UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999.
---------------
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0 - 26728
Talk.com Inc.
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(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
23-2827736
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(I.R.S. Employer Identification No.)
12020 Sunrise Valley Drive, Reston, Virginia 22091
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(Address of principal executive offices - Zip code)
Registrant's telephone number, including area code: 703-391-7500
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(Former name, former address and former fiscal year,
if changed since last report.)
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 (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 13, or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court
Yes No
---
- -
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
As of August 13, 1999, 61,291,568 shares of Common Stock were issued and
outstanding.
<PAGE>
TALK.COM INC.
FORM 10-Q
JUNE 30, 1999
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998
Consolidated Statements of Operations for the three and six
months ended June 30, 1999 and 1998
Consolidated Statement of Stockholders' Equity (Deficit) for
the six months ended June 30, 1999
Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - OTHER INFORMATION
Signatures
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TALK.COM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, 1999
(UNAUDITED) DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $37,114 $ 3,063
Marketable securities -- 89,649
Accounts receivable, trade, net of allowance for uncollectible accounts
of $1,342 and $1,669, respectively 46,016 46,587
Advances to partitions and notes receivable 288 1,870
Prepaid expenses and other current assets 8,488 8,600
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 91,906 149,769
Property and equipment, net 56,679 56,703
Intangibles, net 1,109 1,150
Other assets 6,436 64,938
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $156,130 $272,560
=====================================================================================================================
LIABILITIES, CONTINGENCIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT:
Margin account indebtedness $ -- $49,621
Accounts payable and accrued expenses:
Trade and other 33,418 64,794
Partitions 5,293 4,380
Other 17,973 17,913
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 56,684 136,708
Convertible debt 94,285 242,387
Deferred revenue 24,700 28,400
Other liabilities -- 1,850
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 175,669 409,345
- ---------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
Contingent redemption value of common stock 31,941 --
- ---------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares
outstanding -- --
Common stock - $.01 par value, 100,000,000 shares authorized;
66,934,635 issued 669 669
Additional paid-in capital 209,119 265,325
Accumulated deficit (172,860) (218,229)
Treasury stock, at cost (88,408) (184,550)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (51,480) (136,785)
=====================================================================================================================
TOTAL LIABILITIES, CONTINGENCIES AND STOCKHOLDERS' EQUITY (DEFICIT) $156,130 $272,560
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------------- -------------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------- -------------------------------------
SALES $117,139 $111,098 $227,711 $202,244
COST OF SALES 73,418 93,058 148,116 169,638
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 43,721 18,040 79,595 32,606
GENERAL AND ADMINISTRATIVE EXPENSES 9,049 10,195 19,188 19,823
PROMOTIONAL, MARKETING AND ADVERTISING
EXPENSES 21,193 37,617 35,791 84,939
SIGNIFICANT OTHER CHARGES (INCOME) (1,500) 277 (2,718) 21,595
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 14,979 (30,049) 27,334 (93,751)
INVESTMENT AND OTHER INCOME (EXPENSE), NET (941) 1,004 (962) (3,810)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 14,038 (29,045) 26,372 (97,561)
PROVISION FOR INCOME TAXES -- 67,109 -- 40,388
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN 14,038 (96,154) 26,372 (137,949)
EXTRAORDINARY GAIN -- -- 18,997 --
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 14,038 $ (96,154) $45,369 $(137,949)
==================================================================================================================================
BASIC EPS:
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN $ 0.23 $ (1.49) $ 0.44 $ (2.14)
EXTRAORDINARY GAIN -- -- 0.32 --
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 0.23 $ (1.49) $ 0.76 $ (2.14)
==================================================================================================================================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 60,422 64,486 59,670 64,320
==================================================================================================================================
DILUTED EPS:
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN $ 0.22 $ (1.49) $ 0.42 $ (2.14)
