<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1996
REGISTRATION NO. 333-10391
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
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 (I.R.S. EMPLOYER ID NO.)
JURISDICTION OF STANDARD INDUSTRIAL
INCORPORATION OR CLASSIFICATION CODE NO.)
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
SEPTEMBER 25, 1996
PROSPECTUS
4,200,000 SHARES
[LOGO OF SMARTALK TELESERVICES, INC.]
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.
<TABLE>
<CAPTION>
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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-ATM 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 photographs: 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
Distibution Channels. The Douglas Stewart Company, MCI, Pacific Bell Public
Communications, 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. calling card market,
including prepaid and other phone cards, to exceed $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, payphone sales, and sales
generated through print, direct mail, and, in the future, Internet and
television advertising. SmarTalk has recently entered into an agreement with
Pacific Bell which permits the Company to place an information card, which
displays details about SmarTalk services and provides an "800" number to call
to purchase such services, on 30,000
3
<PAGE>
payphones in California. The Company intends to pursue similar arrangements
with other payphone operators nationwide.
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.
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. SmarTalk will market the recurring revenue
arrangement established with Pacific Bell to other payphone companies.
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 Pacific Bell, 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) 141,630 12,628 997,905
Operating expenses......... 65,200 1,472,944 298,065 3,164,719
--------- ----------- --------- -----------
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)...... 9,335,348 9,335,348 9,335,348 9,335,348
</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 52,012,822
Deferred revenue(4)............................... 4,127,919 4,127,919
Total debt........................................ 3,825,000 200,000
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 $200,000 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 an 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
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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. 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 Pacific Bell, 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 $14.00 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 $14.00 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 $14.00 per share, would have an average unrealized gain of $13.96 per share
over the original cost of the shares that will continue to be held by them.
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................................. $ 989,998 $ 200,000
Long-term debt.................................. 3,285,002 0
----------- -----------
Total debt...................................... 4,275,000 200,000
----------- -----------
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.......................... $(1,539,988) $45,240,012
=========== ===========
</TABLE>
- --------
(1) Actual June 30, 1996 amounts have been adjusted to reflect a $250,000 loan
from SmarTalk Partners obtained in August 1996, and $200,000 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....... 716 312,286 29,110 2,680,115
--------- ----------- --------- -----------
Gross profit (loss). (272) 141,630 12,628 997,905
Operating expenses
Sales and marketing. 1,980 842,306 173,242 1,643,426
General and
administrative..... 63,220 630,638 124,823 1,521,293
--------- ----------- --------- -----------
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. 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.
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
21
<PAGE>
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 and excise 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 12% 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 in the marketplace eligible for recharge. In addition, more
than 10% of revenue 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 bills and recognizes revenue under this agreement
based on minute usage.
Cost of Revenue. Cost of revenue increased to $2,680,115 for the six months
ended June 30, 1996 from $29,110 for the six months ended June 30, 1995. The
increase in cost of revenue was primarily attributable to greater use of the
Company's services, which increased the dollar amount of transport costs and
card costs. The gross profit percentage for the six months ended June 30, 1996
was 27.1% as compared to 30.3% 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.
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.
General and Administrative Expenses. General and administrative expenses
increased to $1,521,293 (or 41.4% of revenue) for the six months ended June
30, 1996 from $124,823 (or 299.1%
22
<PAGE>
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
the 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.
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 $312,286 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 the dollar amount of transport costs and
card costs. The gross profit percentage for the year ended December 31, 1995
was 31.2%. 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 the 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.
23
<PAGE>
General and Administrative Expenses. General and administrative expenses
increased to $630,638 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 the expenses,
including expenses related to functions performed by LCN employees, were
incurred by LCN during the year ended December 31, 1995 and period ended
December 31, 1994 and the Company was billed by LCN.
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 1,744 27,366 127,446 155,730 794,277 1,885,838
-------- --------- --------- --------- --------- ----------- -----------
Gross profit (loss).. (272) 820 11,808 58,454 70,548 345,088 652,817
Operating expenses
Sales and marketing.. 1,980 8,448 164,794 194,672 474,393 657,105 986,321
General and
administrative...... 63,220 104,910 19,913 48,661 457,154 719,842 801,451
-------- --------- --------- --------- --------- ----------- -----------
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>
24
<PAGE>
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 September 20, 1996, the Company's cash and
cash equivalents were $223,856.
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 September 23, 1996, there was
$200,000 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. 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, payphone sales, and sales
generated through print, direct mail, and, in the future, Internet and
television advertising. SmarTalk has recently entered into an agreement with
Pacific Bell which permits the Company to market SmarTalk services on 30,000
payphones in California and intends to pursue similar arrangements with other
payphone operators nationwide. Information cards on payphones, which
prominently display details about the advantages of SmarTalk services, attract
customers to purchase SmarTalk services with a major credit card simply by
calling an "800" number. Payphone companies are able to participate in ongoing
revenues generated from the sale and recharge of SmarTalk services.
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
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programs, warranty registration, customer service programs and premium rewards
for customers. 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. calling card market, including prepaid and other phone cards, to
exceed $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 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 by using a major credit card. 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
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 also intends to pursue opportunities to market SmarTalk services
on payphones. SmarTalk recently entered into an agreement with Pacific Bell to
market and offer its products at 30,000 payphones in California, permitting
the customer to purchase and then immediately begin using SmarTalk services.
See "-- Strategic Partners." SmarTalk will market the recurring revenue
arrangement established in its arrangement with Pacific Bell to other payphone
companies.
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
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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 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
Pacific Bell, 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
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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.
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,
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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.
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
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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.
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
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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 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, payphone sales and sales
generated through print, direct mail, and in the future, Internet and
television advertising.
The Company offers on-line recharge which provides customers with the
convenience of being able to add minutes to the 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."
In addition, SmarTalk intends to continue to market SmarTalk services on
payphones, a point of sale where the Company believes customers are more
likely to use SmarTalk services immediately. To this end, the Company recently
signed an agreement with Pacific Bell to market SmarTalk services at 30,000
payphones in California. See "-- Strategic Partners."
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.
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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.
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.
Pacific Bell.
On May 24, 1996, the Company entered into an agreement with Pacific Bell
which permits the Company to market SmarTalk services on 30,000 payphones
designated by Pacific Bell in California. The information card placed on these
phones will prominently display details about SmarTalk's
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services. The information card alerts the customer that SmarTalk is a
convenient and cost-effective alternative to the other long distance telephone
calls the customer may place. Payphone customers are able to call an
"800" number dedicated to callers from Pacific Bell payphones and purchase
SmarTalk services with a major credit card. The payphone customer is given a
PIN by the operator and can immediately use the PIN to access the SmarTalk
system. SmarTalk has agreed to pay Pacific Bell a fee for installing these new
information cards and Pacific Bell is able to participate in ongoing revenues
generated from the sale and recharge of SmarTalk services sold through the
dedicated "800" number. The Company believes that this relationship provides a
unique distribution channel.
MCI.
On June 21, 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 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
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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 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.
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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 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,
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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
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
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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 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 August 1, 1996, the Company employed 33 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
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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, produce television
advertising and continue to expand the payphone marketing program 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 July 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........................... 42 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)........................... 39 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 also a limited
partner 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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<PAGE>
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 1995, which amount was repaid by the end of 1995.
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 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
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. 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
"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.
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<PAGE>
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 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.
45
<PAGE>
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,
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.
46
<PAGE>
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 September 23, 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 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
47
<PAGE>
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 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.
48
<PAGE>
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 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.
49
<PAGE>
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 1995, which amount was repaid by the end of 1995.
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 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 certain of the office furniture and equipment fixed
assets of LCN pursuant to an agreement dated December 28, 1995 between
SmarTalk and LCN. The purchase was
50
<PAGE>
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 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. 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 loan 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."
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of August 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.
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<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 September 23, 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 September 23, 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......... 716 312,286 29,110 2,680,115
--------- ----------- --------- -----------
Gross profit (loss)... (272) 141,630 12,628 997,905
Sales and marketing..... 1,980 842,306 173,242 1,643,426
General and
administrative......... 63,220 630,638 124,823 1,521,293
--------- ----------- --------- -----------
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.
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.
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.
F-8
<PAGE>
SMARTALK TELESERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR DECEMBER 31, 1994 AND 1995 AND UNAUDITED JUNE 30, 1996
- -------------------------------------------------------------------------------
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>
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>
F-9
<PAGE>
SMARTALK TELESERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR DECEMBER 31, 1994 AND 1995 AND UNAUDITED JUNE 30, 1996
- -------------------------------------------------------------------------------
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>
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 %
======== =========
</TABLE>
The major components of deferred tax assets arising from temporary
differences at December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- ---------
<S> <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. 285,721 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.
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
$200,000 at September 20, 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.................................................................. 27
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
PARTICIPATING 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.]
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............................ 32,500
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................................................. 102,772
----------
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.
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.
3.2 Amended and Restated Bylaws.
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.
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.
10.8B Employment Agreement between SmarTalk TeleServices, Inc. and
Richard M. Teich.
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.
10.11 1996 Stock Incentive Plan.
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.*(1)
10.14A First Amendment to Carrier Agreement dated March 2, 1996 between
SmarTalk TeleServices, Inc. and MCI Telecommunications
Corporation.*(1)
10.14B Second Amendment to Carrier Agreement dated September 9, 1996
between SmarTalk TeleServices, Inc. and MCI Telecommunications
Corporation.*
10.15 Agreement dated October 4, 1995 between SmarTalk TeleServices,
Inc. and West Interactive Corporation.*(1)
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 Business Alliance Agreement between Pacific Bell and the
SmarTalk TeleServices, Inc., dated May 24, 1996.*
10.20 Prepaid Carrier Referral Program Agreement between MCI
Telecommunications Corporation and SmarTalk TeleServices, Inc.,
dated June 21, 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.
10.23 Promissory Note in the amount of $1,000,000 dated September 18,
1996 between Southern California Bank and SmarTalk
TeleServices, Inc.
</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.
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).
24.1 Power of Attorney.(1)
27.1 Financial Data Schedule.
</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. 1 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 September 24, 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. 1 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 September 24, 1996
____________________________________ Directors, President and
Robert H. Lorsch Chief Executive Officer
* Chief Financial Officer September 24, 1996
____________________________________ and Vice President
Glen Andrew Folck Finance/Operations
* Director September 24, 1996
____________________________________
Ahmed O. Alfi
* Director September 24, 1996
____________________________________
Fred F. Fielding
* Director September 24, 1996
____________________________________
Jeffrey I. Scheinrock
* Director September 24, 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.
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.
3.2 Amended and Restated Bylaws.
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.
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.
10.8B Employment Agreement between SmarTalk TeleServices,
Inc. and Richard M. Teich.
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.
10.11 1996 Stock Incentive Plan.
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.*(1)
10.14A First Amendment to Carrier Agreement dated March 2,
1996 between SmarTalk TeleServices, Inc. and MCI
Telecommunications Corporation.*(1)
10.14B Second Amendment to Carrier Agreement dated September
9, 1996 between SmarTalk TeleServices, Inc. and MCI
Telecommunications Corporation.*
10.15 Agreement dated October 4, 1995 between SmarTalk
TeleServices, Inc. and West Interactive
Corporation.*(1)
</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 Business Alliance Agreement between Pacific Bell and
the SmarTalk TeleServices, Inc., dated May 24,
1996.*
10.20 Prepaid Carrier Referral Program Agreement between
MCI Telecommunications Corporation and SmarTalk
TeleServices, Inc., dated June 21, 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.
10.23 Promissory Note in the amount of $1,000,000 dated
September 18, 1996 between Southern California Bank
and SmarTalk TeleServices, Inc.
10.24 Commercial Security Agreement in the amount of
$1,000,000 dated September 18, 1996 between Southern
California Bank and SmarTalk TeleServices, Inc.
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).
24.1 Power of Attorney.(1)
27.1 Financial Data Schedule.
</TABLE>
- --------
* Confidential treatment has been requested. The copy filed as an exhibit
omits information subject to the confidentiality request.
(1) Previously filed.
<PAGE>
EXHIBIT 1.1
SMARTALK TELESERVICES, INC.
__________ SHARES/1/
COMMON STOCK
(NO PAR VALUE)
UNDERWRITING AGREEMENT
New York, New York
_______ ___, 1996
Salomon Brothers Inc
CS First Boston
Donaldson Lufkin & Jenrette Securities Corporation
As Representatives of the several Underwriters,
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Dear Sirs:
SmarTalk Teleservices, Inc., a California corporation (the "Company"),
proposes to sell to the underwriters named in Schedule I hereto (each an
"Underwriter" and together, the "Underwriters"), for whom you (the
"Representatives") are acting as representatives, ____________ shares of the
Company's common stock, no par value per share ("Common Stock") [and the persons
identified in Schedule II hereto propose to sell to the Underwriters the number
of shares of Common Stock set forth opposite each person's name under the column
"Number of Shares of Underwritten Securities" in Schedule II, or an aggregate of
___ shares of Common Stock] (said shares to be sold and issued by the Company
[and the shares to be sold by Selling Shareholders collectively] being
hereinafter called the "Underwritten Securities"). The shares of Common Stock
to be sold by the Company and Selling Shareholders, excluding the Option
Securities defined below, are collectively hereinafter called
- ---------------------
/1/ Plus an option to purchase from SmarTalk Teleservices, Inc. and the Selling
Shareholders identified in Schedule III hereto up to _________ additional
shares to cover over-allotments.
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<PAGE>
the "Underwritten Securities." The Company and the Selling Shareholders
identified in Schedule III hereto also propose to grant to the Underwriters an
option to purchase up to ___________ additional shares of Common Stock (the
"Option Securities"; the Option Securities, together with the Underwritten
Securities, being hereinafter called the "Securities"). The persons identified
in Schedule II and Schedule III, excluding the Company, are hereby referred to
as the "Selling Shareholders."
1. Representations and Warranties as to the Company. The Company
-------------------------------------------------
represents and warrants to, and agrees with, each Underwriter as set forth below
in this Section 1. Certain terms used in this Section 1 are defined in
paragraph (t) hereof.
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement (file number 333-_______) on
Form S-1, including a related preliminary prospectus, for the registration
under the Securities Act of 1933 (the "Act") of the offering and sale of
the Securities. The Company may have filed one or more amendments thereto,
including the related preliminary prospectus, each of which has previously
been furnished to you. The Company will next file with the Commission
either (A) prior to effectiveness of such registration statement, a further
amendment to such registration statement, including the form of final
prospectus or (B) after effectiveness of such registration statement, a
final prospectus in accordance with Rules 430A and 424(b)(1) or (4). In
the case of clause (B), the Company will include in such registration
statement, as amended at the Effective Date, all information (other than
Rule 430A Information) required by the Act and the rules thereunder to be
included in the Prospectus with respect to the Securities and the offering
thereof. As filed, such amendment and form of final prospectus, or such
final prospectus, shall include all Rule 430A Information, together with
all other such required information, with respect to the Securities and the
offering thereof and, except to the extent the Representatives shall agree
in writing to a modification, shall be in all substantive respects in the
form furnished to you prior to the Execution Time or, to the extent not
completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company has advised you, prior to the
Execution Time, will be included or made therein.
(b) On the Effective Date, the Registration Statement did or will, and
when the Prospectus is first filed (if required) in accordance with Rule
424(b) and on the Closing Date, the Prospectus (and any supplements
thereto) will, comply in all material respects with the applicable
requirements of the Act and the rules thereunder; on the Effective Date,
the Registration Statement did not or will not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, the Prospectus, if not filed
pursuant to Rule 424(b), did not or will not,
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<PAGE>
and on the date of any filing pursuant to Rule 424(b) and on the Closing
Date, the Prospectus (together with any supplement thereto) will not,
include any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is organized, with full
corporate power and authority to own its properties and conduct its
business as described in the Prospectus, and is duly qualified to do
business as a foreign corporation and is in good standing under the laws of
each jurisdiction which requires such qualification wherein it owns or
leases properties or conducts business, and in which the failure to be so
qualified would, in the aggregate in all such cases, have a material
adverse effect on the business, condition (financial or otherwise), results
of operation, operations or prospects of the Company and its subsidiaries
on a consolidated basis (a "Material Adverse Effect").
(d) All the outstanding shares of capital stock of each subsidiary
have been duly and validly authorized and issued and are fully paid and
nonassessable, and, except as otherwise set forth in the Prospectus, all
outstanding shares of capital stock of the subsidiaries are owned by the
Company either directly or through wholly owned subsidiaries free and clear
of any security interests, claims, liens or encumbrances.
(e) The Company's authorized equity capitalization is as set forth in
the Prospectus; the capital stock of the Company conforms to the
description thereof contained in the Prospectus; the outstanding shares of
Common Stock (including the Securities being sold hereunder by the Selling
Shareholders) have been duly authorized and validly issued and are fully
paid and nonassessable; the Securities being sold hereunder by the Company
have been duly and validly authorized, and, when issued and delivered to
and paid for by the Underwriters pursuant to this Agreement, will be fully
paid and nonassessable and have been issued in full compliance with all
federal and state securities laws; the Securities have been approved for
quotation, subject to official notice of issuance, on the Nasdaq National
Market System ("NMS"); the certificates for the Securities conform to the
requirements of the California General Corporation Law and the NMS; the
holders of outstanding shares of capital stock of the Company are not
entitled to preemptive right, co-sale right, right of first refusal or
other rights to subscribe for or purchase the Securities [other than those
that will automatically expire upon the consummation of the transactions
contemplated on the Closing Date]; and upon delivery of the Securities
issued and sold by the Company pursuant to this Agreement and payment
therefor as contemplated herein, the Underwriters will acquire good and
marketable title to the Securities, free and clear of
-3-
<PAGE>
any lien, claim, security interest or other encumbrance, restriction on
transfer or other defect in title.
(f) Except as described in the Prospectus, there are no outstanding
options, warrants or other rights calling for the issuance of, and no
commitments, plans or arrangements to issue, any shares of capital stock of
the Company or any security convertible into or exchangeable or exercisable
for capital stock of the Company; and except as described in the
Prospectus, there is no holder of any securities of the Company or any
other person who has the right, contractual or otherwise, to cause the
Company to sell or otherwise issue to them, or to permit them to underwrite
the sale of, any of the Securities or the right to have any Common Stock or
other securities of the Company included in the Registration Statement or
the right, as a result of the filing of the Registration Statement, to
require registration under the Act of any shares of Common Stock or other
securities of the Company. The description of the Company's stock option
and other stock plans or arrangements, and the options or other rights
granted and exercised thereunder, set forth in the Prospectus accurately
and fairly presents the information required under the Act and the rules
and regulations of the Commission thereunder (the "Regulations") to be
shown with respect to such plans, arrangements, options and rights.
(g) There is no pending or threatened action, suit or proceeding
before any court or governmental agency, authority or body or any
arbitrator involving the Company or any of its subsidiaries of a character
required to be disclosed in the Prospectus which is not adequately
disclosed in the Prospectus, and there is no franchise, contract, agreement
or other document of a character required to be described in the
Registration Statement or Prospectus, or to be filed as an exhibit to the
Registration Statement, which is not in all material respects described or
filed as required. The descriptions in the Registration Statement and the
Prospectus of statutes, regulations, contracts, franchises, other
documents, and pending or threatened actions, suits or proceedings before
any court or arbitrator, or brought by any governmental agency, authority
or body are accurate in all material respects and fairly summarize the
matters therein described.
(h) The consolidated financial statements of the Company and its
consolidated subsidiaries, together with related schedules and notes,
included in the Registration Statement and the Prospectus present fairly
the consolidated financial position and the consolidated results of
operations and cash flows of the Company and its consolidated subsidiaries
for the periods or at the dates therein specified; such consolidated
financial statements and related schedules and notes have been prepared in
conformity with generally accepted accounting principles, consistently
applied throughout the periods involved except as otherwise noted in such
financial statements; and the other financial data concerning the Company
and its subsidiaries set forth in the
-4-
<PAGE>
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are accurately presented and were derived from such financial
statements and the books and records of the Company. Price Waterhouse LLP,
whose report is filed with the Commission as a part of the Registration
Statement and the Prospectus, are independent public accountants as
required by the Act and the Regulations.
(i) Neither the Company nor any of its subsidiaries is in violation of
its articles of incorporation or bylaws, or other organizational documents,
or in violation in any material respect of any law, ordinance,
administrative or governmental rule or regulation applicable to the Company
or its subsidiaries, or in violation of any decree of any court or
governmental agency or body having jurisdiction over the Company or its
subsidiaries, or in default in any material respect in the performance of
any obligation, agreement or condition contained in any bond, debenture,
note or any other evidence of indebtedness or in any material agreement,
indenture, lease or other instrument to which the Company or its
subsidiaries are a party or by which it or any of their properties may be
bound.
(j) The Company and each of its subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") as are necessary to own their properties and to
conduct their business in the manner described in the Prospectus, except
where the failure so to have would not, in all such cases in the aggregate,
result in a Material Adverse Effect; the Company and each subsidiary has
fulfilled and performed all of their material obligations with respect to
such permits and no event has occurred which allows, or after notice or
lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any such
permit; and none of such permits contains any restriction that is
materially burdensome to the Company or its subsidiaries in conducting its
or their business as described in the Prospectus.
(k) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (1)
any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company, (2)
any transaction that is material to the Company, except transactions
entered into in the ordinary course of business, (3) any obligation, direct
or contingent, that is material to the Company incurred by the Company,
except obligations incurred in the ordinary course of business, (4) any
change in the capital stock or outstanding indebtedness of the Company that
is material to the Company, (5) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company or (6) any loss
or damage (whether or not insured) to the property of the Company which has
been sustained or will have been sustained which has a Material Adverse
Effect.
-5-
<PAGE>
(l) Except as set forth in the Registration Statement and Prospectus,
(1) the Company has good and marketable title to all properties and assets
described in the Registration Statement and Prospectus as owned by it, free
and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest, other than such as would not have a Material Adverse
Effect, (2) the agreements to which the Company is a party described in the
Registration Statement and Prospectus are valid agreements, enforceable by
the Company and its subsidiaries (as applicable), except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles or with
respect to which any unenforceability would not have a Material Adverse
Effect and, to the Company's knowledge, the other contracting party or
parties thereto are not in material breach or material default under any of
such agreements, and (3) the Company has valid and enforceable leases for
all properties described in the Registration Statement and the Prospectus
as leased by it, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles or with respect to which any unenforceability
would not have a Material Adverse Effect. Except as set forth in the
Registration Statement and the Prospectus, the Company owns or leases all
such properties as are necessary to its operations as now conducted or as
proposed to be conducted.
(m) The Company and its subsidiaries have filed all material federal,
state, local, and foreign tax returns required to be filed, which returns
are true and correct in all material respects, and the Company and its
subsidiaries are not in default in the payment of any taxes which were
payable pursuant to said returns or any assessments with respect thereto,
except where either (i) the amount of such unpaid taxes is not in excess of
the amount reserved therefor, or (ii) the Company is contesting such
default in good faith through appropriate proceedings.
(n) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that: (i) transactions are
executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (ii)
access to assets is permitted only in accordance with management's general
or specific authorizations; and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(o) The Company and its subsidiaries own or possess adequate licenses
or other rights to use all patents, trademarks, trademark registrations,
service marks,
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<PAGE>
service mark registrations, trade names, copyrights, licenses, inventions,
trade secrets, and know-how or other similar rights ("Intellectual
Property") described in the Prospectus as being owned or possessed by them,
or necessary for the conduct of its business as described in the
Prospectus, the Company has not infringed, is not now infringing, and its
business as presently conducted and as proposed to be conducted will not
cause it to infringe, any Intellectual Property belonging to any other
person, which infringement or infringements, either individually or in the
aggregate, could reasonably be expected to have a Material Adverse Effect;
the Company has not received any claim or notice of infringement or
potential infringement of any Intellectual Property of any other person
which could reasonably be expected to have a Material Adverse Effect; and
neither the Company nor any of its subsidiaries has any claim against a
third party with respect to the infringement by such third party of
Intellectual Property of the Company or any such subsidiary material to the
business or prospects of the Company and its subsidiaries considered as a
whole. To the Company's knowledge, the Company is not using any
confidential information or trade secrets of any former employer of any
past or present employees.
(p) Neither the Company nor any of its subsidiaries is involved in any
labor dispute with any union or group of employees nor, to the knowledge of
the Company, is any dispute threatened; and the Company is not aware of any
existing or imminent labor disturbance by the employees of any of its
principal suppliers, manufacturers, distributors, licensees or contractors
which might reasonably be expected to result in a Material Adverse Effect
or any material adverse change in the condition, financial or otherwise, or
in the earnings, business affairs or business prospects of the Company.
(q) The Company and its subsidiaries maintain insurance of the types
and in the amounts generally deemed adequate for their respective
businesses, including, but not limited to, general liability insurance and
insurance covering real and personal property owned or leased by the
Company or any of its subsidiaries against theft, damage, destruction, acts
of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect.
(r) This Agreement has been duly authorized, executed and delivered by
the Company and is a valid and binding agreement enforceable against the
Company in accordance with its terms, except to the extent that rights to
indemnity and contribution hereunder may be limited by federal securities
law or the public policy of a state with respect to such matters.
(s) Neither the issuance and sale of the Securities, the execution,
delivery or performance of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby (i)
requires any consent, approval, authorization or other order of or
registration or filing with any court, regulatory body, administrative
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agency or other governmental body, agency or official (except such as may
have been obtained or such as may be required for the registration of the
Securities under the Act and compliance with the securities or Blue Sky
laws of various jurisdictions) or conflicts or will conflict with or
constitutes or will constitute a breach of, or a default under, the
articles of incorporation or bylaws of the Company or (ii) conflicts or
will conflict with or constitutes or will constitute a breach of, or a
default under, any agreement, indenture, lease or other instrument to which
the Company is a party or by which it or any of its properties may be
bound, or violates or will violate any statute, law, regulation or filing
or judgment, injunction, order or decree applicable to the Company or any
of its properties, or will result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company
pursuant to the terms of any agreement or instrument to which it is a party
or by which it may be bound or to which any of its property or assets is
subject.
(t) The terms which follow, when used in this Agreement, shall have
the meanings indicated. The term "the Effective Date" shall mean each date
that the Registration Statement and any post-effective amendment or
amendments thereto became or become effective. "Execution Time" shall mean
the date and time that this Agreement is executed and delivered by the
parties hereto. "Preliminary Prospectus" shall mean any preliminary
prospectus referred to in paragraph (a) above and any preliminary
prospectus included in the Registration Statement at the Effective Date
that omits Rule 430A Information. "Prospectus" shall mean the prospectus
relating to the Securities that is first filed pursuant to Rule 424(b)
after the Execution Time or, if no filing pursuant to Rule 424(b) is
required, shall mean the form of final prospectus relating to the
Securities included in the Registration Statement at the Effective Date.
"Registration Statement" shall mean the registration statement referred to
in paragraph (a) above, including exhibits and financial statements, as
amended at the Execution Time (or, if not effective at the Execution Time,
in the form in which it shall become effective) and, in the event any post-
effective amendment thereto or a registration statement filed with respect
to the Securities pursuant to Rule 462(b) (or post-effective amendment
thereto), becomes effective prior to the Closing Date (as hereinafter
defined), shall also mean such registration statement as so amended or
registration statement (or amendment thereto) pursuant to Rule 462(b),
respectively. Such term shall include any Rule 430A Information deemed to
be included therein at the Effective Date as provided by Rule 430A or any
Term Sheet filed pursuant to Rule 434. "Rule 424", "Rule 430A," "Rule 434"
and "Rule 462" refer to such rules under the Act. "Rule 430A Information"
means information with respect to the Securities and the offering thereof
permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A.
2. Representations and Warranties of the Selling Shareholders. Each
-----------------------------------------------------------
Selling Shareholder represents and warrants to, and agrees with, each
Underwriter that:
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(a) Such Selling Shareholder is the lawful owner of the Securities to be
sold by such Selling Shareholder hereunder, and upon sale and delivery of,
and payment for, such Securities as provided herein, such Selling
Shareholder will convey to the several Underwriters good and marketable
title to such Securities, free and clear of all liens, encumbrances,
equities and claims whatsoever.
(b) Such Selling Shareholder, after due inquiry, has no reason to
believe that the representations and warranties of the Company contained in
Section 1 hereof are not true and correct in all material respects, is
familiar with the Registration Statement and the Prospectus and has no
knowledge of any material fact, condition or information not disclosed
therein or in any amendment or supplement thereto which has adversely
affected or may adversely affect the business of the Company, or any of its
subsidiaries; and the sale of Securities by such Selling Shareholder
pursuant hereto is not prompted by any material nonpublic information
concerning the Company, or any of its subsidiaries which is not set forth
in the Prospectus or any amendment or supplement thereto.
(c) Such Selling Shareholder has not taken and will not take, directly
or indirectly, any action designed to or which has constituted or which
might reasonably be expected to cause or result in, under the Exchange Act
or otherwise, stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities and has not
effected any sales of shares of Common Stock which, if effected by the
issuer, would be required to be disclosed in response to Item 701 of
Regulation S-K.
(d) Certificates in negotiable form for such Selling Shareholder's
Securities have been placed in custody, for delivery pursuant to the terms
of this Agreement, under a Power of Attorney and Custody Agreement executed
and delivered by such Selling Shareholder, in the form heretofore furnished
to you (the "Custody Agreement"), with _______________, as Custodian (the
"Custodian"); the Securities represented by the certificates so held in
custody for each Selling Shareholder are subject to the interests hereunder
of the Underwriters, the Company, and the other Selling Shareholders; the
arrangements for custody and delivery of such certificates, made by such
Selling Shareholder hereunder and under the Custody Agreement, are not
subject to termination by any acts of such Selling Shareholder, or by
operation of law, whether by the death or incapacity of such Selling
Shareholder or the occurrence of any other event; and if any such death,
incapacity or any other such event shall occur before the delivery of such
Securities hereunder, certificates for the Securities will be delivered by
the Custodian in accordance with the terms and conditions of this Agreement
and the Custody Agreement as if such death, incapacity or other event had
not occurred, regardless of whether or not the Custodian shall have
received notice of such death, incapacity or other event.
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<PAGE>
(e) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by such
Selling Shareholder of the transactions contemplated herein, except such as
may have been obtained under the Act and such as may be required under the
blue sky laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters and such other approvals
as have been obtained.
(f) Neither the sale of the Securities being sold by such Selling
Shareholder nor the consummation of any other of the transactions herein
contemplated by such Selling Shareholder or the fulfillment of the terms
hereof by such Selling Shareholder will conflict with, result in a breach
or violation of, or constitute a default under, any law or the terms of any
indenture or other agreement or instrument to which such Selling
Shareholder is a party or bound, or any judgment, order or decree
applicable to such Selling Shareholder of any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction
over such Selling Shareholder.
In respect of any statements in or omissions from the Registration
Statement or the Prospectus or any supplements thereto made in reliance upon and
in conformity with information furnished in writing to the Company by the
Selling Shareholder specifically for use in connection with the preparation
thereof, the Selling Shareholder hereby makes the same representations and
warranties to each Underwriter as the Company makes to such Underwriter under
paragraph (1)(b).
3. Purchase and Sale.
------------------
(a) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company and the
Selling Shareholders agree, severally and not jointly, to sell to each
Underwriter, and each Underwriter agrees, severally and not jointly, to
purchase from the Company and the Selling Shareholders, at a purchase price
of $_____ per share, the amount of the Underwritten Securities set forth
opposite such Underwriter's and Selling Shareholder's name in Schedule I
and Schedule II hereto, respectively.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company and the
Selling Shareholders named in Schedule III hereto hereby grant an option to
the several Underwriters to purchase, severally and not jointly, up to
_________ shares of the Option Securities at the same purchase price per
share as the Underwriters shall pay for the Underwritten Securities. Said
option may be exercised only to cover over-allotments in the sale of the
Underwritten Securities by the Underwriters. Said option may be exercised
in whole or in part at any time (but not more than once) on or before the
30th day after the date of the Prospectus upon written notice by the
Representatives
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<PAGE>
to the Company and the Selling Shareholders, setting forth the number of
shares of the Option Securities as to which the several Underwriters are
exercising the option and the settlement date. Delivery of certificates
for the shares of Option Securities by the Company and the Selling
Shareholders, and payment therefor to the Company and the Selling
Shareholders, shall be made as provided in Section 4 hereof. The number of
shares of the Option Securities to be purchased by each Underwriter shall
be the same percentage of the total number of shares of the Option
Securities to be purchased by the several Underwriters as such Underwriter
is purchasing of the Underwritten Securities, subject to such adjustments
as you in your absolute discretion shall make to eliminate any fractional
shares.
