<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1998
Registration No. 333-51307
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
AMENDMENT NO. 1
to
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
SMARTALK TELESERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA(1) 4899 95-4502740
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
5500 FRANTZ ROAD, SUITE 125
DUBLIN, OHIO 43017
(614) 764-2933
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------
THADDEUS BEREDAY
5500 FRANTZ ROAD, SUITE 125
DUBLIN, OHIO 43017
(614) 799-4538
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
-------------
COPY TO:
ROBERT M. SMITH
DEWEY BALLANTINE LLP
333 SOUTH HOPE STREET
LOS ANGELES, CALIFORNIA 90071
(213) 626-3399
-------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than Securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------
Title of Each Class of Security to Amount to Be Proposed Maximum Proposed Maximum Amount of
Be Registered Registered Offering Price Aggregate Registration
Per Share(2) Offering Price(2) Fees
- -------------------------------------- ---------------- ------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Common Stock, no par value per share... 100,000 100% $2,018,800 $596
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A proposal to effect the reincorporation of SmarTalk TeleServices, Inc.
from California to Delaware was approved by the shareholders of the
Registrant on December 31, 1997. Accordingly, subject to receipt of all
requisite regulatory approval, the Registrant's state of incorporation
will change from California to Delaware and the Registrant will be a
Delaware corporation.
<PAGE> 2
(2) Based upon the average of the high and low sale price of the Common
Stock as reported by the Nasdaq Stock Market's National Market on April
24, 1998, estimated solely for the purpose of calculating the
registration fee in accordance with Rule 457(c) under the Securities
Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED MAY 7, 1998
PROSPECTUS
SMARTALK TELESERVICES, INC.
100,000 SHARES OF COMMON STOCK
The shares offered hereby (the "Registrable Shares") consist of 100,000
shares of common stock, no par value per share (the "Common Stock"), of SmarTalk
Teleservices, Inc. ("SmarTalk" or the "Company"), which are owned by the selling
shareholders listed herein under "Selling Security Holders" (collectively, the
"Selling Shareholders"). The Registrable Shares may be offered from time to time
by the Selling Shareholders for a period not to exceed one year after the date
of this Prospectus, in accordance with the Rights Agreement, dated March 30,
1998 (the "Registration Rights Agreement"), by and between AudioFAX IP LLC, a
Georgia limited liability company ("AudioFAX") and SmarTalk. SmarTalk shall pay
its own legal and accounting fees, all registration and filing fees attributable
to the registration of the Registrable Shares, all legal fees and filing fees
relating to state securities or "blue sky" filings, if any, the filing fee
payable to the Nasdaq Stock Market's National Market ("Nasdaq") and all printing
fees incurred in connection herewith. SmarTalk shall reimburse the Selling
Shareholders for the reasonable fees and disbursements of not more than one
counsel. SmarTalk will not receive any of the proceeds from the sale of the
Registrable Shares by any Selling Shareholder.
The Selling Shareholders have not informed SmarTalk of any specific
plans for the distribution of the Registrable Shares covered by this Prospectus,
but it is anticipated that the Registrable Shares will be sold from time to time
primarily in transactions (which may include block transactions) on Nasdaq at
the market price then prevailing, although sales may also be made in negotiated
transactions or otherwise. The Selling Shareholders and the brokers and dealers
through whom sale of the Registrable Shares may be made may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), and their commissions or discounts and other compensation may
be regarded as underwriters' compensation. See "Plan of Distribution."
On May 5, 1998, the last reported sale price of the Company's Common
Stock on Nasdaq (where it trades under the symbol "SMTK") was $21.875 per share.
-------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THE PROSPECTUS FOR
CERTAIN INFORMATION RELATING TO THE SALE OF THE NOTES.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------
May 7, 1998
<PAGE> 4
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC" or the "Commission"). Reports,
proxy statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and
CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained by mail from the Public Reference
Section of the Commission at 450 West Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The reports, proxy statements and other information
may also be obtained from the Web site that the Commission maintains at
http://www.sec.gov. SmarTalk Common Stock is listed on Nasdaq and such materials
may be inspected at the offices of Nasdaq, National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on
Form S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the
securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which were
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement. Any
statements contained herein concerning the provisions of any document filed as
an exhibit to the Registration Statement or otherwise filed with the Commission
are not necessarily complete, and in each instance reference is made to the copy
of such document so filed. Each such statement is qualified in its entirety by
such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997;
2. The description of the Company's Common Stock contained in the
Company's Report on Form 8-A, filed October 11, 1996;
3. The financial statements contained in the Company's Current
Reports on Form 8-K dated November 24, 1997 and December 22,
1997 (as amended on Form 8-K/A); and
4. The Company's Proxy Statement for the 1998 Annual Meeting of the
SmarTalk shareholders.
All other documents filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and
prior to the filing of a post-effective amendment which indicates that all
securities offered have been sold or which deregisters all securities then
remaining unsold, shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of filing such documents.
Any statement contained in this Prospectus or in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained in this Prospectus or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person, including any
beneficial owner of Registrable Shares, to whom a copy of this Prospectus is
delivered, upon the written or oral request of such person, a copy of any and
all information that has been incorporated by reference in the Prospectus not
including exhibits to the
2
<PAGE> 5
information that is incorporated by reference (unless such exhibits are
specifically incorporated by reference into such documents). Requests should be
directed to Thaddeus Bereday, the Company's Vice President-Legal Affairs,
General Counsel and Assistant Secretary, at the Company's principal executive
offices located at 5500 Frantz Road, Suite 125, Dublin, Ohio 43017. The
telephone number is (614) 764-2933.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein regarding matters that are not
historical facts are forward-looking statements (within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act). Because such
forward-looking statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those discussed under "RISK FACTORS."
3
<PAGE> 6
RISK FACTORS
Prospective investors should carefully consider the risk factors set
forth below, as well as the other information contained in this Prospectus, in
evaluating an investment in the securities offered hereby. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth below and elsewhere in this Prospectus.
ACQUISITION STRATEGY
The Company regularly pursues opportunities to expand through acquisitions.
The Company plans to continue to seek acquisitions that complement its services,
broaden its consumer base and improve its operating efficiencies. Acquisitions
may result in potentially dilutive issuances of equity securities, the
incurrence of additional debt and the amortization of expenses related to
goodwill and other intangible assets, all of which could have a material adverse
effect on the Company. Acquisitions also involve numerous additional risks,
including difficulties in assimilation of the operations, services, products and
personnel of acquired companies, which could result in charges to earnings or
otherwise adversely affect the Company's operating results. There can be no
assurance that acquisition opportunities will continue to be available, that the
Company will have access to the capital required to finance potential
acquisitions, that the Company will continue to acquire businesses or that any
acquired businesses will be profitable.
