<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1997 Commission File No. 0-21579
SMARTALK TELESERVICES, INC.
--------------------------
Incorporated under the laws IRS Employer Identification
of California No. 95-4502740
1640 S. Sepulveda Boulevard
Suite 500
Los Angeles, California 90025
Telephone: 310-444-8800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock at April 18, 1997:
Voting, No par value: 12,959,679
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMARTALK TELESERVICES, INC.
BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
March 31,
-----------------------------------------
ASSETS 1997 1996
----------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 42,355,298 $ 1,894,648
Trade accounts receivable (less allowance for doubtful
accounts of $89,724 and $70,286, respectively) 2,904,465 765,887
Inventories 809,237 686,494
Prepaid expenses 460,892 107,534
Other current assets 1,931,611 785,388
----------------- -----------------
Total current assets 48,461,503 4,239,951
Non-current assets:
Property and equipment, net 1,123,626 238,373
Other non-current assets 157,456 74,063
----------------- -----------------
Total assets $ 49,742,585 $ 4,552,387
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 2,766,633 $ 1,199,433
Deferred revenue 2,638,091 3,783,915
Accrued marketing costs -- 265,891
Other accrued expenses 258,431 223,622
Note payable and current portion of long-term debt -- 265,234
----------------- -----------------
Total current liabilities 5,663,155 5,738,095
Long-term debt less current portion -- 3,434,766
----------------- -----------------
Total liabilities 5,663,155 9,172,861
Shareholders' equity (deficit):
Preferred stock, no par value; authorized 10,000,000 shares;
no shares issued and outstanding -- --
Common stock, no par value; authorized 100,000,000 shares;
issued and outstanding 12,959,679 and 8,824,834 shares, 51,361,077 315,000
respectively
Accumulated deficit (7,281,647) (4,935,474)
----------------- -----------------
Total shareholders' equity (deficit) 44,079,430 (4,620,474)
----------------- -----------------
Total liabilities and shareholders' equity (deficit) $ 49,742,585 $ 4,552,387
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
SMARTALK TELESERVICES, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------ ------------
1997 1996
------------ ------------
<S> <C> <C>
Revenue $ 7,368,333 $ 1,139,366
Cost of revenue 4,760,748 812,878
------------ ------------
Gross profit 2,607,585 326,488
Sales and marketing 2,545,414 661,040
General and administrative 901,231 697,307
------------ ------------
Operating loss (839,060) (1,031,859)
Interest income 528,763 14,910
Interest expense -- 59,723
------------ ------------
Loss before income taxes (310,297) (1,076,672)
Provision for income taxes -- --
------------ ------------
Net loss $ (310,297) $ (1,076,672)
============ ============
Net loss per share $ (0.02) $ (0.12)
============ ============
Weighted average number of shares 12,897,674 9,335,348
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SMARTALK TELESERVICES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
----------------------------- Stock Accumulated
Shares Amount Subscription Deficit Total
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
December 31, 1995 8,824,834 $ 315,000 $ (300,000) $ (1,394,774) $ (1,379,774)
Issuance of subscribed shared -- -- 300,000 -- 300,000
Purchase of assets of related entity -- -- -- (2,464,028) (2,464,028)
Compensation under stock options
issued -- 24,000 -- -- 24,000
Proceeds from sale of stock, net of
costs 4,000,000 50,439,595 -- -- 50,439,595
Stock options exercised 4,625 8,186 -- -- 8,186
Net loss -- -- -- (3,112,548) (3,112,548)
---------- ------------ ------------ ------------ ------------
December 31, 1996 12,829,459 50,786,781 -- (6,971,350) 43,815,431
Stock options exercised 130,220 574,296 -- -- 574,296
Net loss -- -- -- (310,297) (310,297)
---------- ------------ ------------ ------------ ------------
March 31, 1997 12,959,679 $ 51,361,077 $ -- $ (7,281,647) $ 44,079,430
========== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SMARTALK TELESERVICES, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (310,297) $ (1,076,672)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 43,355 8,071
Provision for bad debt -- 58,826
Sublease termination fee (325,810) --
Changes in assets and liabililties
which increase (decrease) cash:
Accounts receivable (650,273) (599,739)
Inventories (208,217) 31,551
Prepaid expenses (133,196) (104,456)
Other current assets (248,843) (25,670)
Other non-current assets (66,947) (57,963)
Accounts payable (760,559) 275,533
Deferred revenue (61,549) 87,400
Accrued marketing costs (136,931) (115,538)
Other accrued expenses (93,795) 3,940
------------ ------------
Net cash used by operating activities (2,953,062) (1,514,717)
Cash flows from investing activities:
Purchase of LCN, net of equipment acquired -- (464,027)
Capital expenditures (96,423) (241,959)
------------ ------------
Net cash used by investing activities (96,423) (705,986)
------------ ------------
Cash flows from financing activities:
Common stock proceeds, net -- 300,000
Stock options exercised 574,296 --
Note payable to related party -- 1,200,000
Revolving line of credit with related party -- 500,000
------------ ------------
Net cash from financing activities 574,296 2,000,000
------------ ------------
Decrease in cash and cash equivalents (2,475,189) (220,703)
Cash and cash equivalents at beginning of period 44,830,487 2,115,351
------------ ------------
Cash and cash equivalents at end of period $ 42,355,298 $ 1,894,648
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ -- $ 59,723
============ ============
Note payable for LCN purchase $ -- $ 2,000,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
SMARTALK TELESERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF INTERIM PRESENTATION
The accompanying interim period financial statements are unaudited, pursuant to
certain rules and regulations of the Securities and Exchange Commission, and
include, in the opinion of management, all adjustments (consisting of only
normal recurring accruals) necessary for a fair statement of the results for the
periods indicated; which, however, are not necessarily indicative of results
which may be expected for the full year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The financial statements should be
read in conjunction with the financial statements and the notes thereto for the
year ended December 31, 1996 and other information included in the Company's
Form 10-K as filed with the Securities and Exchange Commission.
2. DIVIDENDS
There were no dividends declared or paid for the three months ended March 31,
1997 or 1996.
SMARTALK TELESERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
GENERAL
SmarTalk provides convenient, easy to use, "cost-effective"
telecommunications products and services to individuals and businesses primarily
through its SmarTalk Card. The SmarTalk Card provides customers with a single
point of access to prepaid telecommunications services at a fixed rate charge
per minute regardless of the time of day or, in the case of domestic calls, the
distance of the call. The Company's services currently include domestic
calling, inbound and outbound international long distance calling, as well as
enhanced features such as sequential calling, speed dial and message delivery.
The SmarTalk Card may also be recharged on-line with a major credit card,
allowing the user to add minutes as needed.
SmarTalk services are delivered through proprietary switching,
application and database access software which run on two interactive call
processing platforms, one of which, the VoiceChoice Platform, the Company owns.
The SmarTalk platforms and the Company's proprietary software allow users in the
system to access SmarTalk services, and provide the Company with the flexibility
to customize and add features to SmarTalk services on a platform-wide basis.
SmarTalk's revenue originates from (i) Company and co-branded phone card
sales through retailers, (ii) recharges of existing phone cards, (iii) cards
sold for promotional marketing campaigns, (iv) corporate sales to businesses and
(v) prepaid phone card services provided to one of the Company's strategic
partners.
Under sales agreements with the majority of retailers, the Company sells
cards to the retailer at a set price with normal credit terms. The Company
generally invoices the retailer upon shipment, recognizing deferred revenue.
