<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1997 Commission File No. 0-21579
SMARTALK TELESERVICES, INC.
--------------------------
Incorporated under the laws IRS Employer Identification
of California No. 95-4502740
1640 S. Sepulveda Boulevard
Suite 500
Los Angeles, California 90025
Telephone: 310-444-8800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: Voting, No par value 16,464,300, as of November 10, 1997.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMARTALK TELESERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 150,817,327 $ 44,830,487
Trade accounts receivable, net 11,664,768 2,254,192
Inventories 1,487,296 601,020
Prepaid expenses 2,023,768 327,696
Other current assets 4,270,655 1,682,768
----------------- -----------------
Total current assets 170,263,814 49,696,163
Non-current assets:
Property and equipment, net 4,338,795 744,748
Goodwill, net 93,012,218 --
Debt issuance costs, net 4,664,977 --
Other non-current assets 881,025 90,509
----------------- -----------------
Total assets $ 273,160,829 $ 50,531,420
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,287,733 $ 3,527,192
Deferred revenue 18,060,812 2,699,640
Accrued marketing costs -- 136,931
Other accrued expenses 3,752,826 352,226
Excise and sales tax payable 3,638,229 --
Current portion of long-term debt 60,249 --
----------------- -----------------
Total current liabilities 31,799,849 6,715,989
Long-term debt less current portion 150,951,111 --
----------------- -----------------
Total liabilities 182,750,960 6,715,989
Shareholders' equity:
Preferred stock, no par value; authorized 10,000,000 shares;
no shares issued and outstanding -- --
Common stock, no par value; authorized 100,000,000 shares;
issued and outstanding 16,433,033 and 12,829,459 shares,
respectively 97,879,224 50,786,781
Accumulated deficit <7,469,355> <6,971,350>
----------------- -----------------
Total shareholders' equity 90,409,869 43,815,431
----------------- -----------------
Total liabilities and shareholders' equity $ 273,160,829 $ 50,531,420
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
2
<PAGE>
SMARTALK TELESERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- -------------------------------
1997 1996 1997 1996
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenue $20,565,622 $ 4,588,844 $ 39,730,845 $ 8,266,864
Cost of revenue 11,796,487 3,459,440 23,761,289 6,201,555
----------- ----------- ------------ -----------
Gross profit 8,769,135 1,129,404 15,969,556 2,065,309
Sales and marketing 4,672,415 1,199,140 10,213,879 2,842,566
General and administrative 3,667,800 1,010,184 7,188,175 2,469,477
----------- ----------- ------------ -----------
Operating income (loss) 428,920 (1,079,920) (1,432,498) (3,246,734)
Interest income 790,142 3,431 1,899,666 28,503
Interest expense 740,425 85,695 965,173 215,139
----------- ----------- ------------ -----------
Income (loss) before income taxes 478,637 (1,162,184) (498,005) (3,433,370)
Provision for income taxes -- -- -- --
----------- ----------- ------------ -----------
Net income (loss) $ 478,637 $(1,162,184) $ (498,005) $(3,433,370)
=========== =========== ============ ===========
Net income (loss) per share $ 0.03 $ (0.12) $ (0.03) $ (0.37)
=========== =========== ============ ===========
Weighted average number of shares 16,846,271 9,335,348 14,396,661 9,335,348
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
SMARTALK TELESERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
----------------------------- Stock Accumulated
Shares Amount Subscription Deficit Total
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
December 31, 1995 8,824,834 $ 315,000 $ (300,000) $ (1,394,774) $ (1,379,774)
Issuance of subscribed shares -- -- 300,000 -- 300,000
Purchase of assets of related entity -- -- -- (2,464,028) (2,464,028)
Compensation under stock options
issued -- 24,000 -- -- 24,000
Proceeds from sale of stock, net of
costs 4,000,000 50,439,595 -- -- 50,439,595
Stock options exercised 4,625 8,186 -- -- 8,186
Net loss -- -- -- (3,112,548) (3,112,548)
---------- ------------ ------------ ------------ ------------
December 31, 1996 12,829,459 50,786,781 -- (6,971,350) 43,815,431
Stock options exercised 194,287 716,814 -- -- 716,814
GTI Telecom acquisition 2,580,001 34,830,000 -- -- 34,830,000
SmarTel Communications acquisition 714,286 9,375,004 -- -- 9,375,004
Cardinal Voicecard LTD acquisition 115,000 2,170,625 -- -- 2,170,625
Net Loss -- -- -- (498,005) (498,005)
---------- ------------ ------------ ------------ ------------
September 30, 1997 16,433,033 $ 97,879,224 $ -- $ (7,469,355) $ 90,409,869
========== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
SMARTALK TELESERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (498,005) $ (3,433,370)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation 433,378 51,801
Amortization 1,585,785 --
Provision for bad debt 276 --
Sublease termination fee (325,810) --
Compensation expense associated with stock options issued -- 24,000
Changes in assets and liabilities
which increase (decrease) cash:
Accounts receivable (2,667,337) (1,506,925)
Inventories (227,061) 104,795
Prepaid expenses (3,277,229) (97,366)
Other current assets 1,202,037 (9,575)
Deposits -- (63,325)
Other non-current assets (726,039) (318,577)