4. Delivery and Payment. Delivery of and payment for the
---------------------
Underwritten Securities and the Option Securities (if the option provided for in
Section 3(b) hereof shall have been exercised on or before the third business
day prior to the Closing Date) shall be made at 10:00 AM, New York City time, on
________ ___, 1996, or such later date (not later than _______, 1996) as the
Representatives shall designate, which date and time may be postponed by
agreement between the Representatives, the Company, and the Selling Shareholders
or as provided in Section 10 hereof (such date and time of delivery and payment
for the Securities being herein called the "Closing Date"). Delivery of the
Securities shall be made to the Representatives for the respective accounts of
the several Underwriters against payment by the several Underwriters through the
Representatives of the respective aggregate purchase prices of the Securities
being sold by the Company and the Selling Shareholders to or upon the order of
the Company and the Selling Shareholders by certified or official bank check or
checks drawn on or by a New York Clearing House bank and payable in next day
funds. Delivery of the Securities shall be made at such location in New York,
New York as the Representatives shall reasonably designate at least one business
day in advance of the Closing Date and payment for the Securities shall be made
at the offices of Munger, Tolles & Olson, 355 S. Grand Avenue, Los Angeles,
California. Certificates for the Securities shall be registered in such names
and in such denominations as the Representatives may request not less than three
full business days in advance of the Closing Date.
The Company and the Selling Shareholders agree to have the Securities
available for inspection, checking and packaging by the Representatives in New
York, New York, not later than 1:00 PM on the business day prior to the Closing
Date.
The Selling Shareholders will pay all applicable state transfer taxes,
if any, involved in the transfer to the several Underwriters of the Underwritten
Securities to be purchased by them from the Selling Shareholders and the
respective Underwriters will pay any additional stock transfer taxes involved in
further transfers.
If the option provided for in Section 3(b) hereof is exercised after
the second business day prior to the Closing Date, the Company will deliver (at
the expense of the
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<PAGE>
Company) to the Representatives, at such location as the Representatives shall
reasonably designate at least one business day in advance of the settlement
date, on the date specified by the Representatives (which shall be within three
business days after exercise of said option), certificates for the Option
Securities in such names and denominations as the Representatives shall have
requested not less than two full business days in advance of the settlement date
against payment at the offices of Munger, Tolles & Olson of the purchase price
thereof to or upon the order of the Company and the Selling Shareholders by
certified or official bank check or checks drawn on or by a New York Clearing
House bank and payable in next day funds. If settlement for the Option
Securities occurs after the Closing Date, the Company will deliver to the
Representatives on the settlement date for the Option Securities, and the
obligation of the Underwriters to purchase the Option Securities shall be
conditioned upon receipt of, supplemental opinions, certificates and letters
confirming as of such date the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 7 hereof.
5. Offering by Underwriters. It is understood that the several
-------------------------
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
6. Agreements.
----------
(a) The Company agrees with the several Underwriters that:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and
any amendment thereof, to become effective. Prior to the termination
of the offering of the Securities, the Company will not file any
amendment of the Registration Statement or supplement to the
Prospectus unless the Company has furnished you a copy for your review
prior to filing and will not file any such proposed amendment or
supplement to which you reasonably object. Subject to the foregoing
sentence, if the Registration Statement has become or becomes
effective pursuant to Rule 430A, or filing of the Prospectus is
otherwise required under Rule 424(b), the Company will cause the
Prospectus, properly completed, and any supplement thereto to be filed
with the Commission pursuant to the applicable paragraph of Rule
424(b) within the time period prescribed and will provide evidence
satisfactory to the Representatives of such timely filing. The
Company will promptly advise the Representatives (A) when the
Registration Statement, if not effective at the Execution Time, and
any amendment thereto, shall have become effective, (B) when the
Prospectus, and any supplement thereto, shall have been filed (if
required) with the Commission pursuant to Rule 424(b), (C) when, prior
to termination of the offering of the Securities, any amendment to the
Registration Statement shall have been filed or become effective, (D)
of any request by the Commission for any amendment of the Registration
Statement or supplement to the Prospectus or for any additional
information, (E) of the
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issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the institution or
threatening of any proceeding for that purpose and (F) of the receipt
by the Company of any notification with respect to the suspension of
the qualification of the Securities for sale in any jurisdiction or
the initiation or threatening of any proceeding for such purpose. The
Company will use its best efforts to prevent the issuance of any such
stop order and, if issued, to obtain as soon as possible the
withdrawal thereof.
(ii) If, at any time when a prospectus relating to the Securities
is required to be delivered under the Act, any event occurs as a
result of which the Prospectus as then supplemented would include any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it
shall be necessary to amend the Registration Statement or supplement
the Prospectus to comply with the Act or the rules thereunder, the
Company promptly will prepare and file with the Commission, subject to
the second sentence of paragraph (i) of this Section 6(a), an
amendment or supplement which will correct such statement or omission
or effect such compliance.
(iii) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an
earnings statement or statements of the Company and its subsidiaries
which will satisfy the provisions of Section 11(a) of the Act and Rule
158 under the Act.
(iv) The Company will furnish to the Representatives and counsel
for the Underwriters, without charge, signed copies of the
Registration Statement (including exhibits thereto) and to each other
Underwriter a copy of the Registration Statement (without exhibits
thereto) and, so long as delivery of a prospectus by an Underwriter or
dealer may be required by the Act, as many copies of each Preliminary
Prospectus and the Prospectus and any supplement thereto as the
Representatives may reasonably request. The Company will furnish or
cause to be furnished to the Representatives copies of all reports on
Form SR required by Rule 463 under the Act. The Company will pay the
expenses of printing or other production of all documents relating to
the offering.
(v) The Company will arrange for the qualification of the
Securities for sale under the laws of such jurisdictions as the
Representatives may designate, will maintain such qualifications in
effect so long as required for the distribution of the Securities and
will pay the fee of the National Association of Securities Dealers,
Inc., in connection with its review of the offering.
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<PAGE>
(vi) The Company will not, for a period of 180 days following the
Execution Time, without the prior written consent of Salomon Brothers
Inc, 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; provided, however, that the Company may
-------- -------
issue Common Stock issuable upon the exercise of options outstanding
at the Execution Time.
(vii) The Company will apply the net proceeds from the sale of
its Securities substantially in accordance with the description set
forth in the Prospectus and any Preliminary Prospectus under the
heading "Use of Proceeds."
(viii) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida,
Chapter 92-198, An Act Relating to Disclosure of Doing Business with
----------------------------------------------------
Cuba, and the Company further agrees that if it commences engaging in
----
business with the government of Cuba or with any person or affiliate
located in Cuba after the date the Registration Statement becomes or
has become effective with the Securities and Exchange Commission or
with the Florida Department of Banking and Finance (the "Department"),
whichever date is later, or if the information reported in the
Prospectus, if any, concerning the Company's business with Cuba or
with any person or affiliate located in Cuba changes in any material
way, the Company will provide the Department notice of such business
or change, as appropriate, in a form acceptable to the Department.
(b) Each Selling Shareholder agrees with the several Underwriters that
he will not during the time period of 180 days following the Execution
Time, without the prior written consent of Salomon Brothers Inc, offer,
sell or contract to sell, or otherwise dispose of, directly or indirectly,
or announce the offering of, any other share of Common Stock beneficially
owned by such person, or any securities convertible into, or exchangeable
for, shares of Common Stock, other than shares of Common Stock disposed of
as bona fide gifts.
7. Conditions to the Obligations of the Underwriters. The
--------------------------------------------------
obligations of the Underwriters to purchase the Underwritten Securities and the
Option Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Shareholders contained herein as of the Execution Time and the Closing Date and
any settlement date pursuant to Section 4 hereof, to the accuracy of the
statements of the Company and the Selling Shareholders made in any certificates
pursuant to the provisions hereof, to the performance by the Company and the
Selling Shareholders of their respective obligations hereunder and to the
following additional conditions:
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<PAGE>
(a) If the Registration Statement has not become effective prior to
the Execution Time, unless the Representatives agree in writing to a later
time, the Registration Statement will become effective not later than (i)
6:00 PM New York City time on the date of determination of the public
offering price, if such determination occurred at or prior to 3:00 PM New
York City time on such date or (ii) 12:00 Noon on the business day
following the day on which the public offering price was determined, if
such determination occurred after 3:00 PM New York City time on such date;
if filing of the Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b), the Prospectus, and any such supplement, will be
filed in the manner and within the time period required by Rule 424(b); and
no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or threatened.
(b) The Company shall have furnished to the Representatives the
opinions of Dewey Ballantine, counsel for the Company, dated the Closing
Date, to the effect that:
(i) each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or
organized, with full corporate power and authority to own and lease
its properties and conduct its business as described in the
Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each
jurisdiction which requires such qualification wherein the Prospectus
states it owns or leases properties or conducts business, and in which
the failure to be so qualified would, in the aggregate in all such
cases, have a Material Adverse Effect;
(ii) all the outstanding shares of capital stock of each
subsidiary have been duly and validly authorized and issued and are
fully paid and nonassessable, and, except as otherwise set forth in
the Prospectus, all outstanding shares of capital stock of the
subsidiary are owned by the Company free and clear of any perfected
security interest and, to the knowledge of such counsel, after due
inquiry, any other security interests, claims, liens or encumbrances;
(iii) the Company's authorized equity capitalization is as set
forth in the Prospectus; the authorized and outstanding capital stock
of the Company is as set forth under the caption "Capitalization" in
the Prospectus; the capital stock of the Company conforms to the
description thereof contained in the Prospectus in all material
respects; the outstanding shares of Common Stock, including the
Securities being sold hereunder by the Selling Shareholders, have been
duly and validly authorized and issued and are fully paid and non-
assessable; the
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Securities being sold hereunder by the Company have been duly and
validly authorized, and, when issued and delivered to and paid for by
the Underwriters pursuant to this Agreement, will be validly issued,
fully paid and nonassessable; the Securities have been duly approved
for quotation, subject to official notice of issuance, on NMS; the
certificates for the Securities conform to the requirements of the
California General Corporation Law and NMS; the holders of outstanding
shares of capital stock of the Company are not entitled to preemptive
or other rights to subscribe for the Securities; and upon delivery of
the Securities being sold by the Company pursuant to this Agreement
and payment therefor as contemplated herein, the several Underwriters
will acquire the Securities free and clear of any "adverse claim" (as
such term is used in Section 8-302 of the Uniform Commercial Code as
in effect in the State of California), assuming the purchase of the
Securities by the Underwriters in good faith and without notice of any
such "adverse claim";
(iv) to the best knowledge of such counsel, there are no
outstanding rights, warrants, or options to acquire, or instruments
convertible into or exchangeable for any shares of capital stock or
equity interest in the Subsidiaries;
(v) to the best knowledge of such counsel, there is no pending or
threatened action, suit or proceeding before any court or governmental
agency, authority or body or any arbitrator involving the Company of a
character required to be disclosed in the Registration Statement which
is not adequately disclosed in the Prospectus, and there is no
franchise, contract or other document of a character required to be
described in the Registration Statement or Prospectus, or to be filed
as an exhibit, which is not described or filed as required; the
descriptions in the Registration Statement and the Prospectus of
statutes, regulations, contracts, franchises, other documents, pending
or threatened actions, suits or proceedings before any court or
arbitrator, or brought by any governmental agency, authority or body
fairly present the information required to be shown;
(vi) the Registration Statement has become effective under the
Act; any required filing of the Prospectus, and any supplements
thereto, pursuant to Rule 424(b), have been filed in the manner and
within the time period required by Rule 424(b); to the best knowledge
of such counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued, no proceedings for that
purpose have been instituted or threatened and the Registration
Statement and the Prospectus (other than the financial statements,
schedules and other financial information contained therein as to
which such counsel need
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<PAGE>
express no opinion) comply as to form in all material respects with
the applicable requirements of the Act and the rules thereunder;
(vii) the Company has the corporate power and authority to enter
into this Agreement and to issue, sell and deliver the Securities to
be sold by it to the Underwriters as provided herein; this Agreement
has been duly authorized, executed and delivered by the Company;
(viii) no consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation of the
transactions contemplated herein, except such as have been obtained
under the Act and such as may be required under the blue sky laws of
any jurisdiction in connection with the purchase and distribution of
the Securities by the Underwriters;
(ix) neither the issue and sale of the Securities, nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, result in a
breach or violation of, or constitute a default under any law (except
blue sky laws, as to which such counsel expresses no opinion) or the
Articles of Incorporation or bylaws of the Company or the terms of any
indenture or other agreement or instrument known to such counsel and
to which the Company or any of its subsidiaries is a party or bound or
any judgment, order or decree known to such counsel to be applicable
to the Company or any of its subsidiaries of any court, regulatory
body, administrative agency, governmental body or arbitrator having
jurisdiction over the Company or any of its subsidiaries; and
(x) to the best of such counsel's knowledge, except as described
in the Prospectus, no holders of securities of the Company have rights
to the registration of such securities under the Registration
Statement.
In addition, such counsel shall state that in the course of the
preparation of the Registration Statement and the Prospectus, such counsel
has participated in conferences with officers and representatives of the
Company and with the Company's independent public accountants, at which
conferences such counsel made inquiries of such officers, representatives
and accountants and discussed the contents of the Registration Statement
and the Prospectus and (without taking any further action to verify
independently the statements made in the Registration Statement and the
Prospectus and, except solely as expressly stated in the foregoing opinion,
without assuming responsibility for the accuracy, completeness or fairness
of such statements) nothing has come to such counsel's attention that
causes such counsel to believe that the Registration Statement as of the
Effective Date and as of the Closing Date or the Prospectus as of the date
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thereof and as of the Closing Date contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading
(it being understood that such counsel need not express any statement with
respect to the financial statements, schedules and other financial
information included in the Registration Statement or the Prospectus).
In rendering such opinion, such counsel may opine solely as to matters
involving the application of the laws of the State of California and the
federal law of the United States, and may rely as to matters of fact, to
the extent they deem proper, on certificates of responsible officers of the
Company and public officials. References to the Prospectus in this
paragraph (b) include any supplements thereto at the Closing Date.
(c) The Company shall have furnished to the Representatives the
opinion of ___________, special counsel to the Company on regulatory
matters, dated the Closing Date, to the effect that:
(i) the statements in the Prospectus under the headings "Risk
Factors - Intense Competition," "Risk Factors - Regulation,"
"Business-Competition," "Risk Factor - Limited Protection of Property
Rights; Risk of Infringement" and "Business-Government Regulation"
fairly and accurately summarize the laws, rules and regulations of the
Federal Communications Commission ("FCC") and the comparable state
regulatory agencies or bodies with direct regulatory jurisdiction over
telecommunications matters in the states in which the Company and any
of the Subsidiaries provide intrastate services (the "State Regulatory
Agencies") and, to the best knowledge of such counsel, the statements
in the Prospectus under the heading "Risk Factor - Limited Protection
of Property Rights; Risk of Infringement" fairly and accurately
summarize the right of the Company to use the SmarTalk name;
(ii) The Company possesses all telecommunic material
certificates, authorities or permits required by the FCC and State
Regulatory Agencies for the provision of the telecommunications
services currently provided by the Company, except where the failure
to possess such certificate, authorities or permits could not
reasonably be expected to have a material adverse effect on the
Company and the Company is in compliance in all material respects with
such certificates, authorities and permits;
(iii) to the best knowledge of such counsel, the Company is not
subject to any pending or threatened action, suit or proceeding before
the FCC or any State Regulatory Agency or (with respect to federal or
state
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telecommunications laws) any court of a character required to be
disclosed in the Registration Statement, which is not described as
required;
(iv) no consent, approval, authorization or order of the FCC or
any State Regulatory Agency is required for the issuance and sale of
the Securities or the consummation of the transactions contemplated
thereby; and
(v) neither the issuance and sale of the Securities nor the
consummation of the transactions contemplated hereby will result in a
breach or violation of any law, rule, regulation, judgment, order or
decree of the FCC or any State Regulatory Agency applicable to the
Company.
In rendering such opinion, such counsel may rely as to matters of
fact, to the extent they deem proper and reasonable, on certificates of
public officials and responsible officers of the Company, including
certificates that define the scope of the telecommunications services
provided by the Company. References to the Prospectus in this paragraph
(c) include any supplements thereto at the Closing Date.
(d) The Selling Shareholders shall have furnished to the
Representatives the opinion of __________, counsel for the Selling
Shareholders, dated the Closing Date, to the effect that:
(i) this Agreement, the Custody Agreement and the Power-of-
Attorney have been duly authorized, executed and delivered by the
Selling Shareholders, the Custody Agreement is valid and binding on
the Selling Shareholders and each Selling Shareholder has full legal
right and authority to sell, transfer and deliver in the manner
provided in this Agreement and the Custody Agreement the Securities
being sold by the Selling Shareholder hereunder;
(ii) the delivery by each Selling Shareholder to the several
Underwriters of certificates for the Securities being sold hereunder
by the Selling Shareholders against payment therefor as provided
herein, will pass good and marketable title to such Securities to the
several Underwriters, free and clear of all liens, encumbrances,
equities and claims whatsoever, and free and clear of any "adverse
claim" (as such term is used in Section 8-302 of the Uniform
Commercial Code as in effect in the State of California), assuming the
purchase of the Securities by the Underwriters in good faith and
without notice of any such "adverse claim";
(iii) no consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation by any
Selling
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<PAGE>
Shareholder of the transactions contemplated herein, except such as
may have been obtained under the Act and such as may be required under
the blue sky laws of any jurisdiction in connection with the purchase
and distribution of the Securities by the Underwriters and such other
approvals (specified in such opinion) as have been obtained; and
(iv) neither the sale of the Securities being sold by the Selling
Shareholders nor the consummation of any other of the transactions
herein contemplated by any Selling Shareholder or the fulfillment of
the terms hereof by any Selling Shareholder will conflict with, result
in a breach of, or constitute a default under the terms of any
indenture or other agreement or instrument known to such counsel and
to which the Selling Shareholder is a party or bound, or any order or
regulation known to such counsel to be applicable to the Selling
Shareholder of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over the Selling
Shareholder.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the State
of California or the United States, to the extent they deem proper and
specified in such opinion, upon the opinion of other counsel of good
standing whom they believe to be reliable and who are satisfactory to
counsel for the Underwriters, and (B) as to matters of fact, to the extent
they deem proper, on certificates of responsible officers of the Selling
Shareholders and public officials. References to the Prospectus in this
paragraph (d) include any supplements thereto at the Closing Date.
(e) The Representatives shall have received from Munger, Tolles &
Olson, counsel for the Underwriters, such opinion or opinions, dated the
Closing Date, with respect to the issuance and sale of the Securities, the
Registration Statement, the Prospectus (together with any supplement
thereto) and other related matters as the Representatives may reasonably
require, and the Company and the Selling Shareholders shall have furnished
to such counsel such documents as they reasonably request for the purpose
of enabling them to pass upon such matters.
(f) The Company shall have furnished to the Representatives a
certificate of the Company, signed on behalf of the Company by the Chief
Executive Officer and the principal financial or accounting officer of the
Company, dated the Closing Date, to the effect that the signers of such
certificate have carefully examined the Registration Statement, the
Prospectus, any supplement to the Prospectus and this Agreement and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of
the Closing
-20-
<PAGE>
Date with the same effect as if made on the Closing Date and the
Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the
Closing Date;
(ii) to the Company's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or threatened; and
(iii) since the date of the most recent financial statements
included in the Prospectus (exclusive of any supplement thereto),
there has been no material adverse change in the condition (financial
or other), earnings, business or properties of the Company, whether or
not arising from transactions in the ordinary course of business,
except as set forth in or contemplated in the Prospectus (exclusive of
any supplement thereto).
(g) Each Selling Shareholder shall have furnished to the
Representatives a certificate, signed by the Selling Shareholder, dated the
Closing Date, to the effect that the signer of such certificate has
carefully examined the Registration Statement, the Prospectus, any
supplement to the Prospectus and this Agreement and that the
representations and warranties of such Selling Shareholder in this
Agreement are true and correct in all material respects on and as of the
Closing Date to the same effect as if made on the Closing Date.
(h) At the Execution Time and at the Closing Date, Price Waterhouse
LLP shall have furnished to the Representatives a letter or letters, dated
respectively as of the Execution Time and as of the Closing Date, in form
and substance satisfactory to the Representatives, confirming that they are
independent accountants within the meaning of the Act and the Exchange Act
and the respective applicable published rules and regulations thereunder
and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included or incorporated in the
Registration Statement and the Prospectus and reported on by them
comply in form in all material respects with the applicable accounting
requirements of the Act and the Regulations;
(ii) on the basis of procedures (but not an examination in
accordance with generally accepted auditing standards) consisting of
the following:
(1) a reading of the minutes of the meetings of the
stockholders, directors and the Audit and Compensation Committees
of the Company and, where applicable, the Company's subsidiaries;
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<PAGE>
(2) performing the procedures specified by the American
Institute of Certified Public Accountants for a review of interim
financial information as described in SAS No. 71, Interim
Financial Information, on the unaudited interim financial
statements of the Company and its consolidated subsidiaries
included in the Registration Statement and reading the unaudited
interim financial data for the period from the date of the latest
audited balance sheet included in the Registration Statement to
the date of the latest available interim financial data; and
(3) inquiries of certain officials of the Company who have
responsibility for financial and accounting matters of the
Company regarding its subsidiaries as to transactions and events
subsequent to the December 31, 1995 audited financial statements
incorporated in the Prospectus,
nothing came to their attention which caused them to believe that:
(1) the unaudited financial statements included in the
Registration Statement and the Prospectus do not comply in form
in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations;
(2) any material modifications should be made to the
unaudited financial statements for them to be in conformity with
generally accepted accounting principles; or
(3) with respect to the period subsequent to June 30, 1995,
there were any changes, at a specified date not more than five
business days prior to the date of the letter, in the Long-Term
Debt or Capital Stock of the Company and its consolidated
subsidiaries or decreases in Working Capital or the Shareholders'
Equity of the Company as compared with the amounts shown on the
June 30, 1995 consolidated balance sheet included in the
Registration Statement and the Prospectus, or for the period from
July 1, 1995 to such specified date there were any decreases, as
compared with the corresponding period in the preceding year, in
Sales, or in total or per share amounts of Net Income (Loss) of
the Company and its consolidated subsidiaries, except in all
instances for changes or decreases set forth in such letter, in
which case the letter shall be accompanied by an explanation by
the Company as to the significance thereof unless said
explanation is not deemed necessary by the Representatives; and
-22-
<PAGE>
(iii) they have performed certain other specified procedures as
a result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company and its subsidiaries) set
forth in the Registration Statement and the Prospectus, including the
information set forth under the captions "Summary Consolidated
Financial Data," "Risk Factors", "Capitalization," "Dilution,"
"Selected Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" in the Prospectus, agrees with the
accounting records of the Company and its subsidiaries, excluding any
questions of legal interpretation.
References to the Prospectus in this paragraph (h) include any
supplement thereto at the Closing Date.
(i) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement
thereto), there shall not have been (i) any change or decrease specified in
the letter or letters referred to in paragraph (h) of this Section 7 or
(ii) any change, or any development involving a prospective change, in or
affecting the business or properties of the Company and its subsidiaries
the effect of which, in any case referred to in clause (i) or (ii) above,
is, in the reasonable judgment of the Representatives, so material and
adverse as to make it impractical or inadvisable to proceed with the
offering or delivery of the Securities as contemplated by the Registration
Statement (exclusive of any amendment thereof) and the Prospectus
(exclusive of any supplement thereto).
(j) At the Execution Time, the Company shall have furnished to the
Representatives a letter substantially in the form of Exhibit A hereto from
each executive officer and director of the Company addressed to the
Representatives, in which each such person agrees to certain restrictions,
on the terms provided therein, on the disposition of any shares of Common
Stock beneficially owned by such person or any securities convertible into,
or exchangeable for, shares of Common Stock.
(k) Prior to the Closing Date, the Company shall have furnished to the
Representatives such further information, certificates and documents as the
Representatives may reasonably request.
If any of the conditions specified in this Section 7 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representatives and counsel for
-23-
<PAGE>
the Underwriters, this Agreement and all obligations of the Underwriters
hereunder may be cancelled at, or at any time prior to, the Closing Date by the
Representatives. Notice of such cancellation shall be given to the Company in
writing or by telephone or telegraph confirmed in writing.
8. Reimbursement of Underwriters' Expenses. If the sale of the
----------------------------------------
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 7 hereof is not satisfied,
because of any termination pursuant to Section 11 hereof or because of any
refusal, inability or failure on the part of the Company or any Selling
Shareholder to perform any agreement herein or comply with any provision hereof
other than by reason of a default by the Underwriters, the Company will
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including fees and disbursements of counsel) that shall have been reasonably
incurred by them in connection with the proposed purchase and sale of the
Securities. If the Company is required to make any payments to the Underwriters
under this Section 8 because of any Selling Shareholder's refusal, inability or
failure to satisfy any condition to the obligations of the Underwriters set
forth in Section 7, the Selling Shareholders pro rata in proportion to the
percentage of Securities to be sold by each shall reimburse the Company on
demand for all amounts so paid.
9. Indemnification and Contribution.
---------------------------------
(a) The Company and the Selling Shareholders, jointly and severally,
agree to indemnify and hold harmless each Underwriter, the directors,
officers, employees and agents of each Underwriter and each person who
controls any Underwriter within the meaning of the Act against any and all
losses, claims, damages or liabilities, joint or several, to which they or
any of them may become subject under the Act or other federal or state
statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the registration statement for
the registration of the Securities as originally filed or in any amendment
thereof, or in any Preliminary Prospectus or the Prospectus, or in any
amendment thereof or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, not
misleading, and agrees to reimburse each such indemnified party, as
incurred, for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company and the Selling
-------- -------
Shareholders will not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon any
such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of an Underwriter
through the Representatives specifically for use in connection with
-24-
<PAGE>
the preparation thereof; provided further, that the indemnification
-------- -------
contained in this paragraph 9(a) with respect to any Preliminary Prospectus
shall not inure to the benefit of any Underwriter (or any person
controlling such Underwriter) on account of any such loss, claim, damage or
liability arising from the sale of the Securities by such Underwriter to
any person if a copy of the Prospectus was not delivered or sent to such
person within the time required by the Act and the Regulations, and it has
been finally decided by a court of law that such Prospectus was not so
delivered or sent, and if the Prospectus would have cured the defect giving
rise to such loss, claim, damage or liability, provided that the Company
has delivered such Prospectus in requisite quantity on a timely basis to
permit such delivery or sending. This indemnity agreement will be in
addition to any liability which the Company or the Selling Shareholders may
otherwise have.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its directors, each of its officers who signs the
Registration Statement, each person who controls the Company within the
meaning of either the Act or the Exchange Act, and each Selling Shareholder
to the same extent as the foregoing indemnity from the Company to each
Underwriter, but only with reference to written information relating to
such Underwriter furnished to the Company by or on behalf of such
Underwriter through the Representatives specifically for inclusion in the
documents referred to in the foregoing indemnity. This indemnity agreement
will be in addition to any liability which any Underwriter may otherwise
have. The Company and each Selling Shareholder acknowledges that the
statements set forth in the last paragraph on the cover page, in the
stabilization legend on the inside cover page, and under the heading
"Underwriting" in any Preliminary Prospectus and the Prospectus constitute
the only information furnished in writing by or on behalf of the several
Underwriters for inclusion in any Preliminary Prospectus or the Prospectus,
and you, as the Representatives, confirm that such statements are correct.
(c) Promptly after receipt by an indemnified party under this Section
9 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under this Section 9, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party
(i) will not relieve it from liability under paragraph (a) or (b) above
unless and to the extent it did not otherwise learn of such action and such
failure results in the forfeiture by the indemnifying party of substantial
rights and defenses and (ii) will not, in any event, relieve the
indemnifying party from any obligations to any indemnified party other than
the indemnification obligation provided in paragraph (a) or (b) above. The
indemnifying party shall be entitled to appoint counsel of the indemnifying
party's choice at the indemnifying party's expense to represent the
indemnified party in any action for which indemnification is sought (in
which case the indemnifying party shall not thereafter be responsible for
the fees and
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<PAGE>
expenses of any separate counsel retained by the indemnified party or
parties except as set forth below); provided, however, that such counsel
-------- -------
shall be reasonably satisfactory to the indemnified party. Notwithstanding
the indemnifying party's election to appoint counsel to represent the
indemnified party in an action, the indemnified party shall have the right
to employ separate counsel (including local counsel), and the indemnifying
party shall bear the reasonable fees, costs and expenses of such separate
counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict
of interest, (ii) the actual or potential defendants in, or targets of, any
such action include both the indemnified party and the indemnifying party
and the indemnified party shall have reasonably concluded that there may be
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party,
(iii) the indemnifying party shall not have employed counsel reasonably
satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after notice of the institution of such action or
(iv) the indemnifying party shall authorize in writing the indemnified
party to employ separate counsel at the expense of the indemnifying party.
An indemnifying party will not, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be
sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement,
compromise or consent includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit or
proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 9 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company, the Selling Shareholders,
and the Underwriters agree to contribute to the aggregate losses, claims,
damages and liabilities (including legal or other expenses reasonably
incurred in connection with investigating or defending same) (collectively
"Losses") to which the Company, the Selling Shareholders, or one or more of
the Underwriters may be subject in such proportion as is appropriate to
reflect the relative benefits received by the Company, by the Selling
Shareholders, and by the Underwriters from the offering of the Securities;
provided, however, that in no case shall any Underwriter (except as may be
-------- -------
provided in any agreement among underwriters relating to the offering of
the Securities) be responsible for any amount in excess of the underwriting
discount or commission applicable to the Securities purchased by such
Underwriter hereunder. If the allocation provided by the immediately
preceding sentence is unavailable for any reason, the Company, the Selling
Shareholders, and the Underwriters shall contribute in such proportion as
is appropriate to reflect not only such relative benefits but also the
relative fault of the Company, the Selling Shareholders, and of the
Underwriters in connection with the statements or omissions which resulted
in such Losses as well as any other relevant equitable considerations.
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<PAGE>
Benefits received by the Company and the Selling Shareholders shall be
deemed to be equal to their respective net proceeds from the offering
(before deducting expenses), and benefits received by the Underwriters
shall be deemed to be equal to the total underwriting discounts and
commissions, in each case as set forth on the cover page of the Prospectus.
Relative fault shall be determined by reference to whether any alleged
untrue statement or omission relates to information provided by the
Company, the Selling Shareholders, or the Underwriters. The Company, the
Selling Shareholders, and the Underwriters agree that it would not be just
and equitable if contribution were determined by pro rata allocation or any
other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For
purposes of this Section 9, each person who controls an Underwriter within
the meaning of either the Act or the Exchange Act and each director,
officer, employee and agent of an Underwriter shall have the same rights to
contribution as such Underwriter, and each person who controls the Company
within the meaning of either the Act or the Exchange Act, each officer of
the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to the applicable terms and conditions of
this paragraph (d).
10. Default by an Underwriter. If any one or more Underwriters shall
--------------------------
fail to purchase and pay for any of the Securities agreed to be purchased by
such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Underwriters) the
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase; provided, however, that in the event that the aggregate amount of
-------- -------
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter,
Selling Shareholder, or the Company. In the event of a default by any
Underwriter as set forth in this Section 10, the Closing Date shall be postponed
for such period, not exceeding seven days, as the Representatives shall
determine in order that the required changes in the Registration Statement and
the Prospectus or in any other documents or arrangements may be effected.