ABILITY TO INTEGRATE THE OPERATIONS OF SMARTALK, AMEX TELECOM, CONQUEST, THE
FRONTIER SELECTED ASSETS, GTI AND SMARTEL
SmarTalk recently acquired American Express Telecom, Inc., a Delaware
corporation ("Amex Telecom"), ConQuest Telecommunication Services Corp., a
Delaware corporation ("ConQuest"), the selected assets of the retail prepaid
phone card business of Frontier Corporation, a New York corporation
("Frontier"), GTI Telecom Inc., a Florida corporation ("GTI") and SmarTel
Communications, Inc., a Delaware corporation ("SmarTel"). Because of the
inherent uncertainties associated with integrating the assets, operations and
personnel of several companies, there can be no assurance that operating
efficiencies will be realized as a result of the mergers and acquisitions or
that the combination of such businesses will be successful.
LIMITED OPERATING HISTORY; NET LOSSES; ABILITY TO UTILIZE NET OPERATING LOSS
CARRYFORWARDS; ACCUMULATED DEFICIT
The Company was formed in October 1994 and has had only a limited operating
history upon which investors may base an evaluation of its performance. As a
result of operating expenses and development expenditures, the Company has
incurred significant operating and net losses to date. Net losses for the years
ended December 31, 1995, 1996 and 1997 were approximately $1.3 million, $3.1
million and $61.9 million, respectively. In addition, the ability of the Company
or the Company's subsidiaries, as the case may be, to utilize their net
operating loss carryforwards to offset future taxable income may be subject to
certain limitations contained in the Internal Revenue Code of 1986, as amended
(the "Code"), which may have a material adverse effect on the Company. As of
December 31, 1997, the Company had an accumulated deficit of approximately $68.9
million.
COMPETITION
The telecommunications industry is highly competitive, rapidly evolving and
subject to constant technological change. Currently, there are numerous
companies selling prepaid calling cards, and the Company expects competition to
increase in the future. Other providers currently offer one or more of each of
the services offered by the Company. As a service provider in the long distance
telecommunications industry, the Company's key competitors in the long distance
telecommunications industry are MCI Communications Corporation ("MCI"), AT&T
Corp. ("AT&T") and Sprint Corporation ("Sprint"), all of which are substantially
larger and have: (i) greater financial, technical, engineering, personnel and
marketing resources; (ii) longer operating histories; (iii) greater name
recognition; and (iv) larger consumer bases than the Company. These advantages
afford the Company's competitors pricing flexibility. Telecommunications
services companies may compete for consumers based on price, with the dominant
providers conducting extensive advertising campaigns in order to capture market
share. Competitors with greater financial resources may also be able to provide
more attractive incentive packages to retailers in order to encourage them to
carry products that compete with the Company's services. In addition,
competitors with greater resources than the
4
<PAGE> 7
Company may be better situated to negotiate favorable contracts with retailers.
The Company believes that existing competitors are likely to continue to expand
their service offerings to appeal to retailers and their consumers. Moreover,
because there are few, if any, substantial barriers to entry, the Company
expects that new competitors are likely to enter the telecommunications market
and attempt to market telecommunications services similar to the Company's
services which would result in greater competition.
The Company's ability to compete effectively in the telecommunications
services industry will depend upon the Company's continued ability to provide
high quality services at prices generally competitive with, or lower than, those
charged by its competitors. Certain of the Company's competitors dominate the
telecommunications industry and have the financial resources to enable them to
withstand substantial price competition, which is expected to increase
significantly, and there can be no assurance that the Company will be able to
compete successfully in the future. Moreover, there can be no assurance that
certain of the Company's competitors will not be better situated to negotiate
contracts with suppliers of telecommunications services which are more favorable
than contracts negotiated by the Company. In addition, there can be no assurance
that competition from existing or new competitors or a decrease in the rates
charged for telecommunications services by the major long distance carriers or
other competitors would not have a material adverse effect on the Company.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SERVICES
The telecommunications services industry is characterized by rapid
technological change, new product introduction and evolving industry standards.
The Company's success will depend, in significant part, on its ability to make
timely and cost-effective enhancements and additions to its technology and
introduce new services that meet consumer demands. The Company expects new
products and services, and enhancements to existing products and services, to be
developed and introduced in order to compete with the Company's services. The
Company currently is in the process of completing development of technology that
will permit it to market and deliver prepaid cellular phone service. The
proliferation of new telecommunications technology, including personal
communications services and voice communication over the Internet, may reduce
demand for long distance services, including prepaid calling cards. There can be
no assurance that the Company will be successful in developing and marketing new
services or enhancements to services that respond to these or other
technological changes or evolving industry standards. In addition, there can be
no assurance that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of its
existing services or that its new services or enhancements thereto will
adequately meet the requirements of the marketplace and achieve market
acceptance. Delay in the introduction of new services or enhancements, the
inability of the Company to develop such new services or enhancements or the
failure of such services or enhancements to achieve market acceptance could have
a material adverse effect on the Company.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been highly volatile and may
continue to be subject to wide fluctuations in response to quarterly variations
in operating results, changes in financial estimates by securities analysts, or
other events or factors. In addition, the U.S. stock market has experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities of many telecommunications companies and that
often have been unrelated to the operating performance of such companies. These
broad market fluctuations may adversely affect the market price of the Common
Stock.
DIFFICULTIES OF MANAGING RAPID GROWTH
Although the Company has experienced substantial growth in revenue in the
last year and intends to continue to grow rapidly, there can be no assurance
that the growth experienced by the Company will continue or that the Company
will be able to achieve the growth contemplated by its business strategy. The
Company's ability to continue to grow may be affected by various factors, many
of which are not within the Company's control, including competition and federal
and state regulation of the telecommunications industry. This growth has placed,
and is expected to continue to place, significant demands on all aspects of the
Company's business, including its administrative, technical and financial
personnel and systems. The Company's future operating results will substantially
depend on the ability of its officers and key employees to manage such
anticipated growth, to attract and retain additional highly qualified
management, technical and financial personnel and to implement and/or improve
its technical, administrative, financial control and reporting systems. The
Company's financial controls and reporting
5
<PAGE> 8
systems will require enhancement and further investment in the future in order
to accommodate the Company's anticipated growth. There can be no assurance that
the Company will not encounter difficulties in expanding its financial controls
and reporting systems in order to meet the Company's future needs. If the
Company is unable to respond to and manage changing business conditions, then
the quality of services, its ability to retain key personnel and its results of
operations could be materially adversely affected. Difficulties in managing
continued growth could have a material adverse effect on the Company.
