRICA 20
Equatorial Guinea AFRICA 240
Eritrea AFRICA 291
Ethiopia AFRICA 251
Gabon Republic AFRICA 241
Gambia AFRICA 220
Ghana AFRICA 233
Guinea, People's Rep AFRICA 224
Guinea-Bissau AFRICA 245
Ivory Coast AFRICA 225
Kenya AFRICA 254
Kiribati AFRICA 686
Lesotho AFRICA 266
Liberia AFRICA 231
Libyan Arab People's Soc. Jam. AFRICA 218
Madagascar, Dem Rep of AFRICA 261
Mauritius AFRICA 230
Morocco, Kingdom of AFRICA 212
Mozambique AFRICA 258
Namibia AFRICA 264
Niger Republic AFRICA 227
Nigeria, Fed Rep of AFRICA 234
Reunion Island AFRICA 262
Rwanda AFRICA 250
Sao Tome AFRICA 239
Senegal Rep. AFRICA 221
Sychelles AFRICA 248
Sierra Leone AFRICA 232
South Africa, Rep of AFRICA 27
Swaziland AFRICA 268
Tanzania AFRICA 255
Togo, Rep of AFRICA 228 ]
</TABLE>
Page 1
<PAGE>
ATTACHMENT A
SMARTALK INTERNATIONAL RATES
<TABLE>
<CAPTION>
COUNTRY/
AREA PRICE
COUNTRY CLASS CODE PER MIN
======= ===== ==== =======
<S> <C> <C> <C>
Tunisia AFRICA 216 [
Uganda AFRICA 256
Zaire, Rep of AFRICA 243
Zambia AFRICA 260
Zimbabwe AFRICA 263
Antartica (Casey Base) ANTARTICA 672
Antartica (Scott Base) ANTARTICA 672
Bangladesh ASIA 880
Bhutan ASIA 975
Burma (Myanmar) ASIA 95
Diego Garcia ASIA 246
India ASIA 91
Laos ASIA 856
Macao ASIA 853
Maldives, Rep of ASIA 960
Nepal ASIA 977
Pakistan ASIA 92
Sri Lanka, Dem Soc Rep of ASIA 94
Australia AUST 61
Australian External Territories AUST 61
New Zealand AUST 64
Belize C AMER 501
El Salvador C AMER 503
Guatemala C AMER 502
Honduras C AMER 504
Nicaragua C AMER 505
Panama, Rep of C AMER 507
Canada (Band Average) CANADA
Anguilla CARRIB 809
Antigua CARRIB 809
Bahamas CARRIB 809
Barbados CARRIB 809
Bermuda CARRIB 809
British Virgin Islands CARRIB 809
Cayman Islands CARRIB 809
Dominica CARRIB 809
Dominican Republic CARRIB 809
Grenada CARRIB 809
Jamaica CARRIB 809
Montserrat CARRIB 809
Nevis CARRIB 809
St. Kitts CARRIB 809
St. Lucia CARRIB 809
St. Vincent & The Grenadines CARRIB 809
Trinidad and Tobago CARRIB 809 ]
</TABLE>
Page 2
<PAGE>
ATTACHMENT A
SMARTALK INTERNATIONAL RATES
<TABLE>
<CAPTION>
COUNTRY/
AREA PRICE
COUNTRY CLASS CODE PER MIN
======= ===== ==== =======
<S> <C> <C> <C>
Turks and Ciacos Islands CARRIB 809 [
China, Peoples Rep. of CHINA 86
Mongolian People's Rep. CHINA 976
Cuba CUBA 53
Albania E EURO 355
Armenia E EURO 7
Azerbaijan E EURO 7
Belarus E EURO 7
Bosnia-Hercegovena, Rep. of E EURO 387
Croatia, Rep. of E EURO 385
Czech Republic E EURO 42
Estonia E EURO 372
Georgia E EURO 7
Hungary E EURO 36
Kazakhstan E EURO 7
Kyrgyzstan E EURO 7
Latvia E EURO 371
Lithuania E EURO 370
Macedonia E EURO 389
Poland, Rep of E EURO 48
Romania, Soc Rep of E EURO 40
Russia E EURO 7
Slovakia E EURO 42
Slovenia, Rep. Of E EURO 386
Tajikistan E EURO 7
Turkmenistan E EURO 7
Ukraine E EURO 7
Uzbekistan E EURO 7
Yugoslavia, Fed Rep of E EURO 381
Brunei INDO 673
Indonesia INDO 62
Malaysia INDO 60
Bahrain M EAST 973
Gibralter M EAST 350
Iran M EAST 98
Iraq M EAST 964
Israel M EAST 972
Jordan M EAST 962
Kuwait M EAST 965
Lebanon M EAST 961
Mauritania, Islamic Rep of M EAST 222
Oman M EAST 968
Qatar M EAST 974
Saudi Arabia M EAST 966
Syrian Arab Rep. M EAST 963 ]
</TABLE>
Page 3
<PAGE>
ATTACHMENT A
SMARTALK INTERNATIONAL RATES
<TABLE>
<CAPTION>
COUNTRY/
AREA PRICE
COUNTRY CLASS CODE PER MIN
======= ===== ==== =======
<S> <C> <C> <C>
Turkey M EAST 90 [
United Arab Emirates M EAST 971
Yemen, Rep of M EAST 967
Mexico MEXICO 52
Greenland N ATL 299
Iceland N ATL 354
Aruba OTHER 297
Cape Verde Islands OTHER 238
Christmas & Cocos Islands OTHER 672
Cook Islands OTHER 682
Costa Rica OTHER 506
French Antilles OTHER 596
Guadaloupe OTHER 590
Guatanamo Bay OTHER 5399
Haiti OTHER 509
Malawi OTHER 265
Mali Republic OTHER 223
Malta OTHER 356
Marshall Islands OTHER 692
Mayotte Island OTHER 269
Moldava OTHER 373
Nauru OTHER 674
Netherland Antilles OTHER 599
New Caledonia OTHER 687
Niue OTHER 683
Norfolk Island OTHER 672
Saipan OTHER 670
St. Helena OTHER 290
St. Pierre and Miquelon OTHER 508
Tuvalu OTHER 688
Vanuatu Republic OTHER 678
Wallis & Futuna OTHER 681
American Samoa PAC RIM 684
Cambodia PAC RIM 855
Fiji Islands PAC RIM 679
French Polynesia PAC RIM 689
Guam PAC RIM 671
Hong Kong PAC RIM 852
Japan PAC RIM 81
Korea, Rep. Of PAC RIM 82
Micronesia, Fed. States of PAC RIM 691
Palau, Rep of PAC RIM 680
Papua New Guinea PAC RIM 675
Philippines PAC RIM 63
Singapore, Rep of PAC RIM 65 ]
</TABLE>
Page 4
<PAGE>
ATTACHMENT A
SMARTALK INTERNATIONAL RATES
<TABLE>
<CAPTION>
COUNTRY/
AREA PRICE
COUNTRY CLASS CODE PER MIN
======= ===== ==== =======
<S> <C> <C> <C>
Solomon Islands PAC RIM 677 [
Taiwan PAC RIM 886
Thailand PAC RIM 66
Tonga Islands PAC RIM 676
Vietnam PAC RIM 84
Western Samoa PAC RIM 685
Argentina S AMER 54
Bolivia S AMER 591
Brazil S AMER 55
Bulgaria S AMER 359
Chile S AMER 56
Colombia S AMER 57
Ecuador S AMER 593
Falkland Islands S AMER 500
French Guiana S AMER 594
Guyana S AMER 592
Paraguay S AMER 595
Peru S AMER 51
Suriname S AMER 597
Uruguay S AMER 598
Venezuela S AMER 58
Andorra W EURO 33
Austria W EURO 43
Belgium W EURO 32
Cyprus W EURO 357
Denmark W EURO 45
Facroe Island W EURO 298
Finland W EURO 358
France (Andorra, Monaco) W EURO 33
Germany, Fed Rep of W EURO 49
Greece W EURO 30
Ireland W EURO 353
Italy W EURO 39
Liechtenstein W EURO 41
