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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
June 1, 1997
SmarTalk TeleServices, Inc.
(Exact name of registrant as specified in its charter)
California
(State or jurisdiction of incorporation)
0-21579 95-4502740
(Commission File Number) (IRS Employer Identification No.)
1640 South Sepulveda Boulevard, Suite 500, Los Angeles, CA 90025
(Address of principal executive offices) (Zip Code)
(310) 444-8800
(Registrant's Telephone Number)
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Item 2. Acquisition
On June 1, 1997, SmarTalk TeleServices, Inc., a California corporation
(the "Company"), acquired GTI Telecom, Inc., a Florida corporation ("GTI"),
pursuant to a Stock Purchase Agreement (the "Agreement"), dated as of May 31,
1997, by and among the Company, GTI, Waterton Investment Group I, LLC, a
Delaware limited liability company (the "Preferred Stockholder"), and William R.
Harger, an individual (the "Common Stockholder"), pursuant to which GTI became a
wholly-owned subsidiary of the Company.
Pursuant to the Agreement, the Company purchased all outstanding common
and preferred shares of GTI. In consideration for each outstanding share of
common stock, par value $0.001 per share, the stockholders received $45,580
principal amount of SmarTalk's 10% Subordinated Notes due 2001, (the
"Subordinated Notes"), and 4,437.6 shares of SmarTalk common stock, no par value
("SmarTalk Common Stock"). In consideration for each outstanding share of
preferred stock, par value $0.001, the stockholders received $1,060 principal
amount of Subordinated Notes, and 103.2 shares of SmarTalk Common Stock. The
Agreement is filed as Exhibit 2.1 hereto.
The purchase price for the stock was determined based upon arms-length
negotiations between the Company, on the one hand, and the Common Stockholder
and Preferred Stockholder, on the other hand. Prior to the Agreement, there was
no material relationship between GTI, the Common Stockholder, or the Preferred
Stockholder and the Company, any affiliates of the Company, any director or
officer of the Company, or any associate of any such director or officer.
The Company funded the Agreement by issuing approximately 2.58 million
shares of SmarTalk Common Stock and an aggregate principal amount of $26.5
million in Subordinated Notes to the stockholders of GTI.
The Company is engaged in a similar business as GTI, and intends to use
GTI's assets in a substantially similar manner as used by GTI prior to the
agreement, and operate GTI as a wholly-owned subsidiary of the Company.
In addition, on June 2, 1997, the Company issued a press release
announcing the consummation of the transactions contemplated by the Agreement,
which press release is filed as Exhibit 99.1 hereto.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
The required financial statements will be filed no later than
August 15, 1997.
(b) Pro Forma Financial Information
The required pro forma financial information will be filed no
later than August 15, 1997.
2
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(c) Exhibits
2.1 Stock Purchase Agreement, dated as of May 31, 1997,
by and among SmarTalk TeleServices, Inc., GTI
Telecom, Inc., Waterton Investment Group I, LLC, and
William R. Harger (without schedules)/1/.
4.1 Form of SmarTalk TeleServices, Inc. 10% Subordinated
Note Due 2001.
4.2 Registration Rights Agreement.
99.1 Press Release, dated June 2, 1997, of SmarTalk
TeleServices, Inc.
- ---------------
/1/ SmarTalk shall supplementally furnish a copy of any omitted schedule to
the Securities and Exchange Commission upon request.
3
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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)
By: /s/ ERICH L. SPANGENBERG
---------------------------------
Erich L. Spangenberg
President and Chief
Operating Officer
Date: June 12, 1997
4
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EXHIBIT INDEX
Number Subject Matter
2.1 Stock Purchase Agreement, dated as of May 31, 1997, by and among
SmarTalk TeleServices, Inc., GTI Telecom, Inc., Waterton Investment
Group I, LLC, and William R. Harger (without schedules)/1/.
4.1 Form of SmarTalk TeleServices, Inc. 10% Subordinated Note Due 2001.
4.2 Registration Rights Agreement.
99.1 Press release, dated June 2, 1997, of SmarTalk TeleServices, Inc.
- ---------------
/1/ SmarTalk shall supplementally furnish a copy of any omitted schedule to
the Securities and Exchange Commission upon request.
5
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EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
BY AND AMONG
SMARTALK TELESERVICES, INC.,
GTI TELECOM, INC.,
WATERTON INVESTMENT GROUP I, LLC
AND
WILLIAM R. HARGER
Dated as of May 31, 1997
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TABLE OF CONTENTS
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ARTICLE 1 SALE AND TRANSFER OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1. Sale and Transfer of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3. Instruments of Conveyance . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.4. New Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.5. Documents to be Delivered . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.6. Further Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 2 CONSIDERATION FOR PURCHASE OF COMPANY SHARES . . . . . . . . . . . . . . . . . . 2
2.1. Payment for Each Share of the Company Stock . . . . . . . . . . . . . . . . . . 2
2.2. Per Share Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMMON
STOCKHOLDER AND COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.1. Corporate Organization and Disclosure . . . . . . . . . . . . . . . . . . . . . 4
3.2. Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.3. Subsidiaries, Equity Investments and Joint Ventures . . . . . . . . . . . . . . 5
3.4. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.5. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.6. Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.8. Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . 6
3.9. Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.10. Legal Proceedings, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.11. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.12. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.13. Taxes and Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.14. Agreements and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.15. Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.16. Change in Control Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.17. Customer Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.18. Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.19. Brokers and Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.20. SmarTalk Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE PREFERRED
STOCKHOLDER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.1. Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.2. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
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4.3. SmarTalk Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF SMARTALK . . . . . . . . . . . . . . . . . . . 15
5.1. Organization of SmarTalk and its Subsidiaries . . . . . . . . . . . . . . . . . 15
5.2. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.3. Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.4. SEC Reports and Financial Statements . . . . . . . . . . . . . . . . . . . . . . 16
5.5. SmarTalk Common Stock; Subordinated Notes . . . . . . . . . . . . . . . . . . . 16
5.6. Brokers and Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.7. Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.8. Acquisition of Company Shares . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE 6 COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.1. Access to Properties and Records; Confidentiality . . . . . . . . . . . . . . . 17
6.2. Furnishing Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.3. Further Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.4. Conduct of the Company Prior to the Closing . . . . . . . . . . . . . . . . . . 19
6.5. Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.6. Interim Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.7. Intercompany Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.8. Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.9. Interim Operating Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.10. Assets Complete . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.11. Notice; Efforts to Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.12. Tax Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.13. Consulting and Non-Competition Agreement; Release; Escrow Agreement . . . . . . 23
ARTICLE 7 CONDITIONS TO THE OBLIGATIONS OF SMARTALK . . . . . . . . . . . . . . . . . . . 23
7.1. Representations and Warranties True . . . . . . . . . . . . . . . . . . . . . . 23
7.2. Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.3. Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.4. Customer Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.5. Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.6. Absence of Litigation, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.7. Adverse Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.8. Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.9. Proceedings and Documents Satisfactory . . . . . . . . . . . . . . . . . . . . . 24
7.10. Delivery of Certain Documents . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.11. Consulting and Non-Competition Agreement; Releases . . . . . . . . . . . . . . . 24
7.12. Escrow Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.13. Full Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.14. FIRPTA Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
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ARTICLE 8 CONDITIONS TO THE OBLIGATIONS OF THE STOCKHOLDERS AND
COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.1. Representations and Warranties True . . . . . . . . . . . . . . . . . . . . . . 25
8.2. Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.3. Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.4. Absence of Litigation, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.5. Consulting and Non-Competition Agreement . . . . . . . . . . . . . . . . . . . . 25
8.6. Subordinated Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.7. Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.8. Registration Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.9. Adverse Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE 9 CERTAIN ACTIVITIES AT CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.1. Delivery by the Stockholders and Company . . . . . . . . . . . . . . . . . . . . 26
9.2. Delivery by SmarTalk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE 10 INDEMNIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.1. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.2. Indemnification Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.3. Tax Indemnifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10.4. Off-Sets, Escrow, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE 11 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
11.1. Optional Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
11.2. Notice of Abandonment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
11.3. Mandatory Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
11.4. Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE 12 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
12.1. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
12.2. Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
12.3. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
12.4. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
12.5. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
12.6. Complete Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
12.7. Modifications, Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . 34
12.8. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
12.9. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
12.10. Press Releases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
12.11. Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
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12.12. Invalidity of Any Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . 34
12.13. Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
12.14. Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
12.15. Gender, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
12.16. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
12.17. Access to Records After Closing . . . . . . . . . . . . . . . . . . . . . . . . 35
12.18. Nature and Survival of Representations, etc. . . . . . . . . . . . . . . . . . . 35
12.19. Prohibition on Use of Name . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
12.20. Limitation on Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
12.21. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
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STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, dated as of May 31, 1997 (the
"Agreement"), is by and among SMARTALK TELESERVICES, INC., a California
corporation ("SmarTalk"), GTI TELECOM, INC., a Florida corporation (the
"Company"), WATERTON INVESTMENT GROUP I, LLC, a Delaware limited liability
company (the "Preferred Stockholder"), and WILLIAM R. HARGER, an individual (the
"Common Stockholder" and, together with the Preferred Stockholder, the
"Stockholders").
RECITALS
WHEREAS, the Stockholders are the owners of all of the issued and
outstanding capital stock of the Company;
WHEREAS, the Stockholders desire to sell and transfer to SmarTalk, and
SmarTalk desires to purchase and receive from the Stockholders, the shares of
the capital stock of the Company referred to herein for the consideration and
upon the terms and conditions hereinafter set forth; and
WHEREAS, SmarTalk, the Company and the Stockholders desire to make
certain representations, warranties, covenants and agreements in connection with
the transactions contemplated by this Agreement;
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements herein contained, the parties to this
Agreement hereby agree as follows:
ARTICLE 1
SALE AND TRANSFER OF STOCK
1.1. Sale and Transfer of Stock. Subject to the terms and conditions of
this Agreement, the Stockholders agree to sell, convey and deliver to SmarTalk,
and SmarTalk agrees to purchase and accept at the Closing (as hereinafter
defined) from each Stockholder, the number of shares of common stock and/or
preferred stock of the Company set opposite their respective names on Schedule
1.1.
1.2. Closing. The sale, purchase and other activities provided for
herein (the "Closing") shall take place on May 31, 1997, or as soon as
practicable thereafter, at the offices of Dewey Ballantine, 333 South Hope
Street, Los Angeles, California 90071, or at such other time or place as agreed
among the parties hereto. At the Closing there shall be delivered to SmarTalk
and the Stockholders the opinions, certificates and other documents and
instruments required to be delivered hereunder.
1.3. Instruments of Conveyance. At the Closing the Stockholders shall
deliver to SmarTalk certificates evidencing and representing all of the issued
and outstanding capital stock of the Company duly endorsed in blank or
accompanied by stock powers duly executed in blank in proper form for a
transfer, which shall convey to SmarTalk all of the
<PAGE> 7
Company Shares (as hereinafter defined) free and clear of all liens, pledges
and other encumbrances.
1.4. New Directors and Officers. At the Closing, the Stockholders shall
deliver to SmarTalk written resignations of all of the directors and officers of
the Company. On the date of Closing, the Stockholders shall cause a meeting of
the Board of Directors of the Company to be held upon due notice or waiver
thereof, at which the resignations of the respective officers and directors of
the Company shall be accepted, effective immediately, and the vacancies created
by such resignations thereupon shall be filled by the persons designated by
SmarTalk.
1.5. Documents to be Delivered. At the Closing, the parties hereto
shall deliver, or cause to be delivered, such documents or certificates as may
be necessary, in the reasonable opinion of counsel for any of the parties, to
effectuate the transactions contemplated by this Agreement. From and after the
Effective Time, each of the parties hereto hereby covenants and agrees, without
the necessity of any further consideration whatsoever, to execute, acknowledge
and deliver any and all other documents and instruments and take any and all
such other action as may be reasonably necessary or desirable to effectuate the
transactions set forth herein or contemplated hereby, and the officers and
directors of the parties hereto shall execute and deliver, or cause to be
executed and delivered, all such documents as may reasonably be required to
effectuate such transactions.
1.6. Further Acts. The Stockholders shall, at any time and from time to
time and at no cost to SmarTalk, take any and all steps necessary to place in
SmarTalk's possession and operating control the properties and business of the
Company and will do, execute, acknowledge and deliver or will cause to be done,
executed, acknowledged and delivered, all such further acts, deeds, assignments,
transfers, conveyances, powers of attorney as may be required to more
effectively transfer and confirm to SmarTalk or to its successors or assigns, or
to reduce to possession, any or all of the assets of the Company and to carry
out the purposes and intent of this Agreement.
ARTICLE 2
CONSIDERATION FOR PURCHASE OF COMPANY SHARES
2.1. Payment for Each Share of the Company Stock. (a) SmarTalk agrees
to pay for each share of the Company's common stock, par value $.001 per share
(the "Common Shares"), issued and outstanding immediately prior to the Closing
the amount of the SmarTalk Per Share Consideration as defined in Section 2.2
herein. The Common Shares held in the treasury of the Company shall be canceled
upon payment by the Company on the date of Closing of the indebtedness listed on
Schedule 3.2 giving rise to a security interest therein.
(b) SmarTalk agrees to pay for each share of the Company's preferred
stock, par value $.001 per share (the "Preferred Shares" and together with the
Common Shares, the "Company Shares"), issued and outstanding immediately prior
to the Closing the amount of the SmarTalk Per Preferred Share Consideration as
defined in Section 2.2 herein.
2
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2.2. Per Share Consideration. (a) For each Common Share, a Stockholder
shall receive (the "SmarTalk Per Share Consideration") (i) $45,580 principal
amount of SmarTalk's 10% Subordinated Note due 2001, in the form set forth in
Exhibit A (the "Subordinated Note"), and (ii) 4,437.6 shares of SmarTalk common
stock, no par value ("SmarTalk Common Stock"). For each Preferred Share, a
Stockholder shall receive (the "SmarTalk Per Preferred Share Consideration") (i)
$1,060 principal amount of Subordinated Notes, and (ii) 103.2 shares of SmarTalk
Common Stock.
(b) At the request of each of the Stockholders, a portion of the
SmarTalk Per Share Consideration and the SmarTalk Per Preferred Share
Consideration described above equal to 51,600 shares of SmarTalk Common Stock
and $530,000 principal amount of Subordinated Notes shall be paid directly to
Financial Innovations, Inc. ("Financial Innovations"); provided, however, that
Financial Innovations and its controlling stockholder Mark Weiner shall have
executed an agreement, substantially in the form attached hereto as Exhibit B,
on or prior to the Closing. The Stockholders acknowledge that such payment to
Financial Innovations represents two percent (2%) of the aggregate consideration
to be received by the Stockholders pursuant to clause (a) above and hereby agree
that SmarTalk shall reduce pro rata the SmarTalk Per Share Consideration and the
SmarTalk Per Preferred Share Consideration to reflect such payment to Financial
Innovations.
(c) The SmarTalk Common Stock issued hereunder shall bear a legend
substantially as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
(d) If SmarTalk effects a stock dividend, reclassification,
recapitalization, stock split, combination, exchange of shares or similar
transaction after the date hereof and prior to the Effective Time, the
provisions of this Section 2.2 shall be appropriately adjusted.
(e) No fractional shares of SmarTalk Common Stock shall be issued
pursuant hereto. In lieu of the issuance of any fractional share of SmarTalk
Common Stock pursuant to Section 2.2 hereof, the aggregate number of shares of
SmarTalk Common Stock received by any Stockholder shall be rounded up to the
nearest whole number of shares of SmarTalk Common Stock.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF THE COMMON STOCKHOLDER AND COMPANY
The Common Stockholder and Company hereby jointly and severally
represent and warrant to SmarTalk as follows:
3.1. Corporate Organization and Disclosure. (a) Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Florida with all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted.
Company is qualified to do business and is in good standing in each jurisdiction
(domestic, foreign or otherwise) in which the property owned, leased or operated
by it or the nature of the business conducted by it makes such qualification
necessary. Schedule 3.1(a) contains a list of all jurisdictions where Company is
qualified to do business. Company has not received any written notice or
assertion from the Secretary of State or comparable official of any jurisdiction
to the effect that Company is required to be qualified or otherwise authorized
to do business therein, in which Company has not qualified or obtained such
authorization.
(b) Complete copies of the charter and all amendments thereto to the
date hereof and the Bylaws as presently in effect of Company have been furnished
to SmarTalk. Company is not in default in the performance, observation or
fulfillment of its charter or Bylaws.
(c) True and complete copies of the minute books of Company, which
contain a complete and correct record in all material respects of all meetings
of the Board of Directors of each Company and committees thereof and all
meetings of its stockholders and all actions by written consent without a
meeting by such Board of Directors and committees thereof and its stockholders
since the date of incorporation, have been furnished to SmarTalk. The stock
certificate books and records of Company accurately reflect on the date hereof
the ownership of the Company Shares by the persons and in the amounts set forth
therein.
3.2. Capitalization. The authorized capital stock of Company consists
solely of 10,000,000 Common Shares, of which 500 are issued and outstanding, and
5,000,000 Preferred Shares, of which 3,500 shares are designated as the Series A
Convertible Exchangeable Preferred Stock, and 3,500 of such shares of Series A
Convertible Exchangeable Preferred Stock are issued and outstanding. Except as
set forth in the preceding sentence and except for the Common Shares held in the
Company's treasury that are to be canceled as provided in Section 2.1(a), there
are no other shares of capital stock of the Company which are issued or
outstanding. All outstanding Company Shares have been validly issued and are
fully paid, non-assessable and are not subject to any preemptive rights. The
issuance and sale of all of such Company Shares have been in full compliance
with all applicable federal and state securities laws. Except as set forth in
the Stockholders Agreement of GTI Telecom, Inc., dated as of January 21, 1997
(the "Stockholders Agreement") (which Stockholders Agreement shall terminate as
of the Effective Time without any obligation or liability whatsoever on the part
of the Company or SmarTalk), Schedule 3.2 or in the Articles of Incorporation of
the Company, there are no subscriptions, options, warrants, calls, rights,
contracts, commitments, understandings, restrictions or arrangements relating to
the issuance, sale, transfer or voting of any Company
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Shares or any other equity security of Company, including any rights of
conversion or exchange under any outstanding securities or other instruments.
Except as set forth in Schedule 3.2 or the Stockholders Agreement, there are no
voting rights or other agreements or understandings with respect to the Company
Shares. The Common Stockholder has good and valid title, beneficially and of
record, to such Stockholder's Company Shares in the amount set forth herein,
free and clear of all claims, liens, suits, proceedings, calls, proxies,
charges, options, security interests and encumbrance of any kind, except as set
forth in the Stockholders Agreement; and such Stockholder now has, and on the
date of Closing will have, full power and authority to exchange such Company
Shares for the SmarTalk Per Share Consideration. As of the date of Closing,
all of the issued and outstanding Preferred Shares were held of record by the
Preferred Stockholder.
3.3. Subsidiaries, Equity Investments and Joint Ventures. Company does
not own any capital stock or other equity securities of any corporation, has no
direct or indirect equity or ownership interest in, by way of stock ownership or
otherwise, any corporation, partnership, joint venture, association or business
enterprise and is not contemplating acquiring any such interest.
3.4. Authority. (a) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby by
Company have been duly authorized by all requisite corporate action, and no
other acts or proceedings on the part of Company or its stockholders are
necessary to authorize this Agreement or the transactions contemplated hereby.