DEPENDENCE ON MAJOR RETAILERS
The Company's business is dependent upon its relationships with leading
regional and national retailers. The Company's arrangements with retailers are
often pursuant to short-term arrangements. If the Company is unsuccessful in
providing competitive pricing, meeting the requirements of its retailers,
developing new products that are attractive to such retailers or complying with
the terms of its arrangements with such retailers, such retailers may fail to
market aggressively the Company's services or may terminate their relationships
with the Company, either of which could have a material adverse effect on the
Company. Substantially all of the Company's revenue to date has been derived
from the sale of the SmarTalk Card to retailers. Certain of those retailers
have, from time to time, accounted for a significant percentage of the Company's
revenue. The inability of any such retailer to pay the Company for cards shipped
or the loss of any such retailer could have a material adverse effect on the
Company.
DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL
The Company's success is largely dependent upon its executive officers, the
loss of one or more of whom could have a material adverse effect on the Company.
The Company believes that its continued success will depend to a significant
extent upon the efforts and abilities of Robert H. Lorsch, Chairman of the Board
of Directors (the "Board"), Erich L. Spangenberg, Chief Executive Officer and
Vice Chairman of the Board, Jeff Lindauer, President and Chief Operating
Officer, and Richard M. Teich, Executive Vice President. Although the Company
believes its new management structure will solidify the Company's
infrastructure, there can be no assurance that the anticipated benefits will be
realized or that the new management structure will be successful. Additionally,
although the Company believes that it would be able to locate suitable
replacements for these executives if their services were lost, there can be no
assurance it would be able to do so. Accordingly, the loss of services of any of
these individuals could have a material adverse effect on the Company. The
Company maintains, and is the sole beneficiary of, "key man" life insurance on
Messrs. Lorsch and Teich in the amounts of $3.0 million and $1.0 million,
respectively.
DEPENDENCE UPON TELECOMMUNICATIONS PROVIDERS; NO GUARANTEED SUPPLY
The Company does not own a transmission network and, accordingly, depends
primarily on Frontier, MCI, WorldCom, Inc. and, to a lesser extent, other
carriers for transmission of its long distance calls. Further, the Company is
dependent upon local exchange carriers for call origination and termination. The
Company's ability to maintain and expand its business depends, in part, on its
ability to continue to obtain telecommunications services on favorable terms
from long distance carriers and other such suppliers, as well as the cooperation
of both interexchange and local exchange carriers in originating and terminating
service for its consumers in a timely manner. The Company has not experienced
significant losses in the past because of interruptions of service at any of its
carriers, but no assurance can be given in this regard with respect to the
future. In addition, no assurance can be given that the Company will be able to
obtain long distance services in the future at favorable prices, and a material
increase in the price at which the Company obtains long distance service could
have a material adverse effect on the Company. See "--Competition."
DEPENDENCE ON FACILITIES AND PLATFORMS; DAMAGE TO FACILITIES AND PLATFORMS;
FAILURE AND DOWNTIME
The Company owns and operates the Ohio Platform, a call processing platform
site located in Columbus, Ohio, and the VoiceChoice Platform, a call processing
platform site located in San Francisco, California. Additionally, the Company
utilizes two additional call processing platforms owned and operated by West
Teleservices. The Company's network service operations are dependent upon its
ability to protect the equipment and data at such facilities against damage that
may be caused by fire, power loss, technical failures, unauthorized intrusion,
natural disasters, sabotage and other similar events. Although the Company has
taken precautions to protect itself and its consumers from events that could
interrupt delivery of services, there can be no assurance that a fire, act of
sabotage, technical failure, human error, natural disaster or a similar event
would not cause the failure of a significant technical component, thereby
resulting in an outage. Such an outage could have a material adverse effect on
the Company. The Company believes
6
<PAGE> 9
that technical failures have not resulted in any material downtime of the
SmarTalk Platforms since the Company's inception.
Although the Company maintains business interruption insurance providing for
aggregate coverage of approximately $1.0 million per occurrence, there can be no
assurance that the Company will be able to maintain its insurance, that such
insurance would continue to be available at reasonable prices, that such
insurance would cover all such losses or that such insurance would be sufficient
to compensate the Company for losses it experiences due to the Company's
inability to provide services to its consumers.
SEASONALITY; FACTORS AFFECTING OPERATING RESULTS; POTENTIAL FLUCTUATIONS IN
PERIOD-TO-PERIOD RESULTS
The Company's sales have been, and the Company expects that its sales will
continue to be, somewhat seasonal, due to holiday purchases of the SmarTalk
Card. In addition, the Company's operating results have varied significantly in
the past and may vary significantly in the future. Traditional operator-assisted
long distance services produce peak revenues during the summer months,
coincident with domestic travel and vacation patterns. Though less severe than
call center services, prepaid calling cards are also affected by seasonal demand
fluctuations with demand peaking in the spring and summer months.
Factors that may cause the Company's operating results to vary include: (i)
changes in operating expenses; (ii) the timing of the introduction of services;
(iii) market acceptance of new and enhanced versions of services; (iv) potential
acquisitions; (v) changes in legislation and regulation which affect the
competitive environment for services; (vi) general economic factors; and (vii)
the ability to recognize revenue on the unused portion of expired SmarTalk
Cards. Moreover, for many of the Company's retailers, services represent a new
merchandising category, with the attendant concerns regarding shelf space
positioning, sales force education and effective marketing and, with respect to
arrangements with certain retailers requiring customized services, there may be
significant lead-time to provide such services following receipt of customer
orders. As a result of these factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as an indication of future performance.
RISK OF LOSS FROM RETURNED TRANSACTIONS; FRAUD; BAD DEBT; THEFT OF SERVICES
The Company utilizes national credit card clearance systems for electronic
credit card settlement. The Company generally bears the same credit risks
normally assumed by other users of these systems arising from returned
transactions caused by closed accounts, frozen accounts, unauthorized use,
disputes, theft or fraud. The Company's relationships with providers of merchant
card services such as VISA and MasterCard could be adversely affected by
excessive uncollectibles or chargebacks, which are generally higher in the
telephone industry than in other industries, particularly with respect to
recharges because the transaction typically is not on a face-to-face basis in
which a cardholder signature is captured. Termination of the Company's ability
to offer recharge through merchant card services would have a material adverse
effect on the Company. In order to minimize its financial exposure, the Company
limits the amount that consumers can recharge within specified timeframes and
generally charges a higher rate for recharge services than for the initial
purchase. From time to time, persons have obtained services without rendering
payment to the Company by unlawfully utilizing the Company's access numbers and
personal identification numbers ("PINs"). Although to date the Company has not
experienced material losses due to such unauthorized use of access numbers and
customized PINs, no assurance can be given that future losses due to
unauthorized use will not be material. The Company attempts to manage these
credit, theft and fraud risks through its internal controls, monitoring and
blocking systems. The Company also maintains reserves which it deems adequate
for such risks. Past experience in estimating and establishing reserves and the
Company's historical losses are not necessarily accurate indications of the
Company's future losses or the adequacy of the reserves established by the
Company in the future. Although the Company believes that its risk management
and bad debt reserve practices are adequate, there can be no assurance that the
Company's risk management practices or reserves will be sufficient to protect
the Company from unauthorized or returned transactions or thefts of services
which could have a material adverse effect on the Company.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
As of April 28, 1998, the Company had 22,600,441 shares of Common Stock
outstanding. Of these shares, 15,626,127 shares of Common Stock are freely
tradable without restriction or further registration under the Securities Act.