Nothing contained in this Agreement shall relieve any defaulting Underwriter of
its liability, if any, to
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<PAGE>
the Company, the Selling Shareholders, and any nondefaulting Underwriter for
damages occasioned by its default hereunder.
11. Termination. This Agreement shall be subject to termination in
------------
the absolute discretion of the Representatives, by notice given to the Company
prior to delivery of and payment for the Securities, if prior to such time (i)
trading in the Company's Common Stock shall have been suspended by the
Commission or on NMS or trading in securities generally on NMS shall have been
suspended or limited or minimum prices shall have been established on NMS, (ii)
a banking moratorium shall have been declared either by federal or New York
state authorities or (iii) there shall have occurred any outbreak or escalation
of hostilities, declaration by the United States of a national emergency or war
or other calamity or crisis the effect of which on financial markets is such as
to make it, in the judgment of the Representatives, impracticable to market the
Securities.
12. Representations and Indemnities to Survive. The respective
-------------------------------------------
agreements, representations, warranties, indemnities and other statements of the
Company or its officers and of the Underwriters set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter, any Selling Shareholder,
or the Company or any of the officers, directors or controlling persons referred
to in Section 9 hereof, and will survive delivery of and payment for the
Securities. The provisions of Sections 8 and 9 hereof shall survive the
termination or cancellation of this Agreement.
13. Notices. All communications hereunder will be in writing and
--------
effective only on receipt, and, if sent to the Representatives, will be mailed,
delivered or telegraphed and confirmed to them, care of Salomon Brothers Inc, at
Seven World Trade Center, New York, New York 10048; or, if sent to the Company,
will be mailed, delivered or telegraphed and confirmed to it at 1640 South
Sepulveda Boulevard, Suite 500, Los Angeles, California 90025, Attention: Chief
Executive Officer; or if sent to the Selling Shareholders, will be mailed,
delivered or telegraphed and confirmed to them at ________________.
14. Successors. This Agreement will inure to the benefit of and be
-----------
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 9 hereof, and no
other person will have any right or obligation hereunder.
15. Applicable Law. This Agreement will be governed by and construed
---------------
in accordance with the laws of the State of New York.
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<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company and the several Underwriters.
Very truly yours,
SMARTALK TELESERVICES, INC.
By:
-----------------------------------
Chief Executive Officer
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
SALOMON BROTHERS INC
CS FIRST BOSTON
DONALDSON LUFKIN & JENRETTE
SECURITIES CORPORATION
By: Salomon Brothers Inc
By:
-------------------------------
Its:
-------------------------------
For themselves and the other several
Underwriters named in Schedule I to
the foregoing Agreement
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<PAGE>
EXHIBIT A
[Letterhead of executive officer or director of SmarTalk Teleservices, Inc.]
SmarTalk Teleservices, Inc.
Public Offering of Common Stock
-------------------------------
_________ ____, 1996
Salomon Brothers Inc
CS First Boston
Donaldson Lufkin & Jenrette Securities Corporation
As Representatives of the several Underwriters,
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Dear Sirs:
This letter is being delivered to you in connection with the proposed
Underwriting Agreement (the "Underwriting Agreement"), between SmarTalk
Teleservices, Inc., a California corporation (the "Company"), and each of you as
representatives of a group of Underwriters named therein, relating to an
underwritten public offering of Common Stock, no par value (the "Common Stock"),
of the Company.
In order to induce you and the other Underwriters to enter into the
Underwriting Agreement, the undersigned agrees not to offer, sell or contract to
sell, or otherwise dispose of, directly or indirectly, or announce an offering
of, any shares of Common Stock beneficially owned by the undersigned or any
securities convertible into, or exchangeable for, shares of Common Stock for a
period of 180 days following the day on which the Underwriting Agreement is
executed without the prior written consent of Salomon Brothers Inc; provided,
however, that the undersigned may exercise any outstanding stock options without
such consent.
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<PAGE>
If for any reason the Underwriting Agreement shall be terminated prior to
the Closing Date (as defined in the Underwriting Agreement), the agreement set
forth above shall likewise be terminated.
Yours very truly,
[Signature of executive officer or director]
[Name and address of executive officer or
director]
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<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
SMARTALK TELESERVICES, INC.
The undersigned certify that:
1. They are the president and the assistant secretary, respectively, of
SmarTalk TeleServices, Inc., a California corporation.
2. The Articles of Incorporation of this corporation are hereby amended
and restated to read in full as follows:
I
The name of this corporation is SmarTalk TeleServices, Inc.
II
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the California Corporations Code
(the "Corporations Code") other than the banking business, the trust company
business or the practice of a profession permitted to be incorporated by the
Corporations Code.
III
The corporation is authorized to issue a total of 100,000,000 shares of
common stock with no par value; and 10,000,000 shares of preferred stock with no
par value and with such rights, preferences, privileges and restrictions as
shall be approved by the board of directors.
Immediately upon the filing of this Amended and Restated Articles of
Incorporation, each one (1) outstanding share of the corporation's common stock,
no par value, will be reverse split, automatically, without further action, into
.5625 shares of common stock.
The shares of preferred stock may be issued from time to time in one or
more series. The board of directors is authorized, subject to limitations
prescribed by law and the provisions of this Article III, to provide for the
issuance of the shares of preferred stock in series and, by filing a certificate
pursuant to the
<PAGE>
applicable law of the State of California, to establish from time to time the
number of shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof.
IV
The liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
V
The corporation is authorized to provide indemnification of its agents (as
defined in Section 317 of the Corporations Code) for breach of duty to the
corporation and its shareholders through bylaw provisions or through agreements
with the agents, or both, in excess of the indemnification otherwise permitted
by Section 317 of the Corporations Code, subject to the limits on such excess
indemnification set forth in Section 204 of the Corporations Code.
VI
Immediately upon the closing of an underwritten initial public offering of
the corporation's common stock, the power of the shareholders to take any action
by written consent without a meeting shall be eliminated and any further action
taken by the shareholders shall only be taken at a duly convened meeting of the
shareholders, notwithstanding that applicable law would otherwise permit such
shareholder action to be taken by written consent without a meeting.
VII
Notwithstanding Section 708 of the California Corporations Code,
shareholders may not cumulate their votes in any election of directors. This
Article VII shall become effective only when the corporation becomes a listed
corporation within the meaning of Section 301.5 of the California Corporations
Code.
3. The foregoing amendment and restatement of Articles of Incorporation
has been duly approved by the board of directors.
4. The foregoing amendment and restatement of Articles of Incorporation
has been duly approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code. The total number of outstanding shares of
the corporation is 15,687,500. The number of shares voting in favor of the
amendment and restatement equaled or exceeded the vote required. The percentage
vote required was more than 50%.
2
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We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
DATE: August 15, 1996
/s/ Robert H. Lorsch
---------------------------
Robert H. Lorsch
President
/s/ Glen Andrew Folck
---------------------------
Glen Andrew Folck
Assistant Secretary
3
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
SMARTALK TELESERVICES, INC.
A CALIFORNIA CORPORATION
ARTICLE I. OFFICES
SECTION 1. Principal Executive Office. The principal executive office of
--------------------------
the corporation is hereby fixed and located at 1640 S. Sepulveda Boulevard,
Suite 500, Los Angeles, California 90025. The Board of Directors (herein called
the "Board") is hereby granted full power and authority to change said principal
executive office from one location to another. Any such change shall be noted
on these Amended and Restated Bylaws (the "Bylaws") opposite this Section, or
this Section may be amended to state the new location.
SECTION 2. Other Offices. Branch or subordinate offices may at any time
-------------
be established by the Board at any place or places.
ARTICLE II. SHAREHOLDERS
SECTION 1. Place of Meetings. Regular or special meetings of the
-----------------
shareholders shall be held at any place within or without the State of
California which has been designated in the notice of meeting or, if not stated
in the notice or there is no notice, designated by resolution of the Board. In
the absence of such designation regular meetings shall be held at the principal
executive office of the corporation.
SECTION 2. Annual Meetings. The annual meetings of shareholders shall be
---------------
held on May 15th of each year, at 10:00 a.m., local time, or such other date or
such other time as may be fixed by the Board; provided, however, that should
said day fall upon a Saturday, Sunday, or legal holiday observed by the
corporation at its principal executive office, then any such annual meeting of
shareholders shall be held at the same time and place on the next day thereafter
ensuing which is a full business day. At such meetings directors shall be
elected and any other proper business may be transacted.
SECTION 3. Special Meetings. Special meetings of the shareholders may be
----------------
called at any time by the Board, the Chairman of the Board, the President, or by
the holders of shares entitled to cast not less than 10 percent of the votes at
such meeting. Upon request in writing to the Chairman of the Board, the
President, any Vice President or
<PAGE>
the Secretary by any person (other than the Board) entitled to call a special
meeting of the shareholders, the officer forthwith shall cause notice to be
given to the shareholders entitled to vote that a meeting will be held at a time
requested by the person or persons calling the meeting, not less than 35 nor
more than 60 days after the receipt or request. If the notice is not given
within 20 days after receipt of the request, the persons entitled to call the
meeting may give the notice.
SECTION 4. Notice of Annual or Special Meeting. Written notice of each
-----------------------------------
annual or special meeting of shareholders shall be given not less than 10 nor
more than 60 days before the date of the meeting to each shareholder entitled to
vote thereat. Such notice shall state the place, date, and hour of the meeting
and (i) in the case of a special meeting the general nature of the business to
be transacted, and no other business may be transacted, or (ii) in the case of
the annual meeting, those matters which the Board, at the time of the mailing of
the notice, intends to present for action by the shareholders, but, subject to
the provisions of applicable law, any proper matter may be presented at the
meeting for such action. The notice of any meeting at which directors are to be
elected shall include the names of nominees intended at the time of the notice
to be presented by management for election.
Notice of a shareholders meeting shall be given either personally or by
mail or by other means of written communication, addressed to the shareholder at
the address of such shareholder appearing on the books of the corporation or
given by the shareholder to the corporation for the purpose of notice; or, if no
such address appears or is given, at the place where the principal executive
office of the corporation is located or by publication at least once in a
newspaper of general circulation in the county in which the principal executive
office is located. Notice by mail shall be deemed to have been given at the
time a written notice is deposited in the United States mails, postage prepaid.
Any other written notice shall be deemed to have been given at the time it is
personally delivered to the recipient or is delivered to a common carrier for
transmission, or actually transmitted by the person giving the notice by
electronic means, to the recipient.
SECTION 5. Quorum. A majority of the shares entitled to vote, represented
------
in person or by proxy, shall constitute a quorum at any meeting of shareholders.
The shareholders present at a duly called or held meeting at which a quorum is
present may continue to do business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum, if any action
2
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taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.
SECTION 6. Adjourned Meeting and Notice Thereof. Any shareholders
------------------------------------
meeting, whether or not a quorum is present, may be adjourned from time to time
by the vote of a majority of the shares, the holders of which are either present
in person or represented by proxy thereat, but in the absence of a quorum
(except as provided in Section 5 of this Article) no other business may be
transacted at such meeting.
It shall not be necessary to give any notice of the time and place of the
adjourned meeting or of the business to be transacted thereat, other than by
announcement at the meeting at which such adjournment is taken; provided,
however, when any shareholders meeting is adjourned for more than 45 days or, if
after adjournment a new record date is fixed for the adjourned meeting, notice
of the adjourned meeting shall be given as in the case of an original meeting.
SECTION 7. Voting. The shareholders entitled to notice of any meeting or
------
to vote at any such meeting shall be only persons in whose name shares stand on
the stock records of the corporation on the record date determined in accordance
with Section 9 of this Article. Unless the corporation shall have consummated
an initial public offering of its common stock, any and all actions for which
shareholder approval is required by California law or by these Bylaws or
otherwise, shall require the prior approval (by vote or written consent) of the
shareholders entitled to exercise not less than seventy-five percent (75%) of
the voting power of this corporation, notwithstanding that applicable law would
otherwise permit such actions with the approval of a lesser percentage.
Voting shall in all cases be subject to the provisions of Chapter 7 of the
California Corporations Code and to the following provisions:
(a) Subject to clause (g), shares held by an administrator, executor,
guardian, conservator or custodian may be voted by such holder either in person
or by proxy, without a transfer of such shares into the holder's name; and
shares standing in the name of a trustee may be voted by the trustee, either in
person or by proxy, but no trustee shall be entitled to vote shares held by such
trustee without a transfer of such shares into the trustee's name.
(b) Shares standing in the name of a receiver may be voted by such
receiver; and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into the receiver's name if authority
to do so is contained in the order of the court by which such receiver was
appointed.
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(c) Subject to the provisions of Section 705 of the California
Corporations Code, and except where otherwise agreed in writing between the
parties, a shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
(d) Shares standing in the name of a minor may be voted and the
corporation may treat all rights incident thereto as exercisable by the minor,
in person or by proxy, whether or not the corporation has notice, actual or
constructive, of the nonage, unless a guardian of the minor's property has been
appointed and written notice of such appointment given to the corporation.
(e) Shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxy holder as the bylaws of
such other corporation may prescribe, or in the absence of such provision, as
the Board of Directors of such other corporation may determine or, in the
absence of such determination, by the chairman of the board, president or any
vice president of such other corporation, or by any other person authorized to
do so by the board, president or any vice president of such other corporation.
Shares which are purported to be voted or any proxy purported to be executed in
the name of a corporation (whether or not any title of the person signing is
indicated) shall be presumed to be voted or the proxy executed in accordance
with the provisions of this subdivision, unless the contrary is shown.
(f) Shares of the corporation owned by any subsidiary shall not be
entitled to vote on any matter.
(g) Shares held by the corporation in a fiduciary capacity, and shares
of the corporation held in a fiduciary capacity by any subsidiary, shall not be
entitled to vote on any matter, except to the extent that the settlor or
beneficial owner possesses and exercises a right to vote or to give the
corporation binding instructions as to how to vote such shares.
(h) If shares stand of record in the names of two or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in common,
husband and wife as community property, tenants by the entirety, voting
trustees, persons entitled to vote under a shareholder voting agreement or
otherwise, or if two or more persons (including proxy-holders) have the same
fiduciary relationship respecting the same shares, unless the secretary of the
corporation is given written notice to the contrary and is furnished with a copy
of the instrument or order appointing them or creating the relationship wherein
4
<PAGE>
it is so provided, their acts with respect to voting shall have the following
effect:
(i) If only one votes, such act binds all;
(ii) If more than one vote, the act of the majority so voting
binds all;
(iii) If more than one vote, but the vote is evenly split on any
particular matter, each faction may vote the securities in question
proportionately.
If the instrument so filed or the registration of the shares shows that any such
tenancy is held in unequal interests, a majority or even split for the purpose
of this section shall be a majority or even split in interest.
Elections need not be by ballot; provided, however, that all elections for
directors must be by ballot upon demand made by a shareholder at the meeting and
before the voting begins.
In any election of directors, the candidates receiving the highest number
of votes of the shares entitled to be voted for them up to the number of
directors to be elected by such shares are elected.
SECTION 8. Cumulative Voting. Notwithstanding Section 708 of the
-----------------
California Corporations Code, shareholders may not cumulate their votes in any
election of directors. This provision shall become effective only when the
corporation becomes a listed corporation within the meaning of Section 301.5 of
the California Corporations Code.
SECTION 9. Record Date. The Board may fix, in advance, a, record date for
-----------
the determination of the shareholders entitled to notice of any meeting or to
vote or entitled to receive payment of any dividend or other distribution, or
any allotment of rights, or to exercise rights in respect of any other lawful
action. The record date so fixed shall be not more than 60 nor less than 10
days prior to the date of the meeting nor more than 60 days prior to any other
action. When a record date is so fixed, only shareholders of record on that
date are entitled to notice of and to vote at the meeting or to receive the
dividend, distribution, or allotment of rights, or to exercise of the rights, as
the case may be, notwithstanding any transfer of shares on the books of the
corporation after the record date. A determination of shareholders of record
entitled to notice of or to vote at a meeting of shareholders shall apply to any
adjournment of the meeting unless the Board fixes a new record date for the
adjourned
5
<PAGE>
meeting. The Board shall fix a new record date if the meeting is adjourned for
more than 45 days.
If no record date is fixed by the Board, the record date for determining
shareholders entitled to notice of or to vote at a meeting of shareholders shall
be at the close of business on the business day next preceding the day on which
notice is given or, if notice is waived, at the close of business on the
business day next preceding the day on which the meeting is held. The record
date for determining shareholders for any purpose other than set forth in this
Section 9 or Section 10 of this Article shall be at the close of business on the
day on which the Board adopts the resolution relating thereto, or the sixtieth
day prior to the date of such other action, whichever is later.
SECTION 10. Proxies. Every person entitled to vote shares has the right
-------
to do so either in person or by one or more persons authorized by a written
proxy executed by such shareholder and filed with the Secretary. Any proxy duly
executed is not revoked and continues in full force and effect until revoked by
the person executing it prior to the vote pursuant thereto by a writing
delivered to the corporation stating that the proxy is revoked or by a
subsequent proxy executed by, or by attendance at the meeting and voting in
person by, the person executing the proxy; provider however, that no proxy shall
be valid after the expiration of 11 months from the date of its execution unless
otherwise provided in the proxy.
SECTION 11. Inspectors of Election. In advance of any meeting of
----------------------
shareholders, the Board may appoint any persons other than nominees for office
as inspectors of election to act at such meeting and any adjournment thereof.
If inspectors of election be not so appointed, or if any persons so appointed
fail to appear or refuse to act, the chairman of any such meeting may, and on
the request of any shareholder or shareholder's proxy shall, make such
appointment at the meeting. The number of inspectors shall be either one or
three. If appointed at a meeting on the request of one or more shareholders or
proxies, the majority of shares present shall determine whether one or three
inspectors are to be appointed.
The duties of such inspectors shall be as prescribed by Section 707(b) of
the California Corporations Code and shall include: determining the number of
shares outstanding and the voting power of each; the shares represented at the
meeting, the existence of a quorum; the authenticity, validity, and effect of
proxies; receiving votes, ballots, or consents; hearing and determining all
challenges and questions in any way arising in connection with the right to
vote; counting and tabulating al:L votes or consents, determining when the polls
shall close; determining the result; and doing such acts as may be proper to
conduct the
6
<PAGE>
election or vote with fairness to all shareholders. If there are three
inspectors of election, the decision, act, or certificate of a majority is
effective in all respects as the decision, act, or certificate of all.
ARTICLE III. DIRECTORS
SECTION 1. Powers. Subject to the limitations of the Articles of
------
Incorporation (the "Articles"), of these Bylaws, and of the California
Corporations Code relating to action required to be approved by the shareholders
or by the outstanding shares, the business and affairs of the corporation shall
be managed and all corporate powers shall be exercised by or under the direction
of the Board. The Board may delegate the management of the day-to-day operation
of the business of the corporation to a management company or other person
provided that the business and affairs of the corporation shall be managed and
all corporate powers shall be exercised under the ultimate direction of the
Board. Without prejudice to such general power" but subject to the same
limitations, it is hereby expressly declared that the Board shall have the
following powers in addition to the other powers enumerated in these Bylaws:
(a) To select and remove all the other officers, agents, and
employees of the corporation, prescribe the powers and duties for them as may
not be inconsistent with law, or with the Articles or these Bylaws, fix their
compensation, and require from them security for faithful service.
(b) To conduct, manage, and control the affairs and business of the
corporation and to make such rules and regulations therefor not inconsistent
with law, or with the Articles or these Bylaws, as they may deem best.
(c) To adopt, make, and use a corporate seal, and to prescribe the
forms of certificates of stock, and to alter the form of such seal and of such
certificates from time to time as in their judgment they may deem best.
(d) To authorize the issuance of shares of stock of he corporation
from time to time, upon such terms and for such consideration as may be lawful.
(e) To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations, or other evidences of debt and securities therefor.
SECTION 2. Number and Qualification of Directors. The authorized number
-------------------------------------
of directors shall be not less than
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<PAGE>
five (5) nor more than nine (9) until changed by amendment of the Articles or by
a Bylaw duly adopted by the shareholders amending this Section 2.
SECTION 3. Election and Term of Office. The directors shall be elected at
---------------------------
each annual meeting of shareholders but if any such annual meeting is not held
or the directors are not elected thereat, the directors may be elected at any
special meeting of shareholders held for that purpose. Each director shall hold
office until the next annual meeting and until a successor has been elected and
qualified.
SECTION 4. Vacancies. Any director may resign effective upon giving
---------
written notice to the Chairman of the Board, the President, Secretary, or the
Board, unless the notice specifies a later time for the effectiveness of such
resignation. If the resignation is effective at a future time, a successor may
be elected to take office when the resignation becomes effective.
Vacancies in the Board, including those existing as a result of a removal
of a director, may be filled by a majority of the remaining directors, though
less than a quorum, or by a sole remaining director, and each director so
elected shall hold office until the next annual meeting and until such
director's successor has been elected and qualified.
A vacancy or vacancies in the Board shall be deemed to exist in case of the
death, resignation, or removal of any director, or if the authorized number of
directors be increased, or if the shareholders fail, at any annual or special
meeting of shareholders at which any director or directors are elected, to elect
the full authorized number of directors to be voted for at that meeting.
The Board may declare vacant the office of a director who has been declared
of unsound mind by an order of court or convicted of a felony.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors. Any such election by written
consent requires the consent of a majority of the outstanding shares entitled to
vote. If the Board accepts the resignation of a director tendered to take
effect at a future time, the Board or the shareholders shall have power to elect
a successor to take office when the resignation is to become effective.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of :he director's term of office.
8
<PAGE>
SECTION 5. Place of Meeting. Regular or special meetings of the Board
----------------
shall be held at any place within or without the State of California which has
been designated from time to time by the Board. In the absence of such
designation regular meetings shall be held at the principal executive office of
the corporation.
SECTION 6. Regular Meetings. Immediately following each annual meeting of
----------------
shareholders the Board shall hold a regular meeting for the purpose of
organization, election of officers, and the transaction of other business.
SECTION 7. Special Meetings. Special meetings of the Board for any
----------------
purpose or purposes may be called at any time by the Chairman of the Board, the
President, or the Secretary or by any two directors.
Special meetings of the Board shall be held upon four days' written notice
or 48 hours' notice given personally or by telephone, telegraph, telex, or other
similar means of communication. Any such notice shall be addressed or delivered
to each director at such director's address as it is shown upon the records of
the corporation or as may have been given to the corporation by the director for
purposes of notice or, if such address is not shown on such records or is not
readily ascertainable, at the place in which the meetings of the directors are
regularly held.
Notice by mail shall be deemed to have been given at the time a written
notice is deposited in the United States mails, postage prepaid. Any other
written notice shall be deemed to have been given at the time it is personally
delivered to the recipient or is delivered to a common carrier for transmission,
or actually transmitted by the person giving the notice by electronic means, to
the recipient. Oral notice shall be deemed to have been given at the time it is
communicated, in person or by telephone or wireless to the recipient or to a
person at the office of the recipient who the person giving the notice has
reason to believe will promptly communicate it to the recipient.
SECTION 8. Quorum. A majority of the authorized number of directors
------
constitutes a quorum of the Board for the transaction of business, except to
adjourn as hereinafter provided. Every act or decision done or made by a
majority of the directors present at a meeting duly held at which a quorum is
present shall be regarded as the act of the Board, unless a greater number be
required by law or by the Articles. A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of
directors, if any action taken is approved by at least a majority of the
required quorum for such meeting.
9
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SECTION 9. Participation in Meetings by Conference Telephone. Members of
-------------------------------------------------
the Board may participate in a meeting through use of conference telephone or
similar communications equipment, so long as all members participating in such
meeting can hear one another.
SECTION 10. Waiver of Notice. The transactions of any meeting of the
----------------
Board, however called and noticed or wherever held, are as valid as though had
at a meeting duly held after regular call and notice if a quorum be present and
if, either before or after the meeting, each of the directors not present signs
a written waiver of notice, a consent to holding such meeting or an approval of
the minutes thereof. All such waivers, consents, or approvals shall be filed
with the corporate records or made a part of the minutes of the meeting.
SECTION 11. Adjournment. A majority of the directors present, whether or
-----------
not a quorum is present, may adjourn any directors' meeting to another time and
place. Notice of the time and place of holding an adjourned meeting need not be
given to absent directors if the time and place be fixed at the meeting
adjourned. If the meeting is adjourned for more than 24 hours, notice of any
adjournment to another time or place shall be given prior to the time of the
adjourned meeting to the directors who were not present at the time of the
adjournment.
SECTION 12. Fees and Compensation. Directors and members of committees
---------------------
may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by the Board.
SECTION 13. Action Without Meeting. Any action required or permitted to
----------------------
be taken by the Board may be taken without a meeting if all members of the Board
shall individually or collectiveLy consent in writing to such action. Such
consent or consents shaLl have the same effect as a unanimous vote of the Board
and shall be filed with the minutes of the proceedings of the Board.
SECTION 14. Rights of Inspection. Every director shall have the absolute
--------------------
right at any reasonable time to inspect and copy all books, records, and
documents of every kind and to inspect he physical properties of the corporation
and also of its subsidiary corporations, domestic or foreign. Such inspection
by a director may be made in person or by agent or attorney and includes the
right to copy and obtain extracts.
SECTION 15. Committees. The Board may appoint one or more committees,
----------
each consisting of two or more directors, and delegate to such committees any of
the authority of the Board except with respect to:
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(a) The approval of any action for which the California Corporations
Code also requires shareholders' approval or approval of the outstanding shares;
(b) The filling of vacancies on the Board or on any committee;
(c) The fixing of compensation of the directors for serving on the
Board or on any committee;
(d) The amendment or repeal of Bylaws or the adoption of new Bylaws;
(e) The amendment or repeal of any resolution of the Board which by
its express terms is not so amendable or repealable;
(f) A distribution to the shareholders of the corporation except at a
rate or in a periodic amount or within a price range determined by the Board;
(g) The appointment of other committees of the Board or the members
thereof.
Any such committee must be appointed by resolution adopted by a majority of
the authorized number of directors and may be designated an Executive Committee
or by such other name as the Board shall specify. The Board shall have the
power to prescribe the manner in which proceedings of any such committee shall
be conducted. In the absence of any such prescription, such committee shall
have the power to prescribe the manner in which its proceedings shall be
conducted. Unless the Board or such committee shall otherwise provide, the
regular and special meetings and other actions of any such committee shall be
governed by the provisions of this Article applicable to meetings and actions of
the Board. Minutes shall be kept of each meeting of each committee.
ARTICLE IV. OFFICERS
SECTION 1. Officers. The officers of the corporation shall be a
---------
president, a secretary, and a chief financial officer. The corporation may also
have, at the discretion of the Board, a chairman of the board, a treasurer, one
or more vice-presidents, one or more assistant secretaries, one or more
assistant treasurers, and such other officers as may be elected or appointed in
accordance with the provisions of Section 3 of this Article.
SECTION 2. Election. The officers of the corporation, except such
--------
officers as may be elected or appointed in accordance with the provisions of
Section 3 or Section 5 of this Article, shall be chosen annually by, and
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shall serve at the pleasure of, the Board, and shall hold their respective
offices until their resignation, removal, or other disqualification from
service, or until their respective successors shall be elected.
SECTION 3. Subordinate Officers. The Board may elect, and may empower the
--------------------
President to appoint, such other officers as the business of the corporation may
require, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these Bylaws or as the Board may from
time to time determine.
SECTION 4. Removal and Resignation. Any officer may be removed, either
-----------------------
with or without cause, by the Board of Directors at any time, or, except in the
case of an officer chosen by the Board, by any officer upon whom such power of
removal may be conferred by the Board. Any such removal shall be without
prejudice to the rights, if any, of the officer under any contract of employment
of the officer.
Any officer may resign at any time by giving written notice to the
corporation, but without prejudice to the rights, if any, of the corporation
under any contract to which the officer is a party. Any such resignation shall
take effect at the date of the receipt of such notice or at any later time
specified therein; and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
SECTION 5. Vacancies. A vacancy in any office because of death,
---------
resignation, removal, disqualification, or any other cause shall be filled in
the manner prescribed in these Bylaws for regular election or appointment to
such office.
SECTION 6. Chairman of the Board. The Chairman of the Board, if there
---------------------
shall be such an officer, shall, if present, preside at all meetings of the
Board and exercise and perform such other powers and duties as may be from time
to time assigned by the Board.
SECTION 7. President. Subject to such powers, if any, as may be given by
---------
the Board to the Chairman of the Board, if there be such an officer, the
President is the general manager and chief executive officer of the corporation
and has, subject to the control of the Board, general supervision, direction,
and control of the business and officers of the corporation. The President shall
preside at all meetings of the shareholders and, in the absence of the Chairman
of the Board, or if there be none, at all meetings of the Board. The President
has the general powers and duties of management usually vested in the office of
president and general manager of a corporation and such other powers and duties
as may be prescribed by the Board.
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SECTION 8. Vice President. In the absence or disability of the
--------------
President, the Vice Presidents in order of their rank as filed by the Board or,
if not ranked, the Vice President designated by the Board, shall perform all the
duties of the President, and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the President. The Vice Presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the Board.
SECTION 9. Secretary. The Secretary shall keep or cause to be kept, at
---------
the principal executive office and such other place as the Board may order, a
book of minutes of all meetings of shareholders, the Board, and its committees,
with the time and place of holding, whether regular or special, and, if special,
how authorized, the notice thereof given, the names of those present at Board
and committee meetings, the number of shares present or represented at
shareholders' meetings, and the proceedings thereof. The Secretary shall keep,
or cause to be kept, a copy of the Bylaws of the corporation at the principal
executive office or business office in accordance with Section 213 of the
California Corporations Code.
The Secretary shall keep, or cause to be kept, at the Principal executive
office or at the office of the corporation's transfer agent or registrar, if one
be appointed, a share register, or a duplicate share register, showing the names
of the shareholders and their addresses, the number and classes of shares held
by each, the number and date of certificates issued for the same, and the number
and date of cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all the meetings
of the shareholders and of the Board and of any committees thereof required by
these Bylaws or by law to be given, shall keep the seal of the corporation in
safe custody, and shall have such other powers and perform such other duties as
may be prescribed by the Board.
SECTION 10. The Chief Financial Officer. The Chief Financial Officer
---------------------------
shall keep and maintain, or cause to be kept and maintained, adequate and
correct accounts of the properties and business transactions of the corporation,
and shall send or cause to be sent to the shareholders of the corporation such
financial statements and reports as are by law or these Bylaws required to be
sent to them. The books of account shall at all times be open to inspection by
any director.
The Chief Financial Officer shall cause all moneys and other valuables to
be deposited in the name and to the credit of the corporation with such
depositaries as may be
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designated by the Board. The Chief Financial Officer shall disburse the funds of
the corporation as may be ordered by the Board, shall render to the President
and directors, whenever they request it, an account of all transactions as Chief
Financial Officer and of the financial condition of the corporation, and shall
have such other powers and perform such other duties as may be prescribed by the
Board.
ARTICLE V. OTHER PROVISIONS
SECTION 1. Inspection of Corporate Records.
-------------------------------
(a) A shareholder or shareholders holding at least five percent in
the aggregate of the outstanding voting shares of the corporation or who hold at
least one percent of such voting shares and have filed a Schedule 14B with the
United States Securities and Exchange Commission relating to the election of
directors of the corporation shall have an absolute right to do either or both
of the following:
(i) Inspect and copy the record of shareholders' names and
addresses and shareholdings during usual business hours upon five business days'
prior written demand upon the corporation; or
(ii) Obtain from the transfer agent, if any, for the corporation,
upon five business days' prior written demand and upon the tender of its usual
charges for such a list (the amount of which charges shall be stated to the
shareholder by the transfer agent upon request), a list of the shareholders'
names and addresses who are entitled to vote for the election of directors and
their shareholdings, as of the most recent record date for which it has been
compiled or as of a date specified by the shareholder subsequent to the date of
demand.
(b) The record of shareholders shall also be open to inspection and
copying by any shareholder or holder of a voting trust certificate at any time
during usual business hours upon written demand on the corporation, for a
purpose reasonably related to such holder's interest as a shareholder or holder
of a voting trust certificate.