EXTRAORDINARY GAIN -- -- 0.30 --
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 0.22 $ (1.49) $ 0.72 $ (2.14)
==================================================================================================================================
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING - DILUTED 63,360 64,486 62,894 64,320
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
TALK.COM INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
--------------------------- PAID-IN ACCUMULATED ----------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
------------ ------------ -------------- -------------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 66,935 $669 $265,325 $(218,229) (12,949) $(184,550) $(136,785)
Net income -- -- -- 45,369 -- -- 45,369
AOL investment -- -- (3,730) -- 4,121 58,730 55,000
Exercise of common
stock options -- -- (19,207) -- 2,590 36,912 17,705
Acquisition of treasury
stock -- -- -- -- (639) (7,686) (7,686)
Issuance of common
stock for convertible
debt -- -- (1,328) -- 575 8,186 6,858
Contingent redemption
value of common stock -- -- (31,941) -- -- -- (31,941)
==================================================================================================================================
Balance, June 30, 1999 66,935 $669 $209,119 $ (172,860) ( 6,302) $(88,408) $(51,480)
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------------
1999 1998
- ----------------------------------------------------------------------------- -----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $45,369 $(137,949)
Adjustment to reconcile net income (loss) to net cash
used in operating activities:
Unrealized loss on securities -- 2,850
Provision for bad debts (232) 1,996
Depreciation and amortization 2,912 2,768
Vested AOL warrants and amortization of prepaid AOL marketing costs -- 49,513
Purchased research and development -- 21,034
Deferred revenue (3,700) (3,700)
Extraordinary gain (18,997) --
Valuation allowance for deferred tax assets -- 40,388
(Increase) decrease in:
Accounts receivable, trade 898 (14,943)
Advances to partitions and notes receivable 1,582 14,834
Prepaid expenses and other current assets 112 (7,918)
Other assets 1,676 (38,026)
Increase (decrease) in:
Accounts and partition payables and accrued expenses (30,497) 13,581
Other liabilities (1,850) (1,587)
- --------------------------------------------------------------------------- ---------------------------------
Net cash used in operating activities (2,727) (57,159)
- --------------------------------------------------------------------------- ---------------------------------
Cash flows from investing activities:
Capital expenditures (2,846) (6,836)
Sale (purchase) of securities, net 89,649 (361,157)
Securities sold short -- (10,316)
Due from broker -- 7,856
Acquisition of intangibles -- (285)
Acquisition of ADS Holdings, Inc. -- (26,707)
- ---------------------------------------------------------------------------- ---------------------------------
Net cash provided by (used in) investing activities 86,803 (397,445)
- ---------------------------------------------------------------------------- ---------------------------------
Cash flows from financing activities:
Repayment of margin account indebtedness (49,621) --
Proceeds from margin account indebtedness -- 192,892
Acquisition of convertible debt (65,423) --
Proceeds from exercise of options and warrants 17,705 8,490
AOL investment 55,000 --
Retirement of common stock -- (1,470)
Acquisition of treasury stock (7,686) (28,890)
- ---------------------------------------------------------------------------- ---------------------------------
Net cash (used in) provided by financing activities (50,025) 171,022
- ---------------------------------------------------------------------------- ---------------------------------
Net increase (decrease) in cash and cash equivalents 34,051 (283,582)
Cash and cash equivalents, at beginning of period 3,063 316,730
========================================================================== =================================
Cash and cash equivalents, at end of period $ 37,114 $ 33,148
========================================================================== =================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basic Presentation
The consolidated financial statements include the accounts of Talk.com Inc.
and its wholly-owned subsidiaries, and have been prepared as if the entities had
operated as a single consolidated group since their respective dates of
incorporation. All intercompany balances and transactions have been eliminated.
The consolidated financial statements and related notes thereto as of June
30, 1999 and for the three and six months ended June 30, 1999 and 1998 are
presented as unaudited but in the opinion of management include all adjustments
necessary to present fairly the information set forth therein. These adjustments
consist solely of normal recurring accruals. The consolidated balance sheet
information for December 31, 1998 was derived from the audited financial
statements included in the Company's Form 10-K, as amended. These interim
financial statements should be read in conjunction with that Form 10-K report.