The Common Stockholder has the absolute and unrestricted right, power,
authority, and capacity to execute and deliver this Agreement and, as of the
Closing, consummate the transactions contemplated hereby. This Agreement has
been duly and validly executed and delivered by Company and such Stockholder and
(assuming due authorization, execution and delivery by SmarTalk) is the legal,
valid and binding obligation of Company and such Stockholder enforceable against
Company and such Stockholder in accordance with its terms, except as enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights in general, or by
general principles of equity.
(b) Except as set forth in Schedule 3.4, neither the execution and
delivery by Company and the Common Stockholder of this Agreement nor the
consummation of the transactions contemplated hereby nor compliance with any of
the provisions hereof will (i) conflict with or result in a breach of any
provision of the charter or Bylaws of Company, (ii) violate, conflict with, or
result in a breach of any provision of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or result in the termination or in a right of termination or cancellation of, or
accelerate the performance required by, or result in the creation of any
encumbrance upon any of the properties of Company or result in being declared
void, voidable, without further binding effect or subject to amendment or
modification any of the terms, conditions or provision of, any note, bond,
mortgage, indenture, deed of trust, any license, franchise, permit, lease,
contract, agreement or other instrument or commitment or obligation to which
Company, or any of its respective properties may be bound or affected, (iii)
violate any order, writ, injunction, decree, judgment, ruling, law, rule or
regulation of any Governmental Authority (as defined below), applicable to
Company, or to the Common Stockholder or any of their respective properties, or
(iv) require any consent, approval or authorization of, or notice to, or
declaration, filing or registration with, any person or entity except, in the
case of clauses (ii), (iii) and (iv) above, as could not have a Material Adverse
Effect
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(as hereinafter defined) on the Company or a material adverse effect on the
ability of the Company or such Stockholder to consummate the transactions
contemplated hereby. As used in this Agreement, a "Material Adverse Effect"
shall mean, in respect of Company, any effect or change that is, or is
reasonably likely to be, materially adverse to the business, operations,
assets, financial condition or results of operations of Company.
3.5. Compliance with Laws. Company and, to the best knowledge of
Company, all of its respective officers, directors, employees, consultants and
agents (collectively, the "Personnel"), except as set forth on Schedule 3.5,
have complied in all material respects with all applicable statutes,
regulations, rules, orders, ordinances, judgments, decrees, permits, franchises,
licenses and other laws of the United States of America, all state, local and
foreign governments and other governmental bodies and authorities, and courts
and agencies of any of the foregoing ("Governmental Authority") applicable to
Company, except to the extent noncompliance could not have a Material Adverse
Effect. Except as set forth on Schedule 3.5, Company has not received any notice
or other communication to the effect that, or otherwise been advised that, it is
not in compliance with any of such statutes, regulations and orders, ordinances,
other laws or undertakings, and neither Company nor any Stockholder has any
knowledge of any presently existing circumstances that would be likely to result
in violations of any such regulations which could have a Material Adverse
Effect.
3.6. Licenses. Except as set forth on Schedule 3.5, Company has all
material consents, permits, franchises, licenses, concessions, rights,
authorizations and approvals (collectively, "Licenses") of federal, state, local
and foreign Governmental Authorities and other persons or entities required in
connection with the operation of its business as now being conducted, all of
which are in full force and effect, not subject to any default and no suspension
or cancellation of any of which is threatened.
3.7. Financial Statements. Set forth on Schedule 3.7(a) are true,
correct and complete copies of the audited financial statements of the Company
meeting the form and content requirements of Section 3-05 of Regulation S-X
promulgated by the Securities and Exchange Commission (the "Commission") for
each of the three years ending December 31, 1994, 1995 and 1996. (All of the
audited financial statements referred to above in this Section 3.7 are
hereinafter collectively referred to as the "Company Financial Statements"). Set
forth on Schedule 3.7(b) are true, correct and complete copies of the unaudited
monthly financial statements of the Company (consisting of a balance sheet,
statement of income and statement of cash flow) for each of the four months
ended April 30, 1997. The Company Financial Statements have been prepared from
and are in accordance with the books and records of Company which are complete
and accurate, and the Company Financial Statements fairly present the financial
position, results of operations and changes in financial position of Company as
of the dates and for the periods indicated, in each case in accordance with
United States generally accepted accounting principles ("GAAP"). Company's
unaudited financial statements were prepared on a basis consistent with
Company's audited financial statements contained in the Company Financial
Statements, subject to normal, recurring year-end adjustments; provided,
however, that no such year-end adjustment shall have a Material Adverse Effect.
3.8. Absence of Undisclosed Liabilities. Except (i) as and to the
extent specifically reserved against (which reserves are adequate in amount) in
Company's audited balance sheet as of December 31, 1996, and in the notes to
such balance sheet for the period
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<PAGE> 12
then ended, (ii) liabilities which have been incurred since December 31, 1996,
in the ordinary course of business consistent with past practice and in a
commercially reasonable manner ("Ordinary Course of Business"), which
liabilities would not have a Material Adverse Effect and (iii) liabilities and
obligations specifically disclosed and quantified on Schedule 3.8, Company has
no liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise and whether due or to become due).
3.9. Absence of Certain Changes. Since December 31, 1996, there has not
been any change in or effect on the business, earnings, assets, liabilities,
financial or other condition or results of operations of Company that has a
Material Adverse Effect and no fact or condition exists or is reasonably
contemplated or threatened which Company or the Common Stockholder believes has
a reasonable probability of resulting in any change in or effect on the
business, earnings, assets, liabilities, financial or other condition, results
of operations of Company that has a Material Adverse Effect. Without limiting
the generality of the foregoing, since December 31, 1996, and except as set
forth on Schedule 3.9, there has not been, occurred or arisen with respect to
Company any: (a) amendment of its charter or Bylaws (or equivalent
organizational documents); (b) change in the number of shares of capital stock
issued and outstanding or issuance of any warrants, options or other securities
convertible or exercisable into shares of capital stock; (c) declaration,
setting aside, payment or distribution with respect to, or any split,
combination or reclassification of, shares of capital stock declared or made by
Company; (d) increase in the compensation or severance pay payable or to become
payable by Company to any Personnel who earned in 1996, or will earn in 1997 on
an annualized basis, annual compensation of $60,000 or more, or any increase of
general applicability in the compensation or severance pay payable to Personnel
(in each case, other than pursuant to existing corporate policies, practices and
procedures described in Schedule 3.9 hereto and as in effect on December 31,
1996), or employee welfare, pension, retirement, profit-sharing or similar
payment or arrangement made or agreed to by Company for any present or former
Personnel (except pursuant to the existing plans and arrangements described in
Schedule 3.9 hereto and as in effect on December 31, 1996, or as may be required
by applicable law); (e) significant labor trouble or any material controversy or
unsettled grievance pending or, to the best knowledge of Company, threatened
between Company and any Personnel or a collective bargaining organization
representing or seeking to represent Personnel; (f) encumbrance of any asset,
tangible or intangible, except as set forth on Schedule 3.9; (g) transfer,
lease, guarantee, mortgage, pledge, disposal, sale, assignment or transfer of
any material asset, tangible or intangible, or any conducting of business, in
each case, other than in the Ordinary Course of Business; (h) settlement or
compromise of any material claims or litigations or waiver, release or
assignment of any material rights with respect to the business of Company
whether or not in the Ordinary Course of Business; (i) cancellation, termination
or entering into of, or material modification to, any Contract (as defined in
Section 3.14); (j) material liability or loss incurred with respect to any of
the assets or the operations of the business of Company, except liabilities
incurred in the Ordinary Course of Business; (k) any capital expenditure or
authorization of any capital expenditure, acquisition of assets or execution of
any lease, or any incurring of liability therefor, requiring any payment or
payments in excess of $50,000 in the aggregate; (l) borrowing or lending of
money, issuing of debt securities or pledging the credit of the business of
Company or guaranteeing of any indebtedness of others by Company; (m) failure to
operate the business of Company in the Ordinary Course of Business so as to
preserve the business of Company intact, to keep available to SmarTalk and its
affiliates the services of the Personnel, and to preserve for SmarTalk and its
affiliates the goodwill of Company's suppliers, customers and others having
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<PAGE> 13
business relations with them; (n) loss of service of any Personnel that is or
are material, individually or in the aggregate, to the conduct of the business
of Company; (o) change in accounting practice of Company, except as required by
GAAP; (p) material cancellations by any supplier, customer or contractor; (q)
any material election with respect to Taxes; or (r) any agreement, arrangement
or understanding to do any of the foregoing.
3.10. Legal Proceedings, etc. Except as disclosed on Schedule 3.10,
there is neither (a) any civil, criminal, arbitral or administrative action,
suit, claim, hearing, investigation or proceeding pending or, to the best
knowledge of Company and the Common Stockholder, threatened against, relating to
or affecting (i) Company, (ii) Personnel in reference to actions taken by them
in such capacities or (iii) the transactions contemplated by this Agreement, nor
(b) any valid basis known to Company or such Stockholder for any such
litigation, proceeding or investigation, which, with respect to either clause
(a) or (b) above, if adversely determined could have a Material Adverse Effect
or adversely affect the ability of Company or such Stockholder to consummate the
transactions contemplated hereby. Except as disclosed on Schedule 3.10, there
are no judgements, decrees, injunctions, or orders of any Governmental Authority
outstanding against Company.
3.11. Properties. A list of all leases of real property to which
Company is a party and all of Company's other leased interests in real property
(the "Leasehold Interests") is set forth on Schedule 3.11 hereto. Except as set
forth on Schedule 3.11, neither the execution of this Agreement nor consummation
of the transactions contemplated hereby will require the consent of any landlord
or other person or entity in order to maintain in effect, without additional
consideration or obligation, the Leasehold Interests. Company owns no real
property.
3.12. Employee Benefit Plans. (a) All employee profit-sharing,
incentive, deferred compensation, welfare, pension, retirement, group insurance,
bonus, severance and other employee benefit plans (oral or written) and
agreements maintained or contributed to by Company for the benefit of current or
former Personnel or with respect to which the Company has liability, which
constitutes an "employee benefit plan" within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")
identifying which plans or arrangements (if any) provide benefits after
termination of employment are set forth on Schedule 3.12.
(b) The names and current annual rates of compensation
of all Personnel whose current aggregate annual rates of compensation are
$60,000 or more, together with a summary (containing estimates to the extent
necessary) of existing bonuses, additional incentive compensation (whether
current or deferred), if any, paid or payable to such persons as of April 30,
1997, are set forth on Schedule 3.12.
3.13. Taxes and Tax Returns. (a) Definitions:
"Affiliate" means, with respect to any specified person, a
person that directly or indirectly through one or more intermediaries,
controls, is controlled by or is under common control with, such
specified person, including, without limitation, each subsidiary.
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"Interim Period" means, with respect to any Taxable Period
that begins on or before the Closing Date and ends after the Closing
Date, the portion of such period that ends on the Closing Date.
"IRS" means the Internal Revenue Service.
"Pre-Closing Period" means (i) any Taxable Period that ends on
or before the Closing Date or (ii) with respect to any Taxable Period
that begins on or before and ends after the Closing Date, the portion
of such Taxable Period ending on the Closing Date.
"Post-Closing Period" means (i) any Taxable Period that begins
after the Closing Date or (ii) with respect to any Taxable Period that
begins on or before and ends after the Closing Date, the portion of
such Taxable Period beginning on the day following the Closing Date.
"Short Period" means any Taxable Period that ends on the
Closing Date.
"Tax Benefit" means the amount of the reduction in an
indemnified party's liability for Taxes realized (including recoveries
of Taxes through the carryover of net operating losses) as a result of
the payment or accrual of any loss, expense, or Tax.
"Tax Cost" means the amount of the increase in an indemnified
party's liability for Taxes (including decreases in Tax refunds and
credits) as a result of the payment or accrual of any loss, expense, or
Tax.
"Taxable Period" means any taxable year or any other period
that is treated as a taxable year (including any Short Period or
Interim Period) with respect to which any Tax may be imposed under any
applicable statute, rule, or regulation.
"Taxes" means all taxes, charges, fees, levies, or other
assessments, including, without limitation, income, gross receipts,
excise, real and personal property, sales, use, stamp, transfer,
license, payroll, franchise, Social Security, unemployment and
withholding taxes imposed or required to be withheld by the United
States or any state, local, or foreign government or subdivision or
agency thereof, and such term shall include any interest, penalties or
additions to tax, and any liability for taxes as a transferee or
successor under Code section 6901 (or any analogous provision of state,
foreign, or local law), by contract, or otherwise.
"Tax Reserve" shall have the meaning set forth in Section
3.13(d).
"Tax Return" means any report, return, or other information
required to be supplied to a taxing authority in connection with Taxes.
(b) Except as disclosed on Schedule 3.13(b), all Tax Returns
required to be filed with respect to the Company for all Taxable
Periods ending on or before the date hereof have been timely filed. All
such Tax Returns (i) were prepared in the manner required by
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<PAGE> 15
applicable law, (ii) are true, correct, and complete in all material respects,
and (iii) reflect the liability for Taxes of the Company. Except as set forth
on Schedule 3.13, all Taxes shown to be payable on such Tax Returns, and all
assessments of Tax made against the Company with respect to such Tax Returns,
have been paid when due.
(c) Except as disclosed on Schedule 3.13, true and complete copies of
the federal, state and local income Tax Returns of Company for the last three
years have been provided to SmarTalk prior to the date hereof. Except as
disclosed on Schedule 3.13, since the date of the interim financial statements
for the period ended April 30, 1997, the Company has not incurred any liability
for Taxes that would result in a decrease in the net worth of Company in excess
of $300,000.
(d) Except as set forth on Schedule 3.13, the Company has paid, has
caused to be paid, or has provided a sufficient reserve, including deferred Tax
assets and liabilities (the "Tax Reserve"), on the interim financial statements
for the period ended April 30, 1997, for the payment of all Taxes with respect
to all Taxable Periods, or portions thereof, ending on or before such date.
Schedule 3.13 lists each Tax accrued in the Tax Reserve set forth on the interim
financial statements for the portion of the Taxable Period ended April 30, 1997.
(e) Except as set forth on Schedule 3.13, Company has complied (and
until the date of Closing will comply) in all material respects with the
provisions of the Code relating to the withholding and payment of Taxes,
including, without limitation, the withholding and reporting requirements under
Code sections 1441 through 1464, 3401 through 3406, and 6041 through 6049, as
well as similar provisions under any other laws, and have, within the time and
in the manner prescribed by law, withheld from employee wages and paid over to
the proper governmental authorities all amounts required.
(f) Neither the federal income Tax Returns nor the state or local
income Tax Returns of Company have been examined by the IRS or relevant state
taxing authorities, except as set forth on Schedule 3.13. All deficiencies
asserted as a result of the examinations referred to on Schedule 3.13 have been
paid, and no issue has been raised by any federal, state, local or foreign
income tax authority in any such examination which, by application of the same
or similar principles to similar transactions, could reasonably be expected to
result in a proposed deficiency for any subsequent period which could have a
Material Adverse Effect. Further, to the best of Company's knowledge, no state
of facts exists or has existed which would constitute grounds for the assessment
of any material liability for Taxes. Except as described on Schedule 3.13, there
are no examinations or other administrative or court proceedings relating to
Taxes in progress or pending nor has Company received a revenue agent's report
asserting a tax deficiency. To the best of Company's knowledge, there are no
threatened actions, suits, proceedings, investigations or claims relating to or
asserted for Taxes of Company and there is no basis for any such claim.
(g) No material claim has ever been made in writing by an authority
with respect to the Company in a jurisdiction where the Company does not file
reports and returns that the Company is or may be subject to taxation by that
jurisdiction. There are no security interests on any of the assets of the
Company that arose in connection with any failure (or alleged failure) to pay
any Taxes and, except for liens for real and personal property Taxes that
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are not yet due and payable, there are no liens for any Tax upon any asset of
the Company. The Company has not entered into a closing agreement pursuant to
Section 7121 of the Code.
(h) Except as set forth on Schedule 3.13 hereto, no extension of time
with respect to any date on which a Tax Return was or is to be filed by the
Company is in force, and no waiver or agreement by the Company is in force for
the extension of time for the assessment or payment of any Taxes. Except as set
forth on Schedule 3.13, the Company has not granted a power of attorney to any
person with respect to any Taxable Period.
(i) The Company is not and has never been a member of an (i) affiliated
group (within the meaning of section 1504 of the Code), (ii) affiliated,
combined, consolidated, unitary, or similar group for state or local Tax
purposes, or (iii) controlled group as defined in Treasury Regulations Section
1.382-8T(e)(2).
(j) Except as set forth on Schedule 3.13(j), there are no outstanding
options, warrants, securities convertible into stock, or other contractual
obligations that might be treated for federal income tax purposes as stock or
another equity interest in the Company other than the stock that is the subject
of this Agreement.
(k) The Company has not agreed and is not required to include in income
any material adjustment under either section 481(a) or section 482 of the Code
(or an analogous provision of state, local, or foreign law) by reason of a
change in accounting or otherwise. The Company has not disposed of any material
property in a transaction being accounted for under the installment method
pursuant to Code section 453.
(l) The Company is not a party to any agreement to share Taxes with
respect to any Taxable Period.
(m) The amount of net operating loss carryovers available to the
Company (i) as of December 31, 1996 based on the Company Financial Statements
was no less than $7 million and (ii) as of April 30, 1997 (as estimated on an
unaudited basis and subject to normal adjustment on audit) was no less than $8.2
million. There are no limitations, as of the Closing Date, without giving effect
to this transaction, on the ability of the Company to use the carryovers
described in the preceding sentence or claim any otherwise deductible amounts
(including, without limitation, under sections 382, 383 and 384 of the Code).
(n) Company is not a party to any contract or agreement that,
individually or in the aggregate, or when taken together with any payment that
may be made under this Agreement or any agreements contemplated hereby
including, without limitation, the Employment Agreements and Non-Competition
Agreements, could give rise to the payment of any "excess parachute payment"
within the meaning of section 280G of the Code.
(o) Except as set forth on Schedule 3.13, Company is not a party to any
joint venture, partnership, or other arrangement or contract that could be
treated as a partnership for federal income tax purposes.
3.14. Agreements and Commitments. (a) Schedule 3.14 contains an
accurate list of all commitments, contracts, leases and agreements to which
Company is a party or by
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which it is bound which involves a commitment or obligation in excess of
$25,000 in the aggregate for each such commitment, contract, lease or agreement
or is otherwise material to the business of Company (including, without
limitation, joint venture or partnership agreements, employment agreements,
contracts, tenant leases, equipment leases, equipment maintenance agreements,
agreements with municipalities and labor organizations, loan agreements, bonds,
mortgages, liens or other security agreements, and any other agreement or
undertaking, written or otherwise (the "Contracts")). Company has delivered
true, correct and complete copies of such agreements to SmarTalk. Except as set
forth on Schedule 3.14, there are not: (i) any contracts or commitments which
involve a commitment or obligation in excess of $25,000 in the aggregate for
each such contract or commitment to which Company is a party or by which its
assets or operations are bound; (ii) any patent licensing agreements or any
other agreements, licenses or commitments with respect to patents, patent
applications, trademarks, trade names, service marks, technical assistance,
copyrights or other like terms affecting Company (other than computer software
licenses obtained in the Ordinary Course of Business); (iii) any contracts or
commitments providing for payments based in any manner on the revenues or
profits of Company; (iv) any contracts or commitments limiting the freedom of
Company to engage in any line of business or operate in any geographic area, or
to compete with any person or entity; (v) any instruments relating to
indebtedness for borrowed money, including any note, bond, deed of trust,
mortgage, indenture or agreement to borrow money or any agreement of guarantee
or indemnification, whether written or oral, in favor of any person or entity;
or (vi) any other contract or commitment, whether in the Ordinary Course of
Business or not, which involves future payments, performance of services or
delivery of goods or materials, to or by Company of any amount or value in
excess of $25,000 in the aggregate for each such contract or commitment.