The
7
<PAGE> 10
remaining 6,974,314 shares of Common Stock outstanding are "restricted
securities" as that term is defined in Rule 144 under the Securities Act ("Rule
144").
If the Company proposes to register any of its securities under the
Securities Act of 1933, as amended (the "Securities Act"), the Company generally
must notify SmarTalk Partners, LLC ("SmarTalk Partners"), the holder of
1,595,000 shares of Common Stock (the "Partners Registrable Shares") of the
Company's intent to register such Common Stock and allow SmarTalk Partners an
opportunity to include the Partners Registrable Shares in the Company's
registration. SmarTalk Partners also has the right to require the Company to
prepare and file a registration statement under the Securities Act pertaining to
the Partners Registrable Shares.
On September 17, 1997, the Company sold $150 million aggregate principal
amount of 5 3/4% convertible subordinated notes due September 15, 2004 (the
"5 3/4% Notes") in an offering pursuant to Rule 144A under the Securities Act
(the "5 3/4% Notes Offering"). In connection with the 5 3/4% Notes Offering, the
Company has filed and the Commission declared effective a shelf registration
statement on Form S-3, covering a total of 5,714,286 shares of Common Stock
issuable upon conversion of the 5 3/4% Notes. The Company is obligated to use
all reasonable efforts to keep the registration statement effective until the
shelf registration statement is no longer required for resales of the 5 3/4%
Notes or the Common Stock issued upon conversion thereof. If the shelf
registration statement ceases to be effective or usable, the Company will accrue
liquidated damages which could have a material adverse effect on the Company.
POSSIBLE INABILITY TO RECOGNIZE A PORTION OF DEFERRED REVENUE
The sale of long distance domestic and outbound international telephone
service through prepaid calling cards may be subject to "escheat" laws in
various states. These laws generally provide that payments or deposits received
in advance or in anticipation of the provision of utility (including telephone)
services that remain unclaimed for a specific period of time after the
termination of such services are deemed "abandoned property" and must be
submitted to the state. Although the Company is not aware of any case in which
such laws have been applied to the sale of prepaid calling cards, and does not
believe that such laws are applicable, in the event that such laws are deemed
applicable, the Company may be unable to recognize the portion of its deferred
revenue remaining upon the expiration of the cards with unused calling time. In
such event, the Company may be required to deliver such amounts to certain
states in accordance with these laws, which could have a material adverse effect
on the Company.
GOVERNMENT REGULATION
The Company is currently subject to federal and state government regulation
of its long distance telephone services. The Company is regulated at the federal
level by the Federal Communications Commission (the "FCC") and is currently
required to maintain both domestic and international tariffs for its services
containing the currently effective rates, terms and conditions of service. The
FCC ordered elimination of the tariffing requirement for domestic interstate
non-dominant carriers. The FCC's order is pending review and approval by the
Court of Appeals for the D.C. Circuit following long-standing appeals by the
FCC's past mandatory detariffing policies. In addition, the Company is required
to maintain a certificate of authority, issued by the FCC, to provide
international telecommunications services. The intrastate long distance
telecommunications operations of the Company are also subject to various state
laws and regulations, including prior certification, notification or
registration requirements. The Company generally must obtain and maintain
certificates of public convenience and necessity from regulatory authorities in
most states in which it offers service. In most of these jurisdictions, the
Company must file and obtain prior regulatory approval of tariffs for intrastate
services. In addition, the Company must update or amend the tariffs and, in some
cases, the certificates of public convenience and necessity when rates are
adjusted or new products are added to the long distance services offered by the
Company. The FCC and numerous state agencies also impose prior approval
requirements on transfers of control, including corporate reorganizations and
assignments of certain regulatory authorizations.
If the federal and state regulations requiring the local exchange carriers
to provide equal access for the origination and termination of calls by long
distance subscribers (such as the Company's consumers) change or if the
regulations governing the fees to be charged for such access services change,
particularly if such regulations are changed to allow
8
<PAGE> 11
variable pricing of such access fees based upon volume, such changes could have
a material adverse effect on the Company. In early 1997, the FCC instituted
significant changes to the current incumbent local exchange carrier access
charge structure. These changes were meant, in part, to bring access charges
closer to their actual costs. While there has been a general trend toward access
charge reductions, new primary interexchange charges (PICCs) were authorized by
the FCC to be imposed on interexchange carriers serving presubscribed customers.
PICCs are a flat-rate, per presubscribed line, per month access charge imposed
on all facilities based carriers (although they may be passed on to resellers
such as the Company). Facilities based interexchange carriers were assessed
interstate PICCs effective January 1, 1998. Intrastate PICCs have also been
adopted in the five-state Ameritech region (Michigan, Wisconsin, Illinois,
Indiana, and Ohio). PICCs will affect the Company only to the extent that it
offers presubscribed services. At the same time, the Company may pursue
underlying carriers for pass throughs of any access charge reductions they may
realize from incumbent local exchange carriers.
Through the ConQuest acquisition, the Company is subject to additional
federal, state and international regulation of its long distance, operator
services and prepaid calling card services. The Company is in compliance with
the requirements of the TelePhone Operator Consumer Services Improvement Act of
1990 ("TOCSIA") and the FCC's implementing regulations regarding unblocking,
branding and posting for operator services. The Company maintains informational
tariffs for its operator services and maintains on file tariffs for its long
distance and prepaid calling card services. The Company is licensed in the
states in which it operates as a long-distance operator-services provider, and
is not aware of any instance in which there has been a substantial violation of
federal or state telecommunications regulation in connection with the Company's
services. While the Company believes that it is in compliance with the
applicable federal, state and international regulations governing
telecommunications services, there can be no assurance that the FCC or the
regulatory authorities in one or more states or foreign countries will not raise
material issues with regard to the Company's compliance with applicable
regulations, will not institute new regulation or modify existing regulation, or
that federal, state and international regulatory activities will not otherwise
have a material adverse effect on the Company.