Luxembourg W EURO 352
Monaco W EURO 33
Netherlands W EURO 31
Norway W EURO 47
Portugal W EURO 351
San Marino W EURO 378
Spain W EURO 34
Sweden W EURO 46
Switzerland W EURO 41
United Kingdom W EURO 44
Vatican City W EURO 39 ]
</TABLE>
Page 5
<PAGE>
Portions of this exhibit for which confidential treatment *
has been requested are marked by brackets [ ] and the
pages on which they appear contain an asterick (*) in the
upper right hand corner. The confidential information
omitted has been filed separately with the Securities
and Exchange Commission.
MCI Telecommunications
Corporation
205 North Michigan Avenue
Chicago, IL 60601
312 856-2121
EXHIBIT 10.20
PREPAID CARRIER REFERRAL PROGRAM AGREEMENT
This Agreement (this "Agreement") by and between MCI TELECOMMUNICATIONS
CORPORATION ("MCI"), 3 Ravinia Drive, Atlanta, Georgia 30346, and SMARTTALK
TELESERVICES INC. ("Company"), located at 1640 S. Sepulveda Blvd., Suite 500,
Los Angeles, CA 90025.
1. Lead Generation and Referral Fees.
a. Subject to the terms of this non-exclusive Agreement, Company will
compensate MCI for the sales of Company's prepaid card service(s) ("Service") to
persons or entities for which MCI has submitted leads for such prospects
("Lead(s)") to Company.
b. A Lead shall be in writing and include the Lead's name and the name of the
MCI sales representative who provided the Lead.
c. For Leads that result within one hundred eighty (180) days of receipt of a
Lead in a sale of a Company Service, Company will pay MCI a referral fee as
follows:
Rate Per Unit Paid Referral Fee paid
------------------ -----------------
by Lead to Company by Company to MCI
------------------ -----------------
$0 to [ [ ] from each sale of the Service to Lead
] and above [ ] from each sale of the Service to Lead
d. Definitions.
i. "Unit" means and refers to the basic measurement of use provided
by the Service.
ii. "Gross Revenue" means the amounts billed to Lead for the
Company's Service before promotions and/or credits, and excluding
taxes, surcharges, and Fulfillment charges.
iii. Fulfillment" means the design, production, printing and
distribution costs associated with the Service.
e. Company will pay the referral fees owed to MCI within 60 days of the end of
its billing cycle month.
f. After the Effective Date of this Agreement and continuing through the term
of the Agreement, but not more than once semi-annually, MCI may request, and the
Company shall promptly provide MCI in writing or in a machine readable format as
mutually agreed to between the parties, Company's records, data and invoices
pertaining to the Company's
MCI CONFIDENTIAL
1
<PAGE>
total sales of the Service to the Lead provided by MCI. MCI may review this
information for the sole purpose of determining the Company's compliance with
the terms of this Agreement.
g. This Agreement does not create a commitment by MCI to provide leads to the
Company. MCI is not required to provide any minimum number of leads, either in
terms of revenue or number of prospects provided. Furthermore, all business
dealings concerning the Company's Service shall be entirely between the Company
and the Lead. After the Lead is submitted, Company has the full responsibility
to promote, market, and sell its Service, and shall have all contact with Lead
concerning the sale of its Service.
h. When Company provides Service(s) to Lead(s) pursuant to this Agreement,
Company agrees that 100% of such Service(s) will use inbound and outbound
services provided by MCI to Customer under Section 3(e) of the MCI/Company
Carrier Agreement signed by MCI on November 9, 1995.
2. Relationship of Parties.
a. Neither party shall have the authority to bind the other by contract or
otherwise or to make representations as to the policies or procedures of the
other party. Both parties acknowledge and agree that this Agreement does not
constitute or create an agency, joint venture, partnership, employee
relationship or franchise between the parties.
b. Company employees will not be or be deemed to be MCI employees or joint
employees. Company assumes full responsibility for the acts of its employees
and for their supervision, daily direction and control. MCI will not be
responsible for worker's compensation, disability benefits, unemployment
insurance, withholding taxes, social security and any other taxes or benefits
for Company's employees.
c. MCI employees will not be or be deemed to be Company employees or joint
employees. MCI assumes full responsibility for the acts of its employees and
for their supervision, daily direction and control. Company will not be
responsible for worker's compensation, disability benefits, unemployment
insurance, withholding taxes, social security and any other taxes or benefits
for MCI's employees.
3. Product Training.
Company will provide sales materials to MCI in order to assist in the provision
of Leads.
4. Standards of Conduct.
In performing duties under this Agreement, both parties will observe the highest
standard of integrity and fair dealing with members of the public. Neither
party will do anything that would tend to discredit, dishonor, reflect adversely
upon or in any manner injure the reputation of the other party.