(b) Except as set forth on Schedule 3.14 and as provided for in Section
3.4(b), none of the Contracts requires the consent of the other parties thereto
in order for it to be in full force and effect with respect to Company as
controlled by SmarTalk after the Closing or would give rise to the other party's
right to terminate any Contract as a result of the transactions contemplated
hereby; and Company will use its best efforts to obtain any required consents
prior to the Closing.
3.15. Intellectual Property. Company, directly or indirectly, possesses
or has adequate rights to all licenses, permits and all other franchises,
trademarks, trade names, service marks, inventions, patents, copyrights, and any
applications therefor, trade secrets, research and development, know-how,
technical data, computer software programs or applications and technology
systems necessary to operate their respective businesses and required by
applicable law (the "Intellectual Property"). Except as set forth on Schedule
3.15, all right, title and interest in and to each item of Intellectual Property
is owned by Company, is not subject to any license, royalty arrangement or
pending or, to the knowledge of the Company, threatened claim or dispute and is
valid and in full force and effect. Except as set forth on Schedule 3.15, none
of the Intellectual Property owned or, to the best knowledge of Company, used by
Company infringes any Intellectual Property right of any other entity and no
Intellectual Property owned by Company, to the best knowledge of Company, is
infringed upon by any other entity.
3.16. Change in Control Payments. Except as set forth on Schedule 3.16,
Company has no plans, programs, commitments, arrangements or Contracts to which
it is a party, or to which it is subject, pursuant to which payments may be
required or acceleration of benefits may be required upon change of control of
Company.
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3.17. Customer Relationships. Set forth on Schedule 3.17 hereto is a
complete list of Company's material customer relationships (the "Customer
List"). The Customer List includes all material terms of each such customer
relationship. Except as set forth on Schedule 3.17, the Company's relationship
with each such customer listed on the Customer List is (i) in good standing and
(ii) not currently subject to any dispute or disagreement of any kind whatsoever
which involves more than $100,000 with respect to such customer. Neither the
Company nor the Common Stockholder knows, or has reason to know, of any pending
or threatened termination of any customer relationship described on the Customer
List, or any re-bidding with respect thereto, as a result of the transactions
contemplated herein or otherwise, which termination or re-bidding would have a
Material Adverse Effect. The Company has made no proposals to, nor is involved
in any pending negotiations with, any person or entity with respect to
manufacturers development funds, co-op advertising or similar payments.
3.18. Assets. Except as set forth in Schedule 3.18, Company has good
and marketable title, free and clear of all liens and other encumbrances, to all
of its Assets (as hereinafter defined), except for any such liens and
encumbrances which would not have a Material Adverse Effect. The Assets of
Company include all Assets required to operate the businesses of the Company as
presently conducted. All tangible properties used in the businesses of Company
are in good condition, reasonable wear and tear excepted, and are usable in the
Ordinary Course of Business. As used in this Agreement, "Assets" shall mean all
of the assets, properties, business and rights of the Company of every kind,
nature, character and description, whether real, personal or mixed, tangible or
intangible, accrued or contingent, or otherwise relating to or utilized in
Company's business, directly or indirectly, in whole or in part, whether or not
carried on the books and records of Company, and whether or not owned in the
name of Company or any affiliate of Company wherever located.
3.19. Brokers and Finders. Except as set forth on Schedule 3.19,
neither Company nor the Common Stockholder has employed any broker or finder or
incurred any liability for any brokerage fees, commissions, finders' fees or
similar fees or expenses in connection with this Agreement and no broker or
finder has acted directly or indirectly for Company or such Stockholder in
connection with this Agreement or the transactions contemplated hereby and no
investment banking, financial advisory or similar fees have been incurred or are
or will be payable by Company or such Stockholder in connection with this
Agreement or the transactions contemplated hereby.
3.20. SmarTalk Capital Stock. Except as set forth on Schedule 3.20, the
Common Stockholder does not own or hold any right, title or interest in any of
the capital stock of SmarTalk.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF THE PREFERRED STOCKHOLDER
The Preferred Stockholder hereby represents and warrants to SmarTalk as
follows:
4.1. Capitalization. The authorized capital stock of Company consists
solely of 10,000,000 Common Shares, of which 500 are issued and outstanding, and
5,000,000
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Preferred Shares, of which 3,500 shares are designated as the Series A
Convertible Exchangeable Preferred Stock, and 3,500 of which shares are issued
and outstanding. Except as set forth in the preceding sentence, there are no
other shares of capital stock of the Company which are issued or outstanding.
All outstanding Company Shares have been validly issued and are fully paid,
non-assessable and are not subject to any preemptive rights. The issuance and
sale of all of such Company Shares have been in full compliance with all
applicable federal and state securities laws. Except as set forth in the
Stockholders Agreement (which Stockholders Agreement shall terminate as of the
Effective Time without any obligation or liability whatsoever on the part of
the Company or SmarTalk), Schedule 3.2 or in the Articles of Incorporation of
the Company, there are no subscriptions, options, warrants, calls, rights,
contracts, commitments, understandings, restrictions or arrangements relating
to the issuance, sale, transfer or voting of any Company Shares or any other
equity security of Company, including any rights of conversion or exchange
under any outstanding securities or other instruments. Except as set forth in
Schedule 3.2 or the Stockholders Agreement, there are no voting rights or other
agreements or understandings with respect to the Company Shares. The Preferred
Stockholder has good and valid title, beneficially and of record, to such
Stockholder's Company Shares in the amount set forth herein, free and clear of
all claims, liens, suits, proceedings, calls, proxies, charges, options,
security interests and encumbrance of any kind, except as set forth in the
Stockholders Agreement; and such Stockholder now has, and on the date of
Closing will have, full power and authority to exchange such Company Shares for
the SmarTalk Per Share Consideration.
4.2. Authority. (a) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby by the
Preferred Stockholder have been duly authorized by all requisite action, and no
other acts or proceedings on the part of such Stockholder or its members are
necessary to authorize this Agreement or the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by such
Stockholder and (assuming due authorization, execution and delivery by SmarTalk)
is the legal, valid and binding obligation of such Stockholder enforceable
against such Stockholder in accordance with its terms, except as enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights in general, or by
general principles of equity.
(b) Except as set forth in Schedule 4.2, neither the execution and
delivery by the Preferred Stockholder of this Agreement nor the consummation of
the transactions contemplated hereby nor compliance with any of the provisions
hereof will (i) conflict with or result in a breach of any provision of the
charter or Bylaws (or equivalent organization documents) of such Stockholder,
(ii) violate, conflict with, or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time or both,
would constitute a default) under, or result in the termination or in a right of
termination or cancellation of, or accelerate the performance required by, or
result in the creation of any encumbrance upon any of the properties of such
Stockholder or result in being declared void, voidable, without further binding
effect or subject to amendment or modification any of the terms, conditions or
provision of, any note, bond, mortgage, indenture, deed of trust, any license,
franchise, permit, lease, contract, agreement or other instrument or commitment
or obligation to which such Stockholder, or any of its respective properties may
be bound or affected, (iii) violate any order, writ, injunction, decree,
judgment, ruling, law, rule or regulation of any Governmental Authority,
applicable to such Stockholder, or any of its respective properties, or (iv)
require any consent, approval or authorization of, or notice to, or declaration,
filing or registration with, any person or entity
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except, in the case of clauses (ii), (iii) and (iv) above, as could not have a
Stockholder Material Adverse Effect (as hereinafter defined) on the ability of
such Stockholder to consummate the transactions contemplated hereby. As used
in this Agreement, a "Stockholder Material Adverse Effect" shall mean, in
respect of the Preferred Stockholder, any effect or change that is, or is
reasonably likely to be, materially adverse to the business, operations,
assets, financial condition or results of operations of such Stockholder.
4.3. SmarTalk Capital Stock. Except as set forth on Schedule 4.3, the
Preferred Stockholder does not own or hold any right, title or interest in any
of the capital stock of SmarTalk.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SMARTALK
SmarTalk represents and warrants to each Stockholder as follows:
5.1. Organization of SmarTalk and its Subsidiaries. Each of SmarTalk
and its subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation. Each of
SmarTalk and its subsidiaries has full corporate power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted therein, and each such entity is qualified to do business and is in
good standing in each jurisdiction (domestic, foreign or otherwise) in which
property owned, leased or operated by it or the nature of the business conducted
by it makes such qualification necessary (except for jurisdictions in which such
failure to be so qualified could not be reasonably likely to have a material
adverse effect on the business, earnings, assets, liabilities, financial or
other condition or results of operations of SmarTalk and its subsidiaries taken
as a whole).
5.2. Authority. (a) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby by
SmarTalk have been duly authorized by all requisite corporate action, and no
other acts or other proceedings on the part of SmarTalk or its shareholders are
necessary to authorize this Agreement or the transactions contemplated hereby.
This Agreement has been duly and validly executed by SmarTalk and (assuming the
due authorization, execution and delivery hereof and thereof by Company and the
Stockholders) constitutes the legal, valid and binding obligation of SmarTalk,
enforceable against SmarTalk in accordance with its terms, except as enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement of creditors' rights in general, or
by general principles of equity.
(b) Except as set forth in Schedule 5.2(b), neither the execution and
delivery by SmarTalk of this Agreement nor the consummation of the transactions
contemplated hereby nor compliance with any of the provisions hereof will (a)
conflict with or result in a breach of any provision of the charter or Bylaws of
SmarTalk, or any of its subsidiaries, (b) violate, conflict with, or result in a
breach of any provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, or result in
the termination or in a right of termination or cancellation of, or accelerate
the performance required by, or result in the creation of any encumbrance upon
any of the properties of SmarTalk or any of its subsidiaries or
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result in being declared void, voidable, without further binding effect or
subject to amendment or modification any of the terms, conditions or provision
of, any note, bond, mortgage, indenture, deed of trust, any license, franchise,
permit, lease, contract, agreement or other instrument or commitment or
obligation to which SmarTalk, any of its subsidiaries or any of their
respective properties may be bound or affected, (c) violate any order, writ,
injunction, decree, judgment, ruling, law, rule or regulation of any
Governmental Authority, applicable to SmarTalk or any of its subsidiaries or
any of their respective properties, or (d) except for obtaining the consents
approvals authorizations and permits of, and making filings or notifications
to, any Governmental Authority pursuant to the applicable requirements, if any,
of state securities laws and the rules and regulations promulgated thereunder,
require any consent, approval or authorization of, or notice to, or
declaration, filing or registration with, any person or entity except as would
not be reasonably likely to have a material adverse effect on the business,
earnings, assets, liabilities, financial or other condition or results of
operations of SmarTalk and its subsidiaries taken as a whole or on the ability
of SmarTalk to consummate the transactions contemplated hereby.
5.3. Capitalization. As of December 31, 1996, the authorized, issued
and outstanding capital stock of SmarTalk is as set forth in the Annual Report
of SmarTalk on Form 10-K for the year ended December 31, 1996 (the "Form 10-K"),
and as of April 18, 1997, there were 12,959,679 shares of SmarTalk Common Stock
issued and outstanding. All of the outstanding shares of capital stock of
SmarTalk have been duly authorized and are validly issued, fully paid and
non-assessable and have not been issued in violation of the preemptive or
similar rights of any stockholder of SmarTalk arising by operation of securities
laws or the Certificate of Incorporation or Bylaws of SmarTalk.
5.4. SEC Reports and Financial Statements. SmarTalk has furnished to
Company copies of the Form 10-K, Form 10-Q for the quarter ended March 31, 1997
and its proxy statement for the 1997 annual meeting of shareholders
(collectively, the "SEC Reports"), each as filed with the Commission, and as of
the date hereof, SmarTalk has filed no reports on Form 8-K with the Commission.
As of their respective dates, each SEC Report (i) complied as to form in all
material respects with the applicable requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and (ii) did not on the date of
filing or the date as of which information is set forth therein, contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The financial
statements (including any related schedules and/or notes) included in the SEC
Reports have been prepared in accordance with GAAP consistently applied (except
as may be indicated in the notes thereto) throughout the periods involved and
fairly present the financial position, results of operations and cash flows as
of the dates and for the periods indicated therein.
5.5. SmarTalk Common Stock; Subordinated Notes. The issuance and
delivery by SmarTalk of shares of SmarTalk Common Stock and the Subordinated
Notes have been duly and validly authorized by all necessary corporate action on
the part of SmarTalk. The shares of SmarTalk Common Stock to be issued in
connection herewith, when issued in accordance with the terms of this Agreement,
will be validly issued, fully paid and nonassessable, and the Subordinated Notes
to be issued in connection herewith, when issued in accordance with the terms of
this Agreement, will be validly issued debt obligations of SmarTalk, enforceable
against SmarTalk in accordance with their terms, except as enforcement thereof
may be limited
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by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
the enforcement of creditors' rights in general, or by general principles of
equity.
5.6. Brokers and Finders. Except as set forth on Schedule 5.6, SmarTalk
has not employed any broker or finder or incurred any liability for any
brokerage fees, commissions, finders' fees or similar fees or expenses in
connection with this Agreement and no broker or finder has acted directly or
indirectly for SmarTalk in connection with this Agreement or the transactions
contemplated hereby and no investment banking, financial advisory or similar
fees have been incurred or are or will be payable by SmarTalk in connection with
this Agreement or the transactions contemplated hereby.
5.7. Senior Indebtedness. As of the date hereof, SmarTalk has, and as
of the date of Closing will have, no more than $1,000,000 of Senior Indebtedness
(as defined in the Subordinated Note).
5.8. Acquisition of Company Shares. SmarTalk is acquiring the Company
Shares for investment purposes and not with a view to, or in connection with,
the sale or distribution thereof.
ARTICLE 6
COVENANTS
6.1. Access to Properties and Records; Confidentiality. (a) Between the
date of this Agreement and the Closing, the Company will permit SmarTalk's
authorized representatives reasonable access to any and all premises,
properties, contracts, comments, books, records and other information (including
Tax Returns filed and those in preparation) relating to the Company and will
cause its officers and employees to furnish to SmarTalk and its authorized
representatives any and all financial, technical and operating data and other
information pertaining to the business of the Company, as SmarTalk shall from
time to time reasonably request, and upon the request of SmarTalk, deliver to
SmarTalk true, correct and complete copies of all documents referred to in
Articles 3 and 4 or in any schedule delivered by the Company or the Stockholders
to SmarTalk in connection with this Agreement.
(b) SmarTalk will, and will use its best efforts to cause its employees
and agents to, hold in strict confidence, unless compelled to disclose by
judicial or administrative process or, in the opinion of counsel, by other
requirements of law, all Company Confidential Information (as hereinafter
defined); and SmarTalk will not disclose the Company Confidential Information to
any person, except as otherwise may reasonably be necessary to carry out the
transactions contemplated by this Agreement, including any business or due
diligence review by or on behalf of SmarTalk. If this Agreement is terminated,
then upon the Stockholders' written request SmarTalk will promptly return or
cause to be returned to the Company all documents and all copies thereof
furnished by the Company or the Stockholders and held by SmarTalk or its
representatives containing such Company Confidential Information. For the
purposes hereof, "Company Confidential Information" shall mean all information
of any kind concerning the Company or the Stockholders in connection with the
transactions contemplated by this Agreement except information (i) ascertainable
or obtained from public or published information, (ii) received from a third
party not known by SmarTalk to be under an obligation to the Company
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to keep such information confidential, (iii) which is or becomes known to the
public (other than through a breach of this Agreement), or (iv) which was in
SmarTalk's possession prior to disclosure thereof to SmarTalk in connection
herewith.
(c) Between the date of this Agreement and the Closing, SmarTalk will
permit the Stockholders' authorized representatives reasonable access to any and
all premises, properties, contracts, comments, books, records and other
information (including Tax Returns filed and those in preparation) relating to
SmarTalk and will cause its officers and employees to furnish to the
Stockholders and their authorized representatives any and all financial,
technical and operating data an other information pertaining to the business of
SmarTalk, as the Stockholders shall from time to time reasonably request, and
upon the request of the Stockholders, deliver to the Stockholders true, correct
and complete copies of all documents referred to in Article 5 or in any schedule
delivered by SmarTalk to the Stockholders or Company in connection with this
Agreement.
(d) The Stockholders and Company will, and will use their best efforts
to cause their employees and agents to, hold in strict confidence, unless
compelled to disclose by judicial or administrative process or, in the opinion
of counsel, by other requirements of law, all SmarTalk Confidential Information
(as hereinafter defined); and the Stockholders and Company will not disclose the
SmarTalk Confidential Information to any person, except as otherwise may
reasonably be necessary to carry out the transactions contemplated by this
Agreement, including any business or due diligence review by or on behalf of the
Stockholders and Company. If this Agreement is terminated, then upon SmarTalk's
written request the Stockholders and Company will promptly return or cause to be
returned to SmarTalk all documents and all copies thereof furnished by SmarTalk
and held by the Stockholders or Company or their representatives containing such
SmarTalk Confidential Information. For the purposes hereof, "SmarTalk
Confidential Information" shall mean all information of any kind concerning
SmarTalk in connection with the transactions contemplated by this Agreement
except information (i) ascertainable or obtained from public or published
information, (ii) received from a third party not known by the Stockholders or
Company to be under an obligation to SmarTalk to keep such information
confidential, (iii) which is or becomes known to the public (other than through
a breach of this Agreement), or (iv) which was in the Stockholders' or Company's
possession prior to disclosure thereof to the Stockholders or Company in
connection herewith.
6.2. Furnishing Information. (a) The Stockholders shall cause the
Company, promptly after the execution and delivery hereof, to furnish to
SmarTalk all information concerning the Company required for inclusion in any
statement or application made by SmarTalk to any Governmental Authority in
connection with the transactions contemplated by this Agreement.
(b) SmarTalk shall, promptly after the execution and delivery hereof,
furnish to Company all information concerning SmarTalk required for inclusion in
any statement or application made by Company to any Governmental Authority in
connection with the transactions contemplated by this Agreement.
6.3. Further Acts. Consistent with the terms and conditions hereof,
each party hereto will execute and deliver such instruments, certificates and
other documents and take
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such other action as any other party hereto may reasonably require in order to
carry out this Agreement and the transactions contemplated hereby.