The Telecommunications Act of 1996 mandated the establishment of Universal
Service for the promotion of nationwide access to telecommunications services in
rural, insular and high cost areas that are reasonably comparable in price and
type to those found in urban areas and the promotion of access to advanced
services for schools, libraries and certain health care providers.
Telecommunications providers of interstate services, including payphone
aggregators and private network operators that offer service to others for a fee
on a non-common carrier basis, must contribute toward the funding of Universal
Service. Certain government and public entities are exempt, as are entities
whose contribution would be less than $100.00 per year. Although the Company's
competition will be similarly situated, the Universal Service Fund annual
assessment may have a material adverse effect on the long term financial
condition of the Company.
The Telecommunications Act of 1996 (Section 276) further mandated that the
FCC promulgate rules to establish a per call compensation plan in order to
ensure that all payphone providers are fairly compensated for each completed
intrastate and interstate payphone initiated call, including calls on which
payphone providers had not heretofore received compensation. Such calls included
those placed to toll free numbers (800/888) such as operator-assisted and
prepaid calling card calls, and calls placed through network access codes. In
September 1996, the FCC promulgated rules in order to implement Section 276 of
the Telecommunications Act of 1996 which established a three-phase compensation
plan for payphone providers. Under the first phase, interexchange carriers with
annual toll revenues of more than $100 million were to pay a total of $45.85 per
payphone per month for all toll free access code calls for the first year,
commensurate with their portion of total interexchange revenues. All
switch-based and facilities-based interexchange carriers were to pay $0.35 per
call to each payphone provider during the second year (although payments could
subsequently be recovered from resellers by the carriers), after which per call
compensation rates were to be left to individual market-driven rates negotiated
between payphone providers and interexchange carriers. On July 1, 1997, the D.C.
Circuit Court of Appeals vacated significant portions of the FCC's rules
including the $0.35 per call rate which was found to be arbitrary and
capricious, and remanded the matter to the FCC for reconsideration. On remand,
the FCC in September 1997, established a two-year "default" compensation rate of
$0.284 per payphone-originated toll free or access code call. At the end of the
two-year interim period, the per call payphone compensation rate will be the
deregulated market-based local coin rate less $0.066. This amount is payable by
all "switch-based" interexchange carriers (but again may be passed through to
nonfacilities-based resellers). The revised FCC rules became effective on
October 7, 1997, but continue to be subject to regulatory and legal challenges.
The Company is unable to predict whether this regulation or other potential
changes in the regulatory environment could have a material adverse effect on
the Company.
9
<PAGE> 12
CONTROL OF THE COMPANY
The directors, executive officers and their respective affiliates
beneficially own 4,740,327 shares (approximately 19.5%) of the outstanding
Common Stock, which includes 1,773,750 shares issuable upon the exercise of
stock options exercisable within 60 days of the date of this Prospectus. Mr.
Lorsch beneficially owns 3,250,393 shares (approximately 14.1%) of the
outstanding Common Stock. As a result, these shareholders in general, and Mr.
Lorsch in particular, are able to exercise significant influence over all
matters requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. Such concentration of ownership
may also have the effect of delaying or preventing a change in control of the
Company.
ANTI-TAKEOVER CONSIDERATIONS
The Company's Board has authority to issue up to 10,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of the preferred stock without further vote or action
by the Company's shareholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The Company's Amended and
Restated Articles of Incorporation (the "Articles") and Amended and Restated
Bylaws (the "Bylaws") require that any action required or permitted to be taken
by shareholders of the Company must be effected at a duly called annual or
special meeting of shareholders of the Company and may not be effected by
written consent. In addition, the Company's charter documents eliminate
cumulative voting, which may make it more difficult for a third party to gain
control of the Company's Board. Moreover, the Company's Board has the authority,
without action by, or consent of, the shareholders, to fix the rights and
preferences of and issue shares of preferred stock. These and other charter
provisions may deter a third party who would propose to acquire the Company or
to engage in a similar transaction affecting control of the Company in which the
shareholders might receive a premium for their shares over the then current
market value. Further, the Company may consider additional anti-takeover
defenses, including the implementation of a shareholder rights plan.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act
concerning the Company's future operations, economic performances and financial
condition, including such things as business strategy and measures to implement
strategy, competitive strengths, goals, expansion and growth of the Company's
business and operations and references to future success. These statements are
based on certain assumptions and analyses made by the Company in light of its
experience and its perception of historical trends, current conditions and
expected future developments as well as other factors it believes are
appropriate in the circumstances. However, whether actual results and
developments will conform with the Company's expectations and predictions is
subject to a number of risks and uncertainties, in addition to the risk factors
discussed above, including a global economic slowdown in the telecommunications
industry, unpredictable difficulties or delays in the development of new product
programs, difficulties and unanticipated expense of assimilating newly-acquired
businesses, technological shifts away from the Company's technologies and core
competencies, unforeseen interruptions to the Company's business with its
largest customers and distributors resulting from, but not limited to, strikes,
financial instabilities, unexpected government policies and regulations
affecting the Company or its significant customers, the effects of extreme
changes in monetary and fiscal policies in the U.S. and abroad, including
extreme currency fluctuations and unforeseen inflationary pressures, drastic and
unforeseen price pressures on the Company's services or significant cost
increases that cannot be recovered through price increases or productivity
improvements, significant changes in interest rates or in the availability of
financing for the Company or certain of its customers, rapid escalation of the
cost of regulatory compliance and litigation, unforeseen intergovernmental
conflicts or actions, including but not limited to armed conflict and trade
wars, any difficulties in obtaining or retaining the management or other human
resource competencies that the Company needs to achieve its business objectives,
and other factors, many of which are beyond the control of the Company.
Consequently, all of the forward-looking statements made in this Prospectus are
qualified by these cautionary statements, and there can be no assurance that the
actual results or developments anticipated by the Company will be realized or
that they will have the expected consequences to or effects on the Company and
its subsidiaries or their business or operations.
10
<PAGE> 13
USE OF PROCEEDS
SmarTalk will not receive any proceeds from the sale of the Registrable
Shares by the Selling Shareholders.