MCI CONFIDENTIAL
2
<PAGE>
*
5. Confidentiality.
a. Any confidential specifications, drawings, sketches, data or technical or
business information, and any other confidential material ("Information"),
furnished or disclosed by MCI to Company hereunder, will be deemed the exclusive
property of MCI. In addition, any customer names or lists identifying MCI
customers or Company customers as such and related information or data
("Customer Information") are the exclusive property of MCI or Company as
applicable, and are to be used by the other party solely in the performance of
its obligations and duties hereunder and are to be returned to the other party
upon termination of this Agreement.
b. During the term of this Agreement and for a period of three (3) years after
termination of this Agreement, recipient agrees not to reveal, divulge, make
known, sell, exchange, lease or in any other way transfer any Information or
Customer Information to any third party or to utilize such Information or
Customer Information in direct or indirect competition with the other party or
any of its other affiliates. Both parties agree that monetary damages or breach
of its obligations under this Section may not be adequate and that the non-
breaching party will be entitled to injunctive relief with respect thereto.
6. Term and Termination.
a. This trial Agreement shall commence on the date the Agreement is executed
by both parties and shall continue in full force and effect for a period of [
] days. Thereafter, it shall continue month to month unless terminated by
either party on thirty (30) days written notice.
b. Either party may terminate this Agreement immediately on written notice if
the other party is in material breach of a material provision of this Agreement,
which breach has not been remedied within fifteen (15) days after written notice
thereof.
c. Either party may terminate this Agreement on [ ] day notice to
the other party.
d. After normal expiration of the Term, Company shall continue to pay to MCI
referral fees at the rate in Section 1, for a period of six (6) months.
e. If MCI terminates this Agreement pursuant to Section 6(b) or if Company
terminates this Agreement for a reason other then 6(b) of this Agreement,
Company's commissions shall survive for a period of one (1) year.
7. Limitation of Liability
a. In no event shall either party be liable to the other for any indirect,
special, incidental or consequential loss or damage of any kind, including lost
profits (whether or not the
MCI CONFIDENTIAL
3
<PAGE>
parties have been advised of the possibility of such loss or damage) by reason
of any act or omission in either party's performance under this Agreement.
b. Company agrees that MCI shall have no liability to any of Company's
customers for any service provided to such customer by Company.
8. Indemnification.
Company agrees to indemnify, defend and hold harmless MCI, its parent company,
subsidiaries, affiliates, employees, agents and assigns from any and all
liability to Company's customers or other third parties (including but not
limited to liabilities, judgments, damages, losses, claims, costs and expenses,
including reasonable attorneys fees) arising from (i) a breach by Company of its
obligations to customers where MCI submitted a lead through this Agreement, (ii)
the acts, errors, representations, misrepresentations, or negligence of Company,
its employees, affiliates, distributors or agents, or (iii) violation by Company
of a third party's trade secrets, proprietary information, trademarks, copyright
or patent rights in connection with the provision of goods and/or services.
9. Notices.
All notices required or permitted hereunder and communications relating to this
Agreement shall be in writing and shall be deemed sufficiently given on mailing
by certified mail, return receipt requested, or on personal delivery:
If to MCI:
MCI Telecommunications Corporation
700 South Flower Street, Suite 1800
Los Angeles, CA 90017
ATTN: Branch Manager
with a copy to:
MCI Telecommunications Corporation
205 N. Michigan Avenue, Suite 3000
Chicago, Illinois 60630
ATTN: Alternate Channels/Legal
If to Company:
SmarTalk Teleservices, Inc.
1640 S. Sepulveda Blvd.
Suite 500
Los Angeles, CA 90025
MCI CONFIDENTIAL
4
<PAGE>
ATTN: Robert Lorsch, CEO
10. Compliance with Law.
a. Company shall, at its own expense, operate in full compliance with all
laws, rules and regulations applicable to, and maintain in force all licenses
and permits required for, its performance under this Agreement.
b. Company will notify MCI in writing immediately of the commencement or
threatened commencement of any action, suit or proceeding, and of the issuance
or threatened issuance of any order, writ, injunction, award or decree of any
court, agency or other governmental instrumentality, involving Company's
activities under this Agreement or which may affect Company's ability to perform
its obligations hereunder.
11. Non-Waiver.
No failure by either party to take action on account of any default by the other
will constitute a waiver of any such default or of the performance required of
the other.
12. Competition.
Company understands and Accepts that, as part of MCI's normal business policy
and practices and its obligations under the law, MCI will engage in extensive
marketing efforts in attempt to sell its services to the public and that such
efforts will result in active competition with Company for the business of users
who are Company's customers or prospects. Accordingly, Company agrees that it
will not protest, object, or disapprove, nor be heard to protest, object, or
disapprove of MCI's competitive practices, to any of the Leads provided by MCI.
Under no circumstances shall any inference be derived that MCI's entry into this
Agreement with Company means that MCI will restrict its effort to compete
against Company in any way. Company also understands and accepts that MCI may
enter into similar agreements with competitors of Company to provide leads.
13. Assignment.
Company may not assign or otherwise transfer this Agreement or any of its
interest herein without the prior and express written consent to MCI. Neither
the whole nor any part of the interest of Company in this Agreement will be
transferred or assigned by operation of law.
14. Severability.
No provision of this Agreement which may be deemed unenforceable will in any way
invalidate any other provisions of this Agreement, all of which will remain in
full force and effect.
MCI CONFIDENTIAL
5
<PAGE>
15. Controlling Law and Entire Agreement.
This Agreement will be governed by the domestic laws of the State of New York;
constitutes the entire Agreement between MCI and Company with respect to the
subject matter hereof; and supersedes all prior Agreements and representations,
written or oral, concerning the subject matter of this Agreement. This
Agreement cannot be changed or modified except by written amendment signed by
authorized representatives of MCI and Company.
16. Arbitration.
Any dispute arising out of or related to this Agreement, which cannot be
resolved by negotiation (including, without limitation, any dispute over the
arbitrability of an issue), shall be settled by binding arbitration in
accordance with the J.A.M.S./ENDISPUTE Arbitration Rules and Procedures
("Endispute Rules"), as amended by this Agreement. Unless the parties select a
different location, the arbitration shall be held in New York, New York. The
costs of arbitration, including the fees and expenses of the arbitrator, shall
be shared equally by the parties unless the arbitration awarded provides
otherwise. Each party shall bear the cost of preparing and presenting its case.