The Company recognizes revenue and reduces the deferred revenue account as the
customer utilizes calling time or upon expiration of cards containing unused
calling time. The Company also recognizes deferred revenue upon recharge of
existing phone cards and recognizes the revenue upon the usage or expiration of
the recharge minutes.
6
<PAGE>
The Company was formed in October 1994 and had limited operations until
June 1995. On October 23, 1996, the Company completed the sale of 4,000,000
shares of its stock in a public offering on the NASDAQ national stock market.
The Company raised proceeds of $53,940,000 after deducting the underwriting
discount. A portion of the proceeds were used to repay all of the Company's
indebtedness.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1997 COMPARED WITH QUARTER ENDED MARCH 31, 1996
Revenue. Revenue increased to $7,368,333 for the quarter ended March 31,
1997 from $1,139,366 for the quarter ended March 31, 1996. The substantial
increase in revenue reflects an increase in usage of SmarTalk services by users
of the SmarTalk Card, an increase in the number of retail storefronts in which
the Company's product is distributed, greater brand awareness and consumer
acceptance, and revenue attributable to a distribution and processing agreement
entered into on June 1, 1996 with West Interactive Corporation. Revenue
attributable to the distribution and processing agreement was $3,850,049 in the
first quarter of 1997 and zero for the same period last year. In addition, 11%
of total revenue for the quarter ended March 31, 1997 consisted of revenue
recognized on the unused portion of expired cards (breakage revenue) as compared
to 2.9% for the quarter ended March 31, 1996. Excluding the revenue from the
distribution and processing agreement and from breakage revenue, the recharge
percentage is 12.1% and 13.4% for the quarters ended March 31, 1997 and 1996,
respectively. This percentage decreased slightly year over year as the Company
significantly increased its credit card fraud detection procedures.
Cost of Revenue. Cost of revenue increased to $4,760,748 for the quarter
ended March 31, 1997 from $812,878 for the quarter ended March 31, 1996. The
increase was primarily attributable to greater use of the Company's services.
The gross profit percentage for the quarter ended March 31, 1997 was 35.4% as
compared to 28.7% for the quarter ended March 31, 1996. The gross margin
percentage increased primarily due to lower transport costs from the acquisition
of the VoiceChoice platform on June 15, 1996 and the Company's ability to
recognize breakage revenue.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$2,545,414 (or 34.5% of revenue) for the quarter ended March 31, 1997 from
$661,040 (or 58.0% of revenue) for the quarter ended March 31, 1996. The
decrease as a percentage of revenue was due to revenue growth in 1997. The
increased dollar amount was primarily due to the continued expansion of the
Company's marketing activities, which include co-op advertising, manufacturers
development funds and promotional goods. Additionally, commission expense was
higher in 1997 than in 1996 due to increased sales activity.
General and Administrative Expenses. General and administrative expenses
increased to $901,231 (or 12.2% of revenue) for the quarter ended March 31, 1997
from $697,307 (or 61.2% of revenue) for the quarter ended March 31, 1996. The
increase in dollar amount was primarily due to the addition of personnel and
costs associated with the growth in the Company's business. The decrease as a
percentage of revenue was due to increased revenue growth in 1997. General and
administrative costs for the quarter ended March 31, 1997 included rent
associated with the Company's move into a new office on March 1, 1996, credit
card processing fees associated with the Company's on-line recharge feature, as
well as increased general operating expenses. Additionally, quarter ended March
31, 1997 expense was reduced as the Company received enhanced feature equipment,
with a net fair value of $325,810, in exchange for early termination of a
facility sublease with a strategic partner.
Interest Income (Expense). Interest income, net of interest expense
for the quarter ended March 31, 1997 was $528,763 as compared to ($44,813) for
the quarter ended March 31, 1996. This increase was primarily due to the
investment of the proceeds from the initial public offering and the subsequent
repayment of all of the Company's debt in November 1996.
Income Tax. The Company had losses for the quarters ended March 31, 1997
and 1996. Accordingly, there was no provision for income taxes.
7
<PAGE>
Net Loss. As a result of the above items, net loss decreased to $310,297
for the quarter ended March 31, 1997 from $1,076,672 for the quarter ended March
31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
On October 23, 1996, the Company completed the sale of 4,000,000 shares
of its stock in a public offering (the "Offering"), pursuant to which the Common
Stock is now listed on the NASDAQ national stock market. The Company raised
proceeds of $53,940,000 after deducting the underwriting discount. A portion of
the proceeds were used to repay all of the Company's outstanding loans.
From inception through December 31, 1996, the Company has funded
operations primarily from cash generated by operations, borrowings under its
debt agreements and the sale of its stock. The Company's operating activities
used net cash of $2,953,062 for the quarter ended March 31, 1997. The cash
used by operating activities is primarily attributable to the Company's
continued efforts to increase its penetration of the retail distribution
channel.
In December 1996, the Company entered into a revolving credit facility
with Southern California Bank ("SCB Line of Credit"). Pursuant to the terms of
the SCB Line of Credit, the Company can borrow up to $1,000,000 secured by an
assignment of a deposit account with SCB. Interest on the outstanding principal
balance, calculated from the date of each advance to the repayment of each
advance is at a fixed rate of 7.12%. The credit facility was undrawn at March
31, 1997.
The Company believes that the proceeds from the Offering, together with
the funds anticipated to be generated from operations, will be sufficient to
finance the Company's operations for the next 12 months.
8
<PAGE>
SMARTALK TELESERVICES, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
10.1 Employment agreement of Glen A. Folck dated January 1,
1997.
10.2 Employment agreement of David A. Hamburger dated March 17,
1997.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company for the
three months ended March 31, 1997.
9
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SmarTalk TeleServices, Inc.
---------------------------
(Registrant)
Date: April 14, 1997 By: /s/ Andrew Folck
---------------------------
Andrew Folck
Chief Financial Officer
10
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 1st day of
January, 1997 between SMARTALK TELESERVICES, INC., a California corporation (the
"Company") and GLEN ANDREW FOLCK (the "Executive").
WHEREAS, the parties hereto wish to enter into an employment agreement
to employ the Executive as the Chief Financial Officer, Vice President of
Finance, and Assistant Secretary of the Company and to set forth certain
additional agreements between the Executive and the Company.
NOW, THEREFORE, in consideration of the mutual covenants and
representations contained herein, the parties hereto agree as follows:
1. Term.
-----
The Company will employ the Executive, and the Executive will serve
the Company, under the terms of this Agreement for an initial term of two years,
commencing on the date hereof. Effective as of the expiration of such initial
two-year term and as of each anniversary date thereof, the term of this
Agreement shall be extended for an additional one-year period unless, not later
than three months prior to each such respective date, either party hereto shall
have given notice to the other that the term shall not be so extended.
Notwithstanding the foregoing, the Executive's employment hereunder may be
earlier terminated, as provided in Section 4 hereof. The term of this
Agreement, as in effect from time to time in accordance with the foregoing,
shall be referred to herein as the "Term". The period of time between the
commencement and the termination of the Executive's employment hereunder shall
be referred to herein as the "Employment Period."
2. Employment.
----------
(a) Positions and Reporting. The Company hereby employs the
-----------------------
Executive for the Employment Period as its Chief Financial Officer, Vice
President of Finance, and Assistant Secretary on the terms and conditions set
forth in this Agreement. During the Employment Period, the Executive shall
report directly to the Chief Executive Officer of the Company.