Accounts payable (3,903,643) 1,829,419
Deferred revenue (324,247) 55,429
Accrued marketing costs (136,931) (226,359)
Other accrued expenses 2,987,397 354,100
Deposit from customer (4,060,958) --
Excise and sales tax payable 711,116 --
------------ ------------
Net cash used by operating activities (9,227,271) (3,235,953)
------------ ------------
Cash flows from investing activities:
Purchase of LCN, net of equipment purchased -- (464,027)
Capital expenditures (1,429,976) (545,809)
Acquisitions costs (2,366,458) --
------------ ------------
Net cash used by investing activities (3,796,434) (1,009,836)
------------ ------------
Cash flows from financing activities:
Common stock proceeds, net -- 300,000
Stock options exercised 716,814 --
Note payable to related party -- 1,200,000
Revolving line of credit with related party -- 500,000
Payment to LCN -- (22,943)
Payment of note payable to Worldcom (6,383,691) --
Revolving line of credit with a Bank -- 210,000
Payment on term loan with Pacific Bell Information Services -- (50,000)
Term loan with related party -- 250,000
Payment on debt issued for acquisition (20,614,686) --
Issuance of convertible debt, net of costs 145,335,023 --
Capital lease payments (42,915) --
------------ ------------
Net cash, provided from financing activities 119,010,545 2,387,057
------------ ------------
Increase (decrease) in cash and cash equivalents 105,986,840 (1,858,732)
Cash and cash equivalents at beginning of period 44,830,487 2,115,351
------------ ------------
Cash and cash equivalents at end of period $150,817,327 $ 256,619
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 675,205 $ 215,139
============ ============
Note payable for LCN purchase $ -- $ 2,000,000
============ ============
Issuance of stock for acquisitions $ 46,375,629 $ --
============ ============
Issuance of debt for acquisitions, net $ 20,614,686 $ --
============ ============
Purchase of Voice Choice Platform through issuance of note payable $ -- $ 125,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
SMARTALK TELESERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF INTERIM PRESENTATION
The accompanying interim period consolidated financial statements are unaudited,
pursuant to certain rules and regulations of the Securities and Exchange
Commission, and include, in the opinion of management, all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the results for the periods indicated; which, however, are not
necessarily indicative of results which may be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
financial statements should be read in conjunction with the financial statements
and the notes thereto for the year ended December 31, 1996 and other information
included in SmarTalk TeleServices, Inc.'s (the "Company") Form 10-K and
Forms 8-K, as filed with the Securities and Exchange Commission.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of SmarTalk
TeleServices, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts have been eliminated.
3. GOODWILL
Costs in excess of fair value of net assets acquired is recorded as goodwill and
amortized on a straight-line basis over a twenty year period beginning at the
date of acquisition. Amortization expense for the nine months ended September
30, 1997 and 1996 was $1,585,785 and zero, respectively. Amortization expense
for the quarter ended September 30, 1997 and 1996 was $1,190,069 and zero,
respectively.
4. LONG TERM DEBT
Long term debt consists of the following at September 30, 1997:
<TABLE>
<S> <C>
Convertible subordinated notes due September 15, 2004, $150,000,000
interest payable semi-annually beginning March 15, 1998
at 5 3/4% per annum.
Subordinated notes due June 1, 2001, interest payable 530,000
quarterly beginning September 1, 1997 at 10% per annum.
Capital lease obligations 481,360
------------
Total 151,011,360
Less - current portion (60,249)
------------
Long - term portion $150,951,111
============
</TABLE>
There was no debt outstanding as of December 31, 1996.
Convertible subordinated notes
The notes are unsecured general obligations of the Company which are
subordinated in right of payment. At any time on or after the 90th day following
September 17, 1997, the date of issuance, and prior to the close of business on
the stated maturity date, unless previously redeemed or repurchased, at a
conversion price of $26.25 per share (equivalent to a conversion rate of 38.0952
per $1,000 principal amount of notes) the notes may be converted at the option
of the holder into shares of Common Stock of the Company. The notes are
redeemable, in whole or in part, at the option of the Company, at any time on or
after September 15, 2000, at a specified redemption price plus accrued and
unpaid interest and liquidated damages, if any, to the date of redemption. The
Company is required to offer to purchase the notes upon a change of control (as
defined) at 100% of the principal amount thereof, plus accrued and unpaid
interest and liquidated damages, if any, to the date of purchase. The notes were
issued through a 144A placement under the Securities Act. As of September 30,
1997 the Company incurred $4,664,977 of debt issuance costs associated with this
placement. This amount is being amortized over the term of the notes.