The parties agree that this provision and the Arbitrator's authority to grant
relief shall be subject to the United States Arbitration Act, 9 U.S.C. 1-16 et
seq. ("USAA"), the provisions of this Agreement, and the ABA-AAA Code of Ethics
for Arbitrators in Commercial Disputes. The parties agree that the arbitrator
shall have no power or authority to make awards or issue orders of any kind
except as expressly permitted by this Agreement, and in no event shall the
arbitrator have the authority to make any award that provides for punitive or
exemplary damages. The Arbitrator's decision shall follow the plain meaning of
the relevant documents, and shall be final and binding. The award may be
confirmed and enforced in any court of competent jurisdiction. All post-award
proceedings shall be governed by the USAA.
MCI TELECOMMUNICATIONS SMARTALK TELESERVICES INC.
CORPORATION
By: /s/ Edward Smith By: /s/ Robert H. Lorsch, Chairman
------------------------ ------------------------------------
Name: Edward Smith Name: Robert H. Lorsch
---------------------- ----------------------------------
(Please Print) (Please Print)
Title: Director Title: Chairman/CEO
--------------------- ---------------------------------
Date: 7/10/96 Date: June 21, 1996
---------------------- ----------------------------------
MCI CONFIDENTIAL
6
<PAGE>
Portions of this exhibit for which confidential treatment
has been requested are marked by brackets [ ] and the
pages on which they appear contain an asterick (*) in the
upper right hand corner. The confidential information
omitted has been filed separately with the Securities and
Exchange Commission.
EXHIBIT 10.21
WHOLESALE DISTRIBUTION AGREEMENT
THIS WHOLESALE DISTRIBUTION AGREEMENT (the "Agreement") is made effective
as of the 1st day of June, 1996 (the "Effective Date") by and between West
Interactive Corporation, a Delaware corporation ("WIC") and SmarTalk
TeleServices, Inc., a California corporation ("SmarTalk").
RECITALS
A. SmarTalk is a reseller of telecommunication services including, but not
limited to, prepaid calling card services, and holds all consents and
authorizations and has satisfied all filing, application and bonding
requirements under all federal and state laws that are required to provide such
services.
B. WIC desires to obtain SmarTalk's prepaid calling card services as more
particularly described herein (the "Prepaid Calling Card Services") and
distribute them as a wholesale distributor.
C. SmarTalk desires to provide the Prepaid Calling Card Services on the terms
and conditions set forth herein.
WIC and SmarTalk agree as follows:
1. PREPAID CALLING CARD SERVICES.
-----------------------------
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(a) SmarTalk. SmarTalk shall provide the Prepaid Calling Card Services
--------
described in the attached Exhibit A. Exhibit A shall include all of the Prepaid
Calling Card Services offerings set forth in SmarTalk's tariffs. None of the
Prepaid Calling Card Services currently listed in Exhibit A shall be deleted
from Exhibit A so long as a WIC client is using a particular service. Such
offerings may be modified from time to time at SmarTalk's discretion provided,
however, that SmarTalk shall give WIC sixty (60) calendar days written notice
before modifying or deleting a Prepaid Calling Card Service from Exhibit A.
SmarTalk shall give WIC prompt notice of any changes, additions or deletions to
its tariffed Prepaid Calling Card Services which shall supplement Exhibit A.
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(b) Selection by West. West may from time to time select tariffed Prepaid
-----------------
Calling Card Services for its clients from those services listed on Exhibit A by
giving SmarTalk written notice of its service selection or of changes to such
selection. A current list of WIC clients and the Prepaid Calling Card Services
provided to such clients will be attached to this Agreement as Exhibit B which
may be modified from time to time at WIC's discretion.
(c) Designation as Service Provider. SmarTalk shall be the designated
-------------------------------
service provider disclosed (i) on the prepaid calling cards; (ii) whenever
reasonably possible, on the package; and (iii) in promotional literature
distributed by WIC's clients for Prepaid Calling Card Services. In addition,
SmarTalk shall provide to WIC for distribution to its clients, all disclosures
that must be made on the prepaid calling cards that are customary in the
industry or required by federal or state law. All disclosures will be
customized for each WIC client to reflect the rates, terms and other information
specific to each WIC client's prepaid calling card program and to comply with
the Regulatory Requirements (as hereinafter defined) for the jurisdictional
markets serviced by such WIC client.
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(d) Additional Services. The Prepaid Calling Card Services shall also
-------------------
include, but shall not be limited to, the following additional services:
. Customer Service
. Fraud Detection/Control
. Tax Preparation and Submission
(collectively, the "Additional Services").
(e) SmarTalk Resources. SmarTalk shall assign the personnel and other
------------------
corporate resources required to provide the Prepaid Calling Card Services to
each WIC client and to perform its other obligations under this Agreement. All
SmarTalk personnel performing Prepaid Calling Card Services, and particularly
Additional Services for WIC clients, shall be properly trained in all aspects of
the Prepaid Calling Card Services provided to such WIC clients.
2. CUSTOMER SERVICE.
----------------
(a) Customer Inquiries. SmarTalk shall respond to customer inquiries from
------------------
users of prepaid calling cards distributed by WIC clients that identify SmarTalk
as the service provider ("Calling Card Users"). SmarTalk shall use its
reasonable best efforts to respond diligently to all inquiries and resolve all
disputes related to the Prepaid Calling Card Services; except that, if SmarTalk
determines that it is necessary for WIC or a WIC client to resolve a particular
customer inquiry (e.g. providing a refund of the calling card purchase price),
----
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then SmarTalk shall contact the designated WIC representative described in
Section 6(b). SmarTalk shall provide customer service in accordance with the
following terms:
(i) Standard Customer Service. SmarTalk shall provide its Standard
Customer Service twenty-four (24) hours per day, seven (7) days per week
including holidays, in compliance with SmarTalk's applicable tariffs. Any
inquiry, problem, or dispute that is not handled by Standard Customer Support
personnel will be referred to Enhanced Customer Service for action.