(b) Authority and Duties. The Executive shall exercise such
--------------------
authority, perform such executive duties and functions and discharge such
responsibilities as are
1
<PAGE>
reasonably associated with the Executive's positions, commensurate with the
authority vested in the Executive pursuant to this Agreement and consistent with
the By-Laws of the Company. During the Employment Period, the Executive shall
devote full business time, skill and efforts to the business of the Company.
Notwithstanding the foregoing, the Executive may (i) make and manage personal
business investments of his choice and serve in any capacity with any civic,
educational or charitable organization, or any trade association, without
seeking or obtaining approval by the Board of Directors of the Company (the
"Board"), provided such activities and service do not materially interfere or
conflict with the performance of his duties hereunder and (ii) with the approval
of the Board, serve on the boards of directors of other corporations.
3. Compensation and Benefits.
-------------------------
(a) Salary. During the Employment Period, the Company shall pay to
------
the Executive, as compensation for the performance of his duties and obligations
under this Agreement, a base salary at the rate of $150,000 per annum, payable
in arrears not less frequently than monthly in accordance with the normal
payroll practices of the Company (the "Base Salary"). Such Base Salary shall be
subject to review each year for possible increase by the Board in its sole
discretion, but shall in no event be decreased from its then-existing level
during the Employment Period.
(b) Annual Bonus. The Executive shall earn bonus amounts in the form
------------
of cash and stock awards, to be paid to the Executive within sixty (60) days
following the year-end audit, based upon the satisfaction of performance
criteria that will be established by a committee of the Board (the "Compensation
Committee") in its discretion and upon consultation with the Executive at the
beginning of each year, but in no case after January 31, subject to the approval
of the Board. Such performance criteria will include corporate performance
goals consistent with the Company's business plan for the year, as well as
individual objectives for the Executive's performance that are separate from,
but are consistent with, the Company's business plan. The final determinations
as to the actual corporate and individual performance against the pre-
established goals and objectives, and the amounts of any additional bonus payout
in relationship to such performance, shall be made by the Compensation Committee
in its sole discretion. The cash and stock components of the Executive's bonus
awards shall be in the same average proportion as the awards granted to the
other senior management of the Company. For purposes of this Agreement, senior
management of the Company shall be the president, the executive vice president,
and the general counsel.
(c) Car Allowance. Employer shall pay to Executive as an automobile
-------------
allowance the sum of $600 per month during the Employment Period in lieu of any
other provision for an automobile, insurance, maintenance, gasoline and
expenses.
(d) Insurance Policies. The Company shall purchase for up to an
------------------
annual
2
<PAGE>
premium amount of $5,000 and maintain in force during the Employment Period,
life and disability insurance on the Executive, the beneficiary of which shall
be designated by the Executive (the "Executive Policies"). In the event that the
Company cancels the Executive Policies, the Executive shall have the option to
continue them in force at his own expense. The Executive Policies shall be
assigned to the Executive upon the termination of this Agreement. The Company
may also purchase "key-person" life insurance policies on the Executive's life
in such amounts and of such types as is determined by the Board. The Executive
shall cooperate fully with the Company in obtaining such insurance and shall
submit to such physical examinations and provide such information as is
reasonably required to obtain and maintain such policies. Neither the Executive
nor his successor-in-interest or estate shall have any interest in any such key-
person policies so obtained.
(e) Other Benefits. During the Employment Period, the Executive
--------------
shall receive such other life insurance, pension, disability insurance, health
insurance, holiday, vacation and sick pay benefits and other benefits which the
Company extends, as a matter of policy, to its executive employees and, except
as otherwise provided herein, shall be entitled to participate in all deferred
compensation and other incentive plans of the Company on the same basis as other
like employees of the Company. Without limiting the generality of the
foregoing, the Executive shall be entitled to three (3) weeks vacation during
each year of the Employment Period, which shall be scheduled in the Executive's
discretion, subject to and taking into account the business exigencies of the
Company. Unused vacation may be accrued up to a maximum of six (6) weeks of
unused vacation, and thereafter the Executive shall cease to accrue vacation
thereafter until used.
(f) Business Expenses. During the Employment Period, the Company
-----------------
shall promptly reimburse the Executive for all documented reasonable business
expenses incurred by the Executive in the performance of his duties under this
Agreement, in accordance with the Company's policies and standards of similar or
comparable companies.
(g) Stock Options. Concurrently with the execution of this Agreement,
-------------
the Company and Executive will enter into a Stock Option Agreement, attached
hereto as Exhibit A, pursuant to which the Company shall grant to the Executive
an option to purchase up to 50,000 shares of common stock of the Company on the
terms and conditions set forth therein.
4. Termination of Employment.
--------------------------
(a) Termination for Cause. The Company may terminate the Executive's
---------------------
employment hereunder for cause. For purposes of this Agreement and subject to
the Executive's opportunity to cure as provided in Section 4(c) hereof, the
Company shall have "cause" to terminate the Executive's employment hereunder if:
3
<PAGE>
(i) The Executive has materially breached a material provision
of this Agreement, and, if such breach is curable, it has not been cured or
reasonably commenced being cured within thirty (30) days after written
notice from the Company;
(ii) The Executive is convicted of or pleads guilty to a felony
involving financial misconduct or moral turpitude.
(b) Termination for Good Reason. The Executive shall have the
---------------------------
right at any time to terminate his employment with the Company for any reason.
For purposes of this Agreement and subject to the Company's opportunity to cure
as provided in Section 4(c) hereof, the Executive shall have "good reason" to
terminate his employment hereunder if such termination shall be the result of:
(i) a material diminution during the Employment Period in the
Executive's duties or responsibilities as set forth in Section 2 hereof;
(ii) a breach by the Company of the compensation and benefits
provisions set forth in Section 3 hereof;
(iii) termination by the Executive for any reason within 12
months following the occurrence of a Change in Control (as defined in
Section 4(e) hereof);
(iv) a material breach by the Company of any material terms of
this Agreement.
(c) Notice and Opportunity to Cure. Notwithstanding the foregoing,
------------------------------
it shall be a condition precedent to the Company's right to terminate the
Executive's employment for "cause" and the Executive's right to terminate his
employment for "good reason" that (1) the party seeking the termination shall
first have given the other party written notice stating with specificity the
reason for the termination ("breach") and (2) if such breach is susceptible of
cure or remedy, a period of 30 days from and after the giving of such notice
shall have elapsed without the breaching party having effectively cured or
remedied such breach during such 30-day period, unless such breach cannot be
cured or remedied within 30 days, in which case the period for remedy or cure
shall be extended for a reasonable time (not to exceed 30 days) provided the
breaching party has made and continues to make a diligent effort to effect such
remedy or cure.
(d) Termination Upon Death or Permanent and Total Disability. The
-------------------------------------------------------
Employment Period shall be terminated by the death of the Executive. The
Employment Period may be terminated by the Company if the Executive shall be
rendered incapable of performing his duties to the Company by reason of any
medically determined physical or mental impairment that can be expected to
result in death or
4
<PAGE>
that can be expected to last for a period of six or more consecutive months from
the first date of the disability ("Disability"). If the Employment Period is
terminated by reason of Disability of the Executive, the Company shall give 30-
days' advance written notice to that effect to the Executive.