14
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(c) The accounting books and records and minutes of proceedings of
the shareholders and the Board and committees of the Board shall be open to
inspection upon written demand on the corporation of any shareholder or holder
of a voting trust certificate at any reasonable time during usual business
hours, for a purpose reasonably related to such holders' interests as a
shareholder or as a holder of such voting trust certificate.
(d) Any inspection and copying under this Article may be made in
person or by agent or attorney.
SECTION 2. Inspection of Bylaws. The corporation shall keep in its
--------------------
principal executive office the original or a copy of these Bylaws as amended to
date which shall be open to inspection by shareholders at all reasonable times
during office hours. If the principal executive of the corporation is outside
the State of California and the corporation has no principal business office in
such state it shall upon the written notice of any shareholder send to such
shareholder a copy of these Bylaws as amended to date.
SECTION 3. Endorsement of Documents; Contracts. Subject to the
-----------------------------------
provisions of applicable law, any note, mortgage, evidence of indebtedness,
contract, share certificate, conveyance, or other instrument in writing and any
assignment or endorsement thereof executed or entered into between this
corporation and any other person, when signed by the Chairman of the Board, the
President or any Vice President, and the Secretary, any Assistant Secretary, the
Chief Financial Officer, the Treasurer or any Assistant Treasurer of this
corporation shall be valid and binding on this corporation in the absence of
actual knowledge on the part of the other person that the signing officers had
no authority to execute the same. Any such instruments may be signed by any
other person or persons and in such manner as from time to time shall be
determined by the Board and, unless so authorized by the Board, no officer,
agent, or employee shall have any power or authority to bind the corporation by
any contract or engagement or to pledge its credit or to render it liable for
any purpose or amount.
SECTION 4. Certificates of Stock. Every holder of shares of the
---------------------
corporation shall be entitled to have a certificate signed in the name of the
corporation by the Chairman of the Board, the President or a Vice President and
by the Chief Financial Officer or the treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, certifying the number of shares and the
class or series of shares owned by the shareholder. Any or all of the
signatures on the certificate may be facsimile. If any officer, transfer agent,
or registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it
15
<PAGE>
may be issued by the corporation with the same effect as if such person were an
officer, transfer agent, or registrar at the date of issue.
Certificates for shares may be issued prior to full payment under such
restrictions and for such purposes as the Board may provide; provided, however,
that on any certificate issued to represent any partly paid shares, the total
amount of the consideration to be paid therefor and the amount paid thereon
shall be stated.
Except as provided in this Section, no new certificate for shares shall be
issued in lieu of an old one unless the latter is surrendered and canceled at
the same time. The Board may, however, in case any certificate for shares is
alleged to have been lost, stolen, or destroyed, authorize the issuance of a new
certificate in lieu thereof, and the corporation may require that the
corporation be given a bond or other adequate security sufficient to indemnify
it against any claim that may be made against it (including expense or
liability) on account of the alleged loss, theft, or destruction of such
certificate or the issuance of such new certificate.
SECTION 5. Representation of Shares of other Corporations. The President
----------------------------------------------
or any other officer or officers authorized by the Board or the President are
each authorized to vote, represent, and exercise on behalf of the corporation
all rights incident to any and all shares of any other corporation or
corporations standing in the name of the corporation. The authority herein
granted may be exercised either by any such officer in person or by any other
person authorized so to do by proxy or power of attorney duly executed by said
officer.
SECTION 6. Stock Purchase Plans. The corporation may adopt and carry out
--------------------
a stock purchase plan or agreement or stock option plan or agreement providing
for the issue and sale for such consideration as may be fixed of its unissued
shares, or of issued shares acquired or to be acquired, to one or more of the
employees or directors of the corporation or of a subsidiary or to a trustee on
their behalf and for the payment for such shares in installments or at one time,
and may provide for aiding any such persons in paying for such shares by
compensation for services rendered, promissory notes, or otherwise.
Any such stock purchase plan or agreement or stock option p an or agreement
may include, among other features, the fixing of eligibility for participation
therein, the class and price of shares to be issued or sold under the plan or
agreement, the number of shares which may be subscribed for, the method of
payment therefor, the reservation of title until full payment therefor, the
effect of the termination of employment and option or
16
<PAGE>
obligation on the part of the corporation to repurchase the shares upon
termination of employment, restrictions upon transfer of the shares, the time
limits of the termination of the plan, and any other matters, not in violation
of applicable law, as may be included in the plan as approved or authorized by
the Board or any committee of the Board.
SECTION 7. Annual Report to Shareholders. The annual report to
-----------------------------
shareholders referred to in Section 1501 of the California Corporations Code is
expressly waived, but nothing herein shall be interpreted as prohibiting the
Board from issuing annual or other periodic reports to shareholders.
SECTION 8. Construction and Definitions. Unless the context otherwise
----------------------------
requires, the general provisions, rules of construction, and definitions
contained in the California Corporations Code shall govern the construction of
these Bylaws.
ARTICLE VI. INDEMNIFICATION
SECTION 1. Indemnification.
---------------
(a) The corporation shall have the power to indemnify its "agents"
(as defined in Section 317 of the California Corporations Code), to the full
extent permitted by said Section and applicable law.
(b) The corporation shall indemnify its officers and directors who
were or are parties, or threatened to be made parties, to any "proceeding" (as
defined in Section 317 of the California Corporations Code), from and against
any and all claims, expenses (including attorney's fees and court costs)
judgments, fines, amounts paid in settlement, and other costs and amounts
actually and reasonably incurred in connection with such "proceeding" to the
broadest and maximum extent permitted by California Law if such person acted in
the course and scope of his position with the corporation, acted in good faith,
and acted in a manner such person reasonably believed to be in the best
interests of the corporation and its shareholders (and in the case of a criminal
proceeding had no reasonable cause to believe that the conduct of such person
was unlawful); provided, however, that the determination whether the officer or
director has met the applicable standard of conduct and indemnification therefor
is proper shall be determined in each specific case in accordance with Section
317 of the California Corporations Code; and provided, further that this
indemnification shall not apply to any acts, omissions or transactions for which
indemnification is expressly prohibited by Sections 204 or 317 of the California
Corporations Code.
17
<PAGE>
(c) Expenses reasonably and actually incurred by an officer or
director in any "proceeding" shall be advanced by the corporation as and when
incurred prior to final disposition of the "proceeding" on receipt of an
undertaking, which need not be secured, by or on behalf of the officer or
director to repay such amount if it is ultimately determined that the officer or
director is not entitled to indemnification.
(d) The Board of Directors is authorized to enter into contracts with
any "agent" of this corporation, or any person serving at the request of this
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans, providing for indemnification rights to the maximum extent
permitted by California Law.
SECTION 2. Insurance. The corporation shall have power to purchase and
---------
maintain insurance on behalf of any agent of the corporation against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such whether or not the corporation would have the
power to indemnify the agent against such liability under the provisions of this
Article.
SECTION 3. Nonapplicability to Fiduciaries of Employee Benefit Plans.
---------------------------------------------------------
This Article does not apply to any proceeding against any trustee, investment
manager, or other fiduciary of an employee benefit plan in such person's
capacity as such, even though such person may also be an agent of the
corporation as defined in Section l. Nothing contained in this Article shall
limit any right to indemnification to which such a trustee, investment manager,
or other fiduciary may be entitled by contract or otherwise which shall be
enforceable to the extent permitted by applicable law other than Section 317 of
the California Corporations Code.
ARTICLE VII. EMERGENCY BYLAWS
During any emergency resulting from an attack on the United States or on a
locality in which the corporation conducts its business or customarily holds
meetings of its Board or its shareholders, or during any nuclear or atomic
disaster, or during the existence of any catastrophe, or other similar emergency
condition, as a result of which a quorum of the Board or of the executive
committee, if any, cannot readily be convened for action, a meeting of the Board
or of said committee may be called by any officer or director. Such notice may
be given only to such of he directors or members of the committee, as the case
may be, as it may be feasible to reach at the time and by such means as may be
feasible at the time.
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<PAGE>
The director or directors in attendance at the meeting of the Board, and
the member or members of the executive committee, if any, in attendance at the
meeting of the committee shall constitute a quorum. If none is in attendance at
the meeting, the officers or other persons designated on a list approved by the
Board before 1:he emergency, all in such order of priority and subject to such
conditions and for such period of time (not longer than reasonably necessary
after the termination of the emergency) as may be provided in the resolution
approving the list, shall, to the extent required to provide a quorum at any
meeting of the Board or of the executive committee, be deemed directors or
members of the committee, as the case may be, for such meeting.
The Board, either before or during any such emergency, may provide, and
from time to time modify, lines of succession in the event that during such
emergency any or all officers or agents of the corporation shall for any reason
be rendered incapable of discharging their duties. The Board, either before or
during any such emergency, may, effective in the emergency, change the principal
executive office or designate several alternative offices or authorize the
officers so to do.
ARTICLE VIII. AMENDMENTS
These Bylaws may be amended or repealed either by approval of the
outstanding shares or by the approval of the Board; provided, however, that
after the issuance of shares, a Bylaw specifying or changing a fixed number of
directors or the maximum or minimum number or changing from a fixed to a
variable Board or vice versa may only be adopted by approval of the outstanding
shares.
* * * * *
19
<PAGE>
EXHIBIT 5.1
September 24, 1996
SmarTalk TeleServices, Inc.
1640 South Sepulveda Boulevard
Suite 500
Los Angeles, California 90025
Gentlemen:
We have acted as counsel to SmarTalk TeleServices, Inc., a California
corporation (the "Company"), in connection with the proposed initial public
offering (the "Offering") of up to 4,200,000 shares (the "Firm Shares") of the
Company's common stock, no par value (the "Common Stock"), and up to an
additional 630,000 shares (the "Option Shares") of the Common Stock, which may
be sold pursuant to an over-allotment option granted to the several underwriters
of the Offering. Of the Firm Shares, 4,000,000 shares will be sold by the
Company and 200,000 shares will be sold by certain shareholders (the "Selling
Shareholders"). All of the Option Shares will be sold by the Selling
Shareholders to the extent the underwriters exercise their over-allotment
option. The Company has filed a Registration Statement on Form S-1 (the
"Registration Statement"), which the Company initially filed with the Securities
and Exchange Commission on August 19, 1996 (File No. 33-10391), pursuant to the
Securities Act of 1933, as amended, with respect to the Offering. As such
counsel, we have been requested to render this opinion.
We have examined and reviewed such documents, records and matters of law as
we have deemed necessary for purposes of this opinion. With respect to the
foregoing, we have assumed, without investigation, the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity to originals of all documents submitted to us as certified or
reproduced copies. We also have obtained from the officers of the Company such
advice as to such factual matters as we consider necessary for the purpose of
this opinion, and insofar as this opinion is based on such matters of fact, we
have relied on such advice.
<PAGE>
SmarTalk TeleServices, Inc.
September 24, 1996
Page 2
Based on the foregoing and solely in reliance thereon, we are of the
opinion that:
A. The Firm Shares to be sold by the Company have been duly authorized
and, when issued and paid for as contemplated by the Registration Statement,
will be validly issued, fully paid and nonassessable.
B. The Firm Shares and the Option Shares to be sold by the Selling
Shareholders have been duly authorized and validly issued and are fully paid and
nonassessable.
We hereby disclaim any obligation to notify any person or entity after the
date hereof if any change in fact or law should change our opinion with respect
to any matter set forth in this letter. This opinion letter may not be relied
upon by any other person or entity and may not be circulated, quoted, or cited
in whole or in part, without our express prior written consent.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the prospectus which is part of the Registration Statement.
Very truly yours,
/s/ Dewey Ballantine
<PAGE>
EXHIBIT 10.8A
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this sixteenth day
of July, 1996 between SMARTALK TELESERVICES, INC., a California corporation (the
"Company") and ROBERT H. LORSCH (the "Executive"); and
WHEREAS, the parties hereto wish to enter into an employment agreement
to employ the Executive as President, Chief Executive Officer and Chairman of
the Board of the Company and to set forth certain additional agreements between
the Executive and the Company.
NOW, THEREFORE, in consideration of the mutual covenants and
representations contained herein, the parties hereto agree as follows:
1. Term.
----
The Company will employ the Executive, and the Executive will serve
the Company, under the terms of this Agreement for an initial term of three
years, commencing on the closing of an initial public offering. The Executive
shall retain any accrued benefits under his previous employment agreement with
the Company. Effective as of the expiration of such initial three-year term and
as of each two-year anniversary date thereof, the term of this Agreement shall
be extended for an additional two-year period unless, not later than twelve
months prior to each such respective date, either party hereto shall have given
notice to the other that the term shall not be so extended. Notwithstanding the
foregoing, the Executive's employment hereunder may be earlier terminated, as
provided in Section 4 hereof. The term of this Agreement, as in effect from
time to time in accordance with the foregoing, shall be referred to herein as
the "Term". The period of time between the commencement and the termination of
the Executive's employment hereunder shall be referred to herein as the
"Employment Period."
2. Employment.
----------
(a) Positions and Reporting. The Company hereby employs the
-----------------------
Executive for the Employment Period as its President, Chief Executive Officer
and Chairman of the Board on the terms and conditions set forth in this
Agreement. During the Employment Period, the Executive shall report directly to
the Board of Directors of the Company (the "Board").
<PAGE>
(b) Authority and Duties. The Executive shall exercise such
--------------------
authority, perform such executive duties and functions and discharge such
responsibilities as are reasonably associated with the Executive's positions,
commensurate with the authority vested in the Executive pursuant to this
Agreement and consistent with the By-Laws of the Company. During the Employment
Period, the Executive shall devote full business time, skill and efforts to the
business of the Company. Notwithstanding the foregoing, the Executive may (i)
make and manage personal business investments of his choice and serve in any
capacity with any civic, educational or charitable organization, or any trade
association, without seeking or obtaining approval by the Board, provided such
activities and service do not materially interfere or conflict with the
performance of his duties hereunder and (ii) with the approval of the Board,
serve on the boards of directors of other corporations.
3. Compensation and Benefits.
-------------------------
(a) Salary. During the Employment Period, the Company shall pay to
------
the Executive, as compensation for the performance of his duties and obligations
under this Agreement, a base salary at the rate of $345,000 per annum, payable
in arrears not less frequently than monthly in accordance with the normal
payroll practices of the Company (the "Base Salary"). Such Base Salary shall be
subject to review each year for possible increase by the Board in its sole
discretion, but shall in no event be decreased from its then-existing level
during the Employment Period.
(b) Annual Bonus. The Executive shall earn bonus amounts, based upon
------------
the satisfaction of performance criteria that will be established by a committee
of the Board (the "Compensation Committee") in its discretion and upon
consultation with the Executive at the beginning of each year, but in no case
after January 31, subject to the approval of the Board. Such performance
criteria will include corporate performance goals consistent with the Company's
business plan for the year, as well as individual objectives for the Executive's
performance that are separate from, but are consistent with, the Company's
business plan. The final determinations as to the actual corporate and
individual performance against the pre-established goals and objectives, and the
amounts of any additional bonus payout in relationship to such performance,
shall be made by the Compensation Committee in its sole discretion.
(c) Car Allowance. Employer shall pay to Executive as an automobile
-------------
allowance the sum of $2,400 per month during the Employment Period in lieu of
any other provision for an automobile, insurance, maintenance, gasoline and
expenses.
2
<PAGE>
(d) Insurance Policies. The Company shall purchase for up to an
------------------
annual premium amount of $20,000 and maintain in force during the Employment
Period, life and disability insurance on the Executive, the beneficiary of which
shall be designated by the Executive (the "Executive Policies"). In the event
that the Company cancels the Executive Policies, the Executive shall have the
option to continue them in force at his own expense. The Executive Policies
shall be assigned to the Executive upon the termination of this Agreement. The
Company may also purchase "key-person" life insurance policies on the
Executive's life in such amounts and of such types as is determined by the
Board. The Executive shall cooperate fully with the Company in obtaining such
insurance and shall submit to such physical examinations and provide such
information as is reasonably required to obtain and maintain such policies.
Neither the Executive nor his successor-in-interest or estate shall have any
interest in any such key-person policies so obtained.
(e) Other Benefits. During the Employment Period, the Executive
--------------
shall receive such other life insurance, pension, disability insurance, health
insurance, holiday, vacation and sick pay benefits and other benefits which the
Company extends, as a matter of policy, to its executive employees and, except
as otherwise provided herein, shall be entitled to participate in all deferred
compensation and other incentive plans of the Company on the same basis as other
like employees or the Company. Without limiting the generality of the
foregoing, the Executive shall be entitled to four (4) weeks vacation during
each year of the Employment Period, which shall be scheduled in the Executive's
discretion, subject to and taking into account the business exigencies of the
Company. Unused vacation may be accrued up to a maximum of six (6) weeks of
unused vacation, and thereafter the Executive shall cease to accrue vacation
thereafter until used.
(f) Business Expenses. During the Employment Period, the Company
-----------------
shall promptly reimburse the Executive for all documented reasonable business
expenses incurred by the Executive in the performance of his duties under this
Agreement, in accordance with the Company's policies and standards of similar or
comparable companies.
4. Termination of Employment.
-------------------------
(a) Termination for Cause. The Company may terminate the Executive's
---------------------
employment hereunder for cause. For purposes of this Agreement and subject to
the Executive's opportunity to cure as provided in Section 4(c) hereof, the
Company shall have "cause" to terminate the Executive's employment hereunder if:
3
<PAGE>
(i) The Executive has materially breached a provision of this
Agreement, and, if such breach is curable, it has not been cured or
reasonably commenced being cured within ninety (90) days after written
notice from the Company;
(ii) The Executive is convicted of or pleads guilty to a felony
involving financial misconduct or moral turpitude.
(b) Termination for Good Reason. The Executive shall have the right
---------------------------
at any time to terminate his employment with the Company at any time and for any
reason. For purposes of this Agreement and subject to the Company's opportunity
to cure as provided in Section 4(c) hereof, the Executive shall have "good
reason" to terminate his employment hereunder if such termination shall be the
result of:
(i) a material diminution during the Employment Period in the
Executive's duties or responsibilities as set forth in Section 2 hereof;
(ii) a breach by the Company of the compensation and benefits
provisions set forth in Section 3 hereof;
(iii) notice of non-renewal of the Agreement by the Company in
accordance with Section 1 hereof;
(iv) notice of termination by the Executive under Section 4(c)
hereof within 12 months following the occurrence of a Change in Control (as
defined in Section 4(e) hereof); or
(v) a material breach by the Company of any material terms of
this Agreement.
(c) Notice and Opportunity to Cure. Notwithstanding the foregoing, it
------------------------------
shall be a condition precedent to the Company's right to terminate the
Executive's employment for "cause" and the Executive's right to terminate his
employment for "good reason" that (1) the party seeking the termination shall
first have given the other party written notice stating with specificity the
reason for the termination ("breach") and (2) if such breach is susceptible of
cure or remedy, a period of 30 days from and after the giving of such notice
shall have elapsed without the breaching party having effectively cured or
remedied such breach during such 30-day period, unless such breach cannot be
cured or remedied within 30 days, in which case the period for remedy or cure
shall be extended for a reasonable time (not to exceed 30 days) provided the
breaching party has made and continues to make a diligent effort to effect such
remedy or cure.
(d) Termination Upon Death or Permanent and Total Disability. The
--------------------------------------------------------
Employment Period shall be terminated by the
4
<PAGE>
death of the Executive. The Employment Period may be terminated by the Company
if the Executive shall be rendered incapable of performing his duties to the
Company by reason of any medically determined physical or mental impairment that
can be expected to result in death or that can be expected to last for a period
of six or more consecutive months from the first date of the disability
("Disability"). If the Employment Period is terminated by reason of Disability
of the Executive, the Company shall give 30-days' advance written notice to that
effect to the Executive.
(e) Definition of Change in Control. A "Change in Control" shall
-------------------------------
be deemed to have taken place if:
(i) there shall be consummated any consolidation or merger of the
Company in which the Company is not the continuing or surviving corporation
or pursuant to which shares of the Company's capital stock are converted
into cash, securities or other property, other than a consolidation or
merger of the Company in which the holders of the Company's voting stock
immediately prior to the consolidation or merger shall, upon consummation
of the consolidation or merger, own at least 50% of the voting stock, or
any sale, lease, exchange or other transfer (in one transaction or a series
of transactions contemplated or arranged by any party as a single plan) of
all or substantially all of the assets of the Company; or
(ii) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) shall, after the date hereof, become the beneficial owner (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of securities of the Company representing 35% or more of the
voting power of all of the then outstanding securities of the Company
having the right under ordinary circumstances to vote in an election of the
Board (including, without limitation, any securities of the Company that
any such person has the right to acquire pursuant to any agreement, or upon
exercise of conversion rights, warrants or options, or otherwise, shall be
deemed beneficially owned by such person); or
(iii) individuals who as of the date hereof constitute the
entire Board and any new directors whose election by the Company's
shareholders, or whose nomination for election by the Company's board,
shall have been approved by a vote of at least a majority of the directors
then in office who either were directors at the date hereof or whose
election or nomination for election shall have been so approved (the
"Continuing Directors") shall cease for any reason to constitute a majority
of the members of the Board.
5
<PAGE>
5. Consequences of Termination.
---------------------------
(a) Termination Without Cause or for Good Reason. In the event of
--------------------------------------------
termination of the Executive's employment hereunder by the Company without
"cause" (other than upon death or Disability) or by the Executive for "good
reason" (each as defined in Section 4 hereof), the Executive shall be entitled
to the following severance pay and benefits:
(i) Severance Pay - severance payments in the form of
-------------
continuation of payments of the Executive's Base Salary as in effect
immediately prior to such termination over the longer of (A) the then
remainder of the Term (as if a timely non-renewal notice has been given)
and (B) 24 months (the "Severance Period").
(ii) Benefits Continuation - continuation for the Severance
---------------------
Period of coverage under the group medical care, disability and life
insurance benefit plans or arrangements in which the Executive is
participating at the time of termination; provided, however, that the
-------- -------
Company's obligation to provide such coverages shall be terminated if the
Executive obtains comparable substitute coverage from another employer at
any time during the Severance Period. The Executive shall be entitled, at
the expiration of the Severance Period, to elect continued medical coverage
in accordance with Section 4980B of the Internal Revenue Code of 1986, as
amended (or any successor provision thereto).
(b) Termination Upon Disability. In the event of termination of the
---------------------------
Executive's employment hereunder by the Company on account of Disability, the
Executive shall be entitled to the following severance pay and benefits:
(i) Severance Pay - severance payments in the form of
-------------
continuation of the Executive's Base Salary as in effect immediately prior
to such termination for a period of the longer of 12 months following the
first date of Disability and the then remainder of the Term (as if a timely
non-renewal notice has been given);
(ii) Benefits Continuation - the same benefits as provided in
---------------------
Section 5(a)(ii) above, to be provided during the Employment Period while
the Executive is suffering from Disability and for a period of 12 months
following the effective date of termination of employment by reason of
Disability.
In addition to the foregoing, the Company shall remit to the Executive
any benefits received by the Company, as beneficiary, pursuant to any additional
disability insurance
6
<PAGE>
policy which was maintained by the Executive prior to his employment with the
Company.
(c) Termination Upon Death. In the event of termination of the
----------------------
Executive's employment hereunder on account of the Executive's death, the
Executive's heirs, estate or personal representatives under law, as applicable,
shall be entitled to the payment of the Executive's Base Salary as in effect
immediately prior to death for a period of not less than two calendar months and
not more than the earlier of six calendar months or the payment of benefits
pursuant to the Executive's life insurance policy, as provided for in Section
3(d) above. The Executive's beneficiary or estate shall not be required to
remit to the Company any payments received pursuant to any life insurance policy
purchased pursuant to Section 3(d) above.
(d) Other Terminations. In the event of termination of the
------------------
Executive's employment hereunder for any reason other than those specified in
subsection (a) through (c) of this Section 5, the Executive shall not be
entitled to any severance pay or benefits continuation contemplated by the
foregoing, except as may otherwise be provided under the applicable benefit
plans or award agreements relating to the Executive.
(e) Accrued Rights. Notwithstanding the foregoing provisions of this
--------------
Section 5, in the event of termination of the Executive's employment hereunder
for any reason, the Executive shall be entitled to payment of any unpaid portion
of his Base Salary through the effective date of termination, and payment of any
accrued but unpaid rights solely in accordance with the terms of any incentive
bonus or employee benefit plan or program of the Company.
(f) Conditions to Severance Benefits. (i) The Company shall have the
--------------------------------
right to seek repayment of the severance payments and benefits provided by this
Section 5 in the event that the Executive fails to honor in accordance with
their terms the provisions of Sections 6, 7 and 8 hereof.
(ii) For purposes only of this Section, Employee shall be treated as
having failed to honor the provisions of Sections 6, 7 or 8 hereof only upon the
vote of two-thirds of the Board following notice of the alleged failure by the
Company to the Executive, an opportunity for the Executive to cure the alleged
failure for a period of 30 days from the date of such notice and the Executive's
opportunity to be heard on the issue by the Board.
6. Confidentiality. The Executive agrees that he will not at any
---------------
time during the Employment Period or at any time thereafter for any reason, in
any fashion, form or manner, either directly or indirectly, divulge, disclose or
communicate to any
7
<PAGE>
person, firm, corporation or other business entity, in any manner whatsoever,
any confidential information or trade secrets concerning the business of the
Company, including, without limiting the generality of the foregoing, the
techniques, methods or systems of its operation or management, any information
regarding its financial matters, or any other material information concerning
the business of the Company (including customer lists), its manner of operation,
its plans or other material data (the "Business"). The provisions of this
Section 6 shall not apply to (i) information disclosed in the performance of the
Executive's duties to the Company based on his good faith belief that such a
disclosure is in the best interests of Company; (ii) information that is, at the
time of the disclosure, public knowledge; (iii) information disseminated by the
Company to third parties in the ordinary course of business; (iv) information
lawfully received by the Executive from a third party who, based upon inquiry by
the Executive, is not bound by a confidential relationship to the Company; or
(v) information disclosed under a requirement of law or as directed by
applicable legal authority having jurisdiction over the Executive.
7. Inventions. The Executive is hereby retained in a capacity such
----------
that the Executive's responsibilities may include the making of technical and
managerial contributions of value to Company. The Executive hereby assigns to
Company all rights, title and interest in such contributions and inventions made
or conceived by the Executive alone or jointly with others during the Employment
Period which relate to the Business. This assignment shall include (a) the
right to file and prosecute patent applications on such inventions in any and
all countries, (b) the patent applications filed and patents issuing thereon,
and (c) the right to obtain copyright, trademark or trade name protection for
any such work product. The Executive shall promptly and fully disclose all such
contributions and inventions to Company and assist Company in obtaining and
protecting the rights therein (including patents thereon), in any and all
countries; provided, however, that said contributions and inventions will be the
-------- -------
property of Company, whether or not patented or registered for copyright,
trademark or trade name protection, as the case may be. Inventions conceived by
the Executive which are not related to the Business, will remain the property of
the Executive.
8. Non-Competition. (i) The Executive agrees that he shall not
---------------
during the Employment Period and for a period of one (1) year thereafter,
without the approval of the Board, directly or indirectly, alone or as partner,
joint venturer, officer, director, employee, consultant, agent, independent
contractor or stockholder (other than as provided below) of any company or
business, engage in any "Competitive Business" within the United
8
<PAGE>
States. For purposes of the foregoing, the term "Competitive Business" shall
mean any business directly involved in prepaid telecommunications services
industry. Notwithstanding the foregoing, the Executive shall not be prohibited
during the noncompetition period applicable above from acting as a passive
investor where he owns not more than five percent (5%) of the issued and
outstanding capital stock of any publicly-held company. During the period that
the above noncompetition restriction applies, the Executive shall not, without
the written consent of the Company, solicit any employee who is under contract
with the Company or any current or future subsidiary or affiliate thereof to
terminate his or her employment; nor shall the Executive solicit employees for
any enterprise that competes with Company; but shall have the right to solicit
employees not under contract with the Company for an enterprise that does not
compete with the Company.
9. Breach of Restrictive Covenants. The parties agree that a breach
-------------------------------
or violation of Sections 6, 7 or 8 hereof will result in immediate and
irreparable injury and harm to the innocent party, and that such innocent party
shall have, in addition to any and all remedies of law and other consequences
under this Agreement, the right to seek an injunction, specific performance or
other equitable relief to prevent the violation of the obligations hereunder.
10. Notice. For the purposes of this Agreement, notices, demands
------
and all other communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified or registered mail, return receipt
requested, postage prepaid, addressed as follows:
(a) If to the Company, to:
Attn: President
SmarTalk TeleServices, Inc.
1640 South Sepulveda Blvd., Suite 500
Los Angeles, CA 90025
with a copy to:
Robert M. Smith
Dewey Ballantine
333 South Hope Street, Suite 3000
Los Angeles, CA 90071-1406
9
<PAGE>
(b) If to the Executive, to:
Robert H. Lorsch
3188 Kings Court
Los Angeles, CA 90077
or to such other respective addresses as the parties hereto shall designate to
the other by like notice, provided that notice of a change of address shall be
effective only upon receipt thereof.
11. Excise Tax Limit. Notwithstanding anything in this Agreement to
----------------
the contrary, in the event it shall be determined that any payment or
distribution by the Company or any other person or entity to or for the benefit
of the Executive is a "parachute payment" (within the meaning of Section 280G of
the Code, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (a "Payment") in connection with, or
arising out of, his employment with the Company or a change in ownership or
effective control of the Company (within the meaning of Section 280G of the
Code, and would be subject to the excise tax imposed by Section 4999 of the
Code) (the "Excise Tax"), the Payments shall be reduced to the extent necessary
so that such remaining Payment would not be subject to the excise tax imposed by
Section 4999 of the Code.
12. Arbitration; Legal Fees. Except as provided in Section 9 hereof,
-----------------------
any dispute or controversy arising under or in connection with this Agreement
shall be settled exclusively by arbitration in Los Angeles County, California in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction. The Company shall reimburse Executive for all reasonable legal
fees and costs and other fees and expenses which Executive may incur in respect
of any dispute or controversy arising under or in connection with this
Agreement; provided, however, that the Company shall not reimburse any such fees
-------- -------
costs and expenses if the fact finder determines that the action brought by the
Executive was frivolous.
13. Waiver of Breach. Any waiver of any breach of this Agreement
----------------
shall not be construed to be a continuing waiver or consent to any subsequent
breach on the part either of the Executive or of the Company.
14. Non-Assignment; Successors. Neither party hereto may assign his
--------------------------
or its rights or delegate his or its duties under this Agreement without the
prior written consent of the other party; provided, however, that: (i) this
-------- -------
Agreement shall inure to
10
<PAGE>
the benefit of and be binding upon the successors and assigns of the Company
upon any sale of all or substantially all of the Company's assets, or upon any
merger, consolidation or reorganization of the Company with or into any other
corporation, all as though such successors and assigns of the Company and their
respective successors and assigns were the Company; and (ii) this Agreement
shall inure to the benefit of and be binding upon the heirs, assigns or
designees of the Executive to the extent of any payments due to them hereunder.
As used in this Agreement, the term "Company" shall be deemed to refer to any
such successor or assign of the Company referred to in the preceding sentence.
15. Withholding of Taxes. All payments required to be made by the
--------------------
Company to the Executive under this Agreement shall be subject to the
withholding of such amounts, if any, relating to tax, and other payroll
deductions as the Company may reasonably determine it should withhold pursuant
to any applicable law or regulation.
16. Severability. To the extent any provision of this Agreement or
------------
portion thereof shall be invalid or unenforceable, it shall be considered
deleted therefrom and the remainder of such provision and of this Agreement
shall be unaffected and shall continue in full force and effect.
17. Director and Officer Insurance. The Company shall use its best
------------------------------
efforts to obtain and maintain director's and officer's insurance for the
Executive (in such amounts as are appropriate for executives of businesses
comparable to that of the Company) pursuant to Board of Directors indemnity
agreements then in force and shall give timely notice to the Executive of
termination of any such insurance policy.
18. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
19. Governing Law. This Agreement shall be construed, interpreted
-------------
and enforced in accordance with the laws of the State of California, without
giving effect to the choice of law principles thereof.
20. Entire Agreement. This Agreement constitutes the entire
----------------
agreement by the Company and the Executive with respect to
11
<PAGE>
the subject matter hereof and supersedes any and all prior agreements or
understandings between the Executive and the Company with respect to the subject
matter hereof, whether written or oral. This Agreement may be amended or
modified only by a written instrument executed by the Executive and the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
July 16, 1996.
THE COMPANY
By: /s/ Smartalk TeleServices, Inc.
-----------------------------------
Smartalk TeleServices, Inc.
THE EXECUTIVE
/s/ Robert H. Lorsch
-----------------------------------
Robert H. Lorsch
12
<PAGE>
EXHIBIT 10.8B
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this sixteenth day
of July, 1996 between SMARTALK TELESERVICES, INC., a California corporation (the
"Company") and RICHARD M. TEICH (the "Executive"); and
WHEREAS, the parties hereto wish to enter into an employment agreement
to employ the Executive as Executive Vice President of the Company and to set
forth certain additional agreements between the Executive and the Company.
NOW, THEREFORE, in consideration of the mutual covenants and
representations contained herein, the parties hereto agree as follows:
1. Term.
----
The Company will employ the Executive, and the Executive will serve
the Company, under the terms of this Agreement for an initial term of two years,
commencing on the closing of an initial public offering. The Executive shall
retain any accrued benefits under his previous employment agreement with the
Company. Effective as of the expiration of such initial two-year term and as of
each anniversary date thereof, the term of this Agreement shall be extended for
an additional one-year period unless, not later than three months prior to each
such respective date, either party hereto shall have given notice to the other
that the term shall not be so extended. Notwithstanding the foregoing, the
Executive's employment hereunder may be earlier terminated, as provided in
Section 4 hereof. The term of this Agreement, as in effect from time to time in
accordance with the foregoing, shall be referred to herein as the "Term". The
period of time between the commencement and the termination of the Executive's
employment hereunder shall be referred to herein as the "Employment Period."
2. Employment.
----------
(a) Positions and Reporting. The Company hereby employs the
-----------------------
Executive for the Employment Period as its Executive Vice President on the terms
and conditions set forth in this Agreement. During the Employment Period, the
Executive shall report directly to the President of the Company.
<PAGE>
(b) Authority and Duties. The Executive shall exercise such
--------------------
authority, perform such executive duties and functions and discharge such
responsibilities as are reasonably associated with the Executive's positions,
commensurate with the authority vested in the Executive pursuant to this
Agreement and consistent with the By-Laws of the Company. During the Employment
Period, the Executive shall devote full business time, skill and efforts to the
business of the Company. Notwithstanding the foregoing, the Executive may (i)
make and manage personal business investments of his choice and serve in any
capacity with any civic, educational or charitable organization, or any trade
association, without seeking or obtaining approval by the Board, provided such
activities and service do not materially interfere or conflict with the
performance of his duties hereunder and (ii) with the approval of the Board of
Directors of the Company (the "Board"), serve on the boards of directors of
other corporations.
3. Compensation and Benefits.
-------------------------
(a) Salary. During the Employment Period, the Company shall pay to
------
the Executive, as compensation for the performance of his duties and obligations
under this Agreement, a base salary at the rate of $185,000 per annum, payable
in arrears not less frequently than monthly in accordance with the normal
payroll practices of the Company (the "Base Salary"). Such Base Salary shall be
subject to review each year for possible increase by the Board in its sole
discretion, but shall in no event be decreased from its then-existing level
during the Employment Period.
(b) Annual Bonus. The Executive shall earn bonus amounts, based upon
------------
the satisfaction of performance criteria that will be established by a committee
of the Board (the "Compensation Committee") in its discretion and upon
consultation with the Executive at the beginning of each year, but in no case
after January 31, subject to the approval of the Board. Such performance
criteria will include corporate performance goals consistent with the Company's
business plan for the year, as well as individual objectives for the Executive's
performance that are separate from, but are consistent with, the Company's
business plan. The final determinations as to the actual corporate and
individual performance against the pre-established goals and objectives, and the
amounts of any additional bonus payout in relationship to such performance,
shall be made by the Compensation Committee in its sole discretion.
(c) Car Allowance. Employer shall pay to Executive as an automobile
-------------
allowance the sum of $600 per month during the Employment Period in lieu of any
other provision for an automobile, insurance, maintenance, gasoline and
expenses.
2
<PAGE>
(d) Insurance Policies. The Company shall purchase for up to an
------------------
annual premium amount of $5,000 and maintain in force during the Employment
Period, life and disability insurance on the Executive, the beneficiary of which
shall be designated by the Executive (the "Executive Policies"). In the event
that the Company cancels the Executive Policies, the Executive shall have the
option to continue them in force at his own expense. The Executive Policies
shall be assigned to the Executive upon the termination of this Agreement. The
Company may also purchase "key-person" life insurance policies on the
Executive's life in such amounts and of such types as is determined by the
Board. The Executive shall cooperate fully with the Company in obtaining such
insurance and shall submit to such physical examinations and provide such
information as is reasonably required to obtain and maintain such policies.
Neither the Executive nor his successor-in-interest or estate shall have any
interest in any such key-person policies so obtained.
(e) Other Benefits. During the Employment Period, the Executive
--------------
shall receive such other life insurance, pension, disability insurance, health
insurance, holiday, vacation and sick pay benefits and other benefits which the
Company extends, as a matter of policy, to its executive employees and, except
as otherwise provided herein, shall be entitled to participate in all deferred
compensation and other incentive plans of the Company on the same basis as other
like employees or the Company. Without limiting the generality of the
foregoing, the Executive shall be entitled to four (4) weeks vacation during
each year of the Employment Period, which shall be scheduled in the Executive's
discretion, subject to and taking into account the business exigencies of the
Company. Unused vacation may be accrued up to a maximum of six (6) weeks of
unused vacation, and thereafter the Executive shall cease to accrue vacation
thereafter until used.
(f) Business Expenses. During the Employment Period, the Company
-----------------
shall promptly reimburse the Executive for all documented reasonable business
expenses incurred by the Executive in the performance of his duties under this
Agreement, in accordance with the Company's policies and standards of similar or
comparable companies.
4. Termination of Employment.
-------------------------
(a) Termination for Cause. The Company may terminate the Executive's
---------------------
employment hereunder for cause. For purposes of this Agreement and subject to
the Executive's opportunity to cure as provided in Section 4(c) hereof, the
Company shall have "cause" to terminate the Executive's employment hereunder if:
3
<PAGE>
(i) The Executive has materially breached a provision of this
Agreement, and, if such breach is curable, it has not been cured or
reasonably commenced being cured within ninety (90) days after written
notice from the Company;
(ii) The Executive is convicted of or pleads guilty to a felony
involving financial misconduct or moral turpitude.
(b) Termination for Good Reason. The Executive shall have the right
---------------------------
at any time to terminate his employment with the Company at any time and for any
reason. For purposes of this Agreement and subject to the Company's opportunity
to cure as provided in Section 4(c) hereof, the Executive shall have "good
reason" to terminate his employment hereunder if such termination shall be the
result of:
(i) a material diminution during the Employment Period in the
Executive's duties or responsibilities as set forth in Section 2 hereof;
(ii) a breach by the Company of the compensation and benefits
provisions set forth in Section 3 hereof;
(iii) notice of non-renewal of the Agreement by the Company in
accordance with Section 1 hereof;
(iv) notice of termination by the Executive under Section 4(c)
hereof within 12 months following the occurrence of a Change in Control (as
defined in Section 4(e) hereof); or
(v) a material breach by the Company of any material terms of
this Agreement.
(c) Notice and Opportunity to Cure. Notwithstanding the foregoing, it
------------------------------
shall be a condition precedent to the Company's right to terminate the
Executive's employment for "cause" and the Executive's right to terminate his
employment for "good reason" that (1) the party seeking the termination shall
first have given the other party written notice stating with specificity the
reason for the termination ("breach") and (2) if such breach is susceptible of
cure or remedy, a period of 30 days from and after the giving of such notice
shall have elapsed without the breaching party having effectively cured or
remedied such breach during such 30-day period, unless such breach cannot be
cured or remedied within 30 days, in which case the period for remedy or cure
shall be extended for a reasonable time (not to exceed 30 days) provided the
breaching party has made and continues to make a diligent effort to effect such
remedy or cure.
(d) Termination Upon Death or Permanent and Total Disability. The
--------------------------------------------------------
Employment Period shall be terminated by the
4
<PAGE>
death of the Executive. The Employment Period may be terminated by the Company
if the Executive shall be rendered incapable of performing his duties to the
Company by reason of any medically determined physical or mental impairment that
can be expected to result in death or that can be expected to last for a period
of six or more consecutive months from the first date of the disability
("Disability"). If the Employment Period is terminated by reason of Disability
of the Executive, the Company shall give 30-days' advance written notice to that
effect to the Executive.
(e) Definition of Change in Control. A "Change in Control" shall
-------------------------------
be deemed to have taken place if:
(i) there shall be consummated any consolidation or merger of the
Company in which the Company is not the continuing or surviving corporation
or pursuant to which shares of the Company's capital stock are converted
into cash, securities or other property, other than a consolidation or
merger of the Company in which the holders of the Company's voting stock
immediately prior to the consolidation or merger shall, upon consummation
of the consolidation or merger, own at least 50% of the voting stock, or
any sale, lease, exchange or other transfer (in one transaction or a series
of transactions contemplated or arranged by any party as a single plan) of
all or substantially all of the assets of the Company; or
(ii) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) shall, after the date hereof, become the beneficial owner (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of securities of the Company representing 35% or more of the
voting power of all of the then outstanding securities of the Company
having the right under ordinary circumstances to vote in an election of the
Board (including, without limitation, any securities of the Company that
any such person has the right to acquire pursuant to any agreement, or upon
exercise of conversion rights, warrants or options, or otherwise, shall be
deemed beneficially owned by such person); or
(iii) individuals who as of the date hereof constitute the
entire Board and any new directors whose election by the Company's
shareholders, or whose nomination for election by the Company's board,
shall have been approved by a vote of at least a majority of the directors
then in office who either were directors at the date hereof or whose
election or nomination for election shall have been so approved (the
"Continuing Directors") shall cease for any reason to constitute a majority
of the members of the Board.
5
<PAGE>
5. Consequences of Termination.
---------------------------
(a) Termination Without Cause or for Good Reason. In the event of
--------------------------------------------
termination of the Executive's employment hereunder by the Company without
"cause" (other than upon death or Disability) or by the Executive for "good
reason" (each as defined in Section 4 hereof), the Executive shall be entitled
to the following severance pay and benefits:
(i) Severance Pay - severance payments in the form of
-------------
continuation of payments of the Executive's Base Salary as in effect
immediately prior to such termination over the longer of (A) the then
remainder of the Term (as if a timely non-renewal notice has been given)
and (B) 24 months (the "Severance Period").
(ii) Benefits Continuation - continuation for the Severance
---------------------
Period of coverage under the group medical care, disability and life
insurance benefit plans or arrangements in which the Executive is
participating at the time of termination; provided, however, that the
-------- -------
Company's obligation to provide such coverages shall be terminated if the
Executive obtains comparable substitute coverage from another employer at
any time during the Severance Period. The Executive shall be entitled, at
the expiration of the Severance Period, to elect continued medical coverage
in accordance with Section 4980B of the Internal Revenue Code of 1986, as
amended (or any successor provision thereto).
(b) Termination Upon Disability. In the event of termination of the
---------------------------
Executive's employment hereunder by the Company on account of Disability, the
Executive shall be entitled to the following severance pay and benefits:
(i) Severance Pay - severance payments in the form of
-------------
continuation of the Executive's Base Salary as in effect immediately prior
to such termination for a period of the longer of 12 months following the
first date of Disability and the then remainder of the Term (as if a timely
non-renewal notice has been given);
(ii) Benefits Continuation - the same benefits as provided in
---------------------
Section 5(a)(ii) above, to be provided during the Employment Period while
the Executive is suffering from Disability and for a period of 12 months
following the effective date of termination of employment by reason of
Disability.
In addition to the foregoing, the Company shall remit to the Executive
any benefits received by the Company, as beneficiary, pursuant to any additional
disability insurance
6
<PAGE>
policy which was maintained by the Executive prior to his employment with the
Company.
(c) Termination Upon Death. In the event of termination of the
----------------------
Executive's employment hereunder on account of the Executive's death, the
Executive's heirs, estate or personal representatives under law, as applicable,
shall be entitled to the payment of the Executive's Base Salary as in effect
immediately prior to death for a period of not less than two calendar months and
not more than the earlier of six calendar months or the payment of benefits
pursuant to the Executive's life insurance policy, as provided for in Section
3(d) above. The Executive's beneficiary or estate shall not be required to
remit to the Company any payments received pursuant to any life insurance policy
purchased pursuant to Section 3(d) above.
(d) Other Terminations. In the event of termination of the
------------------
Executive's employment hereunder for any reason other than those specified in
subsection (a) through (c) of this Section 5, the Executive shall not be
entitled to any severance pay or benefits continuation contemplated by the
foregoing, except as may otherwise be provided under the applicable benefit
plans or award agreements relating to the Executive.
(e) Accrued Rights. Notwithstanding the foregoing provisions of this
--------------
Section 5, in the event of termination of the Executive's employment hereunder
for any reason, the Executive shall be entitled to payment of any unpaid portion
of his Base Salary through the effective date of termination, and payment of any
accrued but unpaid rights solely in accordance with the terms of any incentive
bonus or employee benefit plan or program of the Company.
(f) Conditions to Severance Benefits. (i) The Company shall have the
--------------------------------
right to seek repayment of the severance payments and benefits provided by this
Section 5 in the event that the Executive fails to honor in accordance with
their terms the provisions of Sections 6, 7 and 8 hereof.
(ii) For purposes only of this Section, Employee shall be treated as
having failed to honor the provisions of Sections 6, 7 or 8 hereof only upon the
vote of two-thirds of the Board following notice of the alleged failure by the
Company to the Executive, an opportunity for the Executive to cure the alleged
failure for a period of 30 days from the date of such notice and the Executive's
opportunity to be heard on the issue by the Board.
6. Confidentiality. The Executive agrees that he will not at any
---------------
time during the Employment Period or at any time thereafter for any reason, in
any fashion, form or manner, either directly or indirectly, divulge, disclose or
communicate to any
7
<PAGE>
person, firm, corporation or other business entity, in any manner whatsoever,
any confidential information or trade secrets concerning the business of the
Company, including, without limiting the generality of the foregoing, the
techniques, methods or systems of its operation or management, any information
regarding its financial matters, or any other material information concerning
the business of the Company (including customer lists), its manner of operation,
its plans or other material data (the "Business"). The provisions of this
Section 6 shall not apply to (i) information disclosed in the performance of the
Executive's duties to the Company based on his good faith belief that such a
disclosure is in the best interests of Company; (ii) information that is, at the
time of the disclosure, public knowledge; (iii) information disseminated by the
Company to third parties in the ordinary course of business; (iv) information
lawfully received by the Executive from a third party who, based upon inquiry by
the Executive, is not bound by a confidential relationship to the Company; or
(v) information disclosed under a requirement of law or as directed by
applicable legal authority having jurisdiction over the Executive.
7. Inventions. The Executive is hereby retained in a capacity such
----------
that the Executive's responsibilities may include the making of technical and
managerial contributions of value to Company. The Executive hereby assigns to
Company all rights, title and interest in such contributions and inventions made
or conceived by the Executive alone or jointly with others during the Employment
Period which relate to the Business. This assignment shall include (a) the
right to file and prosecute patent applications on such inventions in any and
all countries, (b) the patent applications filed and patents issuing thereon,
and (c) the right to obtain copyright, trademark or trade name protection for
any such work product. The Executive shall promptly and fully disclose all such
contributions and inventions to Company and assist Company in obtaining and
protecting the rights therein (including patents thereon), in any and all
countries; provided, however, that said contributions and inventions will be the
-------- -------
property of Company, whether or not patented or registered for copyright,
trademark or trade name protection, as the case may be. Inventions conceived by
the Executive which are not related to the Business, will remain the property of
the Executive.
8. Non-Competition. (i) The Executive agrees that he shall not
---------------
during the Employment Period and for a period of one (1) year thereafter,
without the approval of the Board, directly or indirectly, alone or as partner,
joint venturer, officer, director, employee, consultant, agent, independent
contractor or stockholder (other than as provided below) of any company or
business, engage in any "Competitive Business" within the United
8
<PAGE>
States. For purposes of the foregoing, the term "Competitive Business" shall
mean any business directly involved in prepaid telecommunications services
industry. Notwithstanding the foregoing, the Executive shall not be prohibited
during the noncompetition period applicable above from acting as a passive
investor where he owns not more than five percent (5%) of the issued and
outstanding capital stock of any publicly-held company. During the period that
the above noncompetition restriction applies, the Executive shall not, without
the written consent of the Company, solicit any employee who is under contract
with the Company or any current or future subsidiary or affiliate thereof to
terminate his or her employment; nor shall the Executive solicit employees for
any enterprise that competes with Company; but shall have the right to solicit
employees not under contract with the Company for an enterprise that does not
compete with the Company.
9. Breach of Restrictive Covenants. The parties agree that a breach
-------------------------------
or violation of Sections 6, 7 or 8 hereof will result in immediate and
irreparable injury and harm to the innocent party, and that such innocent party
shall have, in addition to any and all remedies of law and other consequences
under this Agreement, the right to seek an injunction, specific performance or
other equitable relief to prevent the violation of the obligations hereunder.
10. Notice. For the purposes of this Agreement, notices, demands
------
and all other communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified or registered mail, return receipt
requested, postage prepaid, addressed as follows:
(a) If to the Company, to:
Attn: President
SmarTalk TeleServices, Inc.
1640 South Sepulveda Blvd., Suite 500
Los Angeles, CA 90025
with a copy to:
Robert M. Smith
Dewey Ballantine
333 South Hope Street, Suite 3000
Los Angeles, CA 90071-1406
9
<PAGE>
(b) If to the Executive, to:
Richard M. Teich
3770 Casados Street
Los Angeles, CA 90065
or to such other respective addresses as the parties hereto shall designate to
the other by like notice, provided that notice of a change of address shall be
effective only upon receipt thereof.
11. Excise Tax Limit. Notwithstanding anything in this Agreement to
----------------
the contrary, in the event it shall be determined that any payment or
distribution by the Company or any other person or entity to or for the benefit
of the Executive is a "parachute payment" (within the meaning of Section 280G of
the Code, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (a "Payment") in connection with, or
arising out of, his employment with the Company or a change in ownership or
effective control of the Company (within the meaning of Section 280G of the
Code, and would be subject to the excise tax imposed by Section 4999 of the
Code) (the "Excise Tax"), the Payments shall be reduced to the extent necessary
so that such remaining Payment would not be subject to the excise tax imposed by
Section 4999 of the Code.
12. Arbitration; Legal Fees. Except as provided in Section 9 hereof,
-----------------------
any dispute or controversy arising under or in connection with this Agreement
shall be settled exclusively by arbitration in Los Angeles County, California in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction. The Company shall reimburse Executive for all reasonable legal
fees and costs and other fees and expenses which Executive may incur in respect
of any dispute or controversy arising under or in connection with this
Agreement; provided, however, that the Company shall not reimburse any such fees
-------- -------
costs and expenses if the fact finder determines that the action brought by the
Executive was frivolous.
13. Waiver of Breach. Any waiver of any breach of this Agreement
----------------
shall not be construed to be a continuing waiver or consent to any subsequent
breach on the part either of the Executive or of the Company.
14. Non-Assignment; Successors. Neither party hereto may assign his
--------------------------
or its rights or delegate his or its duties under this Agreement without the
prior written consent of the other party; provided, however, that: (i) this
-------- -------
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of
10
<PAGE>
the Company upon any sale of all or substantially all of the Company's assets,
or upon any merger, consolidation or reorganization of the Company with or into
any other corporation, all as though such successors and assigns of the Company
and their respective successors and assigns were the Company; and (ii) this
Agreement shall inure to the benefit of and be binding upon the heirs, assigns
or designees of the Executive to the extent of any payments due to them
hereunder. As used in this Agreement, the term "Company" shall be deemed to
refer to any such successor or assign of the Company referred to in the
preceding sentence.
15. Withholding of Taxes. All payments required to be made by the
--------------------
Company to the Executive under this Agreement shall be subject to the
withholding of such amounts, if any, relating to tax, and other payroll
deductions as the Company may reasonably determine it should withhold pursuant
to any applicable law or regulation.
16. Severability. To the extent any provision of this Agreement or
------------
portion thereof shall be invalid or unenforceable, it shall be considered
deleted therefrom and the remainder of such provision and of this Agreement
shall be unaffected and shall continue in full force and effect.
17. Director and Officer Insurance. The Company shall use its best
------------------------------
efforts to obtain and maintain director's and officer's insurance for the
Executive (in such amounts as are appropriate for executives of businesses
comparable to that of the Company) pursuant to Board of Directors indemnity
agreements then in force and shall give timely notice to the Executive of
termination of any such insurance policy.
18. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
19. Governing Law. This Agreement shall be construed, interpreted
-------------
and enforced in accordance with the laws of the State of California, without
giving effect to the choice of law principles thereof.
20. Entire Agreement. This Agreement constitutes the entire
----------------
agreement by the Company and the Executive with respect to the subject matter
hereof and supersedes any and all prior
11
<PAGE>
agreements or understandings between the Executive and the Company with respect
to the subject matter hereof, whether written or oral. This Agreement may be
amended or modified only by a written instrument executed by the Executive and
the Company.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
12
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
July 16, 1996.
THE COMPANY
By: /s/ Smartalk TeleServices, Inc.
-----------------------------------
Smartalk TeleServices, Inc.
THE EXECUTIVE
/s/ Richard M. Teich
-----------------------------------
Richard M. Teich
13
<PAGE>
EXHIBIT 10.10
AMENDED AND RESTATED
1996 NONQUALIFIED STOCK OPTION PLAN OF
SMARTALK TELESERVICES, INC.
--------------------------------------
ARTICLE 1. ESTABLISHMENT AND PURPOSE
This Amended and Restated 1996 Nonqualified Stock Option Plan (the "Plan")
is intended to promote the interests of SmarTalk TeleServices, Inc., a
California corporation (the "Company"), by providing a method whereby eligible
persons may be offered incentives and rewards which will encourage them to
acquire a proprietary interest, or otherwise increase their proprietary
interest, in the Company and continue to render services which benefit the
Company.
ARTICLE 2. DEFINITIONS
2.1 Board of Directors. "Board of Directors" shall mean the Board of
------------------
Directors of the Company, as constituted from time to time.
2.2 Code. "Code" shall mean the Internal Revenue Code of 1986, as
----
amended.
2.3 Change of Control. "Change of Control" shall mean a merger of the
-----------------
Company with or into another corporation, or the sale of substantially all of
the assets of the Company.
2.4 Committee. "Committee" shall mean a committee of the members of the
---------
Board of Directors, as described in Section 3.1, or, if no such Committee has
been so designated, the Board of Directors.
2.5 Date of Grant. "Date of Grant" shall mean the date on which the
-------------
Committee makes a grant of an Option pursuant to this Plan.
2.6 Eligible Participant. "Eligible Participant" shall mean any person
--------------------
that is an employee, officer, director, consultant, advisor or agent of the
Company as permitted under the Exchange Act, the Securities Act and the Code.
2.7 Exchange Act. "Exchange Act" shall mean the Securities Exchange Act
------------
of 1934, as amended.
1
<PAGE>
2.8 Exercisability Date. "Exercisability Date" shall have the meaning set
-------------------
forth in Section 6.5(a).
2.9 Exercise Price. "Exercise Price" shall mean the aggregate amount for
--------------
which the Shares may be purchased upon exercise of an Option, as specified by
the Committee in the applicable Stock Option Agreement.
2.10 Exercise Term. "Exercise Term" shall have the meaning set forth in
-------------
Section 6.5(b).
2.11 Expiration Date. "Expiration Date" shall have the meaning set forth
---------------
in Section 6.5(b).
2.12 Fair Market Value. "Fair Market Value" shall mean
-----------------
(a) If the Common Stock is listed on any established stock exchange or
a national market system including, without limitation, the National Market
System of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, the Fair Market Value of a share of Common Stock
shall be the closing sales price for such stock (or the closing bid, if no sales
were reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in Common Stock) on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Committee deems reliable;
(b) If the Common Stock is quoted on the NASDAQ System (but not on the
National Market System thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Committee deems reliable;
(c) In the absence of an established market for the Common Stock, the
Fair Market Value shall be determined in good faith by the Committee.
2.13 Full-Time Employment. "Full-Time Employment" shall mean employed to
--------------------
work a weekly schedule of not less than forty (40) hours or such other schedule
as the Board of Directors may establish with an Optionee pursuant to a Stock
Option Agreement.
2.14 Option. "Option" shall mean a nonqualified stock option granted
------
under the Plan and entitling the Optionee to purchase any Shares.
2
<PAGE>
2.15 Optionee. "Optionee" shall mean a person who holds an Option.
--------
2.16 Permanent Disability. "Permanent Disability" shall mean that the
--------------------
Optionee is unable to substantially perform the Optionee's duties to the Company
by reason of any medically determinable physical or mental impairment that can
be expected to result in death or which has lasted, or can be expected to last,
for a continuous period of not less than twelve (12) months.
2.17 Rule 16b-3. "Rule 16b-3" shall mean Rule 16b-3(b) (or its successor)
----------
under Section 16 of the Exchange Act.
2.18 Securities Act. "Securities Act" shall mean the Securities Act of
--------------
1933, as amended.
2.19 Share. "Share" shall mean one (1) share of Stock, as adjusted in
-----
accordance with Article 8 (if applicable).
2.20 Shareholder Approval. "Shareholder Approval" shall mean the approval
--------------------
of the Plan by the Company's shareholders, in compliance with Rule 16b-3.
2.21 Stock. "Stock" shall mean the voting common stock of the Company.
-----
2.22 Stock Option Agreement. "Stock Option Agreement" shall mean the
----------------------
agreement between the Company and the Optionee which contains the terms,
conditions and restrictions pertaining to his or her Option.
ARTICLE 3. ADMINISTRATION
3.1 Committee Membership.
--------------------
(a) The Plan shall be administered by a Committee duly designated from
time to time by the Board of Directors, which shall consist of two (2) or more
members of the Board of Directors. If at any time the Plan should become subject
to Rule 16b-3, from such time forward, and to the extent required by the
provisions of Rule 16b-3, the Committee shall consist only of disinterested
directors. A member of the Board of Directors is "disinterested" only if he or
she satisfies such requirements as the Securities and Exchange Commission (the
"Commission") may establish for disinterested administrators acting under plans
intended to qualify for exemption under Rule 16b-3. The members of the Committee
shall be appointed by the Board of Directors.
3
<PAGE>
The Committee shall have such powers as specified by the Board of Directors.
(b) If, at any time the Committee consists of only two (2) members and
the Committee is unable to agree on the proper administration of the Plan,
either, or both, of such members shall so advise the Board of Directors and the
Board of Directors shall immediately appoint one of its members to serve on the
Committee in accordance with Section 3.1(a) hereof. If no member of the Board of
Directors is able, or willing, to serve as a member of the Committee, then the
Board of Directors shall appoint a qualified individual (such qualification to
be at the Board of Directors' sole determination and discretion) to serve as a
consultant (the "Consultant") to the Committee and to recommend to the Board of
Directors the appropriate actions to be taken in administering the Plan. The
Consultant shall be appointed until such time as the Board of Directors shall
appoint one of its members to serve on the Committee, at which time the
Consultant's appointment shall expire. In no event shall the Consultant serve
for a period in excess of sixty (60) days.
3.2 Ineligibility. No member of the Committee shall be eligible to
-------------
participate in this Plan.
3.3 Committee Procedures. The Board of Directors shall designate one of
--------------------
the members of the Committee as chairperson. The Committee may hold meetings at
such times and places as it shall determine. The Committee shall act at a
meeting by vote of a majority of the Committee members present at a meeting at
which a quorum exists. The Committee may act without a meeting if all of the
Committee members approve such act in writing.
3.4 Committee Responsibilities. Subject to the other provisions of this
--------------------------
Plan, the Committee shall have full authority and discretion to take the
following actions:
(a) To interpret the Plan and to apply its provisions;
(b) To adopt, amend or rescind rules, procedures and forms relating to
the Plan;
(c) To authorize any person to execute, on behalf of the Company, any
instrument required to carry out the purposes of the Plan;
(d) To determine when Options are to be granted under the Plan;
4
<PAGE>
(e) To select the Optionees;
(f) To determine the number of Shares to be made subject to each
Option;
(g) To prescribe the terms and conditions of each Option, including
(without limitation) the vesting schedule and the Exercise Price per Share
(which shall be not less than the greater of Fair Market Value on the Date of
Grant or the par value of the Shares), and to specify the provisions of the
Stock Option Agreement relating to such Option;
(h) To amend any outstanding Stock Option Agreement, subject to
applicable legal restrictions and, if the effect of such amendment(s) would be
to directly, materially and adversely effect any right of an Optionee under an
existing Option, subject to the consent of such Optionee; and
(i) To take any other actions deemed necessary or advisable for the
administration of the Plan.
All decisions, interpretations and other actions of the Committee shall be final
and binding on all Optionees and all persons deriving their rights from an
Optionee. No member of the Committee shall be liable for any action that he or
she has taken or has failed to take in good faith with respect to the Plan or
any Option.
3.5 Financial Reports. Not less often than annually, the Company shall
-----------------
furnish to Optionees reports of its financial condition, unless such Optionees
have access to equivalent information through their employment or through public
records. Such reports need not be audited.
ARTICLE 4. ELIGIBILITY
4.1 Each Eligible Participant shall be eligible for designation as an
Optionee by the Committee.
ARTICLE 5. STOCK SUBJECT TO PLAN
5.1 Basic Limitation. The aggregate number of Shares that the Company may
----------------
issue under the Plan upon exercise of Options shall be (i) the lesser of (a)
7,087,991 Shares and (b) the number of Shares equal to 9% of the then
outstanding shares of the Company's Common Stock (or securities exercisable or
otherwise convertible into shares of Common Stock) minus (ii) the number of
shares of Common Stock issued or issuable pursuant to options exercised or
outstanding under any other stock
5
<PAGE>
option plan of the Company, subject to adjustment pursuant to Article 8 hereof.
The Shares may be authorized, but unissued, or reacquired Common Stock. The
number of Shares that are subject to Options outstanding at any time under the
Plan shall not exceed the number of Shares which then remain available for
issuance under the Plan. The Company, during the term of the Plan, shall at all
times reserve and keep available sufficient Shares to satisfy the requirements
of the Plan.
5.2 Additional Shares. If any outstanding Option for any reason expires
-----------------
or is canceled or otherwise terminated, the Shares allocable to the unexercised
portion of such Option shall again be available for the purposes of the Plan. If
the Company reacquires any Shares issued under the Plan pursuant to a forfeiture
provision, a right of repurchase or a right of first refusal, such Shares shall
again be available for the purposes of the Plan.
ARTICLE 6. TERMS AND CONDITIONS OF OPTIONS
The Committee may from time to time authorize grants of Options to Eligible
Participants upon such terms and conditions as the Committee may determine in
accordance with the following provisions, unless alternate provisions are agreed
upon by the Committee:
6.1 Stock Option Agreement. The Company and each Optionee shall enter
----------------------
into a Stock Option Agreement that provides the terms of each grant of an Option
under this Plan. The Stock Option Agreement shall be consistent with the terms
and conditions of the Plan and may contain any other terms and conditions which
are not inconsistent with the Plan or applicable law and which the Committee
deems appropriate for inclusion in a Stock Option Agreement, and may be amended
by the Committee, provided such amendments are not inconsistent with the Plan;
provided, however, that if the effect of any such amendment(s) would be
- -------- -------
directly, materially and adversely effect any right of an Optionee under an
existing Option, the consent of such Optionee shall be required for such
amendment. The provisions of the various Stock Option Agreements entered into
under the Plan need not be identical.