SELLING SECURITY HOLDERS
The following table sets forth the name of each Selling Shareholder and
relationship, if any, with the Company and: (i) the number of shares owned by
each Selling Shareholder as of April 29, 1998; (ii) the number of shares being
offered for sale by each Selling Shareholder under this Prospectus; (iii) the
number of shares owned by each Selling Shareholder after the offering; and (iv)
the percentage of the Common Stock of the Company owned by each Selling
Shareholder after the offering.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF PERCENT-AGE
SHARES OWNED SHARES BEING SHARES OWNED OF SHARES
BEFORE THE OFFERED FOR AFTER THE OWNED AFTER
NAME OF SELLING SECURITYHOLDER OFFERING SALE OFFERING THE OFFERING
------------------------------ -------- ---- -------- ------------
<S> <C> <C> <C> <C>
AudioFAX IP LLC 100,000 100,000 * *
</TABLE>
* Because the Selling Shareholders may, pursuant to this Prospectus, offer all
or some portion of the Common Stock they presently hold, no estimate can be
given as to the amount of the Common Stock that will be held by the Selling
Shareholders upon termination of any such sales. In addition, the Selling
Shareholders identified above may have sold, transferred or otherwise disposed
of all or a portion of their Common Stock since the date on which they provided
the information regarding their Common Stock, in transactions exempt from the
registration requirements of the Securities Act. See "Plan of Distribution."
Only Selling Shareholders identified above who beneficially own the
Common Stock set forth opposite each such Selling Shareholder's name in the
foregoing table on the effective date of the Registration Statement may sell
such Common Stock pursuant to this Prospectus. The Company may from time to
time, in accordance with the Registration Rights Agreement, include additional
Selling Shareholders in supplements to this Prospectus.
PLAN OF DISTRIBUTION
The Selling Shareholders may from time to time sell all or a portion of
the Shares in transactions on Nasdaq, in the over-the-counter market, in
negotiated transactions, or a combination of such methods of sale, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. The Shares may be sold directly or
through underwriters or broker-dealers. If the Shares are sold through
underwriters or broker-dealers, the Selling Shareholders may pay underwriting
discounts or brokerage commissions and charges. The methods by which the Shares
may be sold include: (i) a block trade in which the broker or dealer so involved
will attempt to sell the securities as agent but may position and resell a
portion of the block as principle to facilitate the transaction; (ii) purchases
by a broker or dealer as principle and resale by such broker or dealer for its
own account pursuant to this Prospectus; (iii) exchange distributions and/or
secondary distributions in accordance with the rules of the Nasdaq; (iv)
ordinary brokerage transactions and transactions in which the broker solicits
purchasers; and (v) privately negotiated transactions.
Pursuant to the provisions of the Registration Rights Agreement, the
Company will pay the costs and expenses incident to its registration and
qualification of the Shares offered hereby, including registration and filing
fees. In addition, the Company has agreed to indemnify the Selling Shareholders
in certain circumstances, against certain liabilities, including liabilities
arising under the Securities Act. Each Selling Shareholder has agreed to
indemnify the Company and its directors, and its officers who sign the
Registration Statement against certain liabilities, including liabilities
arising under the Securities Act.
Any securities covered by this Prospectus that qualify for sale pursuant
to Rule 144 or Rule 144A may be sold under Rule 144 or Rule 144A rather than
pursuant to this Prospectus. There can be no assurance that any Selling
11
<PAGE> 14
Shareholder will sell any or all of the Shares described herein, and any Selling
Shareholder may transfer, devise or gift such securities by other means not
described herein.
LEGAL MATTERS
Certain legal matters relating to the validity of the Common Stock
offered hereby will be passed upon for the Company by Dewey Ballantine LLP, Los
Angeles, California. Mr. Robert M. Smith, a director of the Company, is a member
of the law firm of Dewey Ballantine LLP.
EXPERTS
The consolidated financial statements of the Company incorporated in
this Prospectus by reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 have been so incorporated in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of SmarTel and subsidiaries as of December 31,
1995 and 1996 and for the three years in the period ended December 31, 1996
incorporated herein by reference in the Company's Current Report on Form 8-K
dated November 24, 1997 have been audited by Arthur Andersen LLP, independent
accountants, as indicated in their report to opinion with respect thereto, and
are incorporated herein by reference in reliance upon the authority of said firm
as experts in giving said report.
The financial statements of GTI as of December 31, 1996 and for the year
then ended, incorporated herein by reference in the Company's Current Report on
Form 8-K, dated November 24, 1997, have been audited by KPMG Peat Marwick LLP,
independent auditors, as stated in their report incorporated herein by
reference. The report of KPMG Peat Marwick LLP covering the December 31, 1996
financial statements of GTI contains explanatory paragraphs which state that
GTI's financial statements have been restated and that recurring losses from
operations and net capital deficiency raise substantial doubt about GTI's
ability to continue as a going concern. The 1996 GTI financial statements do not
include any adjustments that might result from the outcome of that uncertainty.
The financial statements of GTI as of December 31, 1995 and 1994 and for
the years then ended, incorporated in this Prospectus by reference to the
Company's Current Report on Form 8-K, dated November 24, 1997, have been so
incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements referred to above and the reports of each of
the accountants referred to above are incorporated herein by reference in
reliance upon said firms as experts in accounting and auditing.
The consolidated financial statements of ConQuest as of December 31,
1995 and 1996, and for each of the three years in the period ended December 31,
1996, incorporated herein by reference in the Company's Current Report on Form
8-K, dated November 24, 1997, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report incorporated herein by
reference, and are incorporated herein by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The financial statements of Amex Telecom as of December 31, 1996 and
December 31, 1997 and for the years then ended, incorporated herein by reference
in the Company's Current Report on Form 8-K, dated December 22, 1997, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
incorporated herein by reference, and are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 317 of the California General Corporation Law (the
"CGCL"), a corporation may indemnify its directors, officers, employees and
agents and its former directors, officers, employees and agents and those who
serve, at the corporation's request, in such capacities with another enterprise,
against expenses (including attorney's fees), as well as judgements, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in parties by
reason of their serving or having served in
12
<PAGE> 15
such capacity. The CGCL provides, however, that such person must have acted in
good faith and in a manner he or she reasonably believed to be in (or not
opposed to) the best interests of the corporation and, in the case of a criminal
action, such person must have had no reasonable cause to believe his or her
conduct was unlawful. In addition, the CGCL does not permit indemnification in
an action or suit by or in the right of the corporation, where such person has
been adjudged liable to the corporation, unless, and only to the extent that, a
court determines that such person fairly and reasonably is entitled to indemnity
for expenses the court deems proper in light of liability adjudication. With
respect to present or former directors and officers, indemnity is mandatory to
the extent a claim, issue or matter has been successfully defended.
The Company's Amended and Restated Bylaws (the "Bylaws") provide for
mandatory indemnification of directors and officers generally to the same extent
authorized by the CGCL. Under the Bylaws, the Company shall advance expenses
incurred by an officer or director in defending any such action if the director
or officer undertakes to repay such amount if it is determined that he or she is
not entitled to indemnification. The Company has obtained directors' and
officers' liability insurance.