Subordinated notes due June 1, 2001
The notes are unsecured general obligations of the Company which are
subordinated in right of payment. The notes were issued in connection with the
GTI Telecom, Inc. acquisition.
Capital lease obligations
Includes office equipment which is leased under capital lease agreements.
5. ACQUISITIONS
On May 28, 1997 the Company acquired SmarTel Communications Inc., a Boston based
prepaid promotions phone card company, for 714,286 shares of common stock. On
May 31, 1997 the Company acquired GTI Telecom, Inc., a Florida based prepaid
phone card company for 2,580,001 shares of common stock and $26,500,000 in
subordinated debt. On August 13, 1997, the Company acquired Cardinal Voicecard
LTD, a Toronto, Ontario based Canadian prepaid phone card company, for 115,000
shares of common stock. These acquisitions have been accounted for using the
purchase method of accounting. Accordingly, the results of operations of the
acquired businesses are included in the Company's consolidated results of
operations from the date of acquisition.
6. PENDING ACQUISITIONS
The Company has entered into a merger agreement to purchase all of the
outstanding shares of ConQuest Telecommunications Services Corp ("ConQuest").
This agreement is subject to approval by both companies shareholders. Therefore
the Company has filed proxy/prospectus materials with the Securities and
Exchange Commission and is awaiting approval thereof. Certain shareholders
of ConQuest have granted the Company irrevocable proxies to vote all shares of
ConQuest common stock held by them in favor of the merger. ConQuest is located
in Dublin, Ohio and is a provider of value-added telecommunications services to
businesses and individuals. These services include prepaid calling card
services, call center services and international value-added telecommunications
services.
On October 22, 1997, the Company entered into a definitive agreement with
Frontier Corporation, ("Frontier"), a New York-based long distance phone
company, to acquire selected assets of its retail prepaid phone card business.
If the pending acquisition is consummated, the Company will pay $35,000,000 in
cash, subject to adjustments, to Frontier. Further, the Company may be required
to pay Frontier an additional $1,500,000 in the Company's common stock if
certain conditions are met.
7. DIVIDENDS
There were no dividends declared or paid for the nine months ended September 30,
1997 or 1996.
SMARTALK TELESERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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,
inbound and outbound international long distance calling as well as enhanced
features such as sequential calling, content delivery, 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.
SmarTalk services are delivered through proprietary switching,
application and database access software which run on interactive call
processing platforms. 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.
SmarTalk was formed in October 1994 and had limited operations until
June 1995. On October 23, 1996, SmarTalk completed the sale of 4,000,000 shares
of its stock in a public offering on Nasdaq. SmarTalk raised proceeds of
$50,471,781 after deducting the underwriting discount and other costs.
SmarTalk's revenue originates from: (i) SmarTalk and co-branded prepaid
calling card sales through retailers; (ii) recharges of existing prepaid calling
cards; (iii) cards sold for promotional marketing campaigns; (iv) corporate
sales to businesses; and (v) prepaid calling card services provided to one of
SmarTalk's strategic partners, West Teleservices.
Under sales agreements with the majority of retailers, SmarTalk sells
cards to the retailer at a set price. SmarTalk generally invoices the retailer
upon shipment of the cards. SmarTalk also offers Pay-on-Sale and Pay-on-
Activation programs to retailers whereby the retailers are invoiced upon sale to
or activation by a retailer's customer, respectively. Deferred revenue is
recognized when the retailer is invoiced. SmarTalk recognizes revenue and
reduces the deferred revenue account as the customer utilizes calling time or
upon expiration of cards containing unused calling time ("breakage"). SmarTalk
also recognizes deferred revenue upon recharge of existing prepaid calling cards
and recognizes the revenue upon the usage or expiration of the recharge minutes.
SmarTalk's cost of revenue consists primarily of the cost of providing
long distance services and related enhanced services, as well as the cost of
manufacturing and delivering the cards and excise taxes. The cost of providing
long distance services represents obligations to carriers that provide minutes
of long distance over their networks in order to facilitate use of SmarTalk's
product.
Sales and marketing expenses consist primarily of commissions and
advertising costs. SmarTalk pays commissions to its sales representatives based
on sales to retailers. SmarTalk also pays commissions to its sales
representatives and retailers based on the number of minutes recharged on the
SmarTalk Cards sold by each retailer. These commissions are capitalized and
amortized based on customer usage. Advertising consists primarily of trade,
consumer and cooperative advertising ("co-op"), and Manufacturer's Development
Funds ("MDF"). Under the typical co-op advertising program, SmarTalk provides
advertising funds to retailers to promote sales of SmarTalk products and
services. The amount of funds SmarTalk provides in co-op advertising is based on
a percentage of sales of SmarTalk products to retailers. MDF consists of
promotional and marketing funds to access shelf space. Corporation advertising
expense includes trade and consumer advertising, trade show expenses,
promotional goods and the costs of providing to retailers SmarTalk's turnkey
merchandising supplies.