(e) Definition of Change in Control. A "Change in Control" shall be
------------------------------
deemed to have taken place if:
(i) there shall be consummated any consolidation or merger of
the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's capital stock are
converted into cash, securities or other property (other than a
consolidation or merger of the Company in which the holders of the
Company's voting stock immediately prior to the consolidation or merger
shall, upon consummation of the consolidation or merger, own at least 50%
of the voting stock) or any sale, lease, exchange or other transfer (in one
transaction or a series of transactions contemplated or arranged by any
party as a single plan) of all or substantially all of the assets of the
Company; or
(ii) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) shall, after the date hereof, become the beneficial owner (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of securities of the Company representing 35% or more of the
voting power of all of the then outstanding securities of the Company
having the right under ordinary circumstances to vote in an election of the
Board (including, without limitation, any securities of the Company that
any such person has the right to acquire pursuant to any agreement, or upon
exercise of conversion rights, warrants or options, or otherwise, shall be
deemed beneficially owned by such person); or
(iii) individuals who as of the date hereof constitute the
entire Board and any new directors whose election by the Company's
shareholders, or whose nomination for election by the Company's board,
shall have been approved by a vote of at least a majority of the directors
then in office who either were directors at the date hereof or whose
election or nomination for election shall have been so approved (the
"Continuing Directors") shall cease for any reason to constitute a majority
of the members of the Board.
5. Consequences of Termination.
---------------------------
(a) Termination Without Cause or for Good Reason. In the event of
--------------------------------------------
termination of the Executive's employment hereunder by the Company without
"cause" (other than upon death or Disability) or by the Executive for "good
reason" (each as defined in Section 4 hereof), the Executive shall be entitled
to the following severance pay and benefits:
5
<PAGE>
(i) Severance Pay - a lump sum amount equal to three (3) times
--------------
the Executive's Base Salary as in effect immediately prior to such
termination and the highest bonus paid to the Executive during the
Employment Period.
(ii) Benefits Continuation - continuation for the longer of (A)
---------------------
the then remainder of the Term (as if a timely non-renewal notice has been
given) and (B) 24 months (the "Severance Period") of coverage under the
group medical care, disability and life insurance benefit plans or
arrangements in which the Executive is participating at the time of
termination; provided, however, that the Company's obligation to provide
such coverages shall be terminated if the Executive obtains comparable
substitute coverage from another employer at any time during the Severance
Period. The Executive shall be entitled, at the expiration of the
Severance Period, to elect continued medical coverage in accordance with
Section 4980B of the Internal Revenue Code of 1986, as amended (or any
successor provision thereto).
(b) Termination Upon Disability. In the event of termination of
---------------------------
the Executive's employment hereunder by the Company on account of Disability,
the Executive shall be entitled to the following severance pay and benefits:
(i) Severance Pay - severance payments in the form of
-------------
continuation of the Executive's Base Salary as in effect immediately prior
to such termination for a period of the longer of 12 months following the
first date of Disability and the then remainder of the Term (as if a timely
non-renewal notice has been given);
(ii) Benefits Continuation - the same benefits as provided in
---------------------
Section 5(a)(ii) above, to be provided during the Employment Period while
the Executive is suffering from Disability and for a period of 12 months
following the effective date of termination of employment by reason of
Disability.
In addition to the foregoing, the Company shall remit to the Executive
any benefits received by the Company, as beneficiary, pursuant to any additional
disability insurance policy which was maintained by the Executive prior to his
employment with the Company.
(c) Termination Upon Death. In the event of termination of the
----------------------
Executive's employment hereunder on account of the Executive's death, the
Executive's heirs, estate or personal representatives under law, as applicable,
shall be entitled to the payment of the Executive's Base Salary as in effect
immediately prior to death for a period of not less than two calendar months and
not more than the earlier of six calendar months or the payment of benefits
pursuant to the Executive's life insurance policy, as provided for in Section
3(d) above. The Executive's beneficiary or
6
<PAGE>
estate shall not be required to remit to the Company any payments received
pursuant to any life insurance policy purchased pursuant to Section 3(d) above.
(d) Other Terminations. In the event of termination of the
------------------
Executive's employment hereunder for any reason other than those specified in
subsection (a) through (c) of this Section 5, the Executive shall not be
entitled to any severance pay or benefits continuation contemplated by the
foregoing, except as may otherwise be provided under the applicable benefit
plans or award agreements relating to the Executive.
(e) Accrued Rights. Notwithstanding the foregoing provisions of this
--------------
Section 5, in the event of termination of the Executive's employment hereunder
for any reason, the Executive shall be entitled to payment of any unpaid portion
of his Base Salary through the effective date of termination, and payment of any
accrued but unpaid rights solely in accordance with the terms of any incentive
bonus or employee benefit plan or program of the Company.
(f) Conditions to Severance Benefits. (i) The Company shall have the
--------------------------------
right to seek repayment of the severance payments and benefits provided by this
Section 5 in the event that the Executive fails to honor in accordance with
their terms the provisions of Sections 6, 7 and 8 hereof.
(ii) For purposes only of this Section, Employee shall be
treated as having failed to honor the provisions of Sections 6, 7 or 8 hereof
only upon the vote of two-thirds of the Board following notice of the alleged
failure by the Company to the Executive, an opportunity for the Executive to
cure the alleged failure for a period of 30 days from the date of such notice
and the Executive's opportunity to be heard on the issue by the Board.
6. Confidentiality. The Executive agrees that he will not at any
---------------
time during the Employment Period or at any time thereafter for any reason, in
any fashion, form or manner, either directly or indirectly, divulge, disclose or
communicate to any person, firm, corporation or other business entity, in any
manner whatsoever, any confidential information or trade secrets concerning the
business of the Company, including, without limiting the generality of the
foregoing, the techniques, methods or systems of its operation or management,
any information regarding its financial matters, or any other material
information concerning the business of the Company (including customer lists),
its manner of operation, its plans or other material data (the "Business"). The
provisions of this Section 6 shall not apply to (i) information disclosed in the
performance of the Executive's duties to the Company based on his good faith
belief that such a disclosure is in the best interests of Company; (ii)
information that is, at the time of the disclosure, public knowledge; (iii)
information disseminated by the Company to third parties in the ordinary course
of business; (iv) information lawfully received by the Executive from a third
party who, based upon inquiry by the Executive, is not bound by a confidential
relationship to the Company; or (v) information disclosed
7
<PAGE>
under a requirement of law or as directed by applicable legal authority having
jurisdiction over the Executive.
7. Inventions. The Executive is hereby retained in a capacity such
----------
that the Executive's responsibilities may include the making of technical and
managerial contributions of value to Company. The Executive hereby assigns to
Company all rights, title and interest in such contributions and inventions made
or conceived by the Executive alone or jointly with others during the Employment
Period which relate to the Business. This assignment shall include (a) the
right to file and prosecute patent applications on such inventions in any and
all countries, (b) the patent applications filed and patents issuing thereon,
and (c) the right to obtain copyright, trademark or trade name protection for
any such work product. The Executive shall promptly and fully disclose all such
contributions and inventions to Company and assist Company in obtaining and
protecting the rights therein (including patents thereon), in any and all
countries; provided, however, that said contributions and inventions will be the
property of Company, whether or not patented or registered for copyright,
trademark or trade name protection, as the case may be. Inventions conceived by
the Executive which are not related to the Business, will remain the property of
the Executive.
8. Non-Competition. (i) The Executive agrees that he shall not
---------------
during the Employment Period and for a period of one (1) year thereafter,
without the approval of the Board, directly or indirectly, alone or as partner,
joint venturer, officer, director, employee, consultant, agent, independent
contractor or stockholder (other than as provided below) of any company or
business, engage in any "Competitive Business" within the United States. For
purposes of the foregoing, the term "Competitive Business" shall mean any
business directly involved in prepaid telecommunications services industry.