The interim results are not necessarily indicative of the results for any future
periods.
2. AOL Agreements
The Company has negotiated a number of amendments to its marketing
agreements with AOL based on the experience gained by the Company in the
marketing and sale of telecom services to AOL subscribers during 1998. A
substantial amendment to the AOL agreement in January 1999 in which the Company
agreed to fixed quarterly payments ranging from $10 to $15 million during the
exclusivity period of the agreement resulted in: the elimination of the
Company's obligation to make bounty and profit-sharing payments to AOL;
alteration of the terms of the online and offline marketing arrangements between
the Company and AOL; extension of the term of the AOL agreement, including the
long distance exclusivity period, until June 2003, although AOL can end the
Company's long distance exclusivity period on or after June 30, 2000 by
foregoing the fixed quarterly payments described above; elimination of AOL's
rights to receive further common stock warrants based upon customers gained from
the AOL subscriber base; AOL's contribution of up to $4.0 million per quarter
for offline marketing; and establishment of the framework for the Company to
offer additional services and products to AOL subscribers. The fixed payments to
AOL are being amortized based on estimated benefits from the AOL subscriber
base.
On January 5, 1999, pursuant to an Investment Agreement between AOL and the
Company, AOL purchased a total of 4,121,372 shares of common stock of the
Company for $55.0 million in cash and the surrender of rights to purchase
5,076,016 shares of common stock of the Company pursuant to various warrants
held by AOL. AOL agreed to end further vesting under the outstanding performance
warrant and retained vested warrants exercisable for 2,721,984 shares of Company
common stock. See Note 4(a) for a discussion of certain reimbursement
obligations of the Company in favor of AOL.
3. Related Party Transactions
On January 5, 1999, Mr. Daniel Borislow, a founder of the Company and its
Chairman of the Board and Chief Executive Officer, resigned as a director and
officer of the Company. The Company entered into various agreements and engaged
in various transactions with Mr. Borislow and certain entities in which he or
his family had an interest.
The Company paid $1.0 million to Mr. Borislow, assigned certain automobiles
to him, and continued certain of his health and medical benefits and director
and officer insurance. The Company also agreed that, as long as Mr. Borislow
owns at least two percent (2%) of the common stock (on a fully diluted basis),
Mr. Borislow and trusts for the benefit of his children would be entitled to:
registration rights with respect to their shares of common stock; the right to
require the Company to use a portion of the proceeds from any public or private
sale of debt securities by the Company (excluding borrowings from commercial
banks or other financial institutions) to repurchase debt securities of the
Company owned by Mr. Borislow or the trusts for the benefit of his children (see
Note 4 (b)); and the right to require the Company to use the proceeds from the
exercise of stock options or share purchase rights to repurchase common stock
owned by Mr. Borislow or the trusts for the benefit of his children. The Company
also agreed that, as long as Mr. Borislow had such beneficial ownership, the
Company would not, without the prior written consent of Mr. Borislow and subject
to certain exceptions: (a) engage in certain significant corporate transactions,
including the
7
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
sale or encumbrance of substantially all of its assets, mergers and
consolidations and certain material acquisitions, or, (b) for a period of 18
months from the agreement date, offer or sell any of its capital stock unless
and until Mr. Borislow and the trusts have sold or otherwise disposed of all the
shares of common stock held by him on the agreement date. In turn, Mr. Borislow
terminated his employment with the Company and agreed not to compete with the
Company for at least one year. Mr. Borislow also agreed to guarantee up to $20.0
million of the Company's obligations in connection with the AOL investment
discussed below.
On January 5, 1999, the Company assigned to a trust for the benefit of Mr.
Borislow's children the Company's interest in $53,700,000 principal amount of
subordinated notes of Communication TeleSystems International d/b/a WorldxChange
Communications, which were included in other assets at December 31, 1998, in
exchange for $62,545,000 aggregate principal amount of the Company's 2002
Convertible Notes and 2004 Convertible Notes owned by the trust. The exchange
rate was determined based on the Company's assessment of the fair values of the
WorldxChange Notes and of the Company's Convertible Notes given in exchange,
which assessment was supported by the opinion of an independent investment
banking firm as to the fairness to the Company of the consideration received.