(ii) Enhanced Customer Service. SmarTalk shall provide Enhanced Customer
Service to respond to any Calling Card User inquiries that are not satisfied by
Standard Customer Service. Enhanced Customer Service shall be available Monday
through Friday from 9:00 A.M. to 6:00 P.M. PST and on Saturdays from 10:00 A.M.
to 3:00 P.M. PST, with no service provided on Sundays or holidays. If SmarTalk
is unable to resolve the Calling Card User's inquiry at the Standard Customer
Service level, then SmarTalk shall make at least two (2) phone calls and write
at least one (1) letter in an effort to contact such Calling Card User and
resolve the inquiry. Such efforts to contact the Calling Card User shall be
completed within ten (10) days of the initial Calling Card User inquiry.
(iii) Emergency PINs. Starting August 1, 1996, SmarTalk shall make
available to Calling Card Users emergency PINs allowing for 15 minutes of
emergency calling time on a prepaid calling card when, in the determination of a
Standard or Enhanced Customer Service operator, it is necessary to resolve a
complaint online.
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(iv) Customer Service Procedures. SmarTalk will cooperate with WIC to
develop written customer service procedures detailing the procedures SmarTalk
will follow to service Calling Card Users. SmarTalk shall provide WIC with
written customer service procedures by July 31, 1996 which shall be subject to
WIC's written approval. These customer service procedures, which will be
attached as Exhibit C, may be modified by the parties from time to time. If a
major issue arises during a Calling Card User inquiry, SmarTalk will notify the
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*
designated WIC representative described in Section 6(b) of such matter within
twenty-four (24) hours.
(b) Customer Service Report. SmarTalk shall deliver to WIC weekly via
-----------------------
telecopier, a log of all Calling Card User inquiries. The log shall include the
identification number on the calling card, the name and address of the Calling
Card User, a description of the inquiry, a description of the resolution and
whether there is the need for additional follow-up.
3. FRAUD DETECTION/CONTROL. Based on SmarTalk's receipt of originating and
-----------------------
terminating caller identification and PIN code, SmarTalk shall provide its
specialized fraud control services to monitor suspicious activities, and
SmarTalk agrees to provide its standard fraud control and detection services
described on Exhibit D for each WIC client using the Prepaid Calling Card
Services.
4. TAX PREPARATION. SmarTalk shall prepare, pay, and timely file all
---------------
necessary tax returns and filings associated with the Prepaid Calling Card
Services after the Effective Date.
5. PRICING; PAYMENTS.
-----------------
(a) Service Fees. WIC shall pay SmarTalk [ ] for each
------------
In-Only minute and [ ] for each Redirected minute
used by Calling Card Users (collectively the "Service Fees").
(b) Tax Preparation Fees. Each month, WIC shall pay SmarTalk tax
--------------------
preparation fees [ ] for Prepaid Calling
Card Services [ ]. WIC
shall be liable for all taxes due. Each month, WIC shall pay SmarTalk the
applicable
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taxes on Prepaid Calling Card Services provided to WIC's clients which a
reseller is obligated to pay.
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<PAGE>
(c) Payment of Service Fees. Commencing on July 30, 1996 and on the
-----------------------
last day of each month during the term of this Agreement, WIC shall pay SmarTalk
the Service Fees earned during the previous month pursuant to an invoice which
SmarTalk shall provide to WIC no later than two weeks before each payment is
due. The Service Fees for each month will be based upon information provided to
WIC from SmarTalk (where SmarTalk will obtain such information from SmarTalk's
calling card platform service provider), which shall be paid based upon WIC's
records pertaining to Calling Card User minutes. All payments that are to be
made to SmarTalk may be made by check or wire transfer at WIC's option.
(d) Setoff. WIC may setoff any amounts SmarTalk owes WIC against the
------
monthly Service Fees.
(e) Reporting/Auditing Rights. WIC may, upon five (5) days advance
-------------------------
notice to SmarTalk, examine all of SmarTalk's books and records pertaining to
Prepaid Calling Card Services offered by WIC clients ("Books and Records"). All
such examinations shall take place at SmarTalk's offices during normal business
hours. WIC shall bear the costs incurred for such examinations. SmarTalk shall
make the Books and Records available to WIC during such examination or audit
described herein and shall cooperate with WIC in completing its examination or
audit. In addition to the above-described examination rights, WIC may perform,
or cause the performance of an audit of the Books and Records no more than twice
per calendar year. Such audit may be performed by WIC or an independent
accountant selected by WIC. WIC shall pay all costs relating to the
performance of such audit. Notwithstanding the preceding sentence, if such
audit reveals that SmarTalk has overcharged WIC for any Service
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Fees, Taxes or other sums owed by WIC pursuant to this Agreement, and the amount
of the overcharge is
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<PAGE>
four percent (4%) or more of the amount actually owed as determined by such
audit, SmarTalk shall not only immediately refund to WIC the amount of the
overcharge together with interest on such amount at the rate of ten percent
(10%) per annum accrued from the date such amount was paid to the date refunded,
but also shall pay the costs of such audit.
6. WIC Clients; Transactional Records and Confidentiality.
------------------------------------------------------
(a) WIC Clients. SmarTalk (including its employees, representatives and
-----------
agents) shall have no contact with WIC's clients (including their employees,
representatives and agents) regarding matters related to the Prepaid Calling
Card Services (including Calling Card User inquiries) unless (i) requested by
WIC; or (ii) the WIC client, on its own, contacts SmarTalk. SmarTalk may state
in its promotional material and advertising that WIC is a SmarTalk client,
provided that the terms of this Agreement and other information given to
SmarTalk by WIC is treated as Confidential Information in accordance with
subsection (d) below. SmarTalk shall not refer to any WIC client as its
customer or make any reference to a WIC client in any of SmarTalk's promotional
literature or advertising, sales presentations or otherwise without WIC's prior
written approval. Notwithstanding this provision, SmarTalk may disclose such
information if required by law in connection with a public offering provided,
however, that SmarTalk shall provide WIC, prior to such disclosure, with
adequate proof to demonstrate that such disclosure is required by law and
further provided that WIC must agree that such disclosure is required by law.
(b) Designated Representatives. All notices or any Calling Card User
--------------------------
disputes requiring a resolution from WIC's client shall be directed to the WIC
representative listed on
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<PAGE>
Exhibit E. WIC shall direct its notices and other inquiries relating to
SmarTalk's performance
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<PAGE>
of this Agreement to the SmarTalk representative listed on Exhibit E. Each
party may change its representative and such change shall become effective when
notice is given to the appropriate party in accordance with Section 11(d).