General and administrative expenses consist primarily of salaries and
related benefits, sales and use taxes, rent, insurance, bank card processing
fees, and other general expenses including depreciation and amortization. Sales
and use taxes for the SmarTalk platforms are incurred based on customer usage of
long distance minutes which are processed through each of the individual
platforms.
6
<PAGE>
The Company purchased GTI Telecom, Inc., SmarTel Communications, Inc., and
Cardinal Voicecard LTD. (collectively "the Acquisitions") on May 31, 1997, May
28, 1997, and August 13, 1997, respectively. The Acquisitions have been
accounted for using the purchase method of accounting. Accordingly, the results
of operations of the Acquisitions are included in the Company's consolidated
results of operations from the date of acquisition. Financial comparisons to
prior periods are not necessarily meaningful due to the impact of the
Acquisitions.
A significant portion of the Company's business strategy is to pursue
additional distribution opportunities through the retail and alternate
distribution channels and through strategic acquisitions.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1996
Revenue. Revenue increased to $20,565,622 for the quarter ended September
-------
30, 1997 from $4,588,844 for the quarter ended September 30, 1996. The
substantial increase in revenue reflects an increase in usage of SmarTalk
services by users of the SmarTalk Card, an increase in the number of retail
storefronts in which the Company's product is distributed, greater brand
awareness, consumer acceptance, the Acquisitions, and revenue attributable to a
distribution and processing agreement entered into on June 1, 1996 with West
Interactive Corporation. Revenue attributable to the distribution and processing
agreement was $5,147,196 in the third quarter of 1997 and $2,222,897 for the
same period last year.
Recharge revenue for the quarter ended September 30, 1997 and 1996 was
$1,607,639 and $427,347, respectively. This increase is attributable to the
Acquisitions and increased consumer demand.
For the three months ended September 30, 1997, SmarTalk recorded
$2,020,592 in breakage revenue as compared with $105,730 for the three months
ended September 30, 1996. This represented approximately 9.8% and 2.3% of
total revenues for the periods then ended, respectively.
Cost of Revenue. Cost of revenue increased to $11,796,487 for the quarter
---------------
ended September 30, 1997 from $3,459,440 for the quarter ended September 30,
1996. The increase was primarily attributable to greater use of the Company's
services and the Acquisitions. The gross profit percentage for the quarter ended
June 30, 1997 was 42.6% as compared to 24.6% for the quarter ended June 30,
1996. The gross margin percentage increased due to lower transport costs
associated with operating the Company's own platforms, the Company leveraging
its size, scale and scope and the Company's ability to recognize breakage
revenue.
Sales and Marketing Expenses. Sales and marketing expenses increased to
----------------------------
$4,672,415 (or 22.7% of revenue) for the quarter ended September 30, 1997 from
$1,199,140 (or 26.1% of revenue) for the quarter ended September 30, 1996. The
decrease as a percentage of revenue was due to revenue growth in 1997. The
increased dollar amount was primarily due to the Acquisitions and continued
expansion of the Company's marketing activities, which include co-op
advertising, Manufacturers Development Funds and promotional goods.
Additionally, commission expense was higher in 1997 than in 1996 due to
increased sales activity.
General and Administrative Expenses. General and administrative expenses
-----------------------------------
increased to $3,667,800 (or 17.8% of revenue) for the quarter ended September
30, 1997 from $1,010,184 (or 22.0% of revenue) for the quarter ended September
30, 1996. The increase in dollar amount was primarily due to the Acquisitions,
which includes goodwill amortization, and 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 1997 and the
Company's ability to recognize synergies associated with the Acquisitions.
Interest Income (Expense). Interest income, net of interest expense for
-------------------------
the quarter ended September 30, 1997 was $49,717 as compared to $(82,264) for
the quarter ended September 30, 1996. This increase was primarily due to the
interest earned on the Company's cash investments, net of interest expense on
the convertible debt offering and on acquisition indebtedness.
Income Tax. The Company had income for the quarter ended September 30,
----------
1997 which has been offset by losses from previous quarters including the
loss for the quarter ended September 30, 1996. Accordingly, there was no
provision for income taxes.
Net Income (Loss). As a result of the above items, the net income
-----------------
increased to $478,637 for the quarter ended September 30, 1997 from net loss of
$1,162,184 for the quarter ended September 30, 1996.
Decremented Minutes and PIN Activations. Decremented minutes, which
represent actual call traffic over the SmarTalk platforms, were 91,207,466 for
the three months ended September 30, 1997 as compared with 23,510,042 for the
three months ended September 30, 1996. PIN activations were 1,770,574 and
262,872 for the three months ended September 30, 1997 and 1996, respectively.