On January 5, 1999, the Company, in open market transactions, purchased
from two trusts for the benefit of Mr. Borislow's children $65,080,000 aggregate
principal amount of the Company's 2002 Convertible Notes and 2004 Convertible
Notes owned by the trusts for $55.4 million in cash.
On March 18, 1999, the Company purchased from Mr. Borislow $11,477,000
aggregate principal amount of the Company's 2004 Convertible Notes for $10.0
million in cash with proceeds from the exercise of stock options pursuant to the
agreements with Mr. Borislow as described above.
During the three month period ended June 30, 1999, the Company purchased
from Mr. Borislow approximately 639,000 shares of common stock for approximately
$7.7 million with proceeds from the exercise of stock options pursuant to the
agreements with Mr. Borislow as described above.
4. Stockholders' Equity
(a) Contingent Redemption Value of Common Stock
On January 5, 1999, pursuant to an Investment Agreement between AOL and
the Company, AOL acquired 4,121,372 shares of common stock for $55.0 million in
cash and the surrender of rights to acquire up to 5,076,016 shares of common
stock pursuant to various warrants held by AOL. Under the terms of the
Investment Agreement with AOL, the Company has agreed to reimburse AOL for
losses AOL may incur on the sale of any of the 4,121,372 shares during the
period from June 1, 1999 through September 30, 2000. The Company has the first
right to purchase any of the 4,121,372 shares of common stock at the market
value on the day that AOL notifies the Company of their intent to sell any of
the shares plus an amount, if any, equal to the Company's reimbursement
obligation described below. The reimbursement amount would be determined by
multiplying the number of shares, if any, that AOL sells during the applicable
period by the difference between the purchase price per share paid by AOL, or
$19 per share, and the price per share that AOL sells the shares for, if less
than $19 per share. The reimbursement amount may not exceed $14 per share for
2,894,737 shares or $11 per share for 1,226,635 shares. Accordingly, the maximum
amount payable to AOL as reimbursement on the sale of AOL's shares would be
approximately $54.0 million plus AOL's reasonable expenses incurred in
connection with the sale. The Company has the option of six-month 10% note
payable to AOL to satisfy the reimbursement amount or other amounts payable on
exercise of its first refusal rights. Assuming AOL were to sell all of its
shares subject to the Company's reimbursement obligation at the closing price of
the Company's common stock as of June 30, 1999, the reimbursement amount would
be approximately $31.9 million. At June 30, 1999, the Company recorded $31.9
million for the contingent redemption value of this common stock with a
corresponding reduction in additional paid-in capital. AOL also has the right on
termination of long distance exclusivity under the AOL marketing agreements to
require the Company to repurchase the warrants to purchase 2,721,984 shares of
common stock of the Company held by AOL for a minimum price of $36.3 million,
which repurchase price can be paid in Company common stock, cash or a six-month
note. The Company has pledged the stock of its subsidiaries and has agreed to
fund an escrow account of up to $35 million from 50% of the proceeds of any debt
financing, other than a bank, receivable or other asset based financing of up to
$50 million, to secure its obligations under the Investment Agreement with AOL.
AOL has agreed that it will subordinate its security interests to permit the
securitization of certain future financings by the Company. Mr. Borislow has
agreed to guarantee up to $20,000,000 of the Company's reimbursement obligations
under the Investment Agreement with AOL.