(c) Transactional Records. All transactional records created by SmarTalk
---------------------
from the Prepaid Calling Card Services shall be WIC's property and may
be used in any manner WIC desires unless SmarTalk provides WIC with proof
acceptable to WIC in its sole discretion to demonstrate that applicable law
limits such use.
(d) Confidentiality. WIC and SmarTalk shall each keep confidential, and
---------------
shall not disseminate to any third party or use for any purpose (except as may
be required to satisfy its obligations under this Agreement or with the written
consent of the other party) the existence and terms of this Agreement, any
information received directly or indirectly from or about a WIC client that is
not in the public domain, the transactional records described in Section 6(c)
(except as authorized under Section 6(c)), customer lists or customer
information exchanged by the parties in connection with this Agreement, any
business plans or financial information given to either party and information
received from the other that is marked as "Confidential" or "Proprietary".
Notwithstanding the foregoing, the parties may disclose Confidential or
Proprietary information if the disclosing party obtains written consent for such
disclosure from the other party before disclosing such Confidential Information
or the disclosing party is compelled to do so by court order or an
administrative order from a governmental agency after (i) notifying the other
party of the order compelling disclosure and (ii) providing the other party and,
if applicable, any of WIC's clients the opportunity to
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seek a protective order to prevent disclosure. Each party must cooperate with
the other and with WIC's client to obtain the protective order described above.
This Section 6(d) shall survive the expiration or termination of this Agreement
for a period of three (3) years or a time period requested by WIC that is
required pursuant to a confidentiality agreement with a WIC client, whichever is
longer.
(e) No Solicitation. SmarTalk shall not solicit any WIC client, directly
---------------
or indirectly, to perform the Prepaid Calling Card Services or to provide other
telecommunications services to a WIC client while this Agreement remains in
effect and for a period of one (1) year after the termination or expiration of
this Agreement, unless SmarTalk can demonstrate with absolute certainty that it
had been soliciting a WIC client or working with a WIC client prior to the
Effective Date of this Agreement or the date that the customer becomes a WIC
client, whichever date occurs later. Provided, however, this provision shall not
apply if such WIC client first solicits SmarTalk to provide such services or
publicly announces a review of its prepaid calling card vendor relationship, in
which case, should SmarTalk get the prepaid calling card business from the WIC
client, SmarTalk shall use commercially reasonable efforts to insure that WIC is
used to provide call processing services under any of SmarTalk's agreement with
such client.
7. COMPLIANCE.
----------
(a) WIC and SmarTalk intend that SmarTalk shall (i) be solely liable
for compliance with all federal, state and local laws, rules and regulations
governing the operation of resellers of prepaid calling card services
("Regulatory Requirements") and (ii) except as
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expressly limited in Section 8, indemnify WIC against any liability arising out
of an allegation that either WIC or SmarTalk has failed to comply with such
Regulatory Requirements in accordance with the terms of Section 8(a).
(b) So long as this Agreement is in effect, SmarTalk shall (i) obtain and
maintain in force all federal and state tariffs, permits, licenses and
authorizations required for SmarTalk to act as a reseller of the Prepaid Calling
Card Services and (ii) comply with all Regulatory Requirements. SmarTalk shall
notify WIC of any modifications to its tariffs, permits, licenses and
authorizations to reflect any changes in the terms and conditions (including
rates) of the Prepaid Calling Card Services before such tariffs, permits,
licenses or authorizations are filed with the appropriate jurisdiction. In
addition, SmarTalk shall consider filing any amendments or modifications to
SmarTalk's tariffs, permits, licenses or authorizations requested by WIC to
accommodate WIC clients. Although WIC shall not have a right to approve or to
disapprove any proposed filing, WIC will be provided at least ten (10) days to
review any proposed filing, prior to the filing, and to consult with SmarTalk if
said filing involves a substantive change which may have an impact on WIC or a
WIC client. SmarTalk shall make reasonable efforts to resolve any issues
affecting WIC or WIC's clients as a result of SmarTalk's proposed filing of any
tariff, permit, license, or authorization, or any modification thereto. Any
review of such filings by WIC shall not relieve SmarTalk of its responsibility
to insure compliance with all applicable Regulatory Requirements.
8. INDEMNIFICATION.
---------------
(a) Indemnification of WIC. SmarTalk shall indemnify, defend and hold
----------------------
harmless WIC, its officers, directors, employees, representatives and agents
from and of any
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obligations, claims, demands, actions, causes of action, suits, debts, dues,
liabilities, damages, losses, judgments, taxes, assessments, penalties, fines,
setoffs, fees, costs or expenses (including reasonable attorneys' fees) of any
kind whatsoever (collectively "Claims"), for, arising out of, based upon, or in
any manner connected with:
(i) SmarTalk's failure to comply with any Regulatory Requirement
(unless WIC impedes SmarTalk's ability to comply with such requirements in which
case either (i) WIC will be solely liable for such Claim so long as SmarTalk has
not contributed to such failure to comply; or (ii) SmarTalk and WIC shall be
jointly and severally liable for such Claim if SmarTalk has contributed to such
failure to comply) or any regulatory approval or consent that is obtained or
must be obtained by either SmarTalk or WIC from, or any filing (including the
filing of tariffs or the posting of bonds) that must be made with, any federal,
state or local governmental authority to provide the Prepaid Calling Card
Services;
(ii) any SmarTalk breach or default under this Agreement unless such
breach is caused solely by a failure of WIC's platform equipment;
(iii) any breach by SmarTalk of any representation or warranty
contained in this Agreement;
(iv) any dispute with a Calling Card User resulting from any error
made, or any false or misleading information provided by a SmarTalk Enhanced
Customer Service representative, unless caused solely by information provided to
a Calling Card User by WIC's clients or WIC, or their employee or
representative;
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(v) infringement of a patent or copyright or unauthorized use of
any trademark, trade name or service mark used by SmarTalk;
(vi) any breach by WIC of any of its client agreements that results
from SmarTalk's failure to perform in accordance with the terms of this
Agreement; and
(vii) any claim for indemnification made by any WIC client against
WIC if such claim for indemnification relates to the performance of Prepaid
Calling Card Services or
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SmarTalk's obligations under this Agreement.