Notwithstanding the foregoing, the Executive shall not be prohibited during the
noncompetition period applicable above from acting as a passive investor where
he owns not more than five percent (5%) of the issued and outstanding capital
stock of any publicly-held company. During the period that the above
noncompetition restriction applies, the Executive shall not, without the written
consent of the Company, solicit any employee who is under contract with the
Company or any current or future subsidiary or affiliate thereof to terminate
his or her employment; nor shall the Executive solicit employees for any
enterprise that competes with Company; but shall have the right to solicit
employees not under contract with the Company for an enterprise that does not
compete with the Company.
9. Breach of Restrictive Covenants. The parties agree that a
-------------------------------
breach or violation of Sections 6, 7 or 8 hereof will result in immediate and
irreparable injury and harm to the innocent party, and that such innocent party
shall have, in addition to any and all remedies of law and other consequences
under this Agreement, the right to seek an injunction, specific performance or
other equitable relief to prevent the violation
8
<PAGE>
of the obligations hereunder.
10. Notice. For the purposes of this Agreement, notices, demands and
------
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified or registered mail, return receipt
requested, postage prepaid, addressed as follows:
(a) If to the Company, to:
Attn: President
SmarTalk TeleServices, Inc.
1640 South Sepulveda Blvd., Suite 500
Los Angeles, CA 90025
with a copy to:
Robert M. Smith, Esq.
Dewey Ballantine
333 South Hope Street, Suite 3000
Los Angeles, CA 90071-1406
(b) If to the Executive, to:
Glen Andrew Folck
2677 South Centinela Blvd., Suite 406
Santa Monica, CA 90405
or to such other respective addresses as the parties hereto shall designate to
the other by like notice, provided that notice of a change of address shall be
effective only upon receipt thereof.
11. Excise Tax Limit. Notwithstanding anything in this Agreement to
----------------
the contrary, in the event it shall be determined that any payment or
distribution by the Company or any other person or entity to or for the benefit
of the Executive is a "parachute payment" (within the meaning of Section 280G of
the Code, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (a "Payment") in connection with, or
arising out of, his employment with the Company or a change in ownership or
effective control of the Company (within the meaning of Section 280G of the
Code, and would be subject to the excise tax imposed by Section 4999 of the
Code) (the "Excise Tax"), the Payments shall be reduced to the extent necessary
so that such remaining Payment would not be subject to the excise tax imposed by
Section 4999 of the Code.
9
<PAGE>
12. Arbitration; Legal Fees. Except as provided in Section 9 hereof,
-----------------------
any dispute or controversy arising under or in connection with this Agreement
shall be settled exclusively by arbitration in Los Angeles County, California in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction. The Company shall reimburse Executive for all reasonable legal
fees and costs and other fees and expenses which Executive may incur in respect
of any dispute or controversy arising under or in connection with this
Agreement; provided, however, that the Company shall not reimburse any such fees
costs and expenses if the fact finder determines that the action brought by the
Executive was frivolous.
13. Waiver of Breach. Any waiver of any breach of this Agreement
----------------
shall not be construed to be a continuing waiver or consent to any subsequent
breach on the part either of the Executive or of the Company.
14. Non-Assignment; Successors. Neither party hereto may assign his
--------------------------
or its rights or delegate his or its duties under this Agreement without the
prior written consent of the other party; provided, however, that: (i) this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of the Company upon any sale of all or substantially all of the
Company's assets, or upon any merger, consolidation or reorganization of the
Company with or into any other corporation, all as though such successors and
assigns of the Company and their respective successors and assigns were the
Company; and (ii) this Agreement shall inure to the benefit of and be binding
upon the heirs, assigns or designees of the Executive to the extent of any
payments due to them hereunder. As used in this Agreement, the term "Company"
shall be deemed to refer to any such successor or assign of the Company referred
to in the preceding sentence.
15. Withholding of Taxes. All payments required to be made by the
--------------------
Company to the Executive under this Agreement shall be subject to the
withholding of such amounts, if any, relating to tax, and other payroll
deductions as the Company may reasonably determine it should withhold pursuant
to any applicable law or regulation.
16. Severability. To the extent any provision of this Agreement or
------------
portion thereof shall be invalid or unenforceable, it shall be considered
deleted therefrom and the remainder of such provision and of this Agreement
shall be unaffected and shall continue in full force and effect.
17. Director and Officer Insurance. The Company shall use its best
------------------------------
10
<PAGE>
efforts to obtain and maintain director's and officer's insurance for the
Executive (in such amounts as are appropriate for executives of businesses
comparable to that of the Company) pursuant to Board of Directors indemnity
agreements then in force and shall give timely notice to the Executive of
termination of any such insurance policy.
18. Payments; Mitigation. All amounts payable by the Company to the
--------------------
Executive under this Agreement shall be paid promptly on the dates required for
such payment in this Agreement without notice or demand. There shall be no
right of set-off or counterclaim in respect of any claim, debt or obligation
against any payment to the Executive, his dependents, beneficiaries or estate
provided for in this Agreement. Any salary, benefits or other amounts paid or
to be paid to Executive or provided to or in respect of the Executive pursuant
to this Agreement shall not be reduced by amounts owing from Executive to the
Company. Executive shall not be obligated to seek other employment in
mitigation of the amounts payable or the arrangements made under any provision
of this Agreement.
19. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
20. Governing Law. This Agreement shall be construed, interpreted
-------------
and enforced in accordance with the laws of the State of California, without
giving effect to the choice of law principles thereof.
21. Entire Agreement. This Agreement constitutes the entire
----------------
agreement by the Company and the Executive with respect to the subject matter
hereof and supersedes any and all prior agreements or understandings between the
Executive and the Company with respect to the subject matter hereof, whether
written or oral. This Agreement may be amended or modified only by a written
instrument executed by the Executive and the Company.
* * *
IN WITNESS WHEREOF, the parties have executed this Agreement as of
January 1, 1997.
SMARTALK TELESERVICES, INC.
11
<PAGE>
-----------------------------------------
By: Robert H. Lorsch
Its: President and Chief Executive Officer
----------------------------------------
Glen Andrew Folck
172017L.1
12
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 17 day of
March, 1997 between SMARTALK TELESERVICES, INC., a California corporation (the
"Company") and DAVID ANDREW HAMBURGER (the "Executive"); and
WHEREAS, the parties hereto wish to enter into an employment agreement
to employ the Executive as the Vice President - Legal Affairs and General
Counsel of the Company and to set forth certain additional agreements between
the Executive and the Company.
NOW, THEREFORE, in consideration of the mutual covenants and
representations contained herein, the parties hereto agree as follows:
1. Term.
----
The Company will employ the Executive, and the Executive will serve
the Company, under the terms of this Agreement for an initial term of three
years (the "Initial Term"), commencing on the date hereof (the "Effective
Date"). Effective as of the expiration of the Initial Term and as of each
anniversary date thereof, the term of this Agreement shall be extended for an
additional one-year period unless, not later than three months prior to each
such respective date, either party hereto shall have given notice to the other
that the term shall not be so extended. Notwithstanding the foregoing, the
Executive's employment hereunder may be earlier terminated, as provided in
Section 4 hereof. The term of this Agreement, as in effect from time to time in
accordance with the foregoing, shall be referred to herein as the "Term". The
period of time between the Effective Date and the termination of the Executive's
employment hereunder shall be referred to herein as the "Employment Period."
2. Employment.
----------
(a) Positions and Reporting. The Company hereby employs the
-----------------------
Executive for the Employment Period as its Vice President - Legal Affairs and
General Counsel on the terms and conditions set forth in this Agreement. During
the Employment Period, the Executive shall report directly to the President of
the Company.