6.4. Conduct of the Company Prior to the Closing. On and after the date
hereof and prior to the Closing, and except as set forth in Schedule 6.4 or as
otherwise consented to or approved by an authorized officer of SmarTalk in
writing or required by this Agreement, the Company will not act, or omit to act,
otherwise than in accordance with the following:
(a) The business, operations, activities and practices of the Company
shall be conducted only in the Ordinary Course of Business;
(b) No change shall be made in the charter or by-laws of the Company;
(c) No change shall be made in the number of shares of authorized or
issued capital stock of the Company; not shall any option, warrant, call, right,
commitment or agreement of any character be granted or made by the Company
relating to the capital stock or other securities of the Company; nor shall the
Company issue, grant or sell any securities or obligations convertible into or
exchangeable for shares of capital stock of the Company; nor shall the Company
enter into any other agreement with respect to any capital stock of the Company,
or any security convertible into or relating to any capital stock of the
Company;
(d) (i) Company shall not, directly or indirectly, solicit or encourage
(including by way of furnishing any non-public information concerning the
business, properties or assets of the Company), or enter into any negotiations
or discussions concerning, any Acquisition Proposal (as defined below). Company
will notify SmarTalk promptly by telephone, and thereafter promptly inform in
writing, if any such information is requested from, or any Acquisition Proposal
is received by, Company. In the event Company receives an Acquisition Proposal,
Company shall promptly inform the maker thereof of the existence of the
provisions of this Section 6.4(d)(i) and Company or its Board of Directors shall
reject such Acquisition Proposal;
(ii) On and after the date hereof and prior to the Closing,
the Stockholders shall not, directly or indirectly, solicit or encourage
(including by way of furnishing any non-public information concerning the
business, properties or assets of the Company), or enter into any negotiations
or discussions concerning, any Acquisition Proposal. The Stockholders will
notify SmarTalk promptly by telephone, and thereafter promptly confirm in
writing, if any such information is requested from, or any Acquisition Proposal
is received by, any Stockholder. In the event any Stockholder receives an
Acquisition Proposal, the Stockholder shall promptly inform the maker thereof of
the existence of the provisions of this Section 6.4(d)(ii) and the Stockholders
shall reject such Acquisition Proposal. As used in this Agreement, "Acquisition
Proposal" shall mean any proposal received by Company (or any of its affiliates,
officers or directors), or any Stockholder prior to the Closing for a merger or
other business combination involving Company or for the acquisition of, or the
acquisition of a substantial equity interest in, or all or a substantial portion
of the assets of, Company, other than as contemplated by this Agreement;
(e) Company shall not (i) incur any indebtedness; (ii) enter into any
agreement requiring the maintenance of a specified net worth; (iii) assume,
guarantee, endorse,
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or otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other individual, firm or corporation
(other than to customers for the performance of services or the sale of
products in the Ordinary Course of Business); or (iv) make any loans, advances
or capital contributions to, or investments in, any other individual, firm or
corporation (other than in the Ordinary Course of Business with respect to
collections from and deposits with customers); provided that none of the
foregoing shall be permitted with respect to any related party;
(f) Company shall use its best efforts to preserve the business
organization of Company intact, to keep available to SmarTalk the present
services of employees (except those employees terminated for cause) and to
preserve for SmarTalk the goodwill of suppliers, customers and others with whom
business relationships exist;
(g) Company shall use normal and commercially reasonable collection
efforts in respect of the accounts receivable recorded in the Company Financial
Statements and the monthly financial statements;
(h) Company shall take action with respect to the accounts payable
recorded in the Company Financial Statements and the monthly financial
statements in the Ordinary Course of Business;
(i) No change shall be made in any accounting principle or practice of
the Company, including but not limited to any change in the nature or method of
calculation of any reserve of any kind except as required by GAAP; and
(j) Company shall not take, agree to take or knowingly permit to be
taken any action or do or knowingly permit to be done anything in the conduct of
the business of the Company, or otherwise, which would be contrary to or in
breach of any of the terms or provisions of this Agreement, or which would cause
any of the representations of the Company contained herein to be or become
untrue in any respect.
(k) Company shall make no payments to any person or entity other than
payments made in the Ordinary Course of Business with respect to Company's
normal, ongoing business obligations.
6.5. Consents. SmarTalk will use, and the Stockholders will cause the
Company to use, their respective best efforts to obtain all permits, approvals,
authorizations and consents of all third parties necessary, or, in the
reasonable opinion of SmarTalk, desirable for the purpose of (i) consummating
the transactions contemplated hereby, or (ii) enabling the Company to continue
to conduct its business in the ordinary course after the Closing.
6.6. Interim Financial Statements. Within fifteen days after the end of
each calendar month after the date of this Agreement, the Stockholders will
cause the Company to deliver to SmarTalk unaudited income statements with
respect to the Company for such calendar month and the corresponding calendar
month of the preceding fiscal year. All such financial statements shall fairly
present the financial position, results of operations and changes in financial
position of the Company as at the dates or for the periods indicated. All
unaudited financial
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statements delivered pursuant to this Section shall be prepared on a basis
consistent with the Company Financial Statements.
6.7. Intercompany Accounts. Except as otherwise provided herein and
listed on Schedule 6.7, prior to the Closing, (a) all indebtedness and other
amounts owed by the Company or its affiliates to the Stockholders or by the
Stockholders to the Company or its affiliates shall be paid (whether or not then
due) or canceled; and (b) all liens, encumbrances or security interests relating
to any of the aforesaid indebtedness or amounts shall be canceled and shall be
discharged of record.
6.8. Applications. The Stockholders will cause the Company to cooperate
in all reasonable respects with SmarTalk in its application to obtain such
licenses, permits and governmental approvals as may be necessary in order for
SmarTalk to acquire and thereafter to operate the businesses of the Company. In
connection with each such application on the part of SmarTalk, the Stockholders
will cause the Company to furnish SmarTalk with such information and data as may
be necessary or desirable and shall otherwise assist SmarTalk in any reasonable
way requested.
6.9. Interim Operating Reporting. During the period from the date of
this Agreement to the Closing, the Company and its officers will confer on a
regular and frequent basis with one or more representatives of SmarTalk to
report material operational matters and to report the general status of on-going
operations. The Company shall notify SmarTalk in writing of any material adverse
change in the financial position, earnings or business of the Company after the
date hereof and prior to the Closing and any unexpected emergency or other
unanticipated change in the business of the Company and of any governmental
complaints, investigations or hearings or adjudicatory proceedings (or
communications indicating that the same may be contemplated) or of any other
matter and shall keep SmarTalk fully informed of such events and permit its
representatives to participate in all discussions relating thereto.
6.10. Assets Complete. The assets of the Company as of the Closing will
include all the equipment, inventory and other assets being presently used in
the conduct of or related to the businesses of the Company except those sold or
otherwise consumed after the date hereof in the Ordinary Course of Business.
6.11. Notice; Efforts to Remedy. Each party hereto shall promptly give
written notice to the other parties hereto upon becoming aware of the impending
occurrence of any event which would cause or constitute a breach of any of the
representations, warranties or covenants of the first such party contained or
referred to in this Agreement and shall use its best efforts to prevent or
promptly remedy the same. Upon a material breach of any representation, warranty
or covenant, the non-breaching party shall provide the breaching party written
notice (a "Notice") pursuant to Section 12.4 of such breach and the breaching
party shall have five (5) business days after the delivery of such Notice to
cure such breach before the nonbreaching party shall have the right to pursue
any remedy with respect thereto. Notwithstanding the foregoing, in the event of
any conflict between this Agreement and the Escrow Agreement, of even date
herewith (the "Escrow Agreement"), by and among SmarTalk and the Common
Stockholder, among others, with respect to amounts held in or disbursed from
escrow, the provisions of the Escrow Agreement shall supersede any such
conflicting provisions of this Agreement.
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6.12. Tax Covenants. (a) The Stockholders and Company shall refrain
from making any Tax election (including, without limitation, any election under
Section 338 of the Code or any similar provision of state or local law) without
the consent of SmarTalk, which consent shall not be unreasonably withheld.
(b) Company shall prepare and file or cause to be filed in a manner
consistent with past practice, with the approval of SmarTalk, which approval
shall not be unreasonably withheld, all Tax Returns (whether separate or
consolidated, combined, group or unitary Tax Returns that include the Company)
that are required to be filed (subject to permitted extensions) on or before the
date of Closing; and Company shall pay or cause to be paid all Taxes shown as
due, or required to be shown as due, on such Tax Returns.
(c) SmarTalk shall prepare and file (or cause to be prepared and filed)
all Tax Returns of or including Company other than those described in Section
6.12(b) hereof and SmarTalk shall pay all Taxes shown thereon, subject to any
right of indemnification of SmarTalk against the Common Stockholder pursuant to
Section 10.3.
(d) All transfer, documentary, sales, use, registration and other such
Taxes (including, without limitation, all applicable real estate transfer or
gains taxes and stock transfer Taxes), any penalties, interest and additions to
Tax and fees incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the Stockholders. Each party to this
Agreement shall cooperate in the timely making of all filings, returns, reports
and forms as may be required in connection therewith.
(e) For purposes of apportioning a Tax to any Short Period or Interim
Period, the parties hereto shall treat the date of Closing as the last day of
such Period (i.e., the parties shall "close the books" on such date) and shall
elect to do so if permitted by applicable law.
(f) All contracts, agreements, or intercompany account systems under
which Company may at any time have an obligation to share the payment of any
portion of a Tax (or any amount calculated with reference to any portion of a
Tax) shall be terminated with respect to Company as of the date of Closing, and
Company shall thereafter be released from any liability thereunder.
(g) After the Closing, the parties hereto shall (i) provide, and shall
cause each of their affiliates to provide, to the other party and its affiliates
(at the expense of the requesting party) such information relating to Company as
such party may reasonably request with respect to Tax matters and (ii) cooperate
with each other in the conduct of any audit or other proceeding with respect to
any Tax involving Company and shall retain or cause to be retained all books and
records pertinent to Company for each Taxable Period or portion thereof ending
on or prior to the date of Closing until the expiration of the applicable
statute of limitations (giving effect to any and all extensions and waivers).
(h) If any party to this Agreement receives any written notice from any
Taxing authority proposing an adjustment to any Tax for which any other party
hereto may be obligated to indemnify under this Agreement, such party shall give
prompt written notice thereof to the others that describes such proposed
adjustment in reasonable detail. The failure to give
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such notice, however, shall not reduce the obligations of a party hereunder
unless, and to the extent that, such failure prejudices the rights of the other
party to contest such Tax.
6.13. Consulting and Non-Competition Agreement; Release; Escrow
Agreement. SmarTalk and the Common Stockholder shall execute and deliver a
Consulting and Non-Competition Agreement, substantially in the form attached
hereto as Exhibit C. The Common Stockholder shall execute and deliver to
SmarTalk a general release as contemplated by Section 7.11. The Common
Stockholder and SmarTalk shall execute and deliver to each other an Escrow
Agreement as contemplated by Section 7.12.
ARTICLE 7
CONDITIONS TO THE OBLIGATIONS OF SMARTALK
The obligations of SmarTalk under this Agreement shall be subject to
the satisfaction, at or prior to the Closing, of each of the following
conditions, each of which may be waived by SmarTalk as provided herein:
7.1. Representations and Warranties True. The representations and
warranties of the Stockholders and Company contained in this Agreement shall be
true and correct on the date hereof and shall be deemed to have been made again
at and as of the Closing and shall then also be true and correct.
7.2. Performance of Obligations. Each of the obligations of the
Stockholders and Company to be performed by them on or before the Closing
pursuant to the terms hereof shall have been duly performed and complied with by
the time of Closing.
7.3. Consents. All notices to, and consents, authorizations, approvals
and waivers from, third parties listed on Schedule 7.3 required to consummate
the transactions contemplated hereby shall have been made and obtained.
7.4. Customer Agreements. The Company shall have entered into an
agreement with each of Eckerd Drug Company, Ralphs, Food4Less and Dominicks,
which shall be in each case in form and substance satisfactory to SmarTalk in
its sole discretion.
7.5. Legal Opinion. SmarTalk shall have been furnished with the
opinions of Latham & Watkins and Grocock, Loftis & Abramson, counsel to the
Stockholders and Company, as the case may be, dated the date of Closing,
substantially in the form attached hereto as Exhibit D.
7.6. Absence of Litigation, etc. There shall not be threatened,
instituted or pending any suit, action, investigation, inquiry or other
proceeding by or before any Governmental Authority seeking an order, judgment or
decree which, in the reasonable judgment of SmarTalk, would if issued restrain,
prohibit or render unlawful the consummation of the transactions contemplated
hereby, or any of them, or require rescission of this Agreement, or any of such
transactions; no such action shall seek damages in a material amount by reason
of the transactions contemplated hereby, or any of them; nor shall there be in
effect any injunction, writ, preliminary restraining order or any order of any
nature issued by a court of competent
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jurisdiction directing that the transactions provided for herein, or any of
them, not be consummated as so provided. Also, no substantive legal objection
to the transactions contemplated by this Agreement shall have been received
from or threatened by any Governmental Authority.
7.7. Adverse Changes. There shall not have occurred after April 30,
1997, any change in or effect on the Company that would have a Material Adverse
Effect.
7.8. Resignations. Company shall have delivered to SmarTalk the
resignations of all of the officers and directors of Company.
7.9. Proceedings and Documents Satisfactory. SmarTalk shall have
received such certificates, opinions, updated Schedules and other documents as
it or its counsel may reasonably require in order to consummate the transactions
contemplated hereby, all of which shall be in form and substance satisfactory to
it and its counsel. All proceedings in connection with the purchase of Company
Shares set forth herein and all certificates and documents delivered to SmarTalk
pursuant to this Agreement shall be satisfactory in form and substance to
SmarTalk and its counsel acting reasonably and in good faith.
7.10. Delivery of Certain Documents. At the Closing, the Stockholders
shall have caused Company to deliver to SmarTalk copies of the Articles of
Incorporation of the Company certified (not more than 30 days prior to the date
of Closing) by the appropriate governmental authority of the state of Florida.
7.11. Consulting and Non-Competition Agreement; Releases. (a) The
Common Stockholder shall have executed and delivered to SmarTalk a Consulting
and Non-Competition Agreement, substantially in the form attached hereto as
Exhibit C.
(b) Each of the Common Stockholder and the Preferred Stockholder shall
have delivered to SmarTalk a complete and general release, in form and substance
reasonably satisfactory to SmarTalk and its counsel of all claims against the
Company for any matter or thing whenever arising.
7.12. Escrow Agreement. The Common Stockholder shall have executed and
delivered to SmarTalk an Escrow Agreement, in form and substance reasonably
satisfactory to SmarTalk.
7.13. Full Sale. Each Stockholder shall have fully sold to SmarTalk all
of his or its Company Shares for the SmarTalk Per Share Consideration and/or the
SmarTalk Per Preferred Share Consideration, as the case may be, pursuant to
Section 2.2 hereof, it being understood and agreed that the obligations of
SmarTalk to consummate the purchase of Company Shares set forth herein are
conditioned upon full sale by each of the Stockholders of all of their Company
Shares so that upon Closing the Company becomes a wholly-owned subsidiary of
SmarTalk (subject in any event to the release of the security interest on the
Common Shares held in the treasury of the Company).
7.14. FIRPTA Certificate. The Company shall have furnished to SmarTalk
a certification in accordance with Treasury Regulations Section 1.1445-2(b)(3)
certifying that stock
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in the Company is not a real property interest because the Company is not and
has not been a United States real property holding corporation (as defined in
Section 897(c)(2) of the Code) during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code, substantially in the form attached hereto
as Exhibit E.
ARTICLE 8
CONDITIONS TO THE OBLIGATIONS OF THE STOCKHOLDERS AND COMPANY
The obligations of the Stockholders and Company under this Agreement
shall be subject to the satisfaction, at or prior to the Closing, of each of the
following conditions, each of which may be waived by the Stockholders and
Company as provided herein:
8.1. Representations and Warranties True. The representations
and warranties of SmarTalk contained in this Agreement shall be true and correct
on the date hereof and shall be deemed to have been made again at and as of the
Closing and shall then also be true and correct except for changes permitted or
contemplated by this Agreement.
8.2. Performance of Obligations. Each of the obligations of
SmarTalk to be performed by it on or before the Closing pursuant to the terms
hereof shall have been duly performed and complied with by the time of Closing.
8.3. Legal Opinion. The Stockholders shall have been furnished
with the opinion of Dewey Ballantine, counsel to SmarTalk, dated the date of
Closing, substantially in the form attached hereto as Exhibit F.
8.4. Absence of Litigation, etc. There shall not be threatened,
instituted or pending any suit, action, investigation, inquiry or other
proceeding by or before any Governmental Authority seeking an order, judgment or
decree which, in the reasonable judgment of the Stockholders, would if issued
restrain, prohibit or render unlawful the consummation of the transactions
contemplated hereby, or any of them, or require rescission of this Agreement, or
any of such transactions; no such action shall seek damages in a material amount
by reason of the transactions contemplated hereby, or any of them; nor shall
there be in effect any injunction, writ, preliminary restraining order or any
order of any nature issued by a court of competent jurisdiction directing that
the transactions provided for herein, or any of them, not be consummated as so
provided. Also, no substantive legal objection to the transactions contemplated
by this Agreement shall have been received from or threatened by any
Governmental Authority.
8.5. Consulting and Non-Competition Agreement. SmarTalk shall
have executed and delivered to the Common Stockholder a Consulting and
Non-Competition Agreement, substantially in the form attached hereto as Exhibit
C.
8.6. Subordinated Note. SmarTalk shall have executed and
delivered to each of the Stockholders and Financial Innovations the Subordinated
Notes required by Section 2.2 hereof.
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8.7. Common Stock. SmarTalk shall deliver or cause to be
delivered to the Stockholders and Financial Innovations certificates of SmarTalk
Common Stock in the denominations required pursuant to Section 2.2 hereof.
8.8. Registration Rights Agreement. SmarTalk shall have
executed and delivered to the Stockholders the Registration Rights Agreement,
substantially in the form attached hereto as Exhibit G.
8.9. Adverse Changes. There shall not have occurred after March
31, 1997, any change in or effect on SmarTalk that would have, or with
reasonable certainty could have, a material adverse effect upon the business,
operations, assets, financial condition or results of operations of SmarTalk,
other than with respect to acquisition transactions.
ARTICLE 9
CERTAIN ACTIVITIES AT CLOSING
9.1. Delivery by the Stockholders and Company. In addition to
the documents and activities mentioned above, at the Closing, the Stockholders
and Company shall deliver to SmarTalk:
(a) a certificate, dated the date of Closing, signed by the
Common Stockholder and by the President of the Company in
his corporate capacity stating that from the date hereof to
the Closing, (i) no event shall have occurred or have been
threatened which has or could have a Material Adverse
Effect upon the Company; (ii) there has been no change in
the Articles of Incorporation or Bylaws of the Company;
(iii) the representations and warranties of such
Stockholder and Company contained in Article 3 of this
Agreement were and are true at the date of this Agreement
and on the date of Closing and that such Stockholder and
Company have performed or complied with all covenants and
conditions required by this Agreement to be performed or
complied with by such Stockholder and Company prior to or
at the Closing, and (iii) each of the conditions set forth
in Article 8 has been satisfied or waived;
(b) a certificate, dated the date of Closing, signed by an
authorized officer of the Preferred Stockholder stating
that from the date hereof to the Closing, (i) the
representations and warranties of such Stockholder
contained in Article 4 of this Agreement were and are true
at the date of this Agreement and on the date of Closing
and that such Stockholder has performed or complied with
all covenants and conditions required by this Agreement to
be performed or complied with by such Stockholder prior to
or at the Closing, and (ii) each of the conditions set
forth in Article 8 has been satisfied or waived;
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<PAGE> 32
(c) all other previously undelivered documents required to be
delivered by the Company to SmarTalk at or prior to the
Closing by the terms and provisions of this Agreement; and
(d) any other document reasonably requested by counsel for
SmarTalk or necessary for the consummation of the
transactions contemplated by this Agreement.