(b) Indemnification of SmarTalk. WIC shall defend, indemnify and hold
---------------------------
harmless SmarTalk, its officers, directors, employees, representatives and
agents from and of any Claims for, arising out of, based upon, or in any manner
connected with:
(i) any breach or default under this Agreement by WIC;
(ii) any breach by WIC of any representation or warranty contained
in this Agreement;
(iii) infringement of a patent or copyright or unauthorized use of
any trademark, trade name or service mark used by WIC;
(iv) any breach by WIC of any of its client agreements that results
solely from WIC's failure to perform its obligations under such agreements that
have not been delegated to SmarTalk pursuant to this Agreement; and
(v) any Claim arising from or related to any Prepaid Calling Card
Service used by WIC or WIC's clients where SmarTalk is not identified as the
service provider on the customer's calling card and, whenever reasonably
possible, on the packaging.
(c) Notification of Claims. Each person entitled to indemnification
----------------------
under this Section 8 (the "Indemnified Person") must give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly after
(but in no event more than fifteen (15) calendar days) the Indemnified Person
has actual knowledge of any Claim as to which indemnity may be sought, and must
permit the Indemnifying Party to assume the defense of any Claim or any
litigation resulting from such Claim. The failure of the Indemnified Person to
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give notice as required under this Section 8(c) shall not relieve the
Indemnifying Party of its obligations under this Section 8, unless such failure
to give notice has a material adverse effect on the Indemnifying Party's defense
of such Claim.
(d) Counsel. The Indemnifying Party may select counsel to defend any
-------
Claim for which indemnification is sought, subject to the approval of the
Indemnified Person, which approval shall not be unreasonably withheld. The
Indemnified Person may participate in the defense of any Claim at its own
expense.
(e) No Settlement. The Indemnified Person shall not, without the prior
-------------
written consent of the Indemnifying Party, settle or compromise any Claim or
consent to the entry of any judgment, and the Indemnifying Party shall not,
without the prior written consent of the Indemnified Person (which shall not be
unreasonably withheld) settle or compromise any Claim or consent to the entry of
any judgment that does not include as an unconditional term the giving by the
claimant or plaintiff to each Indemnified Person of a full and complete release
from all liability with respect to such Claim and if the Indemnified Person is a
defendant in litigation, a dismissal, with prejudice, from such litigation.
(f) Failure to Assume the Defense of a Claim. If the Indemnifying
----------------------------------------
Party fails to accept the defense of a Claim within thirty (30) calendar days of
receiving notice of such Claim, the Indemnified Person may undertake the defense
of such Claim on behalf of, and for the account of, the Indemnifying Party
subject to the right of the Indemnifying Party to
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assume the defense of such Claim at any time before final determination of such
Claim and shall be reimbursed for the expenses of such defense in full by the
Indemnifying Party.
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(g) Effective Date of Indemnification. The SmarTalk indemnification
---------------------------------
set forth in Section 8(a) shall be effective beginning with the day on which a
prepaid calling card referencing SmarTalk as the service provider is made
available to consumers by a WIC client and will only apply to calling cards
where SmarTalk is identified as the service provider on the customer's calling
card, and whenever reasonably possible, on the packaging; except, that the
indemnifications set forth in Sections 8(a)(ii), 8(a)(iii) and 8(a)(v) shall be
effective as of the Effective Date.
9. REPRESENTATIONS AND WARRANTIES.
------------------------------
(a) Regulatory Compliance. SmarTalk represents and warrants that (i) it
---------------------
is in full compliance with all Regulatory Requirements, (ii) it has made all
federal and state filings required to be made to be a reseller of prepaid
calling card services and (iii) there are no actions, suits, proceedings or
investigations pending or, to the best of its knowledge, threatened against
SmarTalk before any court, administrative agency or other governmental body
alleging that SmarTalk has failed to comply with the Regulatory Requirements or
to make the filings required to be a reseller of prepaid calling card services.
SmarTalk has disclosed to WIC that, as of the Effective Date, SmarTalk is in
precertification compliance with all Regulatory Requirements in Hawaii and
Minnesota, pending final certification. SmarTalk has filed the applications,
tariffs and other documentation which are required to obtain final
certification. SmarTalk will use its best efforts to obtain final certification
in both states as soon as possible and, thereafter, shall remain in compliance
as otherwise required under this Section 9(a). If SmarTalk does not obtain
final certification in Hawaii
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and Minnesota within six (6) months of the Effective Date, WIC may, at its sole
discretion, terminate this Agreement effective immediately.
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*
(b) Other Representations and Warranties. SmarTalk and WIC each
------------------------------------
represent and warrant to the other that: (i) it is duly organized, validly
existing and in good standing in its state of incorporation, and is authorized
to do business in those states where such authorization is required to operate
its business as currently operated; (ii) it has taken all corporate action
necessary to authorize the signing and delivery of this Agreement; and (iii) the
Agreement constitutes a valid and binding agreement, does not conflict with any
other agreement to which it is bound, and is enforceable against it in
accordance with the terms of the Agreement.
(c) Survival. The representations and warranties set forth in this
--------
Section 9 shall be true and correct in all material respects on the date the
Agreement is signed and throughout the period that this Agreement is in effect.
10. TERM; TERMINATION.
-----------------
(a) Term. This Agreement will be effective from and after the Effective
----
Date and shall continue in effect [ ] ("Initial Term") unless
earlier terminated by WIC or SmarTalk in accordance with this Agreement. The
Agreement shall automatically renew for periods of [ ] thereafter,
unless terminated by either party pursuant to Section 10(b)(i).
(b) Termination.
-----------
(i) After the Initial Term of this Agreement set forth in Section
10(a), either party may terminate this Agreement upon giving at least one
hundred twenty (120)
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calendar days written notice before the effective date of such termination;
except that, if SmarTalk terminates the Agreement and WIC so requests, SmarTalk
must continue to perform SmarTalk's obligations under this Agreement until WIC
is able to arrange for the services of another reseller or for a
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period of ninety (90) days beyond the one hundred twenty (120) day notice
period, whichever occurs earlier and SmarTalk will continue to provide services
to Calling Card Users for all cards on which SmarTalk is the designated service
provider and WIC shall continue to pay SmarTalk for such services in accordance
with Sections 5(a) and 5(b).
(ii) This Agreement may be terminated by either WIC or SmarTalk upon
(i) the material breach by the other party of any warranty or representation or
(ii) the material default or material non-performance by the other party of its
obligations under this Agreement (including WIC's failure to timely pay any
undisputed amounts owed to SmarTalk) or any agreements, certificates or
instruments signed and delivered in connection with this Agreement, if the
breaching party does not reasonably cure or commence curing such breach, default
or non-performance within thirty (30) calendar days after the non-breaching
party sends notice of such breach to the breaching party and such breach,
default or non-performance is not completely cured within ninety (90) calendar
days. If SmarTalk terminates the Agreement pursuant to this Section 10(b)(ii),
then it shall not be obligated to continue to perform its obligations as
described in subsection (i) above.