(b) Authority and Duties. The Executive shall exercise such
--------------------
authority,
1
<PAGE>
perform such executive duties and functions and discharge such
responsibilities as are reasonably associated with the Executive's positions,
commensurate with the authority vested in the Executive pursuant to this
Agreement and consistent with the By-Laws of the Company. During the Employment
Period, the Executive shall devote full business time, skill and efforts to the
business of the Company. Notwithstanding the foregoing, the Executive may (i)
make and manage personal business investments of his choice and serve in any
capacity with any civic, educational or charitable organization, or any trade
association, without seeking or obtaining approval by the Board of Directors of
the Company (the "Board"), provided such activities and service do not
materially interfere or conflict with the performance of his duties hereunder
and (ii) with the approval of the Board, serve on the boards of directors of
other corporations.
3. Compensation and Benefits.
-------------------------
(a) Salary. During the Employment Period, the Company shall pay to
------
the Executive, as compensation for the performance of his duties and obligations
under this Agreement, a base salary at the rate of $125,000 per annum for the
period from the Effective Date through the first anniversary of the Effective
Date, at the rate of $140,000 per annum for the period from the first
anniversary of the Effective Date through the second anniversary of the
Effective Date, and at the rate of $160,000 per annum for the period from the
second anniversary of the Effective Date through the third anniversary of the
Effective Date, in each case payable in arrears not less frequently than monthly
in accordance with the normal payroll practices of the Company (the "Base
Salary"). Such Base Salary shall be subject to review each year for possible
increase by the Board in its sole discretion, but shall in no event be decreased
from the levels set forth above during the Initial Term, or from its then-
existing level thereafter.
(b) Annual Bonus. The Executive shall earn bonus amounts in the form
------------
of cash and stock awards based upon the satisfaction of performance criteria
that will be established by a committee of the Board (the "Compensation
Committee") in its discretion and upon consultation with the Executive at the
beginning of each year, but in no case after January 31, subject to the approval
of the Board. Such performance criteria will include corporate performance
goals consistent with the Company's business plan for the year, as well as
individual objectives for the Executive's performance that are separate from,
but are consistent with, the Company's business plan. The final determinations
as to the actual corporate and individual performance against the pre-
established goals and objectives, and the amounts of any additional bonus payout
in relationship to such performance, shall be made by the Compensation Committee
in its sole discretion. The cash and stock components of the Executive's bonus
awards shall be in the same average proportion as the awards granted to the
other senior management of the Company and shall reflect compensation at least
in proportion to the other senior management of the Company. For purposes of
this Agreement, senior management of the Company shall be the president, the
executive vice president, and the chief financial officer.
2
<PAGE>
(c) Car Allowance. Employer shall pay to Executive as an automobile
-------------
allowance the sum of $600 per month during the Employment Period in lieu of any
other provision for an automobile, insurance, maintenance, gasoline and
expenses.
(d) Insurance Policies. The Company shall purchase for up to an
------------------
annual premium amount of $5,000 and maintain in force during the Employment
Period, life and disability insurance on the Executive, the beneficiary of which
shall be designated by the Executive (the "Executive Policies"). In the event
that the Company cancels the Executive Policies, the Executive shall have the
option to continue them in force at his own expense. The Executive Policies
shall be assigned to the Executive upon the termination of this Agreement. The
Company may also purchase "key-person" life insurance policies on the
Executive's life in such amounts and of such types as is determined by the
Board. The Executive shall cooperate fully with the Company in obtaining such
insurance and shall submit to such physical examinations and provide such
information as is reasonably required to obtain and maintain such policies.
Neither the Executive nor his successor-in-interest or estate shall have any
interest in any such key-person policies so obtained.
(e) Other Benefits. During the Employment Period, the Executive
--------------
shall receive such other life insurance, pension, disability insurance, health
insurance, holiday, vacation and sick pay benefits and other benefits which the
Company extends, as a matter of policy, to its executive employees and, except
as otherwise provided herein, shall be entitled to participate in all deferred
compensation and other incentive plans of the Company on the same basis as other
like employees of the Company. Without limiting the generality of the
foregoing, the Executive shall be entitled to three (3) weeks vacation during
each year of the Employment Period, which shall be scheduled in the Executive's
discretion, subject to and taking into account the business exigencies of the
Company. Unused vacation may be accrued up to a maximum of six (6) weeks of
unused vacation, and thereafter the Executive shall cease to accrue vacation
thereafter until used.
(f) Business Expenses. During the Employment Period, the Company
-----------------
shall promptly reimburse the Executive for all documented reasonable business
expenses incurred by the Executive in the performance of his duties under this
Agreement, in accordance with the Company's policies and standards of similar or
comparable companies.
(g) Stock Options. Concurrently with the execution of this Agreement,
-------------
the Company and Executive will enter into a Stock Option Agreement, attached
hereto as Exhibit A, pursuant to which the Company shall grant to the Executive
an option to purchase up to 60,000 shares of common stock of the Company on the
terms and conditions set forth therein.
3
<PAGE>
4. Termination of Employment.
-------------------------
(a) Termination for Cause. The Company may terminate the Executive's
---------------------
employment hereunder for cause. For purposes of this Agreement and subject to
the Executive's opportunity to cure as provided in Section 4(c) hereof, the
Company shall have "cause" to terminate the Executive's employment hereunder if:
(i) The Executive has materially breached a material provision
of this Agreement, and, if such breach is curable, it has not been cured or
reasonably commenced being cured within thirty (30) days after written
notice from the Company;
(ii) The Executive is convicted of or pleads guilty to a felony
involving financial misconduct or moral turpitude.
(b) Termination for Good Reason. The Executive shall have the
---------------------------
right at any time to terminate his employment with the Company for any reason.
For purposes of this Agreement and subject to the Company's opportunity to cure
as provided in Section 4(c) hereof, the Executive shall have "good reason" to
terminate his employment hereunder if such termination shall be the result of:
(i) a diminution during the Employment Period in the
Executive's title, duties, reporting relationship or responsibilities as
set forth in Section 2 hereof;
(ii) a breach by the Company of the compensation and benefits
provisions set forth in Section 3 hereof;
(iii) termination by the Executive for any reason within 12
months following the occurrence of a Change in Control (as defined in
Section 4(e) hereof);
(iv) a relocation of the Executive's principal business office
by more than fifty (50) miles from its existing location; or
(v) a material breach by the Company of any material terms of
this Agreement.
(c) Notice and Opportunity to Cure. Notwithstanding the foregoing,
------------------------------
it shall be a condition precedent to the Company's right to terminate the
Executive's employment for "cause" and the Executive's right to terminate his
employment for "good reason" that (1) the party seeking the termination shall
first have given the other party written notice stating with specificity the
reason for the termination ("breach") and (2) if such breach is susceptible of
cure or remedy, a period of 30 days from and after the giving of such notice
shall have elapsed without the breaching party having effectively
4
<PAGE>
cured or remedied such breach during such 30-day period, unless such breach
cannot be cured or remedied within 30 days, in which case the period for remedy
or cure shall be extended for a reasonable time (not to exceed 30 days) provided
the breaching party has made and continues to make a diligent effort to effect
such remedy or cure.
(d) Termination Upon Death or Permanent and Total Disability. The
--------------------------------------------------------
Employment Period shall be terminated by the death of the Executive. The
Employment Period may be terminated by the Company if the Executive shall be
rendered incapable of performing his duties to the Company by reason of any
medically determined physical or mental impairment that can be expected to
result in death or that can be expected to last for a period of six or more
consecutive months from the first date of the disability ("Disability"). If the
Employment Period is terminated by reason of Disability of the Executive, the
Company shall give 30-days' advance written notice to that effect to the
Executive.