9.2. Delivery by SmarTalk. In addition to the documents and activities
mentioned above, at the Closing SmarTalk shall deliver to the Stockholders a
certificate, dated the date of Closing, signed by the President or a Vice
President of SmarTalk, in his corporate capacity, stating that from the date
hereof to the Closing, (i) the representations and warranties of SmarTalk
contained in Article 5 of this Agreement were and are true at the date of this
Agreement and on the date of Closing and that SmarTalk has performed or complied
with all covenants and conditions required by this Agreement to be performed or
complied with by SmarTalk prior to or at the Closing, and (ii) each of the
conditions set forth in Article 7 has been satisfied or waived.
ARTICLE 10
INDEMNIFICATIONS
10.1. Indemnification. (a) The Preferred Stockholder hereby agrees to
indemnify and hold harmless SmarTalk and its directors, officers, agents and
employees (each, a "SmarTalk Indemnified Person") from and against and to pay
any losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) ("Damages") to which such SmarTalk Indemnified Person may become
subject as the result of any misrepresentation, or breach of warranty with
respect to the representations and warranties set forth in Article 4 and will
reimburse any SmarTalk Indemnified Person for all expenses (including reasonable
counsel and expert fees) as they are incurred by any such SmarTalk Indemnified
Person in connection with any such misrepresentation or breach of warranty or
investigating, preparing or defending any such action or proceeding, whether
pending or threatened, and whether or not such SmarTalk Indemnified Person is a
party hereto. The Preferred Stockholder will not be responsible for any Damages
or expenses to the extent that a court of competent jurisdiction shall have
finally determined that such Damages or expenses resulted primarily from such
SmarTalk Indemnified Person's bad faith or gross negligence or material breach
of this Agreement. The agreement of such Stockholder in this Section 10.1(a)
shall be in addition to any liability such Stockholder may otherwise have.
Notwithstanding the foregoing, the Preferred Stockholder shall have no
obligation to indemnify a SmarTalk Indemnified Person, or otherwise have
liability under this Agreement, with respect to the representations and
warranties contained in Section 4.1 (except for the last sentence thereof)
except to the extent that the SmarTalk Indemnified Persons have reasonably
exhausted, with respect to any breach of such representations and warranties,
all available offsets and escrowed amounts available against the Common
Stockholder under this Agreement or under the Subordinated Note.
(b) The Common Stockholder hereby agrees to indemnify and hold harmless
any SmarTalk Indemnified Person from and against and to pay any Damages to which
such SmarTalk Indemnified Person may become subject as the result of a
Stockholder Liability (as
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<PAGE> 33
defined below) or any misrepresentation, or breach of warranty or covenant made
or to be performed on the part of such Stockholder or Company under this
Agreement, and will reimburse any SmarTalk Indemnified Person for all expenses
(including reasonable counsel and expert fees) as they are incurred by any such
SmarTalk Indemnified Person in connection with any such misrepresentation or
breach of warranty or covenant or investigating, preparing or defending any
such action or proceeding, whether pending or threatened, and whether or not
such SmarTalk Indemnified Person is a party hereto. Notwithstanding any other
provision of this Agreement, the Common Stockholder agrees to indemnify and
hold harmless SmarTalk as follows: for every two dollars ($2.00) of expense
incurred by SmarTalk or the Company after the date of Closing with respect to
bringing the Company into regulatory compliance, SmarTalk shall be entitled to
reduce by three dollars ($3.00) the Subordinated Note held by the Common
Stockholder. The Escrow Fund (as defined in the Escrow Agreement) shall be
applied first to satisfy any claim against the Common Stockholder which
SmarTalk may have pursuant to this Section 10.1(b) or any other provision of
this Agreement or the agreements appended hereto. The Common Stockholder will
not be responsible for any Damages or expenses to the extent that a court of
competent jurisdiction shall have finally determined that such Damages or
expenses resulted primarily from such SmarTalk Indemnified Person's bad faith
or gross negligence or material breach of this Agreement. As used herein,
"Stockholder Liability" means any item expressly identified as a Stockholder
Liability or Stockholder Indemnity on any schedule to this Agreement, for which
the Common Stockholder shall retain liability notwithstanding the disclosure
thereof on any such schedule.
(c) SmarTalk hereby agrees to indemnify and hold harmless the
Stockholders and the Company and its respective directors, officers, agents,
employees, heirs, representatives, successors and assigns (each, a "Company
Indemnified Person") from and against and to pay any Damages to which such
Company Indemnified Person may become subject as the result of any
misrepresentation, breach of warranty or covenant made or to be performed on the
part of the SmarTalk under this Agreement, and will reimburse any Company
Indemnified Person for all expenses (including reasonable counsel and expert
fees) as they are incurred by any such Company Indemnified Person in connection
with any such misrepresentation or breach of warranty or covenant or
investigating, preparing or defending any such action or proceeding, whether
pending or threatened, and whether or not such Company Indemnified Person is a
party hereto. SmarTalk will not be responsible for any Damages or expenses to
the extent that a court of competent jurisdiction shall have finally determined
that such Damages or expenses resulted primarily from such Company Indemnified
Person's bad faith or gross negligence or material breach of this Agreement.
With respect to the guarantees listed on Schedule 10.1(c), SmarTalk further
agrees to indemnify and hold harmless the Common Stockholder for any liabilities
incurred thereunder after the date of Closing. In addition, SmarTalk shall
either obtain a release of the Common Stockholder's guarantee, or irrevocably
tender payment of the underlying debt pertaining thereto, (i) on or before July
1, 1997 with respect to the Financing Agreement, dated January 30, 1997, between
the Company and WorldCom Network Services, Inc., and (ii) on or before June 6,
1997 with respect to the Promissory Note, dated as of October 23, 1995, for the
principal amount of $1,000,000 in favor of Fernando L. Sabino. In the event
SmarTalk fails to obtain the release or repay the underlying debt as required by
clause (i) or (ii) in the preceding sentence, the Common Stockholder's
Subordinated Note shall be accelerated and SmarTalk shall promptly pay such
amount to the Common Stockholder.
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(d) The indemnification obligations of the Stockholders under Sections
10.1 and 10.3(a) shall not apply to any Damages being indemnified thereunder
until the aggregate of all Damages of the SmarTalk Indemnified Person(s) shall
exceed $100,000, and then only to the extent of such excess. Except in the case
of Sections 3.1, 3.2 and 3.8 and any misrepresentations resulting from fraud or
willful misconduct, the indemnification obligations of the Common Stockholder to
SmarTalk hereunder shall not exceed $19,475,000 (the "Maximum Indemnification");
provided that to the extent that SmarTalk purchases any or all of the Common
Stockholder's Subordinated Note at a discount, the Maximum Indemnification shall
be reduced by the amount of such discount. Notwithstanding any other provision
of this Agreement, any reduction in the Maximum Indemnification shall first be
applied against the Subordinated Note not held in escrow pursuant to the Escrow
Agreement.
10.2. Indemnification Procedure. (a) The party or parties being
indemnified are referred to herein as the "Indemnified Party" and the
indemnifying party is referred to herein as the "Indemnifying Party."
(b) The Indemnified Party shall give prompt written notice
("Indemnification Notice") to the Indemnifying Party after discovery by the
Indemnified Party of any matters giving rise to a claim for indemnification or
reimbursement under this Agreement; provided, however, that if no prejudice
results from a failure to deliver prompt notice of a claim, no penalty shall be
exacted therefor and the Indemnified Party shall continue to be entitled to
indemnification.
(c) In the event that the Indemnifying Party advises the Indemnified
Party that the Indemnifying Party will contest a claim for indemnification
hereunder, or fails, within thirty (30) days of receipt of any Indemnification
Notice to notify, in writing, the Indemnified Party of its election to defend,
settle or compromise, at its sole cost and expense, any action or claim (or
discontinues its defense at any time after it commences such defense), then the
Indemnified Party may, at its option, defend, settle or otherwise compromise or
pay such action or claim. In any event, unless and until the Indemnifying Party
elects in writing to assume and does so assume the defense of any such claim or
action, the Indemnified Party's costs and expenses arising out of the defense,
settlement or compromise of any such action or claim shall be Damages subject to
indemnification hereunder.
(d) The Indemnified Party shall reasonably cooperate with the
Indemnifying Party in connection with any negotiation or defense of any such
action or claim by the Indemnifying Party and shall furnish to the Indemnifying
Party all information reasonably available to the Indemnifying Party which
relates to such action or claim. The Indemnifying Party, if the defending party,
shall keep the Indemnified Party fully apprised at all times as to the status of
the defense or any settlement negotiations with respect thereto. If the
Indemnifying Party elects to defend any such action or claim, then the
Indemnified Party shall be entitled to participate in such defense with counsel
of its choice at its sole cost and expense. If the Indemnifying Party does not
assume the defense, the Indemnified Party shall use reasonable efforts to keep
the Indemnifying Party apprised at all times as to the status of the defense.
Payment of indemnification amounts hereunder shall be made to the person
specified by the Indemnified Party. Anything in this Section 10.2 to the
contrary notwithstanding, no person shall, without each of the parties' prior
written consent, settle or compromise any claim or consent to entry of any
judgment in respect thereof which imposes any future obligation on any
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other party or which does not include, as an unconditional term thereof, the
giving by the claimant or the plaintiff to the other parties, a release from
all liability in respect of such claim.
10.3. Tax Indemnifications. (a) The Common Stockholder shall indemnify,
defend and hold harmless SmarTalk, the Company and their respective officers,
directors, employees and agents (each, a "Tax Indemnitee") from and against, and
shall reimburse each Tax Indemnitee for, any and all Taxes (including, without
limitation, reasonable expenses of investigation and reasonable attorneys' and
accountants' fees and expenses in connection with any action, suit or
proceeding) actually incurred or suffered at any time by any Tax Indemnitee
arising out of or attributable to (i) any misrepresentation, inaccuracy or
breach of any representation, warranty, covenant, agreement or promise related
to Taxes by such Stockholder and/or the Company contained in this Agreement (or
in any certificate, document, list or schedule delivered to SmarTalk by the
Stockholders or Company hereunder), (ii) any and all unpaid Taxes for any
Taxable Period, or portion thereof, ending on or before the date of Closing
except to the extent that such Taxes are set forth in the specific amounts on
Schedule 3.13 or in the Tax Reserve accrued on the interim financial statements
for the period ended April 30, 1997 or are attributable to any transaction that
both (x) occurs on the date of Closing but after the Closing and (y) is not in
the Ordinary Course of Business, or (iii) any and all unpaid Taxes, whether
determined on a separate, consolidated, combined, or unitary basis, including
any penalties and interest in respect thereof, of the Company (A) pursuant to
Treasury Regulations Section 1.1502-6 or any comparable provision of state,
local, or foreign law with respect to any Taxable Period beginning before the
date of Closing and (B) pursuant to any guaranty, indemnification, Tax sharing,
or similar agreement made on or before the date of Closing relating to the
sharing of liability for, or payment of, Taxes. The foregoing indemnity shall
not apply to Taxes imposed on the Company as a result of any election by the
Company or SmarTalk under Section 338 of the Code made on or after the Closing.
(b) Any Tax or other amount for which indemnification is provided under
this Agreement shall be (i) increased to take account of any net Tax Cost
incurred by the indemnified party arising from the receipt of indemnity payments
hereunder (i.e., grossed-up for any Tax incurred on such increase) and (ii)
reduced to take account of any net Tax Benefit realized by the indemnified party
arising from the incurrence or payment of any such Tax or other amount. The
parties hereto agree that, except as prohibited by applicable law, all indemnity
payments hereunder shall be treated as adjustments to the applicable SmarTalk
Per Share Consideration.
(c) The indemnitor and its duly appointed representatives shall have
the sole right to negotiate, resolve, settle, or contest any claim for Tax made
by a Taxing authority with respect to which the indemnitor has agreed to
indemnify a Tax Indemnitee under this Section 10.3; provided, however, that the
indemnitor shall not initiate any claim, settle any issue, file any amended Tax
Return, take or advocate any position or otherwise take any action that could
adversely affect the Tax Indemnitee or any of its affiliates, without the
written consent of the Tax Indemnitee, which consent shall not be unreasonably
withheld. If the indemnitor does not assume the defense of a claim for the Tax
made by a Taxing authority with respect to which the indemnitor has indemnified
a Tax Indemnitee under Section 10.3, the Tax Indemnitee may defend the same at
the reasonable expense of the indemnitor in such manner as it may deem
appropriate, including, but not limited to, settling such audit or proceeding
with the consent of the indemnitor, which consent shall not be unreasonably
withheld.
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10.4. Off-Sets, Escrow, etc. No off-sets, set-asides or amounts placed
in escrow as permitted pursuant to the Subordinated Notes or any Escrow
Agreement shall limit or restrict the indemnifications provided in this Article
10, except as expressly provided in Section 10.1(a) or 10.1(d) or the last
sentence of Section 10.3(a).
ARTICLE 11
TERMINATION
11.1. Optional Termination. This Agreement may be terminated at any
time prior to the Closing as follows:
(i) by the mutual consent of SmarTalk and the Stockholders;
(ii) by SmarTalk at any time after thirty (30) days from the
date hereof if, by that date, any of the conditions set
forth in Article 7 shall not have been satisfied or waived;
(iii) by the Stockholders at any time after thirty (30) days from
the date hereof if, by that date, any of the conditions set
forth in Article 8 shall not have been satisfied or waived;
(iv) by either the Company or SmarTalk, if any court of
competent jurisdiction in the United States or other United
States governmental body shall have issued an order, decree
or ruling or taken any other action restraining, enjoining
or otherwise prohibiting the transactions contemplated
hereby and such order, decree, ruling or other action shall
have become final and non-appealable.
11.2. Notice of Abandonment. In the event of any termination pursuant
to Section 11.1, written notice shall forthwith be given to the other party
hereto except with respect to a termination pursuant to Section 11.1(i).
11.3. Mandatory Termination. If the Closing has not occurred by June
30, 1997 this Agreement shall automatically terminate and no longer be of any
force or effect, unless extended by the written agreement of SmarTalk and the
Stockholders.
11.4. Effect of Termination. Except for the confidentiality obligations
contained in Section 6.1 and expense obligations in Section 12.1 hereof, upon
the termination of this Agreement pursuant to Sections 11.1 or 11.3 hereof, this
Agreement shall forthwith become null and void, and no party hereto or any of
its officers, directors or shareholders shall have any liability hereunder.
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ARTICLE 12
MISCELLANEOUS
12.1. Expenses. All expenses of the preparation of this Agreement and
of the purchase of Company Shares set forth herein, including, without
limitation, counsel fees, accounting fees, investment advisor's fees and
disbursements, shall be borne by the respective parties incurring such expense,
whether or not such transactions are consummated. At the Closing, the
Stockholders will pay (i) all legal fees and expenses of the Company and of the
Stockholders in connection with the transactions provided for herein; (ii) the
accounting fees and expenses in connection with the transactions provided for
herein including, without limitation, the expenses incurred in the audit of the
Company Financial Statements provided for in Section 3.7 and (iii) any stock
transfer tax payable upon the transfer of Company Shares to SmarTalk; provided,
however, that SmarTalk shall pay the fees of Gruntal & Company as set forth on
Schedule 3.16; provided further that SmarTalk shall pay up to $200,000 to an
account or accounts jointly designated by the Common Stockholder and the
Preferred Stockholder.
12.2. Schedules. All Schedules, Appendices, exhibits and documents to
be delivered as referred to in this Agreement are integral parts of this
Agreement as if fully set forth herein and all statements of fact appearing
therein shall be deemed to be representations by the party making such
statement. All items disclosed hereunder shall be deemed disclosed only in
connection with the specific representation to which they are explicitly
referenced.
12.3. Headings. The descriptive headings of the several Articles and
Sections of this Agreement and the Table of Contents are inserted for
convenience only and do not constitute a part of this Agreement.
12.4. Notices. Any notices or other communications required or
permitted hereunder shall be given in writing and shall be delivered or sent by
hand or by certified or registered mail, postage prepaid, addressed as follows:
If to SmarTalk, to:
SmarTalk TeleServices, Inc.
1640 South Sepulveda, Suite 500
Los Angeles, California 90025
Attention: Erich L. Spangenberg
Facsimile: (310) 444-8822
Copy to:
Dewey Ballantine
333 South Hope Street, Suite 3000
Los Angeles, California 90071
Attention: Robert M. Smith
Facsimile: (213) 625-0562
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If to the Preferred Stockholder, to:
Waterton Investment Group I, LLC
10000 Santa Monica Boulevard, 5th Floor
Los Angeles, California 90067
Attention: Kenneth J. Abdalla
Facsimile: (310) 789-7218
Copy to:
Latham & Watkins
633 West Fifth Street, Suite 4000
Los Angeles, California 90071
Attention: Robert A. Koenig
Facsimile: (213) 891-8763
If to the Common Stockholder, to:
William R. Harger
c/o William Pringle
7380 Sand Lake Road, Suite 350
Orlando, Florida 32819
Facsimile: (407) 352-4515
Copy to:
Grocock, Loftis & Abramson
126 East Jefferson, Suite 200
Orlando, Florida 32801
Attention: J. Bennett Grocock
Facsimile: (407) 425-0032
or to such other address as shall be furnished in writing by such party, and
any such notice or communication shall be effective and be deemed to have been
given as of the date on which so hand-delivered or on the third business day
following the date on which so mailed; provided that any notice or
communications changing any of the addresses set forth above shall be effective
and deemed given only upon its receipt.
12.5. Assignment. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests, or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties,
except that SmarTalk may assign any or all of its rights, interests and
obligations hereunder to a direct or indirect wholly-owned subsidiary of
SmarTalk, provided that any such
33
<PAGE> 39
subsidiary agrees in writing to be bound by all of the terms, conditions and
provisions contained herein, and that SmarTalk remains obligated for the
performance of all of the obligations so assigned.
12.6. Complete Agreement. This Agreement, including, without
limitation, the Schedules, Exhibits and Appendices, contains the entire
understanding of the parties with respect to the transactions contemplated
hereby and supersede all prior arrangements or understandings with respect
thereto. There are no restrictions, agreements, promises, warranties, covenants
or undertakings other than those expressly set forth herein.
12.7. Modifications, Amendments and Waivers. At any time prior to the
Closing, to the extent permitted by law, (i) the parties hereto may, by written
agreement, modify, amend or supplement any term or provision of this Agreement
and (ii) any term or provision of this Agreement may be waived by the party
which is entitled to the benefits thereof.
12.8. Counterparts. This Agreement may be executed in two or more
counterparts all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
12.9. Governing Law. This Agreement shall be governed by the
substantive laws of the State of California (without regard to such state's
principles of conflicts of law) as to all matters, including but not limited to
matters of validity, construction, effect and performance.
12.10. Press Releases. SmarTalk and the Stockholders shall consult with
each other in releasing information concerning this Agreement and the
transactions contemplated hereby. Each of the parties to this Agreement shall
furnish to others drafts of all releases prior to publication. Nothing contained
in this Agreement shall prevent any party to this Agreement at any time from
furnishing any information to any Governmental Authority.
12.11. Time of Essence. Time is of the essence in the performance of
this Agreement.