6.2 Number of Shares. Each Stock Option Agreement shall specify the
----------------
number of Shares that are subject to the Option and shall provide for the
adjustment of such number in accordance with Article 8 hereof.
6.3 Exercise Price. Each Stock Option Agreement shall specify the
--------------
Exercise Price per Share.
6
<PAGE>
6.4 Vesting. (a) Each Stock Option Agreement shall specify the time or
-------
times when the Options will vest and become exercisable. A Stock Option
Agreement may, in the sole discretion of the Committee, provide for accelerated
exercisability (after the Exercisability Date) or vesting in the event of the
Optionee's death, Permanent Disability, termination of employment without cause
or retirement, or such other events as the Committee deems appropriate under the
circumstances. To the extent exercisable, each Option shall be exercisable in
whole or in part from time to time.
(b) In the event of a Change of Control, each outstanding Option shall
be assumed or an equivalent option shall be substituted by the successor
corporation or a parent or subsidiary of the successor corporation. In the event
that the successor corporation does not agree to assume the Option or to
substitute an equivalent option, each outstanding Option shall become fully
vested and exercisable, including as to Shares as to which it would not
otherwise be exercisable. If an Option becomes fully vested and exercisable in
the event of a Change of Control, the Board shall notify the Optionee that the
Option shall be fully exercisable for a period of thirty (30) days from the date
of such notice, and the Option will terminate upon the expiration of such
period.
6.5 Exercise Term; Expiration Date.
------------------------------
(a) Each Stock Option Agreement shall specify the times when the Option
is to become exercisable; provided, however, that no portion of the Option shall
-------- -------
become exercisable within such time as (i) either (A) there has been sold or
distributed to the public in one or more underwritten public offerings pursuant
to one or more registration statements filed with, and declared effective by,
the Commission under the Securities Act, an aggregate number of shares of the
common stock of the Company representing not less than 15% of the outstanding
common stock of the Company on the date of any such public offering, or (B) the
Committee has resolved to waive (subject to such terms and conditions as the
Committee may specify) the requirement contained in clause (A), above, and (ii)
either (X) there exists on file with the Commission an effective registration
statement under the Securities Act on Form S-8 or other applicable form with
respect to the issuance of Shares pursuant to such Option(s), or (Y) an
exemption from registration is available under the Securities Act with respect
to the issuance of Shares pursuant to such Option(s) (with the date upon which
items (i) and (ii) are both satisfied referred to herein as the "Exercisability
Date"). At such
7
<PAGE>
time as the Company becomes eligible for Form S-8, the Company shall use its
best efforts to cause a registration statement on Form S-8 with respect to the
Shares to be filed and declared effective.
(b) Subject to Sections 6.7 and 6.9, below, the Committee, at its sole
discretion, shall determine the date on which the period of exercisability of
the vested portion of the Option (the "Exercise Term") shall expire (the
"Expiration Date"). Notwithstanding anything in this Plan to the contrary, no
Option granted under this Plan may be exercised more than 10 years from the Date
of Grant.
6.6 Nontransferability. The Optionee shall not transfer the Option by any
------------------
means whatsoever. An Option may be exercised during the lifetime of the Optionee
only by the Optionee. The term "transfer" shall include any attempt by the
Optionee or any other person to assign the Option or any right or interest
therein, claim any right or interest (except as otherwise set forth in Section
6.9 hereof) in the Option as a successor in interest, dispose, pledge or
hypothecate the Option or any right or interest therein whether by operation of
law or otherwise, or make the Option or any right or interest therein subject to
sale under execution, attachment or similar process. Any attempt to transfer the
Option or any right or interest therein shall be void and of no effect
whatsoever.
6.7 Termination of Employment (Except by Death). If an Optionee is an
-------------------------------------------
employee of the Company on the Date of Grant and the Optionee's Full-Time
Employment with the Company terminates for any reason other than his or her
death or Permanent Disability, then his or her vested Option(s) shall expire
within ninety (90) days of such occurrence. Such an Optionee may exercise all or
part of the vested portion of his or her Option(s) at any time after the
Exercisability Date and before the expiration of such Option(s) under the
preceding sentence, but only to the extent that such Option(s) had become
exercisable before such Optionee's Full-Time Employment terminated. The unvested
balance of such Option(s) shall lapse when such Optionee's Full-Time Employment
terminates.
6.8 Leaves of Absence. For purposes of Section 6.7, above, for an
-----------------
Optionee who is an employee of the Company, Full-Time Employment shall be deemed
to continue while such Optionee is on military leave, sick leave or other bona
fide leave of absence (as determined by the Committee, in its sole discretion).
6.9 Death or Permanent Disability of Optionee. If an Optionee who is an
-----------------------------------------
employee of the Company dies or
8
<PAGE>
becomes Permanently Disabled subsequent to the vesting of an Option and prior to
such Option's Expiration Date, then the vested portion of his or her Option(s)
shall expire on the date six (6) calendar months after his or her death or the
date six (6) calendar months after such Optionee becomes Permanently Disabled.
In the case of an Optionee who is not an employee of the Company and who dies or
becomes Permanently Disabled subsequent to the vesting of an Option and prior to
such Option's Expiration Date, the vested portion of his or her Option(s) shall
expire on the date six (6) calendar months after his or her death or the date
six (6) calendar months after such Optionee becomes Permanently Disabled.
Notwithstanding Section 6.6 hereof, all or part of the vested portion of
the Optionee's Option(s) may be exercised at any time after the Exercisability
Date and before the Expiration Date of such vested portion of the Option(s)
pursuant to the preceding sentence by the executors or administrators of his or
her estate or by any person who has acquired such vested portion of the
Option(s) directly from him or her by bequest, beneficiary designation or
inheritance, but only to the extent that such vested portion of the Option(s)
had become exercisable before his or her death or became exercisable as a result
of her or her death. The unvested balance of such Option(s) shall lapse when the
Optionee dies.
6.10 No Rights as a Stockholder. An Optionee, or a transferee of an
--------------------------
Optionee, shall have no rights as a stockholder with respect to any Shares
covered by his or her Option until the date of the issuance of a stock
certificate for such Shares. No adjustments shall be made, except as provided in
Article 8 hereof.
6.11 Modification, Extension and Assumption of Options. Within the
-------------------------------------------------
limitations of the Plan, the Committee may modify, extend or assume outstanding
Options or may accept the cancellation of outstanding Options (whether granted
by the Company or another issuer) in return for the grant of new Options for the
same or a different number of Shares and at the same or a different price.
6.12 Restrictions on Transfer of Shares. Any Shares issued upon exercise
----------------------------------
of an Option shall be subject to such special forfeiture conditions, rights of
repurchase, rights of first refusal and other transfer restrictions as the
Committee may determine. Such restrictions shall be set forth in the applicable
Stock Option Agreement and shall apply, in addition to any general restrictions
that may apply, to all holders of Shares.
9
<PAGE>
6.13 Nonqualified Options. All Options granted pursuant to this Plan
--------------------
shall be options that are not intended to be qualified incentive stock options
under Section 422 of the Code.
ARTICLE 7. PAYMENT FOR SHARES
7.1 General Rule. The entire Exercise Price of Shares issued under the
------------
Plan shall be payable in lawful money of the United States or by check
acceptable to the Company. However, the Committee, in its sole discretion, may
accept payment in the form described in Section 7.2, below.
7.2 Surrender of Stock. To the extent that applicable law permits, an
------------------
Optionee may pay for Shares with Shares owned by the Optionee for more than six
months having a value at the time of exercise equal to the total Exercise Price.
The Optionee must surrender the Shares to the Company in good form for transfer.
Such Shares will be valued at their Fair Market Value on the date when the new
Shares are purchased under the Plan. Upon the full or partial payment of the
Exercise Price by the transfer to the Company of Shares or upon satisfaction of
tax withholding provisions in connection with any such exercise or any other
payment made or benefit realized under this Plan by the transfer or
relinquishment of Shares, there shall be deemed to have been issued or
transferred under this plan only the net number of Shares actually issued or
transferred by the Company less the number of Shares so transferred or
relinquished.
ARTICLE 8. ADJUSTMENT OF SHARES
8.1 Adjustment. The Committee may make or provide for such adjustments in
----------
the (a) number of Shares covered by outstanding Options granted hereunder, and
(b) Exercise Price per Share applicable to such Options (provided that the
Exercise Price per Share as adjusted pursuant to this Section 8 shall not be
less than the greater of Fair Market Value on the Date of Grant or the par value
of the Shares), as the Committee in its sole discretion may in good faith and in
its sole discretion determine to be equitably required in order to prevent
dilution or enlargement of the rights of Eligible Participants that otherwise
would result from (x) any stock dividend, stock split, combination of shares,
recapitalization or other change in the capital structure of the Company, (y)
any merger, consolidation, reorganization, partial or complete liquidation or
other distribution of assets, issuance of rights or warrants to purchase
securities or (z) any other corporate transaction
10
<PAGE>
or event having an effect similar to any of the foregoing. In the event of any
such transaction or event, the Committee may provide in substitution for any or
all outstanding awards under this Plan such alternative consideration as it may
in good faith determine to be equitable under the circumstances and may require
in connection therewith the surrender of all awards so replaced. The Committee
may also make or provide for such adjustments in the number of Shares available
for future grants under Article 5 of the Plan as the Committee in its sole
discretion may in good faith determine to be appropriate in order to reflect any
transaction or event described in this Section 8.
ARTICLE 9. SECURITIES LAW MATTERS
9.1 Shares shall not be issued under the Plan unless the issuance and
delivery of such Shares complies with (or is exempt from) all applicable
requirements of law, including (without limitation) the Securities Act, the
rules and regulations promulgated thereunder, state securities laws and
regulations, and the regulations of any stock exchange on which the Company's
securities may then be listed. Without limiting the foregoing, the Company may
require any Optionee, as a condition of receiving an Option, to give written
assurances in substance and form satisfactory to the Company and its counsel to
the effect that such person is acquiring the Shares subject to the Options for
his own account for investment and not with any current intention of selling or
otherwise distributing the same, and to such other effects as the Company deems
necessary or appropriate in order to comply with federal and applicable state
securities laws. Certificates representing Shares issued upon the exercise of
any Option shall bear such legends as the Committee, in its sole discretion,
deems appropriate to reflect any restrictions on the transfer of the Shares
under any applicable federal or state securities laws.
9.2 If at any time the Plan should become subject to Rule 16b-3, from
such time forward, and to the extent required by Rule 16b-3, the provisions of
this Plan are intended to qualify for exemption under Rule 16b-3, and any
provision of this Plan shall be construed consistent with the applicability,
interpretation and scope of Rule 16b-3.
ARTICLE 10. TAX MATTERS
10.1 Withholding Taxes. To the extent that the Company is required
-----------------
to withhold federal, state, local or foreign taxes in connection with any
payment made or
11
<PAGE>
benefit realized by an Eligible Participant or other person under this Plan, and
the amounts available to the Company for such withholding are insufficient, it
shall be a condition to the receipt of such payment or the realization of such
benefit that the Eligible Participant or such other person make arrangements
satisfactory to the Company for payment of the balance of such taxes required to
be withheld. At the discretion of the Committee, such arrangements may include
relinquishment of a portion of such benefit. The Company and any Eligible
Participant or such other person may also make similar arrangements with respect
to the payment of any taxes with respect to which withholding is not required.
ARTICLE 11. EMPLOYMENT RIGHTS
11.1 No Employment Right. No provision of the Plan, nor any Option
-------------------
granted under the Plan, shall be construed to give any person currently in the
employ of the Company any right to continue in such employ. Subject to any
written employment agreement between the Company and any Optionee who is an
employee of the Company providing to the contrary, the Company reserves the
right to terminate any such person's employment at any time and for any reason.
ARTICLE 12. DURATION AND AMENDMENTS
12.1 Term of the Plan. The Plan shall become effective on the date
----------------
of its adoption by the Board of Directors. The Plan shall terminate
automatically ten years after its adoption by the Board of Directors and may be
terminated on any earlier date pursuant to Section 12.2 below.
12.2 Right to Amend or Terminate the Plan. The Board of Directors
------------------------------------
may amend, suspend or terminate the Plan at any time and for any reason.
However, if at any time the Plan should become subject to Rule 16b-3, from such
time forward, and to the extent required by the provisions of Rule 16b-3, any
amendment which would materially (1) increase the benefits accruing to
participants under the Plan, (2) increase the number of shares which may be
issued under the Plan, or (3) modify the requirements as to eligibility for
participation in the Plan, must be approved by the Company's shareholders
pursuant to the requirements the Commission may establish for plans intended to
qualify for exemption under Rule 16b-3, and no such amendment shall cause Rule
16b-3 to cease to be applicable to this Plan.
12.3 Effect of Amendment or Termination. No Shares shall be issued
----------------------------------
under the Plan after the termination
12
<PAGE>
thereof, except upon exercise of an Option granted prior to such termination.
The termination of the Plan, or any amendment thereof, shall not affect any
Share previously issued or any Option previously granted under the Plan.
12.4 Conflict. If there is any conflict between the terms of an
--------
Option Agreement and the terms of the Plan, the terms of the Plan shall control.
ARTICLE 13. MISCELLANEOUS
13.1 Governing Law. The Plan shall be governed by and construed in
-------------
accordance with the laws, including conflicts of laws, of the State of
California.
13
<PAGE>
EXHIBIT 10.11
SMARTALK TELESERVICES, INC.
1996 STOCK INCENTIVE PLAN
1. PURPOSE OF THE PLAN
The purpose of the SmarTalk TeleServices Inc. 1996 Stock Incentive Plan is
to promote the interests of the Company and its shareholders by strengthening
the Company's ability to attract, motivate and retain employees, advisors,
directors and consultants of the Company, and to provide a means to encourage
stock ownership and a proprietary interest in the Company by employees,
advisors, directors and consultants to the Company upon whose judgment,
initiative, and efforts the financial success and growth of the business of the
Company largely depend.
2. DEFINITIONS
(a) "Award" means an award of an Option, Restricted Stock, Stock
Appreciation Right, Performance Award or Phantom Stock granted under the Plan.
(b) "Award Agreement" means an agreement entered into between the Company
and a Participant setting forth the terms and conditions of an Award granted to
a Participant.
(c) "Board" means the Board of Directors of the Company.
(d) "Change of Control" shall be deemed to occur upon a merger of the
Company with or into another corporation, or the sale of substantially all of
the assets of the Company.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Committee" means the Compensation Committee of the Board, unless the
Board appoints another committee to administer the Plan under Section 4 hereof.
(g) "Common Stock" means the no par value common stock of the Company.
(h) "Company" means SmarTalk TeleServices, Inc., a California corporation.
<PAGE>
(i) "Date of Grant" means the date on which an Award under the Plan is
made by the Committee, or such later date as the Committee may specify that the
Award becomes effective.
(j) "Eligible Person" means an Employee, advisor, director and consultant
of the Company or any of its Subsidiaries.
(k) "Employee" means any person who is an employee of the Company or of
any of its Subsidiaries.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(m) "Fair Market Value" means
(i) If the Common Stock is listed on any established stock exchange
or a national market system including, without limitation, the National Market
System of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, the Fair Market Value of a share of Common Stock
shall be the closing sales price for such stock (or the closing bid, if no sales
were reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in Common Stock) on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Committee deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but not on
the National Market System thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Committee deems reliable;
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the Committee.
(n) "Incentive Stock Option" means an option to purchase Common Stock that
is intended to qualify under section 422 of the Code and the Treasury
Regulations thereunder.
(o) "Nonqualified Stock Option" means an option to purchase Common Stock
that is not an Incentive Stock Option.
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(p) "Option" means an Incentive Stock Option or a Nonqualified Stock
Option granted under Section 6 hereof.
(q) "Participant" means any Eligible Person who has received an Award
under the Plan.
(r) "Permanent Disability" shall mean that the Participant is unable to
substantially perform the Participant's duties to the Company by reason of any
medically determinable physical or mental impairment that can be expected to
result in death or which has lasted, or can be expected to last, for a
continuous period of not less than twelve (12) months.
(s) "Phantom Stock" means an Award under Section 10 hereof entitling a
Participant to a payment at the end of a vesting period of a unit value based on
the Fair Market Value of a share of Common Stock.
(t) "Plan" means the 1996 Stock Incentive Plan as set forth herein, as it
may be amended from time to time.
(u) "Performance Award" means an Award made under Section 9 hereof
entitling a Participant to a payment based on the value of Common Stock (a
"Performance Share") or based on specified dollar units (a "Performance Unit")
at the end of a performance period if certain conditions as may be established
by the Committee are satisfied.
(v) "Restricted Stock" means an Award under Section 8 hereof entitling a
Participant to shares of Common Stock that are nontransferable and subject to
forfeiture until specific conditions established by the Committee are satisfied.
(w) "Stock Appreciation Right" or "SAR" means an Award under Section 7
hereof entitling a Participant to receive an amount, representing the difference
between the base price per share of the right and the Fair Market Value of a
share of Common Stock on the date of exercise.
(x) "Subsidiary" means a subsidiary corporation of the Company, within the
meaning of section 424(f) of the Code.
3. SHARES OF COMMON STOCK SUBJECT TO THE PLAN
3.1 Number of Shares. Subject to the following provisions of this Section
----------------
3, the aggregate number of shares of Common Stock that may be issued or
transferred or exercised pursuant to Awards under the Plan is (i) the lesser of
(a) 7,087,991 shares of Common Stock and (b) the
3
<PAGE>
number of shares equal to 9% of the then outstanding shares of Common Stock
minus (ii) the number of shares of Common Stock issued or issuable pursuant to
options exercised or outstanding under the Company's 1996 Nonqualified Stock
Option Plan. The shares of Common Stock to be delivered under the Plan will be
made available, at the discretion of the Board or the Committee, either from
authorized but unissued shares of Common Stock or from shares of Common Stock
held in the Company's treasury. If any share of Common Stock that is the subject
of an Award is not issued or transferred and ceases to be issuable or
transferable for any reason, such share of Common Stock will no longer be
charged against such maximum share limitation and may again be made subject to
Awards under the Plan.
3.2 Adjustments. If there shall occur any recapitalization,
-----------
reclassification, stock dividend, stock split, reverse stock split or other
distribution with respect to the shares of Common Stock, or any similar
corporate transaction or event in respect of the Common Stock, then the
Committee shall, in the manner and to the extent that it deems appropriate and
equitable to the Participants and consistent with the terms of this Plan, cause
a proportionate adjustment to be made in (i) the maximum number and kind of
shares provided in Section 3.1 hereof, (ii) the number and kind of shares,
units, or other securities subject to the then outstanding Awards, (iii) the
price for each share or unit or other right subject to then outstanding Awards
without change in the aggregate purchase price or value as to which such Awards
remain exercisable or subject to restrictions, (iv) the performance targets or
goals appropriate to any other outstanding Performance Awards, or (v) any other
terms that are affected by the event.
4. ADMINISTRATION OF THE PLAN
4.1 Committee Members. The Plan will be administered by the Committee,
-----------------
which will consist of two or more persons who satisfy the requirements for a
"non-employee director" under Rule 16b-3 promulgated under section 16 of the
Exchange Act. The Committee has and may exercise such powers and authority of
the Board as may be necessary or appropriate for the Committee to carry out its
functions as described in the Plan. No member of the Board nor the Committee
will be liable for any action or determination made in good faith by the Board
or the Committee with respect to the Plan or any Award under it.
4.2 Discretionary Authority. Subject to the express limitation of the
-----------------------
Plan, the Committee has authority in its discretion to determine the Eligible
Persons to whom, and
4
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the time or times at which, Awards may 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 an Award will become vested,
exercisable or payable and the duration of the Award. The Committee also has
discretionary authority to interpret the Plan, to make all factual
determinations under the Plan, and to determine the terms and provisions of the
respective Award Agreements and to make all other determinations necessary or
advisable for Plan administration. The Committee has authority to prescribe,
amend, and rescind rules and regulations relating to the Plan. All
interpretations, determinations, and actions by the Committee will be final,
conclusive, and binding upon all parties.
4.3 Changes to Awards. The Committee shall have the authority to effect,
-----------------
at any time and from time to time, with the consent of the affected
Participants, (i) the cancellation of any or all outstanding Awards and the
grant in substitution therefor of new Awards covering the same or different
numbers of shares of Common Stock and having an exercise or base price which may
be the same as or different than the exercise or base price of the cancelled
Awards or (ii) the amendment of the terms of any and all outstanding Awards.
The Committee may in its discretion accelerate the vesting or exercisability of
an Award at any time.
4.4 Financial Reports. Not less often than annually, the Company
-----------------
shall furnish to Participants reports of its financial condition, unless such
Participants have access to equivalent information through their employment or
through public records. Such reports need not be audited.
5. ELIGIBILITY AND AWARDS
All Eligible Persons are eligible to be designated by the Committee to
receive an Award under the Plan. The Committee has authority, in its sole
discretion, to determine and designate from time to time those Eligible Persons
who are to be granted Awards, and the type and amount of Award to be granted.
Each Award will be evidenced by an Award Agreement as described in Section 11
hereof between the Company and the Participant that may include any terms and
conditions consistent with the Plan as the Committee may determine.
5
<PAGE>
6. STOCK OPTIONS
6.1 Grant of Option; Exercise Price. An Option may be granted to any
-------------------------------
Eligible Person selected by the Committee; provided, however, that only
-------- -------
Employees meeting the requirements of Treasury Regulation (S) 1.421-7(h) shall
be eligible for Awards of Incentive Stock Options. Each Option shall be
designated, at the discretion of the Committee, as an Incentive Stock Option or
a Nonqualified Stock Option. The exercise price of the Option shall be
determined by the Committee; provided, however, that the exercise price of an
-------- -------
Incentive Stock Option shall not be less than 100 percent of the Fair Market
Value of the Common Stock subject to the Option on the Date of Grant.
6.2 Vesting; Term of Option. The Committee, in its sole discretion, shall
-----------------------
prescribe in the Award Agreement for a Participant the time or times at which an
Option or portion thereof shall become vested and exercisable, and may
accelerate the exercisability of any Option at any time. Notwithstanding the
foregoing, all such Options shall vest at a rate of at least 20 percent per year
over five years from the Date of Grant. An Option may become vested and
exercisable upon a Participant's retirement, death disability or other event to
the extent provided in an Award Agreement. The period during which a vested
Option may be exercised shall be ten years from the Date of Grant, unless a
shorter exercise period is specified by the Committee in an Award Agreement.
6.3 Vesting; Change of Control. In the event of a Change of Control, each
--------------------------
outstanding Option shall be assumed or an equivalent option shall be substituted
by the successor corporation or a parent or subsidiary of the successor
corporation. In the event that the successor corporation does not agree to
assume the Option or to substitute an equivalent option, each outstanding Option
shall become fully vested and exercisable, including as to Shares as to which it
would not otherwise be exercisable. If an Option becomes fully vested and
exercisable in the event of a Change of Control, the Board shall notify the
Optionee that the Option shall be fully exercisable for a period of thirty (30)
days from the date of such notice, and the Option will terminate upon the
expiration of such period.
6.4 Option Exercise; Withholding. An Option may be exercised in whole or
----------------------------
in part at any time, with respect to whole shares only, within the period
permitted for the exercise thereof, and shall be exercised by written notice of
intent to exercise the Option with respect to a specified number of shares
delivered to the Company at its
6
<PAGE>
principal office, and payment in full to the Company at said office of the
amount of the exercise price for the number of shares of the Common Stock with
respect to which the Option is then being exercised. Payment of the exercise
price shall be made (i) in cash or by cash equivalent, (ii) at the discretion of
the Committee, in Common Stock (not subject to limitations on transfer) valued
at the Fair Market Value of such shares on the trading date immediately
preceding the date of exercise or (iii) at the discretion of the Committee, by a
combination of such cash and such Common Stock. In addition to and at the time
of payment of the exercise price, the Participant shall pay to the Company in
cash or, at the discretion of the Committee, in Common Stock the full amount of
all federal and state withholding and other employment taxes applicable to the
taxable income of such Participant resulting from such exercise.
6.5 Effect of Termination of Employment.
-----------------------------------
(a) Except by Death or Disability. If a Participant is an Employee of the
-----------------------------
Company on the Date of Grant and the Participant's full-time employment with the
Company terminates for any reason other than his or her death or Permanent
Disability, then his or her vested Option(s) shall expire within ninety (90)
days of such occurrence. Such a Participant may exercise all or part of the
vested portion of his or her Option(s) at any time after the date on which such
Option(s) may be exercised and before the expiration of such Option(s) under
the preceding sentence, but only to the extent that such Option(s) had become
exercisable before such Participant's full-time employment terminated. The
unvested balance of such Option(s) shall lapse when such Participant's full-time
employment terminates.
(b) Death or Permanent Disability. If a Participant who is an Employee of
-----------------------------
the Company dies or becomes Permanently Disabled subsequent to the vesting of an
Option and prior to the expiration date of such Option, then the vested portion
of his or her Option(s) shall expire on the date six (6) calendar months after
his or her death or the date six (6) calendar months after such Participant
becomes Permanently Disabled. In the case of a Participant who is not an
Employee of the Company and who dies or becomes Permanently Disabled subsequent
to the vesting of an Option and prior to the expiration date of such Option, the
vested portion of his or her Option(s) shall expire on the date six (6) calendar
months after his or her death or the date six (6) calendar months after such
Participant becomes Permanently Disabled.
7
<PAGE>
Notwithstanding the provisions of Section 13.1, below, all or part of the
vested portion of the Participant's Option(s) may be exercised at any time after
the Option(s) become exercisable and before the expiration date of such vested
portion of the Option(s) pursuant to the preceding sentence by the executors or
administrators of his or her estate or by any person who has acquired such
vested portion of the Option(s) directly from him or her by bequest, beneficiary
designation or inheritance, but only to the extent that such vested portion of
the Option(s) had become exercisable before his or her death or became
exercisable as a result of her or her death. The unvested balance of such
Option(s) shall lapse when the Participant dies.
6.6 Additional Rules for Incentive Stock Options.
--------------------------------------------
(a) Annual Limits. No Incentive Stock Option shall be granted to a
-------------
Participant as a result of which the aggregate fair market value (determined as
of the Date of Grant) of the stock with respect to which incentive stock options
are exercisable for the first time in any calendar year under the Plan, and any
other stock option plans of the Company, any Subsidiary or any parent
corporation, would exceed $100,000, determined in accordance with section 422(d)
of the Code. This limitation shall be applied by taking options into account in
the order in which granted.
(b) Termination of Employment. Any Incentive Stock Option granted under
-------------------------
the Plan shall be subject to such limitations on the period of exercise
following termination of employment, including such special rules relating to
death and disability, as shall be determined by the Committee to be consistent
with section 422 of the Code and Treasury Regulations thereunder and set forth
in the applicable Award Agreement.
(c) Ten-Percent Owners. Notwithstanding any other provisions of this Plan
------------------
to the contrary, in the case of an Incentive Stock Option granted to an Employee
who, at the time an Incentive Stock Option is granted, owns stock possessing
more than ten percent of the total combined voting power of all classes of stock
of the Company, its parent, if any, or any Subsidiary, as determined under
sections 422(b)(6) and 424(d) of the Code, (i) the period during which any such
Incentive Stock Option may be exercised shall not be greater than five years
from the Date of Grant and (ii) the exercise price of such Incentive Stock
Option shall not be less than 110 percent of the Fair Market Value of a share of
Common Stock on the Date of Grant.
8
<PAGE>
(d) Disqualifying Dispositions. If shares of Common Stock acquired by
--------------------------
exercise of an Incentive Stock Option are disposed of within two years following
the Date of Grant or one year following the transfer of such shares to the
Participant upon exercise, the Participant shall, promptly following such
disposition, notify the Company in writing of the date and terms of such
disposition and provide such other information regarding the disposition as the
Committee may reasonably require.
7. STOCK APPRECIATION RIGHTS
7.1 Grant of SARs. A Stock Appreciation Right granted to a Participant is
-------------
an Award in the form of a right to receive, upon surrender of the right, but
without other payment, an amount based on appreciation in the value of the
Common Stock over a base price established for the Award, payable in cash,
Common Stock or such other form or combination of forms of payout, exercisable
at such time or times and upon conditions as may be approved by the Committee.
7.2 Tandem SARs. 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. An SAR granted in connection with an Option will entitle
the holder, upon exercise, to surrender such Option or any portion thereof to
the extent unexercised, with respect to the number of shares as to which such
SAR is exercised, and to receive payment of an amount computed as described
below. Such Option will, to the extent and when surrendered, cease to be
exercisable. An SAR granted in connection with an Option hereunder will be
exercisable at such time or times, and only to the extent, that a related Option
is exercisable, and will expire no later than the related Option expires. Upon
the exercise of an SAR granted in connection with an Option, the holder will be
entitled to receive payment of an amount determined by multiplying: (i) the
difference between the exercise price of a share of Common Stock
specified in the related Option and the Fair Market Value of a share of Common
Stock on the date of exercise of such SAR, by (ii) the number of shares as to
which such SAR will have been exercised.
7.3 Freestanding SARs. A Stock Appreciation Right may be granted without
-----------------
relationship to an Option and, in such case, will be exercisable as determined
by the Committee, but in no event after 10 years from the Date of Grant. The
base price of an SAR granted without relationship to an Option shall be
determined by the Committee in its sole discretion. An SAR granted without
relationship to an Option will entitle the holder, upon
9
<PAGE>
exercise of the SAR, to receive payment of an amount determined by multiplying:
(i) the difference between the base price of the SAR and the Fair Market Value
of a share of Common Stock on the date of exercise of such SAR, by (ii) the
number of shares as to which such SAR will have been exercised.
7.4 Payment of SARs. Payment of the amount determined under Section 7.2
---------------
or 7.3 hereof may be made, in the discretion of the Committee, in cash, in
shares of Common Stock valued at their Fair Market Value on the date of exercise
or in a combination of cash and shares of Common Stock.
8. RESTRICTED STOCK
8.1 Grants of Restricted Stock. An award of Restricted Stock to a
--------------------------
Participant represents shares of Common Stock that are issued subject to
restrictions on transfer and such other restrictions on incidents of ownership
and forfeiture conditions as the Committee may determine. The restrictions
imposed upon Restricted Stock will lapse in accordance with a schedule or other
conditions as determined by the Committee. The Committee may, in connection
with an award of Restricted Stock, require the payment of a specified purchase
price.
8.2 Restrictions. Shares of Restricted Stock may not be transferred,
------------
assigned or subject to any encumbrance, pledge or charge until all applicable
restrictions are removed or expire or unless otherwise allowed by the Committee.
The Committee may require the Participant to enter into an escrow agreement
providing that the certificates representing Restricted Stock granted or sold
pursuant to the Plan will remain in the physical custody of an escrow holder
until all restrictions are removed or expire. Each certificate representing
Restricted Stock granted pursuant to the Plan will bear a legend making
appropriate reference to the restrictions imposed. The Committee may impose
such conditions on any shares of Restricted Stock as it may deem advisable,
including, without limitation, restrictions under the Securities Act of 1933, as
amended, under the requirements of any stock exchange upon which such shares of
the same class are then listed, and under any blue sky or other securities laws
applicable to such shares.
8.3 Rights as Stockholder. Subject to the foregoing provisions of this
---------------------
Section 8 and the applicable Award Agreement, Section 8.1 hereof, the holder
will have all rights of a shareholder with respect to shares of Restricted Stock
granted to him or her, including the right
10
<PAGE>
to vote the shares and receive all dividends and other distributions paid or
made with respect thereto, unless the Committee determines otherwise at the time
the Restricted Stock is granted.
8.4 Section 83(b) Election. If a Participant makes an election pursuant
----------------------
to section 83(b) of the Code, the Participant shall be required to promptly file
a copy of such election with the Company.