These increases are due to increased usage of the Company's services and the
Acquisitions.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenue. Revenue increased to $39,730,845 for the nine months ended
-------
September 30, 1997 from $8,266,864 for the nine months ended September 30, 1996.
The substantial increase in revenue reflects an increase in usage of SmarTalk
services by users of the SmarTalk Card, an increase in the number of retail
storefronts in which the Company's product is distributed, greater brand
awareness, consumer acceptance, the Acquisitions and revenue attributable to a
distribution and processing agreement entered into on June 1, 1996 with West
Interactive Corporation. Revenue attributable to the distribution and processing
agreement was $13,766,587 and $2,682,897 for the nine months ended September 30,
1997 and 1996, respectively.
Recharge revenue for the nine months ended September 30, 1997 and 1996 was
$2,790,361 and $1,019,584, respectively. This increase is attributable to the
Acquisitions and increased consumer demand.
For the nine months ended September 30, 1997, SmarTalk recorded $4,112,422
in breakage revenue as compared with $216,000 for the nine months ended
September 30, 1996. This represented approximately 10.4% and 2.6% of total
revenues for the periods then ended, respectively.
Cost of Revenue. Cost of revenue increased to $23,761,289 for the nine
---------------
months ended September 30, 1997 from $6,201,555 for the nine months ended
September 30, 1996. The increase was primarily attributable to greater use of
the Company's services and the Acquisitions. The gross profit percentage for the
nine months ended September 30, 1997 was 40.2% as compared to 25.0% for the nine
months ended September 30, 1996. The gross margin percentage increased due to
lower transport costs associated with operating the Company's own platforms, the
Company leveraging its size, scale and scope, and the Company's ability to
recognize breakage revenue.
Sales and Marketing Expenses. Sales and marketing expenses increased to
----------------------------
$10,213,879 (or 25.7% of revenue) for the nine months ended September 30, 1997
from $2,842,566 (or 34.4% of revenue) for the nine months ended September 30,
1996. The increase in dollar amount was primarily due to the Acquisitions, and
continued expansion of the Company's marketing activities, which include co-op
advertising, Manufacturers Development Funds, and free promotional goods.
Additionally, commissions were higher in 1997 than in 1996 due to increased
sales activity.
General and Administrative Expenses. General and administrative expenses
-----------------------------------
increased to $7,188,175 (or 18.1% of revenue) for the nine months ended
September 30, 1997 from $2,469,477 (or 29.9% of revenue) for the nine months
ended September 30, 1996. The increase in dollar amount was primarily due to the
Acquisitions, which includes goodwill amortization, depreciation expense, and
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 1997 and the Company's ability to recognize synergies associated with
the Acquisitions. Additionally, expense was reduced in the first quarter of
1997 as the Company received enhanced feature equipment with a net fair value
of $325,810 in exchange for early termination of a facility sublease with a
strategic partner.
Interest Income (Expense). Interest income, net of interest expense for
-------------------------
the nine months ended September 30, 1997 was $934,493 as compared to $(186,636)
for the nine months ended September 30, 1996. This increase was primarily due to
the interest earned on the Company's cash investments, net of interest expense
on the convertible debt offering and acquisition indebtedness.
Income Taxes. The Company had losses for the nine months ended September
------------
30, 1997 and 1996. Accordingly, there was no provision for income taxes.
Net Loss. As a result of the above items, net loss decreased to $498,005
--------
for the nine months ended September 30, 1997 from $3,433,370 for the nine months
ended September 30, 1996.
Decremented Minutes and PIN Activations. Decremented minutes, which
represent actual call traffic over the SmarTalk platforms, were 181,253,093 for
the nine months ended September 30, 1997 as compared with 39,411,135 for the
nine months ended September 30, 1996. PIN activations were 2,901,076 and 576,343
for the nine months ended September 30, 1997 and 1996, respectively. These
increases are due to increased usage of the Company's services and the
Acquisitions.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
On October 23, 1996, the Company completed the sale of 4,000,000 shares of
its stock in a public offering (the "Offering"), pursuant to which the Common
Stock is now listed on the NASDAQ national stock market. The Company raised
proceeds of $50,471,781 after deducting the underwriting discount and other
related offering costs. A portion of the proceeds were used to repay all of the
Company's then existing indebtedness.
On May 28, 1997 the Company issued 714,286 shares of common stock to
purchase SmarTel Communications, Inc.
On May 31, 1997 the Company issued 2,580,001 shares of common stock and
$26,500,000 in subordinated 10% per annum term notes which mature June 1, 2001
to purchase GTI Telecom, Inc. (the "GTI Notes") Interest payments on the notes
are due quarterly beginning September 1, 1997.
On August 13, 1997 the Company issued 115,000 shares of common stock to
purchase Cardinal Voicecard, Ltd.