12.12. Invalidity of Any Provisions. It is the intention of the parties
hereto that the provisions of this Agreement shall be enforced to the fullest
extent permissible under the laws and public policies of each State and
jurisdiction in which such enforcement is sought, and that the unenforceability
(or the modification to conform with such laws or public policies) of any
provision hereof shall not render unenforceable or impair the remainder of this
Agreement. Accordingly, if any provision of this Agreement shall be deemed
invalid or unenforceable in whole or in part, this Agreement shall be deemed
amended to delete or modify, in whole or in part as necessary, the invalid or
unenforceable provisions or portions thereof and to alter the remainder of this
Agreement in order to render the same valid and enforceable; provided, however,
that if any provision of this Agreement is deemed or held to be illegal, invalid
or unenforceable, there shall be added hereto automatically a provision as
similar as possible to such illegal, invalid or unenforceable provision and be
legal, valid and enforceable. Further, should any provision contained in this
Agreement ever be reformed or rewritten by any judicial body of competent
jurisdiction, such provision as so reformed or rewritten shall be binding upon
all parties hereto.
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<PAGE> 40
12.13. Third Parties. Nothing in this Agreement, expressed or implied,
is intended or shall be construed to confer upon any person other than the
parties hereto any legal or equitable rights or remedies under or by reason of
this Agreement or any provision contained herein.
12.14. Interpretation. As used in this Agreement, (i) the term "person"
shall mean and include an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or any
department or agency thereof; (ii) the term "subsidiary" of any specified
corporation shall mean any corporation of which the outstanding securities
having ordinary voting power to elect a majority of the board of directors are
directly or indirectly owned by such specified corporation and (iii) the term
"affiliate" shall mean, with reference to any person, the spouse, or any other
member of the immediate family, of such person, any director or executive
officer of such person, and any other person directly or indirectly controlling
or controlled by or under direct or indirect common control with such person.
12.15. Gender, etc. Whenever used herein, the singular number shall
include the plural, the plural the singular, and the use of any gender shall be
applicable to all genders.
12.16. Remedies. The Stockholders acknowledge that the agreements
referred to in Section 6.13 are an integral part of the transactions
contemplated in this Agreement and that, without the agreements contained
therein, SmarTalk would not enter into this Agreement.
12.17. Access to Records After Closing. The Stockholders will cause
their respective counsel and certified public accountants to afford to the
representatives of SmarTalk, including its counsel and accountants, reasonable
access to, and copies of, any records relating to the Company not transferred to
the control of SmarTalk, including, but not limited to, all audit and tax work
papers during normal business hours. SmarTalk will afford to the representatives
of the Stockholders reasonable access to, and copies of, the records transferred
to the control of SmarTalk at the Closing during normal business hours after the
Closing. Copies furnished to the party gaining such access shall be furnished at
the cost of the recipient.
12.18. Nature and Survival of Representations, etc. The representations
and warranties made by the Stockholders and SmarTalk in this Agreement shall
survive the Closing for a period of two years after the date of Closing, except
that any or all representations and warranties which may have been fraudulently
given or made or any or all representations, warranties and covenants which
relate to the federal, state, local or foreign tax obligations of the Company
for any taxable period ending prior to or on or including the date of Closing
shall survive the Closing for the period of the applicable statute of
limitations plus any extensions or waivers thereof which SmarTalk may deem
desirable to grant; and except all representations and warranties relating to
the Stockholders' title to their respective shares of stock of the Company and
their authority to accept and to consummate the Closing hereunder or relating to
SmarTalk's authority to accept and to consummate the Closing hereunder or
relating to the valid issuance of the SmarTalk Common Stock or the Subordinated
Notes shall survive the Closing indefinitely. Notwithstanding the foregoing, the
representations and warranties made by the Preferred Stockholder in Sections
4.1, 4.2 and 4.3 shall survive for a period of the lesser of (i) one year after
the date of Closing and (ii) the maturity of the Subordinated Notes. The
representations and warranties made by the Company in this Agreement shall not
survive the Closing. The
35
<PAGE> 41
indemnifications provided for herein shall survive the Closing indefinitely, to
the extent of any claim asserted prior to the expiration of the applicable
representation or warranty.
12.19. Prohibition on Use of Name. Each of the Stockholders agrees that
on and after the Closing, each shall not use the word "GTI" or any similar name
in the conduct of a trade or business.
12.20. Limitation on Liability. The parties acknowledge that Common
Stockholder and Preferred Stockholder have acted individually in entering into
this Agreement, and neither will have any liability to each other with respect
to representations, warranties or covenants made by either of them herein or
with respect to the transactions contemplated hereby, nor will either such
Stockholder have any liability to any other party hereto except with respect to
the representations, warranties and covenants expressly made by such
Stockholder. Effective as of the date of Closing, the Common Stockholder and the
Preferred Stockholder hereby release and discharge each other and their
respective affiliates from all liability and claims, known or unknown, that
either may have against the other by virtue of transactions (whether related to
this Agreement or not) that have occurred or will occur on or prior to the date
of Closing, except as specifically set forth in this Agreement. Without limiting
the generality of the foregoing, the parties agree that the Stockholders
Agreement shall terminate as of the Closing without further action by the
parties hereto and thereto.
12.21. Arbitration. Any controversy or claim arising out of or relating
to this Agreement or any agreement entered into pursuant to this Agreement or
the breach hereof or thereof, including any claim or controversy as to the
arbitrability of any claim or controversy and any claim for rescission, shall be
settled by arbitration in Los Angeles County, California before an arbitrator
selected by or in accordance with the rules of the Judicial Arbitration and
Mediation Service, and judgment upon the award rendered by the arbitrators may
be entered in any court having jurisdiction thereof. In no event shall the
institution or pendency of any arbitration or other proceeding involving claims
under this Agreement, including a claim for indemnification and/or offset
against the Subordinated Notes, in any way limit the obligation of SmarTalk to
pay interest on the Subordinated Notes, which interest will accrue up to the
time at which a final determination is made by the arbitrator that any such
offset is due.
* * *
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<PAGE> 42
IN WITNESS WHEREOF, the Stockholders have executed this Agreement and
SmarTalk and the Company have caused this Agreement to be executed by their duly
authorized officers, respectively, as of the day and year first above written.
SMARTALK TELESERVICES, INC.
By:_______________________________________
Name: Erich L. Spangenberg
Title: President
GTI TELECOM, INC.
By:________________________________________
Name: William R. Harger
Title: President
___________________________________________
WILLIAM R. HARGER
WATERTON INVESTMENT GROUP I, LLC
By:________________________________________
Name: Kenneth J. Abdalla
Title: Managing Member
<PAGE> 1
EXHIBIT 4.1
FORM OF
SMARTALK TELESERVICES, INC.
10% SUBORDINATED NOTE DUE 2001
$________ May 31, 1997
Los Angeles, California
SMARTALK TELESERVICES, INC., a California corporation (the "Company"),
for value received, hereby promises to pay to ____________ (the "Holder"), or
registered assigns, at the time and in the manner hereinafter provided, at its
offices located at 1640 South Sepulveda Blvd., Suite 500, Los Angeles,
California 90025, in lawful money of the United States, the principal sum of
____________ DOLLARS ($________), on June 1, 2001, and to pay interest thereon
from May 31, 1997 or from and including the most recent interest payment date to
which interest has been paid or duly provided for, quarterly on September 1,
December 1, March 1 and June 1 in each year, commencing September 1, 1997, at
the rate of 10% per annum, until the principal hereof is paid or made available
for payment. The interest so payable on any interest payment date will be paid
to the person in whose name this Subordinated Note is registered at the close of
business on the record date for such interest, which shall be the August 15,
November 15, February 15 or May 15 (whether or not a business day), as the case
may be, next preceding such interest payment date. This Subordinated Note is
subject to prepayment, without penalty, in whole or in part, at any time at the
option of the Company. This Subordinated Note is one of a duly authorized issue
of securities of the Company designated as its 10% Subordinated Notes Due 2001,
limited in aggregate principal amount to $26,500,000.
Holder shall not assign, sell, transfer or delegate any of Holder's
rights or duties under this Subordinated Note without the prior written consent
of the Company. [rider]
Principal and interest on this Subordinated Note shall be payable by
check delivered to Holder at the address set forth in the Stock Purchase
Agreement, of even date herewith (the "Stock Purchase Agreement"), by and among
the Company, GTI Telecom, Inc., Waterton Investment Group I LLC, and William R.
Harger, or at such other address designated by Holder, or, at the election of
Holder (by notice delivered on
<PAGE> 2
or after the relevant record date but not less than five (5) days prior to the
relevant payment date), by wire transfer of immediately available funds to any
bank account specified in writing by Holder.
Payment of principal shall be made in full on June 1, 2001, unless there
shall have previously occurred an Acceleration Event (as defined herein), in
which case the principal shall become due and payable on the tenth business day
following an Acceleration Event. For the purposes of this Subordinated Note, an
Acceleration Event shall mean (i) the consummation of a registered offering of
securities on Form S-1, Form S-2 or Form S-3 under the Securities Act of 1933
resulting in net proceeds to the Company of at least $35,000,000, or (ii) the
occurrence of a change in control. For the purposes of this Subordinated Note, a
"change in control" shall be deemed to have occurred if and when: (a) the
Company shall consummate a merger or consolidation (a "Transaction") with
another corporation; provided, however, that a change in control shall not be
deemed to have occurred with respect to a Transaction if the beneficial owners
of the outstanding shares entitled to vote in the election of directors
immediately prior to such Transaction will beneficially own more than fifty
percent (50%) of the outstanding shares entitled to vote in the election of
directors of the corporation resulting from the consummation of the Transaction;
(b) fifty percent (50%) of the Company's securities then entitled to vote in the
election of directors shall be acquired by any "person" or "group" (as such
terms are used in Section 13(d) of the Securities Exchange Act of 1934, as
amended and the rules thereunder); or (c) the Company shall sell all, or
substantially all, of its assets to another corporation.
A holder of this Subordinated Note shall have recourse only to assets of
the Company. No shareholder of the Company shall have any personal liability for
the obligations evidenced by this Subordinated Note.
THE COMPANY MAY, IN ITS REASONABLE DISCRETION, OFFSET ANY AMOUNTS OWED
HEREUNDER BY THE AMOUNT OF ANY CLAIM FOR INDEMNIFICATION OR OTHERWISE BY COMPANY
AGAINST HOLDER PURSUANT TO THE PROVISIONS OF THE STOCK PURCHASE AGREEMENT OR ANY
OTHER AGREEMENT RELATED THERETO BETWEEN THE COMPANY AND THE HOLDER, BUT SUBJECT
IN ANY EVENT TO THE PROCEDURES SET FORTH IN ARTICLE 10 AND SECTION 12.21 OF THE
STOCK PURCHASE AGREEMENT.
In the event the Company shall (i) fail to make complete payment of any
installment of principal or accrued interest when due under this Subordinated
Note, (ii) fail to make the prepayment of principal and accrued interest on this
Subordinated Note as required by the second paragraph hereof, (iii) commit a
material breach of or default under the Stock Purchase Agreement or other
agreements referred to therein as determined by a court or arbitrator, or (iv)
commence a voluntary case under bankruptcy law, consent to the entry of an order
for relief against it in an involuntary case under bankruptcy law ("Involuntary
Case"), consent to the appointment of any receiver, trustee or similar official
for it or substantially all of its creditors, generally be unable to pay its
2
<PAGE> 3
debts as the same become due, or be subject to an order of a court for relief
against the Company in an Involuntary Case, or for appointment of a Receiver, or
for the liquidation of the Company, then, Holder may accelerate this
Subordinated Note and may, by written notice to the Company, declare the entire
unpaid principal amount of this Subordinated Note and all accrued and unpaid
interest thereon to be immediately due and payable and, thereupon, the unpaid
principal amount and all such accrued and unpaid interest shall become and be
forthwith due and payable, without presentment, demand, protest or further
notice of any kind, all of which are expressly waived by the Company; provided,
however, that in the case of clause (i), (ii) or (iii) above, Holder shall,
prior to accelerating this Subordinated Note, deliver a written notice (a
"Notice") to the Company advising the Company that if such default is not cured
within five (5) days of receipt of such Notice, Holder may declare a default and
accelerate this Subordinated Note. The failure of Holder to accelerate this
Subordinated Note shall not constitute a waiver of any of Holders' rights under
this Subordinated Note.
The indebtedness evidenced by this Subordinated Note is subordinate and
subject in right of payment to the extent provided below, to the prior payment
in full of all Senior Indebtedness. For the purposes of this Subordinated Note,
Senior Indebtedness means the principal of and premium, if any, and interest on
(a) all indebtedness of the Company for money borrowed, other than the
Subordinated Notes, whether outstanding on the date of execution of this
Subordinated Note or thereafter created, incurred or assumed, except
indebtedness that by the terms of the instrument or instruments by which such
indebtedness was created or incurred expressly provides that it (i) is junior in
right of payment to the Subordinated Notes or (ii) ranks pari passu with the
Subordinated Notes, and (b) amendments, renewals, extensions, modifications,
refinancings and refundings of any such indebtedness. For the purposes of this
Subordinated Note, "indebtedness for money borrowed" when used with respect to
the Company means: (a) all indebtedness of the Company for money borrowed
(including any indebtedness secured by a mortgage, conditional sales contract or
other lien which is (i) given to secure all or part of the purchase price of
property subject thereto, whether given to the vendor of such property or to
another, or (ii) existing on property at the time of acquisition thereof); (b)
all indebtedness of the Company evidenced by notes, debentures, bonds or other
securities; (c) all lease obligations of the Company which are capitalized on
the books of the Company in accordance with generally accepted accounting
principles; (d) all indebtedness of others of the kinds described in the
preceding clause (c) assumed by or guaranteed by the Company through an
agreement to purchase, contingent or otherwise; and (e) all renewals, extensions
or refundings of indebtedness of the kinds described in either of the preceding
clauses (c) or (d). Notwithstanding anything to the contrary in the foregoing,
Senior Indebtedness shall not include any indebtedness or lease obligation of
any kind of the Company to any subsidiary of the Company a majority of the
voting stock of which is owned by the Company.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar
3
<PAGE> 4
proceeding relating to the Company or its property, in an assignment for the
benefit of creditors or any marshalling of the Company's assets and liabilities:
(1) holders of Senior Indebtedness shall be entitled to receive
payment in full of all such Senior Indebtedness before Holder shall be
entitled to receive any payment with respect to the Subordinated Note
(except that Holder may receive securities that are subordinated to at
least the same extent as the Subordinated Note to (a) Senior
Indebtedness and (b) any securities issued in exchange for Senior
Indebtedness); and
(2) until all Senior Indebtedness (as provided in subsection (1)
above) are paid in full, any distribution to which Holder would be
entitled but for this paragraph shall be made to holders of Senior
Indebtedness (except that Holder may receive securities that are
subordinated to at least the same extent as the Subordinated Note to (a)
Senior Indebtedness and (b) any securities issued in exchange for Senior
Indebtedness), as their interests may appear.
The Company may not make any payment or distribution to Holder in
respect of the Subordinated Note (other than securities that are subordinated to
at least the same extent as the Subordinated Note to (a) Senior Indebtedness and
(b) any securities issued in exchange for Senior Indebtedness) until all Senior
Indebtedness have been paid in full if:
(i) a default in the payment of any principal or interest with
respect to Senior Indebtedness occurs and is continuing beyond any
applicable grace period in the agreement, indenture or other document
governing such Senior Indebtedness; or
(ii) a default, other than a payment default, on Senior
Indebtedness occurs and is continuing that then permits holders of the
Senior Indebtedness to accelerate its maturity and Holder receives a
notice of the default (a "Payment Blockage Notice") from the holder of
such Senior Indebtedness. If Holder receives any such Payment Blockage
Notice, no subsequent Payment Blockage Notice shall be effective for
purposes of this paragraph unless and until (i) at least 360 days shall
have elapsed since the effectiveness of the immediately prior Payment
Blockage Notice and (ii) all scheduled payments of principal, premium,
if any, and interest on the Subordinated Note that have come due have
been paid in full in cash. No nonpayment default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the
Holder shall be, or be made, the basis for a subsequent Payment Blockage
Notice.
The Company may and shall resume payments on and distributions in
respect of the Subordinated Note upon the earlier of:
(1) the date upon which the default is cured or waived, or
4
<PAGE> 5
(2) in the case of a default referred to in the preceding
paragraph (ii), 179 days pass after notice is received if the maturity
of such Senior Indebtedness has not been accelerated,
if the foregoing provisions otherwise permit the payment, distribution or
acquisition at the time of such payment or acquisition.
After all Senior Indebtedness is paid in full and until the Subordinated
Note is paid in full, Holder shall be subrogated (equally and ratably with all
other Indebtedness pari passu with the Subordinated Note) to the rights of
holders of Senior Indebtedness to receive distributions applicable to Senior
Indebtedness to the extent that distributions otherwise payable to the Holder
have been applied to the payment of Senior Indebtedness. A distribution made
under the foregoing provisions to holders of Senior Indebtedness that otherwise
would have been made to Holder is not, as between the Company and Holder, a
payment by the Company on the Subordinated Note.
Holder agrees to take such action as may be necessary or appropriate to
effectuate the subordination provided in this Subordinated Note and shall
cooperate fully with all reasonable requests of the Company, including, without
limitation, the execution of any subordination agreements or otherwise as
required by any holder of Senior Indebtedness that is not inconsistent with the
terms hereof.
The foregoing provisions define the relative rights of Holder and
holders of Senior Indebtedness. Nothing herein shall:
(1) impair, as between the Company and Holder the obligation of
the Company, which is absolute and unconditional, to pay principal of
and interest on the Subordinated Note in accordance with its terms;
(2) affect the relative rights of Holder and creditors of the
Company other than their rights in relation to holders of Senior
Indebtedness; or
(3) prevent Holder from exercising its available remedies upon a
default, subject to the rights of holders of Senior Indebtedness to
receive distributions and payments otherwise payable to Holder.
If the Company fails because of the foregoing provisions to pay
principal of or interest on the Subordinated Note on the due date, the failure
is still a default.
The Company shall pay all costs, including reasonable attorney's fees,
incurred by Holder in the enforcement of this Subordinated Note.
5
<PAGE> 6
This Subordinated Note shall be governed by the laws of the State of
California.
SMARTALK TELESERVICES, INC.
By: ____________________________
Name:
Title:
6
<PAGE> 1
EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and
entered into as of May 31, 1997 by and among SmarTalk TeleServices, Inc., a
California corporation (the "Company"), and each of the holders of the Company's
Common Stock, no par value (the "Common Stock") executing this Agreement (each
of which is referred to herein, together with its transferees, as a "Holder" and
collectively with their transferees, the "Holders").
WHEREAS, pursuant to that certain Stock Purchase Agreement dated
as of May 31, 1997 (the "Stock Purchase Agreement") by and among the Company,
GTI Telecom, Inc., a Florida corporation ("GTI") and the Holders, SmarTalk will
purchase and receive from the Holders, all of the outstanding shares of capital
stock of GTI, and in connection therewith the Holders will receive 2,580,000
shares of Common Stock; and
WHEREAS, the Company has agreed to provide the registration
rights set forth in this Agreement and the execution and delivery of this
Agreement by the Company is a condition to the obligations of SmarTalk, GTI and
the Holders under the Stock Purchase Agreement;
NOW THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the parties hereto
agree as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.1. DEFINITIONS. Capitalized terms used herein and not
otherwise defined herein have the meanings ascribed to them in the Stock
Purchase Agreement. In addition, the following capitalized terms shall have the
meanings ascribed to them below:
"Affiliate," as applied to any specified Person, shall mean any
other Person directly or indirectly controlling or controlled by or under direct
or indirect common control with such specified Person and, in the case of a
Person who is an individual, shall include (i) members of such specified
Person's immediate family (as defined in Instruction 2 of Item 404(a) of
Regulation S-K under the Securities Act) and (ii) trusts, the trustee and all
beneficiaries of which are such specified Person or members of such Person's
immediate family as determined in accordance with the foregoing clause (i). For
the purposes of this definition, "control," when used with respect to any
Person, means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Business Day" means any day that is not a Saturday, Sunday or a
day on which banking institutions in New York, New York or Los Angeles,
California are not required to be open.