9. PERFORMANCE AWARDS
9.1 Grant of Performance Awards. The Committee may grant Performance
---------------------------
Awards, which shall be denominated on the Date of Grant either in shares of
Common Stock (Performance Shares) or in specified dollar units (Performance
Units). At the time of a Performance Award grant, the Committee shall
determine, in its sole discretion, one or more performance periods and
performance goals to be achieved during the applicable performance periods, as
well as such other restrictions and conditions as the Committee deems
appropriate. In the case of Performance Units, the Committee shall also
determine a target unit value or a range of unit values for each Award. No
performance period shall exceed ten years from the date of the grant. The
performance goals applicable to a Performance Award grant may be subject to such
later revisions as the Committee shall deem appropriate to reflect significant
unforeseen events such as changes in law, accounting practices or unusual or
nonrecurring items or occurrences.
9.2 Payment of Performance Awards. At the end of the performance period,
-----------------------------
the Committee shall determine the extent to which performance goals have been
attained or a degree of achievement between maximum and minimum levels in order
to establish the level of payment to be made, if any, and shall determine if
payment is to be made in the form of cash or Common Stock (valued at its Fair
Market Value at the time of payment) or a combination of cash and Common Stock.
In the case of Performance Shares, the Committee may provide that during a
performance period a Participant shall be paid with respect to each Performance
Share a cash amount in the same amount and at the same time as a dividend is
paid on a share of Common Stock.
10. PHANTOM STOCK
10.1 Grant of Phantom Stock. Phantom Stock is an Award to a Participant of
----------------------
a number of hypothetical share units with respect to shares of Common Stock,
with an initial value based on the Fair Market Value of the Common Stock on the
Date of Grant. Phantom Stock shall be subject
11
<PAGE>
to such restrictions and conditions as the Committee shall determine. On the
Date of Grant, the Committee shall determine, in its sole discretion, the
vesting period of the Phantom Stock and the maximum value of the Phantom Stock,
if any. No vesting period shall exceed 10 years from the date of the grant.
10.2 Payment of Phantom Stock. At the end of the vesting period applicable
------------------------
to Phantom Stock granted to a Participant, a cash amount equivalent 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 determined by the Committee at the
time of grant, shall be paid with respect to each such Phantom Stock unit to the
Participant. The Committee may provide that during the vesting period a
Participant shall be paid with respect to each Phantom Stock unit, cash amounts
in the same amount and at the same time as a dividend on a share of Common
Stock.
11. AWARD AGREEMENTS
11.1 Form of Agreement. Each Award under this Plan shall be evidenced by
-----------------
an Award Agreement in a form approved by the Committee setting forth the number
of shares of Common Stock, units or other rights (as applicable) subject to the
Award, the exercise, base or purchase price (if any) of the Award, the time or
times at which an Award will become vested, exercisable or payable, the duration
of the Award and, in the case of Performance Awards, the applicable performance
goals. The Award Agreement shall also set forth other material terms and
conditions applicable to the Award as determined by the Committee consistent
with the limitations of this Plan.
11.2 Termination of Employment. The Award Agreements may include
-------------------------
provisions describing the treatment of an Award in the event of the retirement,
disability, death or other termination of a Participant's employment with or
other services to the Company, including any provisions relating to the vesting,
exercisability, acceleration, forfeiture or cancellation of the Award in these
circumstances, including such provisions as required for Incentive Stock Options
pursuant to Section 6.4(b) thereof.
11.3 Contract Rights. Any obligation of the Company to any Participant
----------------
with respect to an Award shall be based solely upon contractual obligations
created by this Plan and an Award Agreement. No Award shall be enforceable until
the Award Agreement or a receipt has been signed by the Participant and on
behalf of the Company by its authorized representative. By executing the Award
12
<PAGE>
Agreement or receipt, a Participant shall be deemed to have accepted and
consented to the terms of this Plan and any action taken in good faith under
this Plan by and within the discretion of the Committee, the Board of Directors
or their delegates.
12. EFFECTIVE DATE, TERMINATION AND AMENDMENT
12.1 Effective Date. The Plan shall become effective on the date of its
--------------
adoption by the Board; provided, however, that no Incentive Stock Option shall
-------- -------
be exercisable by a Participant unless and until the Plan shall have been
approved by the stockholders of the Company, which approval shall be obtained
within 12 months before or after the adoption of the Plan by the Board.
12.2 Termination. The Plan shall terminate on the date immediately
-----------
preceding the tenth anniversary of the earlier of the date the Plan is adopted
by the Board or the date the Plan is approved by the Company's stockholders.
The Board may, in its sole discretion and at any earlier date, terminate the
Plan. Notwithstanding the foregoing, no termination of the Plan shall in any
manner affect any Award theretofore granted without the consent of the
Participant or the permitted transferee of the Award.
12.3 Amendment. The Board may at any time and from time to time and in any
---------
respect, amend or modify the Plan. Notwithstanding the foregoing, no amendment
or modification of the Plan shall in any manner affect any Award theretofore
granted without the consent of the Participant or the permitted transferee of
the Award.
13. GENERAL PROVISIONS
13.1 Non-assignability. Awards under the Plan shall not be assignable nor
-----------------
transferable, except by will or by the laws of descent and distribution, and
during the lifetime of a Participant the Award shall be exercised only by such
Participant or by his or her guardian or legal representative.
13.2 Rights as Stockholder. A Participant shall have no rights as a holder
---------------------
of Common Stock with respect to any unissued securities covered by an Award
until the date the Participant becomes the holder of record of these securities.
Except as provided in Section 3.2 hereof, no adjustment or other provision shall
be made for dividends or other stockholder rights, except to the extent that the
Award Agreement provides for dividend payments or similar economic benefits.
13
<PAGE>
13.3 Employment. Nothing in the Plan, in the grant of any Award or in any
----------
Award Agreement shall confer upon any Eligible Person the right to continue in
the capacity in which he is employed by or otherwise serves the Company or any
Subsidiary.
13.4 Securities Laws. No shares of Common Stock will be issued or
---------------
transferred pursuant to an Award unless and until all then applicable
requirements imposed by federal and state securities and other laws, rules and
regulations and by any regulatory agencies having jurisdiction, and by any stock
exchanges upon which the Common Stock may be listed, have been fully met. As a
condition precedent to the issuance of shares pursuant to the grant or exercise
of an Award, the Company may require the Participant to take any reasonable
action to meet such requirements.
13.5 Tax Withholding. The Participant shall be responsible for payment of
---------------
any taxes or similar charges required by law to be withheld from an Award or an
amount paid in satisfaction of an Award and these obligations shall be paid by
the Participant on or prior to the payment of the Award. The Award Agreement
shall specify the manner in which the withholding obligation shall be satisfied
with respect to the particular type of Award.
13.6 Other Compensation and Benefit Plans. The adoption of the Plan shall
------------------------------------
not affect any other stock incentive or other compensation plans in effect for
the Company or any Subsidiary, nor shall the Plan preclude the Company from
establishing any other forms of stock incentive or other compensation for
employees of the Company or any Subsidiary. The amount of any compensation
deemed to be received by Participant pursuant to an Award shall not constitute
compensation with respect to which any other employee benefits of such
Participant are determined, including, without limitation, benefits under any
bonus, pension, profit sharing, life insurance or salary continuation plan,
except as otherwise specifically provided by the terms of such plan.
13.7 Plan Binding on Successors. The Plan shall be binding upon the
--------------------------
Company, its successors and assigns, and the Participant, his or her executor,
administrator and permitted transferees.
13.8 Construction and Interpretation. Whenever used herein, nouns in the
-------------------------------
singular shall include the plural, and the masculine pronoun shall include the
feminine gender. Headings of Articles and Sections hereof are inserted for
convenience and reference and constitute no part of the Plan.
14
<PAGE>
13.9 Severability. If any provision of the Plan or any Award Agreement
------------
shall be determined to be illegal or unenforceable by any court of law in any
jurisdiction, the remaining provisions hereof and thereof shall be severable and
enforceable in accordance with their terms, and all provisions shall remain
enforceable in any other jurisdiction.
13.10 Governing Law. The validity and construction of this Plan and of
-------------
the Award Agreements shall be governed by the laws of the State of California.
------------------
15
<PAGE>
This SmarTalk TeleServices, Inc. 1996 Stock Incentive Plan was duly
adopted and approved by the Board of Directors of this SmarTalk TeleServices,
Inc. on the 15th day of August, 1996.
/s/ Glen Andrew Folck
- ----------------------------------------------------
[Assistant Secretary] of SmarTalk TeleServices, Inc.
This SmarTalk TeleServices, Inc. 1996 Stock Incentive Plan was duly
approved by the stockholders of this SmarTalk TeleServices, Inc. on the 15th
day of August, 1996.
/s/ Glen Andrew Folck
- ----------------------------------------------------
[Assistant Secretary] of SmarTalk TeleServices, Inc.
16
<PAGE>
EXHIBIT 10.14B
Second Amendment to Carrier Agreement dated September 9, 1996 between SmarTalk
TeleServices, Inc. and MCI Telecommunications Corporation.*
- ------------------------------
* Confidential treatment has been requested. The copy filed as an exhibit
omits information subject to the confidentiality request.
<PAGE>
EXHIBIT 10.19
Business Alliance Agreement between Pacific Bell and the Company, dated May 24,
1996.*
- ------------------------------
* Confidential treatment has been requested. The copy filed as an exhibit
omits information subject to the confidentiality request.
<PAGE>
EXHIBIT 10.20
Prepaid Carrier Referral Program Agreement between MCI Telecommunications
Corporation and the Company, dated June 21, 1996.*
- ------------------------------
* Confidential treatment has been requested. The copy filed as an exhibit
omits information subject to the confidentiality request.
<PAGE>
EXHIBIT 10.21
Wholesale Distribution Agreement between Western Interactive Corporation and the
Company, dated June 1, 1996.*
- ------------------------------
* Confidential treatment has been requested. The copy filed as an exhibit
omits information subject to the confidentiality request.
<PAGE>
EXHIBIT 10.22
[LOGO OF SOUTHERN CALIFORNA BANK APPEAR HERE]
LOAN AGREEMENT
<TABLE>
<S> <C>
BORROWER: SMARTALK TELESERVICES, INC. (TIN: 95--4502740) LENDER: SOUTHERN CALIFORNIA BANK
1640 S. SEPULVEDA BLVD., STE. 500 HEAD OFFICE - DOWNEY MAIN
LOS ANGLES, CA 90025 10990 DOWNEY AVENUE
DOWNEY, CA 90240-2296
====================================================================================================================================
</TABLE>
THIS LOAN AGREEMENT BETWEEN SMARTALK TELESERVICES, INC. ("BORROWER") AND
SOUTHERN CALIFORNIA BANK ("LENDER") IS MADE AND EXECUTED ON THE FOLLOWING TERMS
AND CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS
APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER FINANCIAL
ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR
SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL
ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS FROM
LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE "LOAN"
AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT: (A) IN
GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S
REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS AGREEMENT; (B)
THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE
SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS SHALL
BE AND ALL SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF THIS
AGREEMENT.
TERM. This Agreement shall be effective as of SEPTEMBER 18, 1996 and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
ACCOUNT. The word "Account" means a trade account, account receivable, or
other right to payment for goods sold or services rendered owing to
Borrower (or to a third party grantor acceptable to Lender).
ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity
obligated upon an Account.
ADVANCE. The word "Advance" means a disbursement of Loan funds under this
Agreement.
BORROWER. The word "Borrower" means SmarTalk TeleServices, Inc.. The word
"Borrower" also includes, as applicable, all subsidiaries and affiliates
of Borrower as provided below in the paragraph titled "Subsidiaries and
"Affiliates."
BORROWING BASE. The words "Borrowing Base" mean as determined by Lender
from time to time, the lesser of (a) $1,000,000.00; or (b) 70.00% of the
aggregate amount of Eligible Accounts.
BUSINESS DAY. The words "Business Day" mean a day on which commercial banks
are open for business in the State of California.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive
of extraordinary gains and income, plus depreciation and amortization.
COLLATERAL. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real
or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise. The
word "Collateral" includes without limitation all collateral described
below in the section titled "COLLATERAL."
DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable
to Lender. The net amount of any Eligible Account against which Borrower
may borrow shall exclude all returns, discounts, credits, and offsets of
any nature. Unless otherwise agreed to by Lender in writing, Eligible
Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an officer,
an employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary
of, or affiliated with or related to Borrower or its shareholders,
officers, or directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by the
Account Debtor may be conditional.
(d) Accounts with respect to which the Account Debtor is not a
resident of the United States, except to the extent such Accounts are
supported by insurance, bonds or other assurances satisfactory to
Lender.
(e) Accounts with respect to which Borrower is or may become liable to
the Account Debtor for goods sold or services rendered by the Account
Debtor to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or setoff.
(g) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Accounts
Debtor.
(h) Accounts with respect to which Lender, in its sole discretion,
deems the creditworthiness or financial condition of the Account
Debtor to be unsatisfactory.
(i) Accounts of any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief under
any provision of any state or federal bankruptcy, insolvency, or
debtor-in-relief acts; or who has had appointed a trustee, custodian,
or receiver for the assets of such Account Debtor; or who has made an
assignment for the benefit of creditors or has become insolvent or
fails generally to pay its debts (including its payrolls) as such
debts become due.
(j) Accounts with respect to which the Account Debtor is the United
States government or any department or agency of the United States.
(k) Accounts which have not been paid in full within 90 DAYS from the
invoice date. The entire balance of any Account of any single Account
debtor will be ineligible whenever the portion of the Account which
has not been paid within 90 DAYS from the invoice date is in excess of
25.000% of the total amount outstanding on the Account.
(l) That portion of the Accounts of any single Account Debtor which
exceeds 15.000% of all of Borrower's Accounts.
(m) Accounts with respect to which the Account Debtor is obligated to
Borrower under a Note.
ELIGIBLE INVENTORY. The words "Eligible Inventory" mean, at any time, all
of Borrower's inventory as defined below except:
(a) Inventory which is not owned by Borrower free and clear of all
security interests, liens, encumbrances, and claims of third parties.
(b) Inventory which Lender, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective, or unfit for further
processing.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
EXPIRATION DATE. The words "Expiration Date" mean the date of termination
of Lender's commitment to lend under this Agreement.
GRANTOR. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
<PAGE>
09-18-1996 LOAN AGREEMENT PAGE 2
LOAN NO 404569048 (CONTINUED)
===============================================================================
connection with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by
Lender against Borrower, or any one more of them; whether now or hereafter
existing, voluntary or involuntary, due or not due, absolute or contingent,
liquidated or unliquidated; whether Borrower may be liable individually or
jointly with others; whether Borrower may be obligated as a guarantor,
surety, or otherwise; whether recovery upon such Indebtedness may be or
hereafter may become barred by any statute of limitations; and whether such
Indebtedness may be or hereafter may become otherwise unenforceable.
INVENTORY. The word "Inventory" means all of Borrower's raw materials, work
in process, finished goods, merchandise, parts and supplies, of every kind
and description, and goods held for sale or lease or furnished under
contracts of service in which Borrower now has or hereafter acquires any
right, whether held by Borrower or others, and all documents of title,
warehouse receipts, bills of lading, and all other documents of every type
covering all or any part of the foregoing. Inventory includes inventory
temporarily out of Borrower's custody or possession and all returns on
Accounts.
LENDER. The word "Lender" means SOUTHERN CALIFORNIA BANK, its successors
and assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
LIQUID ASSETS. The words "Liquid Assets" means Borrower's cash on hand
plus Borrower's readily marketable securities.
LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of business
and securing obligations which are not yet delinquent; (d) purchase money
liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure
indebtedness outstanding on the date of this Agreement or permitted to be
incurred under the paragraph of this Agreement titled "Indebtedness and
Liens"; (e) liens and security interests which, as of the date of this
Agreement, have been disclosed to and approved by the Lender in writing;
and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to
the net value of Borrower's assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection with
the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance acceptable
to Lender.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean "Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible items,
but including leaseholds and leasehold improvements) less total Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is subject
to the following conditions precedent, with all documents, instruments,
opinions, reports, all other items required under this Agreement to be in
form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered
by Borrower to Lender.
(b) Lender shall have received such opinions of counsel, supplemental
opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall
be in full force and effect.
(d) All guaranties required by Lender for the Line of Credit shall
have been executed by each Guarantor, delivered to Lender, and be in
full force and effect.
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, inventory, books, records,
and operations, and Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then due
and payable.
(g) There shall not exist at the time of any Advance a condition
which would constitute an Event of Default under this Agreement, and
Borrower shall have delivered to Lender the compliance certificate
called for in the paragraph below titled "Compliance Certificate."
MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested
orally by authorized persons. Lender may, but need not, require that all
oral requests be confirmed in writing. Each Advance shall be conclusively
deemed to have been made at the request of and for the benefit of Borrower
(a) when credited to any deposit account of Borrower maintained with Lender
or (b) when advanced in accordance with the instructions of an authorized
person. Lender, at its option, may set a cutoff time, after which all
requests for Advances will be treated as having been requested on the next
succeeding Business Day. Under no circumstances shall Lender be required to
make any Advance in an amount less than $1,000.00.
MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount
of the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lender, shall pay to
Lender an amount equal to the difference between the outstanding principal
balance of the Advances and the Borrowing Base. On the Expiration Date,
Borrower shall pay to Lender in full the aggregate unpaid principal amount
of all Advances then outstanding and all accrued unpaid interest, together
with all other applicable fees, costs and charges, if any, not yet paid.
FACILITY CHARGE. Borrower recognizes that Lender has incurred and will
continue to incur certain costs and expenses in connection with
establishing, maintaining, servicing, and administering the credit
facility. To ensure that Lender is able to recover such costs and expenses,
Borrower agrees that, notwithstanding any other provision of this
Agreement, the promissory note for the Line of Credit, or the Related
Documents, Lender shall be entitled to collect the following facility
charge, which Borrower hereby promises and agrees to pay: [(a) THE BORROWER
AGREES TO IMMEDIATELY REPAY THE lENDER FOR EXPENSES THAT INCLUDE, BUT ARE
NOT LIMITED TO, FILING, RECORDING, SEARCH FEES, APPRAISAL FEES, TITLE
REPORT FEES AND DOCUMENTATION FEES. (b) THE BORROWER AGREES TO REIMBURSE
THE LENDER FOR THE COST OF PERIODIC AUDITS AND APPRAISAL OF PERSONAL
PROPERTY COLLATERAL SECURING THIS AGREEMENT, AT SUCH INTERVALS AS THE
LENDER MAY REASONALBLY REQUIRE. THE AUDITS AND APPRAISALS MAY BE PERFORMED
BY EMPLOYEES OF THE lENDER OR BY INDEPENDENT APPRAISERS, AND MINIMUM
MONTHLY INTEREST CHARGE OF $4,429.00 WHICH THE BORROWER HEREBY PROMISES AND
AGREES TO PAY FOR A PERIOD OF ONE YEAR FROM THE DATE OF THIS AGREEMENT.]
LOAN ACCOUNT. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the credit facility.
Lender shall provide Borrower with periodic statements of Borrower's
account, which statements shall be considered to be correct and
conclusively binding on Borrower unless Borrower notifies Lender to the
contrary within thirty (30) days after Borrower's receipt of any such
statement which Borrower deems to be incorrect.
<PAGE>
09-18-1996 LOAN AGREEMENT PAGE 3
LOAN NO 404569048 (CONTINUED)
================================================================================
Borrower (and others, if required) shall grant to Lender Security Interests in
such property and assets as Lender may require (the "Collateral"), including
without limitation Borrower's present and future Accounts, general intangibles,
and Inventory. Lender's Security Interests in the Collateral shall be
continuing liens and shall include the proceeds and products of the Collateral,
including without limitation the proceeds of any insurance. With respect to the
Collateral, Borrower agrees and represents and warrants to Lender:
PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's Security Interests in the Collateral. Upon
request of Lender, Borrower will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Borrower will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Contemporaneous with the execution of this
Agreement, Borrower will execute one or more UCC financing statements and
any similar statements as may be required by applicable law, and will file
such financing statements and all such similar statements in the
appropriate location or locations. Borrower hereby appoints Lender as its
irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue any Security Interest. Lender may at
any time, and without further authorization from Borrower, file a carbon,
photograph, facsimile, or other reproduction of any financing statement for
use as a financing statement. Borrower will reimburse Lender for all
expenses for the perfection, termination, and the continuation of the
perfection of Lender's security interest in the Collateral. Borrower
promptly will notify Lender of any change in Borrower's Social Security
Number or Employer Identification Number. Borrower further agrees to notify
Lender in writing prior to any change in address or location of Borrower's
principal governance office or should Borrower merge or consolidate with
any other entity.
COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which records
shall be available to Lender or Lender's representative upon demand for
inspection and copying at any reasonable time. With respect to the
Accounts, Borrower agrees to keep and maintain such records as Lender may
require, including without limitation information concerning Eligible
Accounts and Account Balances and agings. With respect to the Inventory,
Borrower agrees to keep and maintain such records as Lender may require,
including without limitation information concerning Eligible Inventory and
records itemizing and describing the kind, type, quality, and quantity of
Inventory, Borrower's Inventory costs and selling prices, and the daily
withdrawals and additions to Inventory. The following is an accurate and
complete list of all locations at which Borrower keeps or maintains
business records concerning Borrower's Accounts and Inventory: 1640 S.
SEPULVEDA #500, LOS ANGELES, CA 90025.
COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender schedules of
Accounts and Inventory and Eligible Accounts and Eligible Inventory, in
form and substance satisfactory to the Lender. Thereafter and at such
frequency as Lender shall require, Borrower shall execute and deliver to
Lender such supplemental schedules of Eligible Accounts and Eligible
Inventory and such other matters and information relating to the Accounts
and Inventory as Lender may request.
REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of an Eligible
Account; (b) All Account information listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance; and (c)
Lender, its assigns, or agents shall have the right at any time and at
Borrower's expense to inspect, examine, and audit Borrower's records and to
confirm with Account Debtors the accuracy of such Accounts.
REPRESENTATIONS AND WARRANTIES CONCERNING INVENTORY. With respect to the
Inventory, Borrower represents and warrants to Lender: (a) All Inventory
represented by Borrower to be Eligible Inventory for purposes of this
Agreement conforms to the requirements of the definition of Eligible
Inventory; (b) All Inventory values listed on schedules delivered to Lender
will be true and correct, subject to immaterial variance; (c) The value of
the Inventory will be determined on a consistent accounting basis; (d)
Except as agreed to the contrary by Lender in writing, all Eligible
Inventory is now and at all times hereafter will be in Borrower's physical
possession and shall not be held by others on consignment, sale on
approval, or sale or return; (e) Except as reflected in the Inventory
schedules delivered to Lender, all Eligible Inventory is now and at all
times hereafter will be of good and merchantable quality, free from
defects; (f) Eligible Inventory is not now and will not at any time
hereafter be stored with a bailee, warehouseman, or similar party without
Lender's prior written consent, and, in such event, Borrower will
concurrently at the time of bailment cause any such bailee, warehouseman,
or similar party to issue and deliver to Lender, in form acceptable to
Lender, warehouse receipts in Lender's name evidencing the storage of
Inventory; and (g) Lender, its assigns, or agents shall have the right at
any time and at Borrower's expense to inspect and examine the Inventory and
to check and test the same as to quality, quantity, value, and condition.
REMITTANCE ACCOUNT. Borrower agrees that Lender may at any time require
Borrower to institute procedures whereby the payments and other proceeds of
the Accounts shall be paid by the Account Debtors under a remittance
account or lock box arrangement with Lender, or Lender's agent, or with one
or more financial institutions designated by Lender. Borrower further
agrees that, if no Event of Default exists under this Agreement, any and
all of such funds received under such a remittance account or lock box
arrangement shall, at Lender's sole election and discretion, either be (a)
paid or turned over to Borrower; (b) deposited into one or more accounts
for the benefit of Borrower (which deposit accounts shall be subject
to a security assignment in favor of Lender); (c) deposited into one or
more accounts for the joint benefit of Borrower and Lender (which deposit
accounts shall likewise be subject to a security assignment in favor of
Lender); (d) paid or turned over to Lender to be applied to the
Indebtedness in such order and priority as Lender may determine within its
sole discretion; or (e) any combination of the foregoing as Lender shall
determine from time to time. Borrower further agrees that, should one or
more Events of Default exist, any and all funds received under such a
remittance account or lock box arrangement shall be paid or turned over to
Lender to be applied to the Indebtedness, again in such order and priority
as Lender may determine within its sole discretion.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of California
and is validly existing and in good standing in all states in which
Borrower is doing business. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is presently
engaged or presently proposes to engage. Borrower also is duly qualified as
a foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower of (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
PROPERTIES. Except for Permitted Liens, Borrower owns and has good title
to all of Borrower's properties free and clear of all Security Interests,
and has not executed any security documents or financing statements
relating to such properties. All of Borrower's properties are titled in
Borrower's legal name, and Borrower has not used, or filed a financing
statement under, any other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and
Safety Code, Section 25100, et seq., or other applicable state or Federal
laws, rules, or regulations adopted pursuant to any of the foregoing.
Except as disclosed to and acknowledged by Lender in writing, Borrower
represents and warrants that: (a) During the period of Borrower's ownership
of the properties, there has been no use, generation, manufacture, storage,
treatment, disposal, release or threatened release of any hazardous waste
or substance by any person on, under, about or from any of the properties.
(b) Borrower has no knowledge of, or reason to believe that there has been
(i) any use, generation, manufacture, storage, treatment, disposal,
release, or threatened release of any hazardous waste or substance on,
under, about or from the properties by any prior owners or occupants of any
of the properties, or (ii) any actual or threatened litigation or claims of
any kind by any person relating to such matters. (c) Neither Borrower nor
any tenant, contractor, agent or other authorized user of any of the
properties shall use, generate, manufacture, store, treat, dispose of, or
release any hazardous waste or substance on, under, about or from any of
the properties; and any such activity shall be conducted in compliance with
all applicable federal, state, and local laws, regulations, and ordinances,
including without limitation those laws, regulations and ordinances
described above. Borrower authorizes Lender and its agents to enter upon
the properties to make such inspections and tests as Lender may deem
appropriate to determine compliance of the properties with this section of
the Agreement. Any inspections or tests made by Lender shall be at
Borrower's expense and for Lender's purposes only and shall not be
construed to create any responsibility or liability on the part of Lender
to Borrower or to any other person. The representations and warranties
contained herein are based on Borrower's due diligence in investigating the
properties for hazardous waste and hazardous substances. Borrower hereby
(a) releases and waives any future claims against Lender for indemnity or
contribution in the event Borrower becomes liable for cleanup or other
costs under any such laws, and (b) agrees to indemnify and hold harmless
Lender against any and
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09-18-1996 LOAN AGREEMENT PAGE 4
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this section of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release occurring
prior to Borrower's ownership or interest in the properties, whether or not
the same was or should have been known to Borrower. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the Indebtedness and the termination or expiration
of this Agreement and shall not be affected by Lender's acquisition of any
interest in any of the properties, whether by foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements or
permitted the filing or attachment of any Security interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lenders Security Interests and rights in and to such
Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
INVESTMENT COMPANY ACT. Borrower is not an "investment company" or a
company "controlled" by an "investment company", within the meaning of the
Investment Company Act of 1940, as amended.
PUBLIC UTILITY HOLDING COMPANY ACT. Borrower is not a "holding company", or
a "subsidiary company" of a "holding company", or an "affiliate" of a
"holding company" or of a "subsidiary company" of a "holding company",
within the meaning of the Public Utility Holding Company Act of 1935, as
amended.
REGULATIONS G, T AND U. Borrower is not engaged principally, or as one of
its important activities, in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of
Regulations G,T and U of the Board of Governors of the Federal Reserve
System).
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 1640 S. Sepulveda Blvd., Ste. 500, Los
Angeles, CA 90025. Unless Borrower has designated otherwise in writing this
location is also the office or offices where Borrower keeps its records
concerning the collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
CLAIMS AND DEFENSES. There are no defenses or counterclaims, offsets or
other adverse claims demands or actions of any kind, personal or otherwise,
that Borrower, Grantor, or any Guarantor could assert with respect to the
Note, Loan, Indebtedness, this Agreement, or the Related Documents.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's Indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
event later than one hundred twenty (120) days after the end of each fiscal
year, Borrower's balance sheet and income statement for the year ended,
audited by a certified public accountant satisfactory to Lender, and, as
soon as available, but in no event no later than thirty (30) days after the
end of each month, Borrower's balance sheet and profit and loss statement
for the period ended, prepared and certified as correct to the best
knowledge and belief by Borrower's chief financial officer or other officer
or person acceptable to Lender. All financial reports required to be
provided under this Agreement shall be prepared in accordance with
generally accepted accounting principles, applied on a consistent basis,
and certified by Borrower as being true and correct.
ADDITIONAL INFORMATION. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports
with respect to Borrower's financial condition and business operations as
Lender may request from time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios:
TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not less
than $55,000,000.00.
The following provisions shall apply for purposes of determining compliance
with the foregoing financial covenants and ratios: QUARTERLY. Except as
provided above, all computations made to determine compliance with the
requirements contained in this paragraph shall be made in accordance with
generally accepted accounting principles, applied on a consistent basis,
and certified by Borrower as being true and correct.
INSURANCE. Maintain fire and any other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least thirty (30) days' prior written notice to Lender. Each insurance
policy also shall include an endorsement providing that coverage in favor
of Lender will not be impaired in any way by any act, omission or default
of Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loans, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender
may reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
The cost of such appraisal shall be paid by Borrower.
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN FEES AND CHARGES. In addition to all other agreed upon fees and
charges, pay the following: $10,000.00 LOAN FEE.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income, or profits. Provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lien or claim so
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09-18-1996 LOAN AGREEMENT PAGE 5
LOAN NO 404569048 (CONTINUED)
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accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
OPERATIONS. Maintain executive and management personnel with substantially
the same qaualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conducts its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordiances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act and
with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefits plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may request, all at Borrower's
expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
at least annually and at the time of each disbursement of Loan proceeds
with a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the
representations and warranties set forth in this Agreement are true and
correct as of the date of the certificate and further certifying that, as
of the date of the certificate, no Event of Default exists under this
Agreement.
ENVIRONMENT COMPLIANCE AND REPORTS. Borrower shall comply in all
environmental, protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of a
intentional or unintentional action or omission on its part or on the part
of any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in complicance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice,
summons, lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify of make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in, or
encumber any of Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different that those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended). Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
ADDITIONAL TERMS, CONDITIONS AND COVENANTS. An exhibit, titled "ADDITIONAL
TERMS, CONDITIONS AND COVENANTS, " is attached to this Agreement by this
reference is made a part of this Agreement just as if all the provisions, terms
and conditions of the Exhibit had been fully set forth in this Agreement.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, saving, or some other account), including without
limitation all accounts held jointly with someone else and all accounts Borrower
may open in the future, excluding however all IRA and Keogh accounts, and all
trust accounts for which the grant of a security interest would be prohibited
by law. Borrower authorizes Lender, to the extent permitted by applicable law,
to charge or setoff all sums owing on the Indebtedness against any and all such
accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or
person that may materially affect any of Borrower's property or Borrower's
or any Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any or the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time
and for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
<PAGE>
09-18-1996 LOAN AGREEMENT PAGE 6
LOAN NO 404569048 (CONTINUED)
================================================================================
any governmental agency. This includes a garnishment, attachment, or levy
on or of any of Borrower's deposit accounts with Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or
becomes incompetent, or revokes or disputes the validity of, or liability
under, any Guaranty of the Indebtedness.