In December 1996, the Company entered into a revolving credit facility
with Southern California Bank ("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 an
assignment of a deposit account with SCB. Interest on the outstanding principal
balance, calculated from the date of each advance to the repayment of each
advance is at a fixed rate of 7.12%. The credit facility was undrawn at
September 30, 1997.
On September 17, 1997, SmarTalk issued $150,000,000 in principal amount of
convertible subordinated notes. The net proceeds to SmarTalk from the
Convertible Subordinated Notes Offering (after deducting the underwriting
discounts and estimated expenses) was approximately $145,335,023. SmarTalk used
a portion of these proceeds to repurchase $25,970,000 of the outstanding GTI
Notes for $20,614,686; the difference of $5,355,314 was recorded as a reduction
to goodwill.
From inception through December 31, 1996, the Company has funded
operations primarily from borrowings under its debt agreements and the sale of
its stock. The Company's operating activities used net cash of $(9,227,271) for
the nine months ended September 30, 1997. The cash used by operating activities
is primarily attributable to the Company's continued efforts to increase its
penetration of the retail and alternate distribution channels.
Additionally, the Company believes that the net proceeds from the
convertible subordinated notes offering, together with existing sources of
liquidity, will be sufficient to fund its capital expenditures, working capital
and other cash requirements through the foreseeable future.
Short-term and long-term funding needs for SmarTalk relate principally to
acquisitions, additional market penetration, liquidity, operations and capital
expenditures. These requirements principally have been met through the proceeds
of the Offering in October 1996 and the Convertible Subordinated Notes Offering
in September 1997. The following table sets forth selected finanical data from
the statements of cash flows:
<TABLE>
<CAPTION>
Cash (used in) provided by:
---------------------------
Operations Investing Financing
---------- --------- ----------
<S> <C> <C> <C>
Nine months ended September 30, 1996 $ (3,235,953) $(1,009,836) $ 2,387,057
Nine months ended September 30, 1997 (9,227,271) (3,796,434) 119,010,545
Year ended December 31, 1996 (4,762,535) (1,169,110) 48,646,781
</TABLE>
Working capital, current assets and current liabilities are illustrated in the
table below:
<TABLE>
<CAPTION>
Current Current Working
Assets Liabilities Capital
--------- ----------- --------
<S> <C> <C> <C>
September 30, 1996 $ 3,471,504 $ 8,789,420 $ (5,317,916)
September 30, 1997 170,263,814 31,799,849 138,463,965
December 31, 1996 49,696,163 6,715,989 42,980,174
</TABLE>
The increase in working capital at September 30, 1997 is directly attributable
to the proceeds raised from the debt offering netted against the related changes
in deferred revenues recorded from acquisitions, other current liabilities in
excess of current assets, and the related cash expended for acquisition costs.
Impact of Inflation
SmarTalk does not consider inflation to have had a material impact on the
results of operations.
8
<PAGE>
SMARTALK TELESERVICES, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
10.1 Employment agreement with Gene Russell dated June 11, 1997.
10.2 Employment agreement with Lauren Becker dated July 30,
1997.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
SmarTalk filed Form 8-K on August 15, 1997 pertaining to the
acquisition of ConQuest Telecommunications Services Corp.
containing item number 2 and item number 7(c) exhibits 2.1, 4.1
and 99.1.
9
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SmarTalk TeleServices, Inc.
---------------------------
(Registrant)
Date: November 14, 1997 By: /s/ Andrew Folck
---------------------------
Andrew Folck
Chief Financial Officer
10
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 11th day of
June, 1997 between SMARTALK TELESERVICES, INC., a California corporation (the
"Company") and GENE RUSSELL (the "Executive"); and
WHEREAS, the parties hereto wish to enter into an employment agreement
to employ the Executive as the Vice President - Sales 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 and
one-half years (the "Initial Term"), commencing on the date hereof (the
"Effective Date"). Effective as of the expiration of the Initial 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 Effective Date 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 Vice President - Sales on the terms
and conditions set forth in this Agreement.
(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 bylaws 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,
<PAGE>
educational or charitable organization, or any trade association, without
seeking or obtaining approval by the Board of Directors of the Company (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 $150,000 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 the levels set forth above
during the Initial Term, or from its then-existing level during the Employment
Period.
(b) Annual Bonus. The Executive shall earn bonus amounts in the form
------------
of cash and stock awards 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, 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) Insurance Policies. The Company shall purchase for up to an
------------------
annual premium amount of $3,000 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.
(d) 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 of the Company. Without limiting the generality of the
foregoing, the
2
<PAGE>
Executive shall be entitled to three (3) 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.
(e) 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.
(f) Stock Options. Concurrently with the execution of this Agreement,
-------------
the Company and Executive will enter into a Stock Option Agreement, attached
hereto as Exhibit A, pursuant to which the Company shall grant to the Executive
an option to purchase up to sixty thousand (60,000) shares of common stock of
the Company on the terms and conditions set forth therein.