<PAGE> 2
"Closing" is defined in the Stock Purchase Agreement.
"Effectiveness Date" is defined in Section 2.1.
"Effectiveness Period" is defined in Section 2.1.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Event Date" is defined in Section 2.1.
"Holders" means the holders of Common Stock which have executed
this Agreement, together with their transferees.
"Filing Date" is defined in Section 2.1.
"90-Day Period" is defined in Section 3.4
"Person" means an individual, partnership, corporation, limited
liability company, trust or unincorporated organization, or a government or
agency or political subdivision thereof.
"Piggyback Registration" is defined in Section 2.2.
"Prospectus" means the prospectus included in a Registration
Statement, as amended or supplemented by any prospectus supplement and by all
other amendments thereto, including post-effective amendments, and all material
incorporated by reference into such Prospectus.
"Public Distribution" shall mean any bona fide underwritten
public distribution of Stock pursuant to an effective registration statement
under the Securities Act or any other applicable law, or any bona fide public
sale in an open market transaction under Rule 144 of the Securities Act (or any
successor rule) if such sale is in compliance with the requirements of
paragraphs (c), (d), (e), (f) and (g) of such Rule (notwithstanding the
provisions of paragraph (k) of such Rule).
"Public Offering" shall mean any bona fide underwritten public
distribution of Stock pursuant to an effective registration statement under the
Securities Act or any other applicable law.
"Registrable Securities" means each share of Stock acquired by
the Holders pursuant to the Stock Purchase Agreement (or as set forth in clause
(ii) of the definition of "Stock" below), until (i) it has been effectively
registered under the Securities Act and disposed of by such Holders pursuant to
an effective registration statement, or (ii) it is sold by such Holders pursuant
to Rule 144 (or any similar provisions then in force) under the Securities Act;
provided, however, that "Registrable Securities" shall not include any share of
Stock or other security that has been issued under clause (ii) of the definition
of "Stock" below if such share of
2
<PAGE> 3
Stock or security was issued pursuant to a registration statement filed with the
SEC and is not "restricted" within the meaning of Rule 144 under the Securities
Act.
"Registration Expenses" is defined in Section 3.2.
"Registration Statement" means any registration statement of the
Company relating to a Shelf Registration pursuant to Section 2.1 or a Piggyback
Registration pursuant to Section 2.2, including the Prospectus included therein,
all amendments and supplements thereto (including post-effective amendments) and
all exhibits and material incorporated by reference therein.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Selling Holder" means a Holder who sells or proposes to sell
Registrable Securities pursuant to a Registration Statement under the Securities
Act.
"Shelf Registration" or "Shelf Registration Statement" is defined
in Section 2.1.
"Stock" means the following securities: (i) the Common Stock or
(ii) any security or other instrument (a) received as a dividend on, or other
payment made to the holders of, the Common Stock (or any other security or
instrument referred to in this definition) or (b) issued in connection with a
split of the Common Stock (or any other security or instrument referred to in
this definition) or as a result of any exchange or reclassification of the
Common Stock (or any other security or instrument referred to in this
definition), reorganization, consolidation, merger or recapitalization.
"Underwritten Registration" or "Underwritten Offering" means a
Piggyback Registration in which Stock of the Company is sold to an underwriter
for re-offering to the public.
ARTICLE II.
REGISTRATION RIGHTS
SECTION 2.1. SHELF REGISTRATION.
(a) Filing and Effectiveness. The Company shall cause to be filed
with the SEC prior to the later to occur of (i) May 30, 1998 or (ii) 10 days
after the date the Company first becomes eligible to file a registration
statement on Form S-3 (the date of such filing is referred to herein as the
"Filing Date") a shelf registration statement pursuant to Rule 415 under the
Securities Act (a "Shelf Registration" or a "Shelf Registration Statement"),
which Shelf Registration Statement shall provide for resales of all Registrable
Securities held by each of the Holders who shall have provided the information
required pursuant to Section 3.1(b). The
3
<PAGE> 4
Company shall use its best efforts to have such Shelf Registration declared
effective within 60 days of the Filing Date (the date of such effectiveness is
referred to herein as the "Effectiveness Date") and to keep such Shelf
Registration Statement continuously effective, supplemented and amended to the
extent necessary to ensure that it is available for resales of Registrable
Securities by such Holders, and to ensure that it conforms with the requirements
of this Agreement, the Securities Act and the policies, rules and regulations of
the SEC as announced from time to time, for a period of at least two years
following the Closing (the "Effectiveness Period"), subject in any event to
Section 3.4(a)(2) hereof.
(b) Effective Registration. A registration will not be deemed to
have been effected as a Shelf Registration unless it has been declared effective
by the SEC and the Company has complied in all material respects with its
obligations under this Agreement with respect thereto; provided that if, after
it has become effective, the offering of Registrable Securities pursuant to such
registration is or becomes the subject of any stop order, injunction or other
order or requirement of the SEC or any other governmental or administrative
agency, or if any court prevents or otherwise limits the sale of Registrable
Securities pursuant to the registration (for any reason other than the acts or
omissions of the Holders), such registration will be deemed not to have been
effected. If (i) the Shelf Registration is deemed not to have been effected in
accordance with the provisions of the preceding sentence or (ii) the Shelf
Registration does not remain continuously effective for the period described in
subsection (a) above, then such Shelf Registration Statement shall not count as
a Shelf Registration and the Company shall continue to be obligated to effect a
registration pursuant to this Section 2.1.
(c) No Underwriter. The Company shall be under no obligation to
effect or to assist any underwritten offering of Registrable Securities except
to the extent that a Piggyback Registration is effected in the form of an
Underwritten Offering pursuant to Section 2.2.
SECTION 2.2. PIGGYBACK REGISTRATION.
If at any time after May 30, 1998 the Company shall determine to
file a registration statement under the Securities Act relating to a proposed
sale to the public of its Common Stock (but excluding registrations on Form S-4
or S-8) either for its own account or the account of a security holder or
holders (in either case a "Piggyback Registration"), the Company shall:
(a) promptly give to each Holder of a Registrable Security
written notice thereof (which notice will include a list of the jurisdictions in
which the Company intends to attempt to qualify such securities under the
applicable blue sky or other state securities laws, the proposed offering price,
and the plan of distribution);
(b) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within 30 days after such written notice from the Company, by any
holder or holders of Registrable Securities; and
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(c) use its best efforts to cause the managing underwriter or
underwriters of such proposed Underwritten Offering to permit the Registrable
Securities requested to be included in the Registration Statement for such
Underwritten Offering to be included on the same terms and conditions as any
similar securities of the Company included therein. Notwithstanding the
foregoing, if the managing underwriter or underwriters of such offering advise
the Holders of such Registrable Securities that marketing considerations require
a limitation on the number of shares of Common Stock or other Registrable
Securities offered pursuant to any Registration Statement subject to this
Section 2.2, then subject to the advice of said managing underwriter or
underwriters as to the size and composition of the offering, the Company will
include Common Stock and other Registrable Securities in such registration in
accordance with the following priorities: (i) first, Common Stock to be sold for
the account of the Company; (ii) second, Common Stock to be sold for the account
of the Company's stockholders, other than the Holders of Registrable Securities,
who have demanded or requested to be included in the registration pursuant to
"demand," "piggyback" or other registration rights provisions of other
agreements to which the Company is a party and (iii) third, pro rata with
respect to all Holders of Registrable Securities who have requested to be
included in the registration pursuant to this Section 2.2 in proportion to the
number of shares owned by each such Holder.
ARTICLE III.
REGISTRATION PROCEDURES
SECTION 3.1. REGISTRATION PROCEDURES.
(a) General Provisions. In connection with any Registration
Statement and any related Prospectus required by this Agreement to permit the
sale or resale of Registrable Securities, the Company shall:
(1) prepare and file with the SEC a registration statement
with respect to such Registrable Securities within the time periods
specified herein, make all required filings with the NASD and use its
best efforts to cause such registration statement to become effective
within the time periods specified herein;
(2) promptly prepare and file with the SEC such amendments
and post-effective amendments to the Registration Statement as may be
necessary to keep the Registration Statement effective for the
applicable period set forth in Section 2.1, or such shorter period as
will terminate when all Registrable Securities covered by such
Registration Statement have been sold; cause the Prospectus to be
supplemented by a required Prospectus supplement, and as so supplemented
to be filed pursuant to Rule 424 under the Securities Act, and to comply
fully with the applicable provision of Rules 424 and 430A under the
Securities Act in a timely manner; and comply with the provisions of the
Securities Act with respect to the disposition of all securities covered
by such Registration Statement during the applicable period in
accordance with the intended method or methods of distribution by the
sellers thereof set forth in such Registration Statement or supplement
to the Prospectus;
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(3) use its best efforts to keep such Registration
Statement continuously effective for the time periods specified herein
and provide all requisite financial statements for the period specified
in Section 2.1; upon the occurrence of any event that would cause any
such Registration Statement or the Prospectus contained therein (A) to
contain a material misstatement or omission or (B) not to be effective
and usable for resale of Registrable Securities during the period
required by this Agreement, the Company shall file promptly an
appropriate amendment to such Registration Statement, in the case of
clause (A), correcting any such misstatement or omission, and, in the
case of either clause (A) or (B), use its best efforts to cause such
amendment to declared effective and such Registration Statement and
related Prospectus to become usable for their intended purposes(s) as
soon as practicable thereafter;
(4) provide (A) the Holders of Registrable Securities
participating in the registration, (B) the sale or placement agent
therefor, if any, (C) counsel for such agent, and (D) counsel for each
of the Holders thereof, the opportunity to participate in the
preparation of such registration statement, each prospectus included
therein or filed with the SEC, and each amendment or supplement thereto,
and for a reasonable period prior to the filing of such registration
statement, and throughout the period specified in Section 3.4(b) hereof,
make available for inspection by the parties referred to in (A) through
(D) above such financial and other information and books and records of
the Company, provide access to properties of the Company and cause the
officers, directors, employees, counsel and independent certified public
accountants of the Company to respond to such inquiries as shall be
reasonably necessary to conduct a reasonable investigation within the
meaning of Section 11 of the Securities Act;
(5) advise the Selling Holders promptly and, if requested
by such Selling Holders, to confirm such advice in writing, (A) when the
Prospectus or any Prospectus supplement or post-effective amendment has
been filed, and, with respect to any Registration Statement or any
post-effective amendment thereto, when the same has become effective,
(B) of any request by the SEC for amendments to the Registration
Statement or amendments or supplements to the Prospectus or for
additional information relating thereto, (C) of the issuance by the SEC
of any stop order suspending the effectiveness of the Registration
Statement under the Securities Act or of the suspension by any state
securities commission of the qualification of the Registrable Securities
for offering or sale in any jurisdiction, or the initiation of any
proceeding for any of the preceding purposes, (D) of the existence of
any fact or the happening of any event that makes any statement of a
material fact made in the registration Statement, the Prospectus, any
amendment or supplement thereto, or any document incorporated by
reference therein untrue, or that requires the making of any additions
to or changes in the Registration Statement or the Prospectus in order
to make the statements therein not misleading. If at any time the SEC
shall issue any stop order suspending the effectiveness of the
Registration Statement, or any state securities commission or other
regulatory authority shall issue an order suspending the qualification
or exemption from qualification of the Registrable Securities under
state securities or Blue Sky laws, the
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Company shall use its best efforts to obtain the withdrawal or lifting
of such order at the earliest possible time;
(6) furnish to each Selling Holder named in any
Registration Statement or Prospectus such number of copies of any
Registration Statement or Prospectus included therein or any amendments
or supplements to any such Registration Statement or Prospectus
(including all documents incorporated by reference after the initial
filing of such Registration Statement and all exhibits filed therewith),
reasonably requested by such Selling Holder;
(7) if requested by any Selling Holders, promptly include
in any Registration Statement or Prospectus, pursuant to a supplement or
post-effective amendment if necessary, such information as such Selling
Holders may reasonably request to have included therein, including,
without limitation, information relating to the "Plan of Distribution"
of the Registrable Securities, information with respect to the principal
amount of Registrable Securities being sold, the purchase price being
paid therefor and any other terms of the offering of the Registrable
Securities to be sold in such offering, and make all required filing of
such Prospectus supplement or post-effective amendment as soon as
practicable after the Company is notified of the matters to be included
in such Prospectus supplement or post-effective amendment;
(8) deliver to each Selling Holder, without charge, as
many copies of the Prospectus (including each preliminary prospectus)
and any amendment or supplement thereto as such Persons reasonably may
request; the Company hereby consents to the use of the Prospectus and
any amendment or supplement thereto by each of the Selling Holders in
connection with the offering and the sale of the Registrable Securities
covered by the Prospectus or any amendment or supplement thereto;
(9) prior to any public offering of Registrable
Securities, cooperate with the Selling Holders and their respective
counsel in connection with the registration and qualification of the
Registrable Securities under the securities or Blue Sky laws of such
jurisdictions as the Selling Holders may request and do any and all
other acts or things necessary or advisable to enable the disposition in
such jurisdictions or the Registrable Securities covered by the
applicable Registration Statement; provided, however, that the Company
shall not be required to register or qualify as a foreign corporation
where it is not now so qualified or to take any action that would
subject it to the service of process in suits or to taxation, except as
is required as a result of the Registration Statement, in any
jurisdiction where it is not now so subject;
(10) in connection with any sale of Registrable Securities
that will result in such securities no longer being Registrable
Securities, cooperate with the Selling Holders to facilitate the timely
preparation and delivery of certificates representing Registrable
Securities to be sold and not bearing any restrictive legends; and to
register such Registrable Securities in such denominations and such
names as the Selling Holders may request at least two Business Days
prior to such sale of Registrable Securities;
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(11) if requested by the Selling Holders, provide a CUSIP
number for all Registrable Securities not later than the effective date
of the Registration Statement covering such Registrable Securities and
provide the Company's transfer agent(s) and registrar(s) for the
Registrable Securities with printed certificates for the Registrable
Securities;
(12) cooperate and assist in any filings required to be
made with the NASD and in the performance of any due diligence
investigation by any underwriter (including any "qualified independent
underwriter") that is required to be retained in accordance with the
rules and regulations of the NASD, and use their best efforts to cause
such Registration Statement to become effective and approved by such
governmental agencies or authorities as may be necessary to enable the
Selling Holders or to consummate the disposition of such Registrable
Securities;
(13) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC, and make generally
available to its security holders, as soon as practicable, a
consolidated earnings statement meeting the requirements of Rule 158
under the Securities Act (which need not be audited) covering a period
of at least twelve month periods, but not more than eighteen months,
beginning with the first month of the Company's first quarter commencing
after the effective date of the Registration Statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the
Securities Act; and
(14) cause all Registrable Securities covered by the
Registration Statement to be listed on each securities exchange on which
securities of the same class issued by the Company are then listed if
requested by the Selling Holders holding a majority of the Registered
Securities or the managing underwriter(s), if any.
(b) Provision by Holders of Certain Information. No Holder of
Registrable Securities may include any of its Registrable Securities in any
Registration Statement pursuant to this Agreement unless and until such Holder
furnishes to the Company in writing, within 20 days after receipt of a request
therefor, such information as the Company may reasonably request specified in
item 507 of Regulation S-K under the Securities Act for use in connection with
any Registration Statement or Prospectus or preliminary Prospectus included
therein. Each Holder as to which any Registration Statement is being effected
agrees to furnish promptly to the Company all information required to be
disclosed in order to make the information previously furnished to the Company
by such Holder not materially misleading.
SECTION 3.2. REGISTRATION EXPENSES.
(a) All expenses incident to the Company's performance of or
compliance with this Agreement will be paid by the Company, regardless of
whether any Registration Statement required hereunder becomes effective,
including, without limitation the following (referred to herein as "Registration
Expenses"):
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(1) all registration and filing fees;
(2) fees and expenses of compliance with securities or
blue sky laws (including, without limitation, reasonable fees and
disbursements of counsel for the Selling Holders in connection with blue
sky qualifications of the Registrable Securities and determination of
their eligibility for investment under the laws of such jurisdictions as
the Holders of Registrable Securities being sold may designate);
(3) printing (including, without limitation, expenses of
printing or engraving certificates for the Registrable Securities in a
form eligible for trading on the New York Stock Exchange or for deposit
with the Depository Trust Company and of printing prospectuses),
messenger, telephone and delivery expenses;
(4) reasonable fees and disbursements of counsel for
the Company and for the Selling Holders (subject to the provisions of
Section 3.2(c) hereof);
(5) reasonable fees and disbursements of all independent
certified public accountants of the Company (including, without
limitation, the expenses of any special audit and "cold comfort" letters
required by or incident to such performance); and
(6) fees and expenses of other Persons retained by the
Company; and
(7) fees and expenses associated with any NASD filing
required to be made in connection with the registration of the
Registrable Securities.
(b) The Company will, in any event, pay its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, the fees and expenses incurred in connection with the listing of the
Registrable Securities to be registered on NASDAQ or on each national securities
exchange on which similar securities issued by the Company are then listed,
rating agency fees and the fees and expenses of any Person, including special
experts, retained by the Company.
(c) In connection with each Registration required hereunder, the
Company will reimburse the Holders of Registrable Securities being registered
pursuant to a registration statement required hereunder for the reasonable fees
and disbursements of not more than one counsel chosen by the holders of a
majority in number of such Registrable Securities.
SECTION 3.3. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No Holder may
participate in any Underwritten Registration hereunder unless such Holder (i)
agrees to sell its Registrable Securities on the basis provided in any
underwriting arrangements approved by the Persons entitled hereunder to approve
such arrangements and (ii) completes and executes all reasonable questionnaires,
powers of attorney, underwriting agreements, hold-back agreements, letters and
other documents customarily required under the terms of such underwriting
arrangements. Notwithstanding the foregoing, (x) no Selling Holder shall be
required to make
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any representations or warranties except those which relate solely to such
Holder and its intended method of distribution, and (y) the liability of each
such Holder to any underwriter under such underwriting agreement will be limited
to liability arising from misstatements or omissions regarding such Holder and
its intended method of distribution and any such liability shall not exceed an
amount equal to the amount of net proceeds such Holder derives from such
registration. Nothing in this Section 3.3 shall be construed to create any
additional rights regarding the registration of Registrable Securities in any
Person otherwise than as set forth herein.
SECTION 3.4. HOLD-BACK AGREEMENTS.
(a) Restrictions on Public Distribution by Holder of
Registrable Securities.
(1) Upon the written request of the managing underwriter
or underwriters of a Public Offering, each Holder of Registrable
Securities shall not effect any Public Distribution of such securities,
or any securities convertible into or exchangeable or exercisable for
such securities, including a sale pursuant to Rule 144 under the
Securities Act (except as part of such Public Offering), during the
14-day period prior to, and during the 90-day period following, the
offering date for each Public Offering made pursuant to such
registration statement (as identified by such underwriter or
underwriters or the Company in good faith). The foregoing provisions
shall not apply to any Holder that is prevented by applicable statute or
regulation from entering into any such agreement; provided, however,
that any such Holder shall undertake not to effect any Public
Distribution of the class of securities covered by such registration
statement (except as part of such Underwritten Offering) during such
period unless it has provided 60 days' prior written notice of such
Public Distribution to the managing underwriter.