(e) Definition of Change in Control. A "Change in Control" shall be
-------------------------------
deemed to have taken place if:
(i) there shall be consummated any consolidation or merger of
the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's capital stock are
converted into cash, securities or other property (other than a
consolidation or merger of the Company in which the holders of the
Company's voting stock immediately prior to the consolidation or merger
shall, upon consummation of the consolidation or merger, own at least 50%
of the voting stock) or any sale, lease, exchange or other transfer (in one
transaction or a series of transactions contemplated or arranged by any
party as a single plan) of all or substantially all of the assets of the
Company; or
(ii) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) shall, after the date hereof, become the beneficial owner (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of securities of the Company representing 35% or more of the
voting power of all of the then outstanding securities of the Company
having the right under ordinary circumstances to vote in an election of the
Board (including, without limitation, any securities of the Company that
any such person has the right to acquire pursuant to any agreement, or upon
exercise of conversion rights, warrants or options, or otherwise, shall be
deemed beneficially owned by such person); or
(iii) individuals who as of the date hereof constitute the
entire Board and any new directors whose election by the Company's
shareholders, or whose nomination for election by the Company's board,
shall have been approved by a vote of at least a majority of the directors
then in office who either were directors at the date hereof or whose
election or nomination for election
5
<PAGE>
shall have been so approved (the "Continuing Directors") shall cease for
any reason to constitute a majority of the members of the Board.
5. Consequences of Termination.
---------------------------
(a) Termination Without Cause or for Good Reason. In the event of
--------------------------------------------
termination of the Executive's employment hereunder by the Company without
"cause" (other than upon death or Disability) or by the Executive for "good
reason" (each as defined in Section 4 hereof), the Executive shall be entitled
to the following severance pay and benefits:
(i) Severance Pay - a lump sum amount equal to three (3) times
-------------
the Executive's highest annual Base Salary and highest annual bonus; and
(ii) Benefits Continuation - continuation for the longer of (A)
---------------------
the then remainder of the Term (as if a timely non-renewal notice has been
given) and (B) 24 months (the "Severance Period") of coverage under the
group medical care, disability and life insurance benefit plans or
arrangements in which the Executive is participating at the time of
termination; provided, however, that the Company's obligation to provide
such coverages shall be terminated if the Executive obtains comparable
substitute coverage from another employer at any time during the Severance
Period. The Executive shall be entitled, at the expiration of the
Severance Period, to elect continued medical coverage in accordance with
Section 4980B of the Internal Revenue Code of 1986, as amended (or any
successor provision thereto).
(b) Termination Upon Disability. In the event of termination of
---------------------------
the Executive's employment hereunder by the Company on account of Disability,
the Executive shall be entitled to the following severance pay and benefits:
(i) Severance Pay - severance payments in the form of
-------------
continuation of the Executive's Base Salary as in effect immediately prior
to such termination for a period of the longer of 12 months following the
first date of Disability and the then remainder of the Term (as if a timely
non-renewal notice has been given);
(ii) Benefits Continuation - the same benefits as provided in
---------------------
Section 5(a)(ii) above, to be provided during the Employment Period while
the Executive is suffering from Disability and for a period of 12 months
following the effective date of termination of employment by reason of
Disability.
In addition to the foregoing, the Company shall remit to the Executive
any benefits received by the Company, as beneficiary, pursuant to any additional
disability insurance policy which was maintained by the Executive prior to his
employment with
6
<PAGE>
the Company.
(c) Termination Upon Death. In the event of termination of the
----------------------
Executive's employment hereunder on account of the Executive's death, the
Executive's heirs, estate or personal representatives under law, as applicable,
shall be entitled to the payment of the Executive's Base Salary as in effect
immediately prior to death for a period of not less than two calendar months and
not more than the earlier of six calendar months or the payment of benefits
pursuant to the Executive's life insurance policy, as provided for in Section
3(d) above. The Executive's beneficiary or estate shall not be required to
remit to the Company any payments received pursuant to any life insurance policy
purchased pursuant to Section 3(d) above.
(d) Other Terminations. In the event of termination of the
------------------
Executive's employment hereunder for any reason other than those specified in
subsection (a) through (c) of this Section 5, the Executive shall not be
entitled to any severance pay or benefits continuation contemplated by the
foregoing, except as may otherwise be provided under the applicable benefit
plans or award agreements relating to the Executive.
(e) Accrued Rights. Notwithstanding the foregoing provisions of this
--------------
Section 5, in the event of termination of the Executive's employment hereunder
for any reason, the Executive shall be entitled to payment of any unpaid portion
of his Base Salary through the effective date of termination, and payment of any
accrued but unpaid rights solely in accordance with the terms of any incentive
bonus or employee benefit plan or program of the Company.
(f) Conditions to Severance Benefits. (i) The Company shall have the
--------------------------------
right to seek repayment of the severance payments and benefits provided by this
Section 5 in the event that the Executive fails to honor in accordance with
their terms the provisions of Sections 6, 7 and 8 hereof.
(ii) For purposes only of this Section, Employee shall be
treated as having failed to honor the provisions of Sections 6, 7 or 8 hereof
only upon the vote of two-thirds of the Board following notice of the alleged
failure by the Company to the Executive, an opportunity for the Executive to
cure the alleged failure for a period of 30 days from the date of such notice
and the Executive's opportunity to be heard on the issue by the Board.
6. Confidentiality. The Executive agrees that he will not at any
---------------
time during the Employment Period or at any time thereafter for any reason, in
any fashion, form or manner, either directly or indirectly, divulge, disclose or
communicate to any person, firm, corporation or other business entity, in any
manner whatsoever, any confidential information or trade secrets concerning the
business of the Company, including, without limiting the generality of the
foregoing, the techniques, methods or
7
<PAGE>
systems of its operation or management, any information regarding its financial
matters, or any other material information concerning the business of the
Company (including customer lists), its manner of operation, its plans or other
material data (the "Business"). The provisions of this Section 6 shall not apply
to (i) information disclosed in the performance of the Executive's duties to the
Company based on his good faith belief that such a disclosure is in the best
interests of Company; (ii) information that is, at the time of the disclosure,
public knowledge; (iii) information disseminated by the Company to third parties
in the ordinary course of business; (iv) information lawfully received by the
Executive from a third party who, based upon inquiry by the Executive, is not
bound by a confidential relationship to the Company; or (v) information
disclosed under a requirement of law or as directed by applicable legal
authority having jurisdiction over the Executive.
7. Inventions. The Executive is hereby retained in a capacity such
----------
that the Executive's responsibilities may include the making of technical and
managerial contributions of value to Company. The Executive hereby assigns to
Company all rights, title and interest in such contributions and inventions made
or conceived by the Executive alone or jointly with others during the Employment
Period which relate to the Business. This assignment shall include (a) the
right to file and prosecute patent applications on such inventions in any and
all countries, (b) the patent applications filed and patents issuing thereon,
and (c) the right to obtain copyright, trademark or trade name protection for
any such work product. The Executive shall promptly and fully disclose all such
contributions and inventions to Company and assist Company in obtaining and
protecting the rights therein (including patents thereon), in any and all
countries; provided, however, that said contributions and inventions will be the
property of Company, whether or not patented or registered for copyright,
trademark or trade name protection, as the case may be. Inventions conceived by
the Executive which are not related to the Business, will remain the property of
the Executive.