(g) Signing Bonus. The Company shall pay to the Executive upon the
-------------
execution of this Agreement fifteen thousand dollars ($15,000) as a signing
bonus which amount shall be earned by Executive pro rata over the first year of
the Employment Period. Should Executive cease to be employed during the first
year of the Employment Period, Executive shall promptly remit any unearned
portion of this signing bonus.
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
Executive shall commit any of the following:
(i) any act or omission which shall represent a breach in any
material respect of any of the terms of this Agreement;
(ii) gross misconduct that, in the reasonable good faith
opinion of the Company could be significantly injurious to the Company;
(iii) gross negligence or wanton and reckless acts or omissions
in the performance of Executive's duties, in any such case which are to the
material detriment of the Company;
(iv) bad faith in the performance of Executive's duties,
consisting of willful acts or omissions, to the material detriment of the
Company;
(v) addiction to illegal drugs or chronic alcoholism; or
(vi) any conviction or pleading of guilty to a crime that
constitutes a felony
3
<PAGE>
under the laws of the United States or any political subdivision thereof.
(b) Termination for Good Reason. The Executive shall have the right
---------------------------
at any time to terminate his employment with the Company 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 diminution during the Employment Period in the Executive's
title, duties, reporting relationship 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) 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 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.
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 - a lump sum amount equal to one-half (.5) the
-------------
Executive's annual Base Salary; and
4
<PAGE>
(ii) Benefits Continuation - continuation for six (6) months (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 six (6) months following the first date
of Disability;
(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 six (6)
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 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(c) 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(c) 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,
5
<PAGE>
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 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
-------- -------
6
<PAGE>
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 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: David Hamburger
General Counsel
SmarTalk TeleServices, Inc.
1640 South Sepulveda Blvd., Suite 500
Los Angeles, CA 90025
7
<PAGE>
(b) If to the Executive, to:
Gene Russell
26392 Houston Trail
Laguna Hills, CA 92653
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. 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.
12. 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.
13. 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 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.
14. 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.
15. 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.
8
<PAGE>
16. Payment. All amounts payable by the Company to the Executive
-------
under this Agreement shall be paid promptly on the dates required for such
payment in this Agreement without notice or demand. Any salary, benefits or
other amounts paid or to be paid to Executive or provided to or in respect of
the Executive pursuant to this Agreement shall not be reduced by amounts owing
from Executive to the Company.
17. Authority. Each of the parties hereto hereby represents that
---------
each has taken all actions necessary in order to execute and deliver this
Agreement and the Stock Option Agreement attached hereto as Exhibit A.
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 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
June 11, 1997.
SMARTALK TELESERVICES, INC.
/s/ ERICH L. SPANGENBERG
-------------------------------------------
By: Erich L. Spangenberg
Its: President and Chief Operating Officer
/s/ GENE RUSSELL
-----------------------------------------
Gene Russell
9
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 30th day of
July, 1997 between SMARTALK TELESERVICES, INC., a California corporation (the
"Company") and LAUREN BECKER (the "Executive"); and
WHEREAS, the parties hereto wish to enter into an employment agreement
to employ the Executive as the Vice President - Marketing 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 (the "Initial Term"), commencing on the date hereof (the "Effective
Date"). Effective as of the expiration of the Initial 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 Effective Date 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 Vice President - Marketing on the
terms and conditions set forth in this Agreement. During the Employment Period,
the Executive shall report directly to the Chief Executive Officer of the
Company, the President of the Company, or any designee thereof.
(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 bylaws of the Company, including senior
marketing responsibilities. 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
<PAGE>
investments of her 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 of Directors of the Company (the "Board"),
provided such activities and service do not materially interfere or conflict
with the performance of her 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 her duties and obligations
under this Agreement, a base salary at the rate of $125,000 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 the levels set forth above
during the Initial Term, or from its then-existing level during the Employment
Period.
(b) Annual Bonus. The Executive shall earn bonus amounts in the form
------------
of cash and stock awards 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, 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. Assuming
Executive performs her duties in a manner satisfactory to the Compensation
Committee, Executive shall receive bonus amounts in proportion to similarly
situated employees and shall be paid such monies at the time other similarly
situated employees receive their awards, if any.
(c) Benefits. During the Employment Period, the Executive shall
--------
receive such 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 simarly situated executives 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 of the Company. Without limiting the generality of the
foregoing, the Executive shall be entitled to three (3) 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.
(d) 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 her duties under this
Agreement, in accordance with the
2
<PAGE>
Company's policies and standards of similar or comparable companies.
(e) Stock Options. Concurrent with the commencement of the term, the
-------------
Company and Executive will enter into a Stock Option Agreement, attached hereto
as Exhibit A, pursuant to which the Company shall grant to the Executive an
option to purchase up to 50,000 shares of Company common stock on the terms and
conditions set forth therein.