(2) Each Holder agrees, upon a request of the Company made
after the Effectiveness Date in writing and delivered with at least five
days' prior notice, not to effect any public sale or distribution of
Common Stock or otherwise conduct marketing activities with respect to
the Stock for a period not to exceed 90 days (the "90-Day Period") if
the Company proposes to make a securities offering, material acquisition
or engage in any other material corporate transaction not in the
ordinary course of business, if the Board of Directors of the Company
determines in good faith as evidenced by a resolution of the Board of
Directors that the continuation of public sales or a distribution or
other marketing activities could adversely affect the Company's ability
to complete such other transactions. The Holders will be subject to the
requirements of this subparagraph only during the period commencing on
the Effectiveness Date and ending on the last day of the Effectiveness
Period, provided, however, that the Company shall not be permitted to
designated more than two such 90-Day Periods and the Effectiveness
Period will be extended by such number of days equal to the number of
days the Holders were subject to the requirements of this subparagraph.
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ARTICLE IV.
INDEMNIFICATION AND CONTRIBUTION
SECTION 4.1. INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify and hold harmless each Selling Holder, each person, if any, who
controls such Holder (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) (hereinafter referred to as a "controlling
person"), the respective officers, directors, partners, employees,
representatives and agents of any Holder or any controlling person (each an
"Indemnified Holder"), to the fullest extent lawful, from and against any and
all losses, claims, damages, liabilities, judgments, actions and expenses
(including without limitation and as incurred, reimbursement of all reasonable
costs of investigating, preparing, pursuing or defending any claim or action, or
any investigation or proceeding by any governmental agency or body, commenced or
threatened, including the reasonable fees and expenses of counsel to any
Indemnified Holder) directly or indirectly caused by, related to, based upon,
arising out of or in connection with any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement or
Prospectus (or any amendment or supplement thereto), or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities or expenses are caused by an untrue
statement or omission or alleged untrue statement or omission that is made in
reliance upon and in conformity with information relating to any of the Holders
furnished in writing to the Company by any of the Holders expressly for use
therein.
SECTION 4.2. INDEMNIFICATION BY HOLDERS OF REGISTRABLE SECURITIES. Each
Selling Holder agrees, severally and not jointly, to indemnify and hold harmless
the Company and its directors, officers and any person controlling (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
the Company and its respective officers, directors, partners, employees,
representatives and agents of each such person, to the same extent as the
foregoing indemnity from the Company to each of the Indemnified Holders, but
only with respect to losses, claims, damages, liabilities, judgments, actions
and expenses (including without limitation and as incurred, reimbursement of all
reasonable costs of investigating, preparing, pursuing or defending any claim or
action, or any investigation or proceeding by any governmental agency or body,
commenced or threatened, including the reasonable fees and expenses of counsel
to the Company) directly or indirectly caused by, related to, based upon,
arising out of or in connection with any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement or
Prospectus (or any amendment or supplement thereto), or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, to the extent, but only
to the extent, that such untrue statement or omission is contained in any
information relating to such Holder furnished in writing by such Holder
expressly for use in any Registration Statement or Prospectus. In case any
action or proceeding shall be brought against the Company or its directors or
officers or any such controlling person in respect of which indemnity may be
sought against a Holder of Registrable Securities, such Holder shall have the
rights and duties
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given the Company, and the Company or its directors or officers or such
controlling person shall have the rights and duties given to each Holder by the
preceding paragraph. Each Selling Holder also agrees to indemnify and hold
harmless each other Selling Holder or underwriters participating in the
distribution on substantially the same basis as that of the indemnification of
the Company provided in this Section 4.2. In no event shall the liability of any
selling Holder hereunder be greater in amount than the dollar amount of the
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation. The Company shall be entitled to
receive indemnities from underwriters, selling brokers, dealer managers and
similar securities industry professionals participating in the distribution, to
the same extent as provided above with respect to information so furnished in
writing by such Persons specifically for inclusion in any Registration Statement
or Prospectus.
SECTION 4.3. CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any Person entitled
to indemnification hereunder (an "Indemnified Party") will (i) promptly give
notice of any claim, action or proceeding (including any governmental or
regulatory investigation or proceeding) or the commencement of any such action
or proceeding to the Person against whom such indemnity may be sought (an
"Indemnifying Party"); provided that the failure to give such notice shall not
relieve the Indemnifying Party of its obligations pursuant to this Agreement
except to the extent that such Indemnifying Party has been prejudiced in any
material respect by such failure, and (ii) permit the Indemnifying Party to
assume the defense of such claim with counsel reasonably satisfactory to such
Indemnified Party; provided that the Indemnified Party shall have the right to
employ separate counsel and participate in the defense of such claim, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Party unless (a) the Indemnifying Party has agreed to pay for such fees and
expenses, or (b) the Indemnifying Party shall have failed to assume the defense
of such claim and employ counsel reasonably satisfactory to such Indemnified
Party or (c) in the reasonable judgment of such Indemnified Party, based upon
advice of its counsel, a conflict of interest may exist between such Indemnified
Party and the Indemnifying Party with respect to such claims. If such defense is
not assumed by the Indemnifying Party, the Indemnifying Party will not be
subject to any liability for any settlement of any such claim effected without
the Indemnifying Party's prior written consent, which consent shall not be
unreasonably withheld. The Indemnifying Party shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff, the
Indemnifying Party agrees to indemnify and hold harmless any Indemnified Party
from and against any loss, claim damage, liability or expense by reason of any
settlement of any such claim or action. No Indemnifying Party shall, without the
prior written consent of each Indemnified Party, settle or compromise or consent
to the entry of judgment in or otherwise seek to terminate any pending or
threatened action, claim, litigation or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not any
Indemnified Party is a party thereto), unless such settlement, compromise,
consent or termination includes an unconditional release of each Indemnified
Party from all liability arising out of such action, claim, litigation or
proceeding. An Indemnifying Party who is not entitled to, or elects not to,
assume the defense of the claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
Indemnifying Party with respect to such claim, unless in the reasonable judgment
of any
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Indemnified Party a conflict of interest may exist between such Indemnified
Party and any other such Indemnified Parties with respect to such Claim, in
which event the Indemnifying Party shall be obligated to pay the fees and
expenses of such additional counsel or counsels.
SECTION 4.4. CONTRIBUTION. If the indemnification provided for in this
Article IV is unavailable to an Indemnified Party (other than by reason of
exceptions provided in those Sections) in respect of any losses, claims,
damages, liabilities or expenses referred to therein, then each applicable
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall have a
joint and severable obligation to contribute to the amount paid or payable by
such Indemnified Party as a result of such losses, claims, damages, liabilities
or expenses in such proportion as is appropriate to reflect the relative fault
of the Indemnifying Party, on the one hand, and of the Indemnified Party, on the
other, in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of the Indemnifying Party, on the
one hand, and of the Indemnified Party, on the other, shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission to state a material fact relates to
information supplied by the Indemnifying Party or by the Indemnified Party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The amount paid or payable by
a party as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations set
forth in the second paragraph of Section 4.1, any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim.
The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 4.4 were determined by pro rata
allocation (even if the Holders were treated as one entity for such purpose) or
by any other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages, liabilities or expenses referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 4.4, none of the Indemnified
Holders shall be required to contribute, in the aggregate, any amount in excess
of the amount by which the net proceeds received by such Holder with respect to
the Registrable Securities exceeds the greater of (A) the amount paid by such
Holder for its Registrable Securities and (B) the amount of any damages which
such Holder has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Holders' obligation to
contribute pursuant to this Section 4.4 are several in proportion to the
respective number of Registrable Securities held by each of the Holders
hereunder and not joint.
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For purposes of this Article IV, each controlling person of a
Holder shall have the same rights to contribution as such Holder, and each
officer, director, and person, if any, who controls the Company within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act
shall have the same rights to contribution as the Company, subject in each case
to the limitations set forth in the immediately preceding paragraph. Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a claim
for contribution may be made against another party or parties under this Article
IV, notify such party or parties from whom contribution may be sought, but the
omission to so notify such party or parties shall not relieve the party or
parties from who contribution may be sought from any obligation it or they may
have under this Article IV or otherwise except to the extent that it has been
prejudiced in any material respect by such failure. No party shall be liable for
contribution with respect to any action or claim settled without its written
consent; provided, however, that such written consent was not unreasonably
withheld.
SECTION 4.5. ADDITIONAL INDEMNITY. The indemnity, contribution and
expense reimbursement obligations under this Article IV shall be in addition to
any liability each Indemnifying Party may otherwise have; provided, however,
that any payment made by the Company which results in an Indemnified Party
receiving from any source(s) indemnification, contribution or reimbursement for
an amount in excess of the actual loss, liability or expense incurred by such
Indemnified Party, shall be refunded to the Company by the Indemnified Party
receiving such excess payment.
ARTICLE V.
MISCELLANEOUS
SECTION 5.1. RULE 144. The Company agrees it will file in a timely
manner all reports required to be filed by it pursuant to the Securities Act and
the Exchange Act and the rules and regulations adopted by the SEC thereunder and
will take such further action as any Holder of Registrable Securities may
reasonably request in order that such Holder may affect sales of Registrable
Securities without registration within the limitations of the exemptions
provided by Rule 144, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the SEC. At any reasonable time
and upon the request of a Holder of Registrable Securities, the Company will
furnish such Holder with such information as may be necessary to enable the
Holder to effect sales of Registrable Securities pursuant to Rule 144 under the
Securities Act and will deliver to such Holder a written statement as to whether
it has compiled with such information and requirements.
SECTION 5.2. SPECIFIC PERFORMANCE. Each Holder, in addition to being
entitled to exercise all rights provided herein or granted by law, including
recovery of liquidated or other damages, will be entitled to specific
performance of its rights under this Agreement. The Company agrees that monetary
damages would not be adequate compensation for any loss incurred by reason of a
breach by it of the provisions of this Agreement and hereby agrees to waive the
defense in any action for specific performance that a remedy at law would be
adequate.
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SECTION 5.3. NO INCONSISTENT AGREEMENTS. The Company will not on or
after the date of this Agreement enter into any agreement with respect to its
securities that is inconsistent with the rights granted to the Holders in this
Agreement or otherwise conflicts with the provisions hereof. The Company has not
previously entered into any agreement granting any registration rights with
respect to its securities to any Person. The rights granted to the Holders
hereunder do not in any way conflict with and are not inconsistent with the
rights granted to the holders of the Company's securities under any agreement in
effect on the date hereof.
SECTION 5.4. CHARTER AMENDMENTS AFFECTING THE COMPANY'S COMMON STOCK.
The Company will not amend its Articles of Incorporation in any respect that
would materially and adversely affect the rights of the Holders hereunder.
SECTION 5.5. AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to or departures from the provisions
hereof may not be given unless the Company has obtained the written consent of
each Holder.
SECTION 5.6. NOTICES. Unless otherwise provided herein, any notice,
request, instruction or other document to be given hereunder by any party to the
others shall be made in writing, by hand-delivery, telegraph, telex, telecopier,
registered first-class mail or air courier guaranteeing overnight deliver as
follows:
if to the Company, to:
SmarTalk TeleServices, Inc.
1640 South Sepulveda Boulevard, Suite 500
Los Angeles, CA 90025
Attention: General Counsel
Fax: 310 (479-3297)
if to any Holder:
to the address specified below such Holder's name on the
signature pages hereto;
or to such other place and with such other copies as any party hereto may
designate as to itself by written notice to the others. All such notices and
communications shall be deemed to have been duly given: at the time delivered by
hand, if personally delivered; five Business Days after being deposited in the
mail, postage prepaid, if mailed; when answered back, if telexed; when receipt
acknowledged, if telecopied: and on the next Business Day if timely delivered to
an air courier guaranteeing overnight delivery.
SECTION 5.7. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent holders of Registrable Securities,
15
<PAGE> 16
provided that the Company may not assign its rights or obligations under this
Agreement to any other person or entity without the written consent of each of
the Holders.
SECTION 5.8. COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
SECTION 5.9. HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
SECTION 5.10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without regard
to the choice of law provisions thereof.
SECTION 5.11. SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
SECTION 5.12. ENTIRE AGREEMENT. This Agreement is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted by the Company with
respect to the Registrable Securities. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
SECTION 5.13. PRONOUNS. Whenever the context may require, any pronouns
used herein shall be deemed also to include the corresponding neuter, masculine
or feminine forms.
SECTION 5.14. ATTORNEY'S FEES. In any action or proceeding brought to
enforce any provision of this Agreement, the successful party shall be entitled
to recover reasonable attorney's fees in addition to its costs and expenses and
any other available remedy.
SECTION 5.15. SECURITIES HELD BY THE COMPANY OR ITS SUBSIDIARIES.
Whenever the consent or approval of Holders of a specified percentage or
Registrable Securities is required hereunder, Registrable Securities held by the
Company or its Subsidiaries shall not be counted in determining whether such
consent or approval was given by the Holders of such required percentage.
SECTION 5.16. FURTHER ASSURANCES. Each party shall cooperate and take
such action as may be reasonably requested by another party in order to carry
out the provisions and purposes of this Agreement and the transactions
contemplated hereby.
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SECTION 5.17. TERMINATION. Unless sooner terminated in accordance with
its terms or as otherwise herein provided, this Agreement shall terminate upon
the earlier to occur of (i) the mutual agreement by the parties hereto, (ii)
with respect to any Holder, such Holder ceasing to own any Registrable
Securities, or (iii) the fifteenth anniversary of the Closing.
(signature page follows)
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IN WITNESS HEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
SMARTALK TELESERVICES, INC.
By: /s/ ERICH L. SPANGENBERG
------------------------------------
Name: Erich L. Spangenberg
Title: President, Chief Operating Officer
Address: 1640 South Sepulveda Boulevard,
Suite 500
Los Angeles, California 90025
FAX: (310) 479-3297
By: /s/ WILLIAM R. HARGER
------------------------------------
WILLIAM R. HARGER
Address: c/o J. Bennett Grocock, Esq.
126 East Jefferson Street,
Suite 200
Orlando, Florida 32801
FAX: (407) 425-0032
WATERTON INVESTMENT GROUP I, LLC
By: Waterton Management, L.L.C.
Its: Managing Member
By: /s/ KENNETH J. ABDALLA
--------------------------------------
Kenneth J. Abdalla
Managing Member of
Waterton Management, L.L.C.
Address: 10000 Santa Monica Boulevard,
Fifth Floor
Los Angeles, California 90067
FAX: (310) 798-7201
<PAGE> 1
EXHIBIT 99.1
[SMARTALK TELESERVICES, INC. LETTERHEAD]
NEWS RELEASE
FOR IMMEDIATE RELEASE
Contact: William Kahn, Director, Investor Relations
(310) 444-8800, ext. 133
Steve Knipstein, Manager, Public Relations
(310) 444-8800, ext. 147
SMARTALK(SM) ACQUIRES GTI TELECOM
AND ADDS OVER 4,000 RETAIL STOREFRONTS
June 2, 1997 (Los Angeles) -- SMARTALK(SM) Teleservices, Inc. (Nasdaq:
SMTK) today announced the acquisition of GTI Telecom, Inc., a manufacturer and
distributor of prepaid calling cards. Through the acquisition SMARTALK adds
more than 4,000 storefronts to its retail distribution channel, boosting its
market share in the retail drug and grocery segments. The Company emerges from
the acquisition with more than 13,000 storefronts.
GTI maintains agreements to distribute phone cards into such leading
national retailers as Dominick's Finer Foods, Eckerd Drug, Food4Less, Ralphs
Supermarkets and Spencer Gifts, amongst others. Additionally, GTI holds a
variety of licenses for use in connection with prepaid calling cards including
entertainment properties such as Star Wars.
The purchase price for GTI is approximately $70 million, involving the
issuance of approximately 2.5 million shares of common stock and $26 million of
the Company's subordinated notes due 2001, as well as the assumption of
approximately $10 million of GTI indebtedness.
Last week, SMARTALK also announced the acquisition of Boston-based
SmarTel Communications, Inc., the nation's leading premium and incentive based
calling card company. SmarTel creates interactive communications and
value-added promotional prepaid programs for
<PAGE> 2
SMARTALK Acquires GTI
June 2, 1997
Page 2
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such clients as Gillette, Hewlett-Packard, Wells Fargo Bank, Nabisco, Pfizer and
Prudential Securities.
"The purchase of these two companies demonstrates that SMARTALK is
executing on its plan to be a consolidator of this industry. These acquisitions
are synergistic and increase our share in the marketplace and create a prepaid
calling card powerhouse on a bigger scale and wider scope than our competitors
- -- clearly positioning SMARTALK as one of the top three in the industry,"
stated SMARTALK Chairman and CEO, Robert H. Lorsch. "We are comfortable that we
can integrate these three companies smoothly with a minimum of complications.
Additionally, due to the size of the combined operation, we see many
opportunities to leverage costs through relationships with carriers, plastic
manufacturers and other vendors."
Privately held GTI posted approximately $21 million in revenues in
1996. The company was started in 1993 and will continue to operate out of its
Winter Park, Fla. headquarters, where GTI founder William R. Harger will assist
in the transition and serve as a continuing consultant to the company.
According to Harger, "I think the two best prepaid companies in the
business have just become the best prepaid company in the business. This is a
perfect step for GTI as it brings us in under a bigger umbrella, which will
bring both operating and cost efficiencies into play."
"Bill has done an excellent job in building GTI," continued Lorsch.
"GTI's success in the retail drug and supermarket segments fit well with our
existing retail distribution network."
SMARTALK manufactures and distributes prepaid calling cards and other
enhanced telecommunications products for retail and promotional marketing
purposes. The Company currently maintains retail distribution agreements with
mass merchandisers, consumer electronics retailers and home office superstores,
such as Office Depot, Future Shop, Venture Stores, The Good Guys, Staples, Best
Buy, Service Merchandise, Jewel/Osco Combo Stores, Osco Drug, Sav-On Drug,
OfficeMax, Bradlees, Marshall Field's, Robinsons-May, and Builders Square, as
well as supermarkets, university book stores and convenience stores nationwide.
Headquartered in Los Angeles, SMARTALK is a member of the Telecommunications
Resellers Association, International Telecard Association and the Consumer
Electronics Manufacturer's Association.
<PAGE> 3
SMARTALK Acquires GTI
June 2, 1997
Page 3
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###
Note: Certain statements made herein that are not historical are
forward-looking within the meaning of the Private Securities Litigation Reform
Act of 1995. Such statements include, but are not limited to, the Company's
utilization of GTI's existing retail and promotional relationships to expand
market share, the Company's plan to be a consolidator of the industry and the
Company's expectation of smooth integration of the three entities. Investors
are cautioned that all forward-looking statements involve risks and
uncertainties including, without limitation, risks related to the Company's
ability to successfully integrate GTT's operations in a timely fashion, ability
to maintain existing retailer relationships, market acceptance and consumer
demand for the Company's products and services, pricing dependence on
third-party vendors and the Company's ability to maintain efficient marketing
and distribution expenditures with new product lines. This list is not intended
to be exhaustive. Investors who seek more information about the Company's
business and relevant risk factors may wish to review the Company's SEC
reports, including, but not limited to, its Annual Report on Form 10-K for 1996.