The Company has entered into separate indemnification agreements with
its directors and officers. Each indemnification agreement provides for, among
other things: (i) indemnification against any and all expenses, liabilities and
losses (including attorney's fees, judgements, fines, taxes, penalties and
amounts paid in settlement) of any claim against an indemnified party unless it
is determined, as provided in the indemnification agreement, that
indemnification is not permitted under applicable law; and (ii) prompt
advancement of expenses to any indemnified party in connection with his or her
defense against any claim.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is therefore unenforceable.
13
<PAGE> 16
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information ................................................ 2
Incorporation of Certain Information by Reference .................... 2
Cautionary Statement Regarding
Forward-Looking Statements ....................................... 3
Risk Factors ......................................................... 4
Use of Proceeds ...................................................... 11
Selling Security Holders ............................................. 11
Plan of Distribution ................................................. 11
Legal Matters ........................................................ 12
Experts .............................................................. 12
Indemnification of Directors and Officers ............................ 12
</TABLE>
100,000 SHARES
SMARTALK TELESERVICES, INC.
COMMON STOCK
________________
PROSPECTUS
MAY 7, 1998
________________
================================================================================
<PAGE> 17
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with
the registration of the Common Stock offered hereby. The Company will bear all
of such expenses. All amounts are estimated except for the Securities and
Exchange Commission registration fee and Nasdaq entry fee.
PAYABLE
BY REGISTRANT
<TABLE>
<S> <C>
SEC registration fee........................................... $ 596
Legal fees and expenses........................................ 7,500
Accounting fees and expenses................................... 5,000
Nasdaq entry fee............................................... 2,000
Miscellaneous fees and expenses................................ 2,404
Total.................................................... $15,000
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 317 of the California General Corporation Law (the
"CGCL"), a corporation may indemnify its directors, officers, employees and
agents and its former directors, officers, employees and agents and those who
serve, at the corporation's request, in such capacities with another enterprise,
against expenses (including attorney's fees), as well as judgements, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in parties by
reason of their serving or having served in such capacity. The CGCL provides,
however, that such person must have acted in good faith and in a manner he or
she reasonably believed to be in (or not opposed to) the best interests of the
corporation and, in the case of a criminal action, such person must have had no
reasonable cause to believe his or her conduct was unlawful. In addition, the
CGCL does not permit indemnification in an action or suit by or in the right of
the corporation, where such person has been adjudged liable to the corporation,
unless, and only to the extent that, a court determines that such person fairly
and reasonably is entitled to indemnity for expenses the court deems proper in
light of liability adjudication. With respect to present or former directors and
officers, indemnity is mandatory to the extent a claim, issue or matter has been
successfully defended.
The Company's Amended and Restated Bylaws (the "Bylaws") provide for
mandatory indemnification of directors and officers generally to the same extent
authorized by the CGCL. Under the Bylaws, the Company shall advance expenses
incurred by an officer or director in defending any such action if the director
or officer undertakes to repay such amount if it is determined that he or she is
not entitled to indemnification. The Company has obtained directors' and
officers' liability insurance.
The Company has entered into separate indemnification agreements with
its directors and officers. Each indemnification agreement provides for, among
other things: (i) indemnification against any and all expenses, liabilities and
losses (including attorney's fees, judgements, fines, taxes, penalties and
amounts paid in settlement) of any claim against an indemnified party unless it
is determined, as provided in the indemnification agreement, that
indemnification is not permitted under applicable law; and (ii) prompt
advancement of expenses to any indemnified party in connection with his or her
defense against any claim.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER. DESCRIPTION
<S> <C>
2.1 Stock Purchase Agreement, dated as of December 22, 1997, by and
among SmarTalk TeleServices, Inc., American Express Telecom, Inc.
and American Express Travel Related Services Company, Inc.
(without Schedules).(1)
2.2 Asset Purchase Agreement, dated October 22, 1997, among SmarTalk
TeleServices, Inc., SMTK NY-1 Corp. and Frontier Corporation.(2)
</TABLE>
II-1
<PAGE> 18
<TABLE>
<S> <C>
2.3 Agreement and Plan of Reorganization and Merger, dated as of July
30, 1997, by and among ConQuest Telecommunication Services Corp.,
SmarTalk TeleServices, Inc. and SMTK Acquisition Corp. II.(3)
2.4 Stock Purchase Agreement, dated May 31, 1997, by and among
SmarTalk TeleServices, Inc., GTI Telecom, Inc. Waterton
Investment Group I, LLC and William R. Harger.(4)
2.5 Agreement and Plan of Merger, dated May 24, 1997, among SmarTalk
TeleServices, Inc., SMTK Acquisition Corporation, SmarTel
Communications, Inc., and each of the stockholders of SmarTel
Communications, Inc.(5)
3.1 Amended and Restated Articles of Incorporation.(6)
3.2 Amended and Restated Bylaws.(6)
4.1 Registration Rights Agreement.(6)
4.2 Specimen Stock Certificate.(6)
4.3 Terms of Contingent Value Rights.(5)
4.4 Form of SmarTalk TeleServices, Inc. 10% Subordinated Note Due
2001.(4)
4.5 Registration Rights Agreement, dated as of May 31, 1997, among
SmarTalk TeleServices, Inc., William R. Harger and Waterton
Investment Group I, LLC.(4)
4.6 Indenture, dated as of September 17, 1997, between SmarTalk
TeleServices, Inc. and Wilmington Trust Company, as Trustee.(7)
4.7 Registration Rights Agreement, dated as of September 12, 1997,
among SmarTalk TeleServices, Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and Salomon Brothers Inc.(7)
5.1 Opinion of Dewey Ballantine LLP regarding legality of shares
being registered.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of Price Waterhouse LLP.
23.5 Consent of Ernst & Young LLP.
23.6 Consent of Ernst & Young LLP.
23.7 Consent of Dewey Ballantine LLP (included in its opinion filed as
Exhibit 5.1).
24.1 Powers of Attorney (included on the signature page of this
Registration Statement).
</TABLE>
(1) Incorporated by reference to SmarTalk's Form 8-K, dated December
22, 1997 (amended on Form 8-K/A).
(2) Incorporated by reference to SmarTalk's Form 8-K, dated October
22, 1997.
(3) Incorporated by reference to SmarTalk's Form 8-K, dated July 30,
1997.
(4) Incorporated by reference to SmarTalk's Form 8-K, dated June 1,
1997 (amended on Form 8-K/A).