(f) Moving Allowance. The Company shall pay to the Executive upon
----------------
the execution of this Agreement thirty-five thousand dollars ($35,000) as a
moving allowance which amount shall be earned by Executive pro rata over the
first year of the Employment Period. Should Executive cease to be employed
during the first year of the Employment Period, Executive shall promptly remit
any unearned portion of this signing bonus.
(g) Car Allowance. Employer shall pay to Executive as an automobile
-------------
allowance the sum of $500 per month during the Employment Period in lieu of any
other provision for an automobile, insurance, maintenance, gasoline and
expenses.
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
Executive shall commit any of the following:
(i) any act or omission which shall represent a breach in any
material respect of any of the terms of this Agreement;
(ii) gross misconduct that, in the reasonable good faith
opinion of the Company could be significantly injurious to the Company;
(iii) gross negligence or wanton and reckless acts or omissions
in the performance of Executive's duties, in any such case which are to the
material detriment of the Company;
(iv) bad faith in the performance of Executive's duties,
consisting of willful acts or omissions, to the material detriment of the
Company;
(v) addiction to illegal drugs or chronic alcoholism; or
(vi) any conviction or pleading of guilty to a crime that
constitutes a felony under the laws of the United States or any political
subdivision thereof.
(b) Termination for Good Reason. The Executive shall have the right
---------------------------
at any time to terminate her employment with the Company for any reason. For
purposes of this Agreement and subject to the Company's opportunity to cure as
provided in Section 4(c)
3
<PAGE>
hereof, the Executive shall have "good reason" to terminate her employment
hereunder if such termination shall be the result of:
(i) a diminution during the Employment Period in the
Executive's title, duties, reporting relationship 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) a material breach by the Company of any material terms of
this Agreement; or
(iv) a relocation of the Executive's principal business office
by more than fifty (50) miles from its existing location; or
(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 her
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 death of the Executive. The
Employment Period may be terminated by the Company if the Executive shall be
rendered incapable of performing her 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.
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 - a lump sum amount equal to the Executive's
-------------
annual Base Salary; and
4
<PAGE>
(ii) Benefits Continuation - continuation for one (1) year (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 one (1) year following the first date
of Disability;
(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 one (1) year
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 policy which was maintained by the Executive prior to her
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 a life insurance policy provided in accordance with Section 3(c)
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(c) above.
(d) Termination Following a Change of Control. In addition to the
-----------------------------------------
amounts set forth in Section 5(a), 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) within one (1) year following a "Change of Control", all of
the unvested options to purchase Company common stock held by the Executive
shall immediately vest. A "Change in Control" shall be deemed to have taken
place if:
(i) there shall be consummated any consolidation or merger of the
5
<PAGE>
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.
(e) Other Terminations. In the event of termination of the
------------------
Executive's employment hereunder for any reason other than those specified in
subsection (a) through (d) 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.
(f) 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 her 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.
(g) 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
6
<PAGE>
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 she 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 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 her 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. (iv) The Executive agrees that she 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 States. For
purposes of the foregoing, the term "Competitive Business" shall mean any
business directly
7
<PAGE>
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 she 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: David Hamburger
General Counsel
SmarTalk TeleServices, Inc.
1640 South Sepulveda Blvd., Suite 500
Los Angeles, CA 90025
(b) If to the Executive, to:
Lauren Becker
1022 Palisades Beach Road
Santa Monica, CA 90405
With a copy to:
David R. Altshuler, Esq.
520 Broadway - Suite 680
Santa Monica, CA 90401
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.
8
<PAGE>
11. 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.
12. 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.
13. Non-Assignment; Successors. Neither party hereto may assign her
--------------------------
or its rights or delegate her 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 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.
14. 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.
15. 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.
16. Payment; Mitigation. All amounts payable by the Company to the
-------------------
Executive under this Agreement shall be paid promptly on the dates required for
such payment in this Agreement without notice or demand. There shall be no
right of set-off or counterclaim in respect of any claim, debt or obligation
against any payment to the Executive, his
9
<PAGE>
dependents, beneficiaries or estate provided for in this Agreement. Any salary,
benefits or other amounts paid or to be paid to Executive or provided to or in
respect of the Executive pursuant to this Agreement shall not be reduced by
amounts owing from Executive to the Company. Executive shall not be obligated to
seek other employment in mitigation of the amounts payable or the arrangements
made under any provision of this Agreement.
17. Authority. Each of the parties hereto hereby represents that
---------
each has taken all actions necessary in order to execute and deliver this
Agreement and the Stock Option Agreement attached hereto as Exhibit A.
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 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 30, 1997.
SMARTALK TELESERVICES, INC.
/s/ Erich L. Spangenberg
-------------------------------------------
By: Erich L. Spangenberg
Its: President and Chief Operating Officer
/s/ Lauren Becker
-------------------------------------------
Lauren Becker
10
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