CHANGE IN OWNERSHIP. Any change in ownership other than an underwritten
initial public stock offering of twenty-five percent (25%) or more of the
common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's rights to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Document, constitutes
the entire understanding and agreement of the parties as to the matters set
forth in this Agreement. No alteration of or amendment to this Agreement
shall be effective unless given in writing and signed by the party or
parties sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY
LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES
UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF LOS
ANGELES COUNTY, THE STATE OF CALIFORNIA. SUBJECT TO THE PROVISIONS ON
ARBITRATION, THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
ARBITRATION. LENDER AND BORROWER AGREE THAT ALL DISPUTES, CLAIMS AND
CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE,
ARISING FROM THIS AGREEMENT OR OTHERWISE, INCLUDING WITHOUT LIMITATION
CONTRACT AND TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF
THE AMERICAN ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act
to take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any Collateral, including any claim to
rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated, provided however that no arbitrator
shall have the right or the power to enjoin or restrain any act of any
party. Lender and Borrower agree that in the event of an action for
judicial foreclosure pursuant to California Code of Civil Procedure Section
726, or any similar provision in any other state, the commencement of such
an action will not constitute a waiver of the right to arbitrate and the
court shall refer to arbitration as much of such action, including
counterclaims, as lawfully may be refered to arbitration. Judgment upon
any award rendered by any arbitrator may be entered in any court having
jurisdiction. Nothing in this Agreement shall preclude any party from
seeking equitable relief from a court of competent jurisdiction. The
statute of limitations, estoppel, waiver, laches, and similar doctrines
which would otherwise be applicable in an action brought by a party shall
be applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of an action for
these purposes. The Federal Arbitration Act shall apply to the
construction, interpretation, and enforcement of this arbitration
provision.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the Borrowers
signing below is responsible for ALL obligations in this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchases, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights to privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchase of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the sale
of such participation interests. Borrower further waives all rights to
offset or counterclaim that it may now or later against Lender or against
any purchaser of a participation interest and unconditionally agrees that
either Lender or such purchaser may enforce Borrower's obligation under
the Loans irrespective of the failure or insolvency of any holder of any
interest in the Loans. Borrower further agrees that purchaser of any such
participation interests may enforce its interests irrespective of any
personal claims or defenses that Borrower may have against Lender.
BORROWER INFORMATION. Borrower consents to the release of information on or
about Borrower by Lender in accordance with any court order, law or
regulation and in response to credit inquiries concerning Borrower.
NON-LIABILITY OF LENDER. The relationship between Borrower and Lender ia a
debtor and creditor relationship and not fiduciary in nature, nor is the
relationship to be construed as creating any partnership or joint venture
between Lender and Borrower. Borrower is exercising its own judgment with
respect to Borrower's business. All information supplied to Lender is for
Lender's protection only and no other party is entitled to rely on such
information. There is no duty for Lender to review, inspect, supervise, or
inform Borrower of any matter with respect to Borrower's business. Lender
and Borrower intend that Lender may reasonably rely on all information
supplied by Borrower to Lender, together with all representations and
warranties given by Borrower to Lender, without investigation or
confirmation by Lender and that any investigation or failure to investigate
will not diminish Lender's right to so rely.
NOTICE OF LENDER'S BREACH. Borrower must notify Lender in writing of any
breach of this Agreement or the Related Documents by Lender and any other
claim, cause of action or offset against Lender within thirty (30) days
after the occurrence of such breach or after the accrual of such claim,
cause of action or offset. Borrower waives any claim, cause of action or
offset for which notice is not given in accordance with this paragraph.
Lender is entitled to rely on any failure to give such notice.
BORROWER INDEMNIFICATION. Borrower shall indemnify and hold Lender harmless
from and against all claims, costs, expenses, losses, damages, and
liabilities of any kind, including but not limited to attorneys' fees and
expenses, arising out of any matter relating directly or indirectly to the
Indebtedness, whether resulting from internal disputes of the Borrower,
disputes between Borrower and any Guarantor, or whether involving any third
parties, or out of any other matter whatsoever related to this Agreement
or the Related Documents, but excluding any claim or liability which arises
as a direct result of Lender's gross negligence of willful misconduct. This
indemnity shall survive full repayment and satisfaction of the indebtedness
and termination of this Agreement.
COUNTERPARTS. This Agreement may be executed in multiple counterparts, each
of which, when so executed, shall be deemed an original, but all such
counterparts, taken together, shall constitute one and the same Agreement.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimilie, and shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to be given
at the address shown above. Any party may change its address for notices
under this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address.
To the extent permitted by applicable law, if there is more than one
Borrower, notice to any Borrower will constitute notice to all Borrowers.
For notice purposes, Borrower will keep Lender informed at all times of
Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such
<PAGE>
09-18-1996 LOAN AGREEMENT PAGE 7
LOAN NO 404569048 (CONTINUED)
================================================================================
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on any Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part Lender in exercising any right shall operate
as a waiver of such right or any other right. A waiver by Lender of a
provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT,
AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF SEPTEMBER 18,
1996.
BORROWER:
SMARTALK TELESERVICES, INC.
BY: /s/ Robert H. Lorsch BY: /s/ Glen Andrew Folck
------------------------------- --------------------------------------
ROBERT H. LORSCH, PRESIDENT GLEN ANDREW FOLCK, ASSISTANT SECRETARY
LENDER:
SOUTHERN CALIFORNIA BANK
BY: /s/ Authorized Officer
------------------------------
AUTHORIZED OFFICER
================================================================================
<PAGE>
ADDITIONAL TERMS, CONDITIONS AND COVENANTS
<TABLE>
<S> <C>
BORROWER: SMARTALK TELESERVICES, INC. (TIN: 95--4502740) LENDER: SOUTHERN CALIFORNIA BANK
1640 S. SEPULVEDA BLVD., STE. 500 HEAD OFFICE - DOWNEY MAIN
LOS ANGELES, CA 90025 10990 DOWNEY AVENUE
DOWNEY, CA 90240-2296
====================================================================================================================================
</TABLE>
THIS ADDITIONAL TERMS, CONDITIONS AND COVENANTS IS ATTACHED TO AND BY THIS
REFERENCE IS MADE A PART OF EACH BUSINESS LOAN AGREEMENT OR NEGATIVE PLEDGE
AGREEMENT, DATED SEPTEMBER 18, 1996, AND EXECUTED IN CONNECTION WITH A LOAN OR
OTHER FINANCIAL ACCOMMODATIONS BETWEEN SOUTHERN CALIFORNIA BANK AND SMARTALK
TELESERVICES, INC..
AFFIRMATIVE COVENANTS--OTHERS: Borrower covenants and agrees with Lender
that, while this Agreement is in effect, Borrower will provide the following
financial information and statements and such additional information as
requested by the Lender from time to time:
(a) Borrower's quarterly financial statements reviewed by a C.P.A. to the
Lender within 60 days of quarter end.
(b) Borrower may be subject to collateral audits on a periodic basis as
determined by Lender.
(c) A Collateral Schedule and Borrowing Base Certificate setting forth the
respective amounts of Eligible Accounts and Eligible Inventory within 5 days
after the end of each week with corresponding Sales and Collection Reports.
(d) Statements showing an aging and reconciliation of the Borrower's
receivables within 15 days after the end of each month.
(e) A statement showing an aging of accounts payable within 15 days after the
end of each month.
(f) A listing of names and addresses of all debtors obligated upon the
Borrower's accounts receivable within 15 days after the end of each quarter.
(g) Copies of the Borrower's future Federal Income Tax Returns, and any
amendments thereto, within 15 days of filing thereof with the Internal Revenue
Service. Borrower further agrees to promptly deliver to the Lender copies of all
receipts issued to Borrower for the payments of federal withholding taxes
required of it.
(h) Promptly upon the Lender's request, such other statements, lists, budgets,
forecasts, projections, or reports as the Borrower and as to each guarantor of
the Borrower's obligations to the Lender as the Lender may request.
ADDITIONAL COVENANTS AND RATIOS. Borrower agrees to comply with the following
covenants and ratios:
(1) Lender to review loan covenants for adjustment based upon results of
pending equity offering. Covenants will be first measured as of 12/31/96 and
quarterly thereafter.
(2) Borrower deposit relationship to be established at Southern California
Bank.
(3) Borrower to maintain a ratio of Total Liabilities to Tangible Net Worth
of not more than 0.50 to 1.00.
ADDITIONAL DEFINITIONS. For the purpose of calculating tangible net worth and
debt to tangible net worth, intangible assets shall include amounts due from
Officers, Stockholders and Affiliates.
THIS ADDITIONAL TERMS, CONDITIONS AND COVENANTS IS EXECUTED ON SEPTEMBER 18,
1996.
BORROWER:
SMARTALK TELESERVICES, INC.
BY: /s/ Robert H. Lorsch BY: /s/ Glen Andrew Folck
--------------------------- --------------------------------------
ROBERT H. LORSCH, PRESIDENT GLEN ANDREW FOLCK, ASSISTANT SECRETARY
LENDER:
SOUTHERN CALIFORNIA BANK
BY: /s/
--------------------------
AUTHORIZED OFFICER
================================================================================
<PAGE>
EXHIBIT 10.23
[LOGO OF SOUTHERN CALIFORNIA BANK APPEARS HERE]
PROMISSORY NOTE
<TABLE>
<S> <C>
BORROWER: SMARTALK TELESERVICES,INC. (TIN: 95-4502740) LENDER: SOUTHERN CALIFORNIA BANK
1640 S. SEPUIVEDA BLVD., STE. 500 HEAD OFFICE - DOWNEY MAIN
LOS ANGELES, CA 90025 10990 DOWNEY AVENUE
DOWNEY, CA 90240-2296
====================================================================================================================================
</TABLE>
PRINCIPAL AMOUNT: $1,000,000.00 INITIAL RATE: 10.625%
DATE OF NOTE: September 18, 1996
PROMISE TO PAY. SMARTALK TELESERVICES, INC. ("BORROWER") PROMISES TO PAY TO
SOUTHERN CALIFORNIA BANK ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED
STATES OF AMERICA, THE PRINCIPAL AMOUNT OF ONE MILLION & 00/100 DOLLARS
($1,000,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE
UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE
CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE.
PAYMENT. BORROWER WILL PAY THIS LOAN ON DEMAND, OR IF NO DEMAND IS MADE, IN ONE
PAYMENT OF ALL OUTSTANDING PRINCIPAL PLUS ALL ACCRUED UNPAID INTEREST ON
SEPTEMBER 1, 1997. IN ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF
ACCRUED UNPAID INTEREST BEGINNING NOVEMBER 1, 1996, AND ALL SUBSEQUENT INTEREST
PAYMEMNTS ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. Interest on this
Note is computed on a 365/360 simple interest basis; that is, by applying the
ratio of the annual interest rate over a year of 360 days, multiplied by the
outstanding principal balance, multiplied by the actual number of days the
principal balance is outstanding. Borrower will pay Lender at Lender's address
shown above or at such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be applied first
to accrued unpaid interest, then to principal, and any remaining amount to any
unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an independent index which is the WALL
STREET JOURNAL PRIME RATE (the "Index"). The Index is not necessarily the
lowest rate charged by Lender on its loans. If the Index becomes unavailable
during the term of this loan, Lender may designate a substitute index after
notice to Borrower. Lender will tell Borrower the current Index rate upon
Borrower's request. Borrower understands that Lender may make loans based
on other rates as well. The interest rate change will not occur more often
than each DAY. THE INDEX CURRENTLY IS 8.250% PER ANNUM. THE INTEREST RATE TO BE
APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 2.375
PERCENTAGE POINTS OVER THE INDEX, RESULTING IN AN INITIAL RATE OF 10.625% PER
ANNUM. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. Other than
Borrower's obligation to pay any minimum interest charge, Borrower may pay
without penalty all or a portion of the amount owed earlier than it is due.
Early payments will not, unless agreed to by Lender in writing, relieve
Borrower of Borrower's obligation to continue to make payments of accrued
unpaid interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 DAYS OR MORE LATE, Borrower will be charged
5.000% OF THE REGULARLY SCHEDULED PAYMENT OR $5.00, WHICHEVER IS GREATER.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any of the material respect either
now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver
is appointed for any part of Borrower's property, Borrower makes an assignment
for the benefit of creditors, or any proceeding is commenced either by Borrower
or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any guarantor dies or any of the other events described in this
default section occurs with respect to any guarantor of this Note. (h) A
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the Indebtedness is impaired.
(i) Lender in good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to pay
all amounts declared due pursuant to this section, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted under applicable
law, increase the variable interest rate on this Note to 7.375 percentage points
over the Index. Lender may hire or pay someone else to help collect this Note
if Borrower does not pay. Borrower also will pay Lender that amount. This
includes, subject to any limits under applicable law, Lender's attorneys' fees
and Lender's legal expenses whether or not there is a lawsuit, including
attorneys' fees and legal expenses for bankruptcy proceedings (including efforts
to modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any court
costs, in addition to all other sums provided by law. THIS NOTE HAS BEEN
DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. IF THERE
IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE
JURISDICTION OF THE COURTS OF LOS ANGELES COUNTY, THE STATE OF CALIFORNIA
SUBJECT TO THE PROVISIONS ON ARBITRATION, THIS NOTE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
DISHONORED ITEM FEE. Borrower will pay a fee to lender of $16.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested orally by Borrower or by an authorized person.
Lender may, but need not, require that all oral requests be confirmed in
writing. All communications, instructions, or directions by telephone or
otherwise to Lender are to be directed to Lender's office shown above. The
following party or parties are authorized to request advances under the line of
credit until Lender receives from Borrower at Lender's address shown above
written notice of revocation of their authority: ROBERT H. LORSCH, PRESIDENT;
AND GLEN ANDREW FOLCK, ASSISTANT SECRETARY. Borrower agrees to be liable for
all sums either: (a) advanced in accordance with the instructions of an
authorized person or (b) credited to any of Borrower's accounts with Lender.
The unpaid principal balance owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under this
Note if: (a) Borrower or any guarantor is in default under the terms of this
Note or any agreement that Borrower or any guarantor has with Lender, including
any agreement made in connection with the signing of this Note; (b) Borrower or
any guarantor ceases doing business or is insolvent; (c) any guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such guarantor's
guarantee of this Note or any other loan with Lender; (d) Borrower has applied
funds provided pursuant to this Note for purposes other than those authorized by
Lender; or (e) Lender in good faith deems itself insecure under this Note or any
other agreement Lender and Borrower.
ARBITRATION. LENDER AND BORROWER AGREE THAT ALL DISPUTES, CLAIMS AND
CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE,
ARISING FROM THIS NOTE OR OTHERWISE, INCLUDING WITHOUT LIMITATION CONTRACT AND
TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE AMERICAN
ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to take or
dispose of any collateral securing this Note shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or mortgage;
obtaining a writ of attachment or imposition of a receiver; or exercising any
rights relating to personal property, including taking or disposing of such
property with or without judicial process pursuant to Article 9 of the Uniform
Commercial Code. Any disputes, claims, or controversies concerning the
lawfulness or reasonableness of any act, or exercise of any right, concerning
any collateral securing this Note, including any claim to rescind, reform, or
otherwise modify any agreement relating to the collateral securing this Note,
shall also be arbitrated, provided however that no arbitrator shall have the
right or the power to enjoin or restrain any act of any party. Lender and
Borrower agree that in the event of an action for judicial foreclosure pursuant
to California Code of Civil Procedure Section 726, or any similar provision in
any other state, the commencement of such an action will not constitute a waiver
of the right to arbitrate and the court shall refer to arbitration as much of
such action, including counterclaims, as lawfully may be referred to
arbitration. Judgment upon any award rendered by any arbitrator may be entered
in any court having jurisdiction. Nothing in this Note shall preclude any party
from seeking equitable relief from a court of
<PAGE>
09-18-1996 PROMISSORY NOTE PAGE 2
LOAN NO 404569048 (CONTINUED)
================================================================================
brought by a party shall be applicable in any arbitration proceeding, and the
commencement of an arbitration proceeding shall be deemed the commencement of
an action for these purposes. The Federal Arbitration Act shall apply to the
construction, interpretation, and enforcement of this arbitration provision.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo enforcing
any of its rights or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive any applicable statute of limitations, presentment, demand
for payment, protest and notice of dishonor. Upon any change in the terms of
this Note, and unless otherwise expressly stated in writing, no party who signs
this Note, whether as maker, guarantor, accommodation maker or endorser, shall
be released from liability. All such parties agree that Lender may renew or
extend (repeatedly and for any length of time) this loan, or release any party
or guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral; and take any other action deemed necessary
by Lender without the consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without the consent of or notice to
anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
SMARTALK TELESERVICES, INC.
BY: /s/ Robert H. Lorsch BY: /s/ Glen Andrew Folck
--------------------------- --------------------------------------
ROBERT H. LORSCH, PRESIDENT GLEN ANDREW FOLCK, ASSISTANT SECRETARY
LENDER:
SOUTHERN CALIFORNIA BANK
BY: /s/
---------------------------
AUTHORIZED OFFICER
================================================================================
<PAGE>
EXHIBIT 10.24
[LOGO OF SOUTHERN CALIFORNIA APPEARS HERE]
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<S> <C>
BORROWER: SMARTALK TELESERVICES, INC. (TIN: 95-4502740) LENDER: SOUTHERN CALIFORNIA BANK
1640 S. SEPULVEDA BLVD., STE.500 HEAD OFFICE - DOWNEY MAIN
LOS ANGELES, CA 90025 10990 DOWNEY AVENUE
DOWNEY, CA 90240-2296
==========================================================================================================================
</TABLE>
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN SMARTALK
TELESERVICES, INC. (REFERRED TO BELOW AS "GRANTOR"); AND SOUTHERN CALIFORNIA
BANK (REFERRED TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR
GRANTS TO LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE
INDEBTEDNESS AND AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS
AGREEMENT WITH RESPECT TO THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH
LENDER MAY HAVE BY LAW.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
COLLATERAL. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL
INTANGIBLES
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions
for any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing; photograph,
microfilm, microfiche, or electronic media, together with all of
Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or
data on electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
GRANTOR. The word "Grantor" means SmarTalk TeleServices, Inc., its
successors and assigns.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the Indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents. In addition, the word
"Indebtedness" includes all other obligations, debts and liabilities, plus
interest thereon, of Grantor, or any one or more of them, to Lender, as
well as all claims by Lender against Grantor, or any one or more of them,
whether existing now or later; whether they are voluntary or involuntary,
due or not due, direct or indirect, absolute or contingent, liquidated or
unliquidated; whether Grantor may be liable individually or jointly with
others; whether Guarantor may be obligated as guarantor, surety,
accommodation party or otherwise; whether recovery upon such indebtedness
may be or hereafter may become barred by any statute of limitations; and
whether such indebtedness may be or hereafter may become otherwise
unenforceable.
LENDER. The word "Lender" means SOUTHERN CALIFORNIA BANK, its successors
and assigns.
NOTE. The word "Note" means the note or credit agreement dated September
18, 1996, in the principal amount of $1,000,000.00 from SmarTalk
TeleServices, Inc. to Lender, together with all renewals of, extensions of,
modifications of, refinancings of, consolidations of and substitutions for
the note or credit agreement.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environments, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection with
the Indebtedness.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory security
interest in and hereby assigns, conveys, delivers, pledges, and transfers all of
Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other account), including all accounts held
jointly with someone else and all accounts Grantor may open in the future,
excluding, however, all IRA and Keogh accounts, and all trust accounts for which
the grant of a security interest would be prohibited by law. Grantor authorizes
Lender, to the extent permitted by applicable law, to charge or setoff all
Indebtedness against any and all such accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
PERFECTION OF SECURITY INTEREST. Grantor agrees to exclude such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue the security interest granted in this Agreement.
Lender may at any time, and without further authorization from Grantor,
file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor
will reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender's security interest in the
Collateral. Grantor promptly will notify Lender before any change in
Grantor's name including any change to the assumed business names of
Guarantor. THIS IS A CONTINUING SECURITY AGREEMENT AND WILL CONTINUE IN
EFFECT EVEN THOUGH ALL OR ANY PART OF THE INDEBTEDNESS IS PAID IN FULL AND
EVEN THOUGH FOR A PERIOD OF TIME GRANTOR MAY NOT BE INDEBTED TO LENDER.
NO VIOLATION. The execution and delivery of this Agreement will not violate
any law or agreement governing Grantor or to which Grantor is a party, and
its certificate or articles of incorporation and bylaws do not prohibit any
term or condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral. At the time any account becomes subject to a
security interest in favor of Lender, the account shall be a good and valid
account representing an undisputed, bona fide indebtedness incurred by the
account debtor, for merchandise held subject to delivery instructions or
theretofore shipped or delivered pursuant to a contract of sale, or for
services theretofore performed by Grantor with or for the account debtor;
there shall be no setoffs or counterclaims against any such account; and no
agreement under which any deductions or discounts may be claimed shall have
been made with the account debtor those disclosed to Lender in writing.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d)
all other properties where Collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the
<PAGE>
09-18-1996 COMMERCIAL SECURITY AGREEMENT PAGE 2
LOAN NO 404569048 (CONTINUED)
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REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the
records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Except in the ordinary
course of its business, including the sales of inventory, Grantor shall not
remove the Collateral from its existing locations without the prior written
consent of Lender. To the extent that the Collateral consists of vehicles,
or other titled property, Grantor shall not take or permit any action which
would require application for certificate of title for the vehicles
outside the State of California, without the prior written consent of
Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale in
the ordinary course of Grantor's business does not include a transfer in
partial or total satisfaction of a debt or any bulk sale. Grantor shall not
pledge, mortgage, encumber or otherwise permit the Collateral to be subject
to any lien, security interest, encumbrance, or charge, other than the
security interest provided for in this Agreement, without the prior written
consent of Lender. This includes security interests even if junior in right
to the security interests granted under this Agreement. Unless waived by
Lender, all proceeds from any disposition of the Collateral (for whatever
reason) shall be held in trust for Lender and shall not be commingled with
any other funds; provided however, this requirement shall not constitute
consent by Lender to any sale or other disposition. Upon receipt, Grantor
shall immediately deliver any such proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specially consented. Grantor shall defend Lender's rights
in the Collateral against the claims and demands of all other persons.
COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation names
and addresses of account debtors and agings of accounts and general
intangibles. Insofar as the Collateral consists of inventory and equipment,
Grantor shall deliver to Lender, as often as Lender shall require, such
lists, descriptions, and designations of such Collateral as Lender may
require to identify the nature, extent, and location of such Collateral.
Such information shall be submitted for Grantor and each of its
subsidiaries or related companies.
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall have
the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of all
cases involving the return, rejection, repossession, loss or damage of or
to any Collateral; of any request for credit or adjustment or of any other
dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys' fees or other charges that could accrue as
a result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
COMPLIANCE WITH GOVERNMENT REQUIREMENTS. Grantor shall comply promptly
with laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender's
interest in the Collateral, in Lender's opinion, is not jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"),
the Hazardous Material Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conversation and Recovery Act, 42 U.S.C. Section 6901, et
seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and
Safety Code, Section 25100, et seq., or other applicable state or Federal
laws, rules, or regulations adopted pursuant to any of the foregoing. The
terms "hazardous waste" and "hazardous substance" shall also include,
without limitation, petroleum and petroleum by-products or any fraction
thereof and asbestos. The representations and warranties contained herein
are based on Grantor's due diligence in investigating the Collateral for
hazardous wastes and substances. Grantor hereby (a) release and waives any
future claims against Lender for indemnity or contribution in the event
Grantor becomes liable for cleanup or other costs under any such laws, and
(b) agrees to indemnify and hold harmless Lender against any and all claims
and losses resulting from a breach of this provision of this Agreement.
This obligation to indemnify shall survive the payment of the Indebtedness
and the satisfaction of this Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
cancelled or diminished without at least thirty (30) days' prior written
notice to Lender and not including any disclaimer of the insurer's
liability for failure to give such a notice. Each insurance policy also
shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default or Grantor
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require.
If Grantor at any time fails to obtain or maintain any insurance as
required under this Agreement, Lender may (but shall not be obligated to)
obtain such insurance as Lender deems appropriate, including if it so
chooses "single interest insurance," which will cover only Lender's
interest in the Collateral.
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay all of the
indebtedness, and shall pay the balance to Grantor. Any proceeds which have
not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created
by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reverse funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the payment
of premiums shall remain Grantor's sole responsibility.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish Lender
reports on each existing policy of insurance showing such information as
lender may reasonably request including the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the
property insured; (e) the then current value on the basis of which
insurance has been obtained and the manner of determining that value; and
(f) the expiration date of the policy. In addition, Grantor shall upon
request by Lender (however not more often than annually) have an
independent appraiser satisfactory to Lender determine, as applicable, the
cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of
the Collateral by Lender is required by law to perfect Lender's security
interest in such Collateral. Until otherwise notified by Lender, Grantor may
collect any of the Collateral consisting of accounts. At any time and even
though no Event of Default exists, Lender may exercise its rights to collect the
accounts and to notify account debtors to make payments directly to Lender for
application to the Indebtedness. If Lender at any time has possession of any
Collateral, whether before or after an Event of Default, Lender shall be deemed
to have exercised reasonable care in the custody and preservation of the
Collateral if Lender takes such action for that purpose as Grantor shall request
or as Lender, in
<PAGE>
09-18-1996 COMMERCIAL SECURITY AGREEMENT PAGE 3
LOAN NO 404569048 (CONTINUED)
================================================================================
parties, nor to protect, preserve or maintain any security interest given to
secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due on
the Indebtedness.
OTHER DEFAULTS. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any
time and for any reason.
INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral securing
the Indebtedness. This includes a garnishment of any Grantor's deposit
accounts with Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or such Guarantor dies or
becomes incompetent.
ADVERSE CHANGE. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the California Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due any payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all
or any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If the
Collateral contains other goods not covered by this Agreement at the time
of repossession, Grantor agrees Lender may take such other goods, provided
that Lender makes reasonable efforts to return them to Grantor after
repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease,
transfer, or otherwise deal with the Collateral or proceeds thereof in its
own name or that of Grantor. Lender may sell the Collateral at public
auction or private sale. Unless the Collateral threatens to decline
speedily in value or is of a type customarily sold on a recognized market,
Lender will give Grantor reasonable notice of the time after which any
private sale or any other intended disposition of the Collateral is to be
made. The requirements of reasonable notice shall be met if such notice is
given at least ten (10) days, or such lesser time as required by state law,
before the time of the sale or disposition. All expenses relating to the
disposition of the Collateral, including without limitation the expense of
retaking, holding, insuring, preparing for sale and selling the Collateral,
shall become a part of the Indebtedness secured by this Agreement and shall
be payable on demand, with interest at the Note rate from date of
expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference as Lender may determine. Insofar as the Collateral
consists of accounts, general intangibles, insurance policies, instruments,
chattel paper, choses in action, or similar property, Lender may demand,
collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Collateral as Lender may determine, whether or not
Indebtedness or Collateral is then due. For these purposes, Lender may, on
behalf of and in the name of Grantor, receive, open and dispose of mail
addressed to Grantor; change any address to which mail and payments are to
be sent; and endorse notes, checks, drafts, money orders, documents of
title, instruments and items pertaining to payment, shipment, or storage of
any Collateral. To facilitate collection, Lender may notify account debtors
and obligors on any Collateral to make payments directly to Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even in the transaction described in this
subsection is a sale of accounts or chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies
of a secured creditor under the provisions of the Uniform Commercial Code,
as may be amended from time to time. In addition, Lender shall have and may
exercise any or all other rights and remedies it may have available at law,
in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether
evidenced by this Agreement or the Related Documents or by any other
writing, shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude
pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Grantor under this Agreement, after
Grantor's failure to perform, shall not affect Lender's right to declare a
default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement;
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender accepted by
Lender in the State of California. If there is a lawsuit, Grantor agrees
upon Lender's request to submit to the jurisdiction of the courts of the
State of California. Subject to the provisions on arbitration, this
Agreement shall be governed by and construed in accordance with the laws of
the State of California.
ARBITRATION. LENDER AND GRANTOR AGREE THAT ALL DISPUTES, CLAIMS AND
CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE,
ARISING FROM THIS AGREEMENT OR OTHERWISE, INCLUDING WITHOUT LIMITATION
CONTRACT AND TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF
THE AMERICAN ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act
to take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of
<PAGE>
09-18-1996 COMMERCIAL SECURITY AGREEMENT PAGE 4
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================================================================================
the Collateral, shall also be arbitrated, provided however that no
arbitrator shall have the right or the power to enjoin or restrain any act
of any party. Lender and Grantor agree that in the event of an action for
judicial foreclosure pursuant to California Code of Civil Procedure Section
726, or any similar provision in any other state, the commencement of such
an action will not constitute a waiver of the right to arbitrate and the
court shall refer to arbitration as much of such action, including
counterclaims, as lawfully may be referred to arbitration. Judgment upon
any award rendered by any arbitrator may be entered in any court having
jurisdiction. Nothing in this Agreement shall preclude any party from
seeking equitable relief from a court of competent jurisdiction. The
statute of limitations, estoppel, waiver, laches, and similar doctrines
which would otherwise be applicable in an action brought by a party shall
be applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of an action for
these purposes. The Federal Arbitration Act shall apply to the
construction, interpretation, and enforcement of this arbitration
provision.
ATTORNEY'S FEES; EXPENSES. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Grantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Grantor also shall pay all courts costs and such additional fees
as may be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under
this Agreement shall be joint and several, and all reference to Grantor
shall mean each and every Grantor. This means that each of the Borrowers
signing below is responsible for ALL obligations in this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimille, and shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is given at the
address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the parties, specifying
that the purpose of the notice is to change the party's address. To the
extent permitted by applicable law, if there is more than one Grantor,
notice to any Grantor will constitute notice to all Grantors. For notice
purposes, Grantor will keep Lender informed at all times of Grantor's
current address(es).
POWER OF ATTORNEY. Grantor hereby appoints Lender as it true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover
all sums of money or other property which may now or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse any
and all claims, instruments, receipts, checks, drafts or warrants issued in
payment for the Collateral; (c) to settle or compromise any and all claims
arising under the Collateral, and, in the place and stead of Grantor, to
execute and deliver its release and settlement for the claim; and (d) to
file any claim or claims or to take any action or institute or take part in
any proceedings, either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to be necessary or
advisable. This power is given as security for the Indebtedness, and the
authority hereby conferred is and shall be irrevocable and shall remain in
full force and effect until renounced by Lender.
PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offering provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer
of the Collateral, this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Grantor, shall constitute a waiver of
any of Lender's rights or of any Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated for the
Indebtedness, Borrower irrevocably waives, disclaims and relinquishs all
claims against such other person which Borrower has or would otherwise have
by virtue of payment of the Indebtedness or any part thereof, specifically
including but not limited to all rights of indemnity, contribution or
exoneration.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED SEPTEMBER
18, 1996.
GRANTOR:
SMARTALK TELESERVICES, INC.
BY: /s/ Robert H. Lorsch BY: /s/ Glen Andrew Folck
--------------------------- ----------------------------
ROBERT H. LORSCH, PRESIDENT GLEN ANDREW FOLCK, ASSISTANT
SECRETARY
================================================================================
<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
September 25, 1996
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<S> <C> <C>
<PERIOD-TYPE> OTHER<F1> YEAR
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1995
<PERIOD-START> OCT-28-1994 JAN-01-1995
<PERIOD-END> DEC-31-1994 DEC-31-1995
<CASH> 391 2,115,351
<SECURITIES> 0 0
<RECEIVABLES> 267 236,434
<ALLOWANCES> 35 11,460
<INVENTORY> 0 718,045
<CURRENT-ASSETS> 4,023 3,821,166
<PP&E> 0 4,486
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 4,023 3,841,752
<CURRENT-LIABILITIES> 64,495 5,221,526
<BONDS> 0 0
0 0
0 0
<COMMON> 5,000 315,000
<OTHER-SE> 0 (300,000)
<TOTAL-LIABILITY-AND-EQUITY> 4,023 3,841,752
<SALES> 444 453,916
<TOTAL-REVENUES> 444 453,916
<CGS> 716 312,286
<TOTAL-COSTS> 716 312,286
<OTHER-EXPENSES> 65,200 1,472,944
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 2,012
<INCOME-PRETAX> (65,472) (1,329,302)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (65,472) (1,329,302)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (65,472) (1,329,302)
<EPS-PRIMARY> (.01) (.14)
<EPS-DILUTED> (.01) (.14)
<FN>
<F1>PERIOD OF 2.5 MONTHS
</FN>
</TABLE>