(5) Incorporated by reference to SmarTalk's Form 8-K, dated May 28,
1997 (amended on Form 8-K/A).
(6) Incorporated by reference to SmarTalk's Registration Statement on
Form S-1, registration number 333-10391, filed with the Securities and
Exchange Commission on August 19, 1996 and the amendments thereto.
(7) Incorporated by reference to SmarTalk's Form 8-K, dated September
17, 1997.
(b) Financial Statement Schedules.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-2
<PAGE> 19
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE> 20
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Robert H. Lorsch, Erich L. Spangenberg and Thaddeus Bereday his true and lawful
attorney-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on the 7th day
of May, 1998.
SMARTALK TELESERVICES, INC.
By: /s/ ERICH L. SPANGENBERG
-------------------------------------
Name: Erich L. Spangenberg
Title: Vice Chairman of the Board of
Directors and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------- ------------------------------- ------------------
<S> <C> <C>
/s/ ROBERT H. LORSCH Chairman of the Board of May 7, 1998
- -------------------------------- Directors
Robert H. Lorsch
/s/ ERICH L. SPANGENBERG Vice Chairman of the Board of May 7, 1998
- -------------------------------- Directors and Chief Executive
Erich L. Spangenberg Officer
(Principal Executive Officer)
/s/ GLEN ANDREW FOLCK Vice President of Finance, May 7, 1998
- -------------------------------- Chief Financial Officer and
Glen Andrew Folck Assistant Secretary
(Principal Financial and
Accounting Officer)
/s/ AHMED O. ALFI Director May 7, 1998
- --------------------------------
Ahmed O. Alfi
/s/ FRED F. FIELDING Director May 7, 1998
- --------------------------------
Fred F. Fielding
/s/ KENNETH A. VIELLIEU Director May 7, 1998
- --------------------------------
Kenneth A. Viellieu
/s/ ROBERT M. SMITH Director May 7, 1998
- --------------------------------
Robert M. Smith
</TABLE>
II-4
<PAGE> 1
EXHIBIT 5.1
May 1, 1998
SmarTalk TeleServices, Inc.
5500 Frantz Road, Suite 125
Dublin, Ohio 43017
Dear Sirs:
In connection with the registration under the Securities Act of 1933
(the "Act") of 100,000 shares (the "Securities") of Common Stock, no par value,
of SmarTalk TeleServices, Inc., a California corporation (the "Company"), we,
as your special counsel, have examined such corporate records, certificates and
other documents, and such questions of law, as we have considered necessary or
appropriate for the purposes of this opinion. Upon the basis of such
examination, we advise you that, in our opinion, the Securities are validly
issued, fully paid and nonassessable.
The foregoing opinion is limited to the Federal laws of the United
States, and the laws of the State of California, and we are expressing no
opinion as to the effect of the laws of any other jurisdiction.
We have relied as to certain matters on information obtained from
public officials, officers of the Company and other sources believed by us to
be responsible.
We hereby consent to the filing of this opinion as an exhibit to the
registration statement and to the references to us under the heading "Legal
Matters" in the Prospectus. In giving such consent, we do not thereby admit
that we are in the category of persons whose consent is required under Section
7 of the Act.
Very truly yours,
/s/ Dewey Ballantine LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 of our report
dated March 30, 1998, appearing in Part II, Item 8, "Financial Statements -
Report of Independent Accountants," of SmarTalk TeleServices, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
Columbus, Ohio
May 1, 1998
<PAGE> 1
EXHIBIT 23.2
[ARTHUR ANDERSEN LLP LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference into SmarTalk TeleServices, Inc. Registration Statement on Form S-3
of our report dated April 4, 1997 (except with respect to the matter discussed
in Notes 1, 3(a), 4(d), 5 and 9, as to which the date is May 24, 1997 and to
the matter discussed in Note 1(c), as to which the date is November 24, 1997)
included in SmarTalk TeleServices, Inc. Form 8-K dated November 24, 1997, on
the financial statements of SmarTel Communications, Inc. and subsidiaries (the
Company) as of December 31, 1995 and 1996 and for the three years in the period
ended December 31, 1996 and to all references to our Firm included in this
registration statement. It should be noted that we have not audited any
financial statements of the Company subsequent to December 31, 1996 or
performed any audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
Boston, Massachusetts
May 1, 1998
<PAGE> 1
EXHIBIT 23.3
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors of
GTI Telecom, Inc.:
We consent to the use of our report dated April 4, 1997, except as to note 15
which is as of May 15, 1997 and note 2 which is as of November 24, 1997 with
respect to the balance sheet of GTI Telecom, Inc. as of December 31, 1996 (as
restated), and the related statements of operations, stockholders' deficit and
cash flows for the year ended December 31, 1996 (as restated), which report
appears in the Form 8-K of SmarTalk TeleServices, Inc. dated November 27, 1997
incorporated by reference in the registration statement on Form S-3 of SmarTalk
Teleservices, Inc. to be filed on May 5, 1998 and to the reference to our firm
under the heading "Experts" in the Form S-3.
Our report contains an explanatory paragraph which states that the Company's
financial statements have been restated.
Our report also contains an explanatory paragraph that states that GTI Telecom,
Inc. has suffered recurring losses from operations and has working capital and
stockholder's deficits which raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
/s/ KPMG Peat Marwick LLP
-------------------------
Orlando, Florida
May 4, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 of SmarTalk
TeleServices, Inc. of our report dated July 18, 1996, except as to Note 2,
which is as of November 24, 1997, relating to the financial statements of GTI
Telecom, Inc., which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
Columbus, Ohio
May 1, 1998
<PAGE> 1
EXHIBIT 23.5
CONSENT
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3 No. 333-51307) and related Prospectus of
SmarTalk TeleServices, Inc. for the registration of 100,000 shares of its
common stock and to the incorporation by reference therein of our report dated
February 7, 1997 (except Note 11 as to which the date is February 19, 1997 and
the last paragraph of Note 9 as to which the date is November 25, 1997), with
respect to the consolidated financial statements of ConQuest Telecommunication
Services Corp. included in the Current Report on Form 8-K of SmarTalk
TeleServices, Inc. dated November 24, 1997, filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
May 1, 1998
Columbus, Ohio
<PAGE> 1
EXHIBIT 23.6
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3 No. 333-51307) and related Prospectus of
SmarTalk TeleServices, Inc. for the registration of 100,000 shares of its common
stock and to the incorporation by reference therein of our report dated
February 2, 1998, with respect to the financial statements of American Express
Telecom, Inc. included in the Current Report on Form 8-K/A of SmarTalk
TeleServices, Inc. dated March 30, 1998 filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
Salt Lake City, Utah
May 1, 1998