(c) Effects of Termination. Termination of this Agreement by one party
----------------------
because of the breach, default or non-performance of the other party will not
affect or diminish the rights or claims or remedies available at law or in
equity to the non-defaulting party arising by reason of such breach, default or
non-performance, except as may be expressly provided herein.
11. MISCELLANEOUS PROVISIONS.
------------------------
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(a) Entire Agreement; Binding Effect. This Agreement contains the entire
--------------------------------
agreement regarding matters expressly set forth herein, and supersedes all prior
agreements or proposals, except as specifically incorporated herein, and cannot
be changed orally, but only by an instrument in writing signed by WIC and
SmarTalk. This Agreement is binding upon and shall inure to the benefit of WIC,
SmarTalk, and their respective successors and permitted assigns.
(b) Assignment. SmarTalk may not assign, sell, transfer or otherwise
----------
convey its rights or delegate or subcontract any of its duties under this
Agreement, without the prior written consent of WIC, which consent may not be
unreasonably withheld, except that it shall not be unreasonable for WIC to
withhold its consent if, in its reasonable discretion, the proposed assignee
cannot perform SmarTalk's obligations hereunder, including its indemnification
obligations set forth in Section 8(a). Any attempted assignment, sale,
transfer, conveyance, delegation or subcontract of this Agreement without WIC's
consent shall be void.
(c) Severability. The invalidity or unenforceability of any provision of
------------
the Agreement shall not affect the other provisions of this Agreement. If any
provision in this Agreement is held to be invalid, such provision will not be
severed from this Agreement; instead, the scope of the rights and duties created
thereby shall be reduced by the smallest extent necessary to conform such
provision to the applicable law, preserving to the greatest lawful extent the
intent of WIC and SmarTalk. The parties then shall negotiate in good faith to
amend this Agreement, adopting a substitute provision that is legally binding
and enforceable for the one deemed invalid or unenforceable.
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(d) Notice. Any notice, request, consent, approval, authorization or
------
other communication necessary or appropriate under this Agreement (collectively
a "Notice" or "Notices") shall be in writing and shall contain the information
required hereby to be communicated as well as such other information as may be
deemed appropriate by the party giving notice. In order to be effective, any
notice required to be in writing shall be hand-delivered, or sent by telecopy
(with confirmatory copy sent by a commercial overnight service), Federal
Express, United Parcel Service or similar commercial overnight service, to the
parties as set forth below, or at such other place or telecopy number as a party
may, from time to time, designate in a written notice conforming to the
requirements set forth in this subsection (d).
To WIC: West Interactive Corporation
9223 Bedford Avenue
Omaha, Nebraska 68134
Attn: Nancee Berger
Facsimile No.: 402-573-1736
To SmarTalk: SmarTalk TeleServices, Inc.
1640 Sepulveda Blvd
Los Angeles, CA 90025
Attn: Robert H. Lorsch
Facsimile No.: 310-479-3297
With a Copy to: Bernard Walter
111 Lake Street
Dallas, PA 18612
Facsimile No.: 800-230-6626
Each notice given or sent in accordance with the provisions of this Section
ll(d) shall be deemed to have been given and received on the date of its
delivery, or on the date it is refused, whichever is earlier.
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(e) Governing Law. This Agreement shall be governed by, and construed
--------------
and enforced in accordance with the laws of Nebraska, without consideration of
conflict of laws principles.
(f) Prevailing Parties. If any legal action, arbitration or other
------------------
proceeding is brought to enforce or interpret this Agreement, the prevailing
party shall be entitled to recover
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reasonable attorneys' fees and other costs incurred in such action or other
proceeding from the other parties, in addition to any other relief to which such
party may be entitled.
(g) No Partnership. Nothing contained in this Agreement shall be
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construed to create a partnership or other relationship that may invoke
fiduciary obligations between the parties hereto.
(h) Counterparts. This Agreement may be signed in one or more
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counterparts, each of which that contains a signature or facsimile signature
shall be deemed as original, but all of which together constitute one and the
same instrument, which will become effective when each of the parties have
signed this Agreement.
(i) Arbitration. Any controversy or claim arising out of or relating to
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this Agreement or any agreements or transactions contemplated hereby shall be
settled by arbitration in accordance with the Commercial Rules of Arbitration of
the American Arbitration Association in effect on the date hereof, and any award
rendered in such arbitration shall be final and binding on the Parties. Judgment
on any award rendered by the arbitrator may be entered in any court having
jurisdiction thereof. Any arbitration hereunder shall be decided by a single
arbitrator, who shall be a lawyer experienced in commercial matters. The parties
shall attempt to agree on an arbitrator but either party may at any time request
that an arbitrator be selected in accordance with the Commercial Arbitration
Rules. Any arbitration hereunder shall be held in Omaha, Nebraska.
Notwithstanding the foregoing, WIC and SmarTalk shall have the right to petition
any court of competent jurisdiction for specific performance, injunctive relief
or other equitable remedy when the remedy sought requires timely action.
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<PAGE>
(j) Preferred Carrier. To the extent WIC distributes prepaid calling
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card services,
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<PAGE>
WIC agrees that SmarTalk will be its preferred carrier and will purchase
SmarTalk services whenever commercially feasible.
(k) Outbound International. WIC will use its best efforts to utilize
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SmarTalk's outbound international services provided, however, that SmarTalk's
pricing to WIC is competitive to WIC's current international outbound rates
based on the countries to which service will be provided.
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<PAGE>
IN WITNESS WHEREOF, WIC and SmarTalk have signed and delivered this
Agreement as of the date first written above.
ATTEST: WEST INTERACTIVE CORPORATION
By: /s/ Nancee R. Berger
- ------------------------ -----------------------------
Name: Nancee R. Berger
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Title: Executive Vice President
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SMARTALK TELESERVICES, INC.
By: /s/ Robert H. Lorsch
- ------------------------ -----------------------------
Name: Robert H. Lorsch
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Title: President
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated August 15, 1996,
relating to the financial statements of SmarTalk TeleServices, Inc., which
appears in such Prospectus. We also consent to the references to us under the
heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Century City, California
October 9, 1996