8. Non-Competition. (i) The Executive agrees that he shall not
--------------
during the Employment Period and for a period of one (1) year thereafter,
without the approval of the Board, directly or indirectly, alone or as partner,
joint venturer, officer, director, employee, consultant, agent, independent
contractor or stockholder (other than as provided below) of any company or
business, engage in any "Competitive Business" within the United States. For
purposes of the foregoing, the term "Competitive Business" shall mean any
business directly involved in prepaid telecommunications services industry.
Notwithstanding the foregoing, the Executive shall not be prohibited during the
noncompetition period applicable above from practicing law as an employee of any
law firm or from acting as a passive investor where he owns not more than five
percent (5%) of the issued and outstanding capital stock of any publicly-held
company. During the period that the above noncompetition restriction applies,
the Executive shall not, without the written consent of the Company, solicit any
employee who is under contract with the Company or any current or future
subsidiary or affiliate thereof to
8
<PAGE>
terminate his or her employment; nor shall the Executive solicit employees for
any enterprise that competes with Company; but shall have the right to solicit
employees not under contract with the Company for an enterprise that does not
compete with the Company.
9. Breach of Restrictive Covenants. The parties agree that a
-------------------------------
breach or violation of Sections 6, 7 or 8 hereof will result in immediate and
irreparable injury and harm to the innocent party, and that such innocent party
shall have, in addition to any and all remedies of law and other consequences
under this Agreement, the right to seek an injunction, specific performance or
other equitable relief to prevent the violation of the obligations hereunder.
10. Notice. For the purposes of this Agreement, notices, demands and
------
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or (unless otherwise
specified) mailed by United States certified or registered mail, return receipt
requested, postage prepaid, addressed as follows:
(a) If to the Company, to:
Attn: President
SmarTalk TeleServices, Inc.
1640 South Sepulveda Blvd., Suite 500
Los Angeles, CA 90025
with a copy to:
Robert M. Smith, Esq.
Dewey Ballantine
333 South Hope Street, Suite 3000
Los Angeles, CA 90071-1406
(b) If to the Executive, to:
David Andrew Hamburger
555 South Barrington, #305
Los Angeles, CA 90049
or to such other respective addresses as the parties hereto shall designate to
the other by like notice, provided that notice of a change of address shall be
effective only upon receipt thereof.
9
<PAGE>
11. Excise Tax Limit. Notwithstanding anything in this Agreement to
----------------
the contrary, in the event it shall be determined that any payment or
distribution by the Company or any other person or entity to or for the benefit
of the Executive is a "parachute payment" (within the meaning of Section 280G of
the Code, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (a "Payment") in connection with, or
arising out of, his employment with the Company or a change in ownership or
effective control of the Company (within the meaning of Section 280G of the
Code, and would be subject to the excise tax imposed by Section 4999 of the
Code) (the "Excise Tax"), the Payments shall be reduced to the extent necessary
so that such remaining Payment would not be subject to the excise tax imposed by
Section 4999 of the Code.
12. Arbitration; Legal Fees. Except as provided in Section 9 hereof,
-----------------------
any dispute or controversy arising under or in connection with this Agreement
shall be settled exclusively by arbitration in Los Angeles County, California in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction. The Company shall reimburse Executive for all reasonable legal
fees and costs and other fees and expenses which Executive may incur in respect
of any dispute or controversy arising under or in connection with this
Agreement; provided, however, that the Company shall not reimburse any such fees
costs and expenses if the fact finder determines that the action brought by the
Executive was frivolous.
13. Waiver of Breach. Any waiver of any breach of this Agreement
----------------
shall not be construed to be a continuing waiver or consent to any subsequent
breach on the part either of the Executive or of the Company.
14. Non-Assignment; Successors. Neither party hereto may assign his
--------------------------
or its rights or delegate his or its duties under this Agreement without the
prior written consent of the other party; provided, however, that: (i) this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of the Company upon any sale of all or substantially all of the
Company's assets, or upon any merger, consolidation or reorganization of the
Company with or into any other corporation, all as though such successors and
assigns of the Company and their respective successors and assigns were the
Company; and (ii) this Agreement shall inure to the benefit of and be binding
upon the heirs, assigns or designees of the Executive to the extent of any
payments due to them hereunder. As used in this Agreement, the term "Company"
shall be deemed to refer to any such successor or assign of the Company referred
to in the preceding sentence.
15. Withholding of Taxes. All payments required to be made by the
--------------------
10
<PAGE>
Company to the Executive under this Agreement shall be subject to the
withholding of such amounts, if any, relating to tax, and other payroll
deductions as the Company may reasonably determine it should withhold pursuant
to any applicable law or regulation.
16. Severability. To the extent any provision of this Agreement or
------------
portion thereof shall be invalid or unenforceable, it shall be considered
deleted therefrom and the remainder of such provision and of this Agreement
shall be unaffected and shall continue in full force and effect.
17. Director and Officer Insurance. The Company shall use its best
------------------------------
efforts to obtain and maintain director's and officer's insurance for the
Executive (in such amounts as are appropriate for executives of businesses
comparable to that of the Company) pursuant to Board of Directors indemnity
agreements then in force and shall give timely notice to the Executive of
termination of any such insurance policy.
18. Payments; Mitigation. All amounts payable by the Company to the
--------------------
Executive under this Agreement shall be paid promptly on the dates required for
such payment in this Agreement without notice or demand. There shall be no
right of set-off or counterclaim in respect of any claim, debt or obligation
against any payment to the Executive, his dependents, beneficiaries or estate
provided for in this Agreement. Any salary, benefits or other amounts paid or
to be paid to Executive or provided to or in respect of the Executive pursuant
to this Agreement shall not be reduced by amounts owing from Executive to the
Company. Executive shall not be obligated to seek other employment in
mitigation of the amounts payable or the arrangements made under any provision
of this Agreement.
19. Authority. Each of the parties hereto hereby represents that
---------
each has taken all actions necessary in order to execute and deliver this
Agreement and the Stock Option Agreement attached hereto as Exhibit A.
20. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
21. Governing Law. This Agreement shall be construed, interpreted
-------------
and enforced in accordance with the laws of the State of California, without
giving effect to the choice of law principles thereof.
11
<PAGE>
22. Entire Agreement. This Agreement constitutes the entire
----------------
agreement by the Company and the Executive with respect to the subject matter
hereof and supersedes any and all prior agreements or understandings between the
Executive and the Company with respect to the subject matter hereof, whether
written or oral. This Agreement may be amended or modified only by a written
instrument executed by the Executive and the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
March 17, 1997.
SMARTALK TELESERVICES, INC.
-----------------------------
By: Robert H. Lorsch
Its: Chairman and President
-----------------------------
David Andrew Hamburger
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 42,355,298
<SECURITIES> 0
<RECEIVABLES> 2,994,189
<ALLOWANCES> 89,724
<INVENTORY> 809,237
<CURRENT-ASSETS> 48,461,503
<PP&E> 1,257,161
<DEPRECIATION> 133,535
<TOTAL-ASSETS> 49,742,585
<CURRENT-LIABILITIES> 5,663,155
<BONDS> 0
0
0
<COMMON> 51,361,077
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 49,742,585
<SALES> 7,368,333
<TOTAL-REVENUES> 7,368,333
<CGS> 4,760,748
<TOTAL-COSTS> 4,760,748
<OTHER-EXPENSES> 3,446,645
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 528,763
<INCOME-PRETAX> (310,297)
<INCOME-TAX> 0
<INCOME-CONTINUING> (310,297)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (310,297)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