8
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Restriction on Future Sales of Common Stock
The Company is subject to certain restrictions under the terms of certain
registration rights agreements that could affect the Company's ability to raise
capital. Under these agreements, entered into by the Company for the benefit of
Mr. Borislow and two trusts for the benefit of his children (the "Trusts"), the
Company has agreed that as long as Mr. Borislow continues to own at least 2% of
the Company's outstanding common stock, the Company will use up to 40% of the
proceeds from the sale of any public or private debt securities, excluding
borrowings from a commercial bank or financial institution, to repurchase the
Company's Convertible Notes held by Mr. Borislow or the Trusts and that until
June 2000, the Company will not sell any shares of capital stock of the Company
without the consent of Mr. Borislow (other than sales of common stock on
exercise of options or rights as long as the proceeds are used to repurchase
common stock of the Company held by Mr. Borislow or the Trusts). Mr. Borislow
has agreed to subordinate his rights to require the Company to repurchase the
Company's Convertible Notes held by him or the Trusts until the AOL escrow is
fully funded.
5. Legal Proceedings
On June 16, 1998, a purported shareholder class action was filed in the
United States District Court for the Eastern District of Pennsylvania against
the Company and certain of its officers alleging violation of the securities
laws in connection with certain disclosures made by the Company in its public
filings and seeking unspecified damages. Thereafter, additional lawsuits making
substantially the same allegations were filed by other plaintiffs in the same
court. At this point, no classes have been certified. A motion to dismiss was
recently granted as to certain officers of the Company and denied as to the
Company. There are currently no officers of the Company who is a party to these
actions. The Company believes the allegations in the complaints are without
merit and intends to defend the litigations vigorougly. The Company also is a
party to certain legal actions arising in the ordinary course of business.
The Company believes that the ultimate outcome of the foregoing actions
will not result in liability that would have a material adverse effect on the
Company's financial condition or results of operations.
9
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following tables set forth for the periods indicated certain financial
data as a percentage of sales:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
------ ------
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 62.7 83.8
------ ------
Gross profit 37.3 16.2
General and administrative expenses 7.7 9.2
Promotional, marketing and advertising expenses 18.1 33.8
Significant other charges (income) (1.3) 0.2
------ ------
Operating income (loss) 12.8 (27.0)
Investment and other income (expense), net (0.8) 0.9
------ ------
Income (loss) before income taxes 12.0 (26.1)
Provision for income taxes -- 60.4
------ ------
Net income (loss) 12.0% (86.5)%
====== ======
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
1999 1998
------ ------
Sales 100.0% 100.0%
Cost of sales 65.0 83.9
------ ------
Gross profit 35.0 16.1
General and administrative expenses 8.5 9.8
Promotional, marketing and advertising expenses 15.7 42.0
Significant other charges (income) (1.2) 10.7
------ ------
Operating income (loss) 12.0 (46.4)
Investment and other income (expense), net (0.4) (1.8)
------ ------
Income (loss) before income taxes 11.6 (48.2)
Provision for income taxes -- 20.0
------ ------
Income (loss) before extraordinary gain 11.6 (68.2)
Extraordinary gain 8.3 --
------ ------
Net income (loss) 19.9% (68.2)%
====== ======
</TABLE>
10
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Sales. Sales increased by 5.4% to $117.1million in the second quarter of
1999 from $111.1 million in the second quarter of 1998. The increase in sales
primarily reflected an increase in the number of customers under the AOL
Agreement. The AOL-related sales increase was partially offset by a decrease in
the Company's non-AOL sales.
Cost of Sales. Cost of sales decreased by 21.1% to $73.4 million in the
second quarter of 1999 from $93.1 million in the second quarter of 1998. This
decrease was primarily due to lower network usage costs for OBN services on a
per minute basis and lower partition costs due to the Company's decrease in
non-AOL sales.
Gross Margin. Gross margin increased to 37.3% in the second quarter of 1999
from 16.2% in the second quarter of 1998. The increase in gross margin was
primarily due to lower network usage costs for OBN services on a per minute
basis and lower partition costs due to the Company's decrease in non-AOL sales.
The Company anticipates continued gross margin improvement; however, price
competition continues to intensify for the Company's products and this trend can
be expected to continue to put downward pressure on gross margins.
Other Operating Expenses. General and administrative expenses decreased by
11.2% to $9.0 million in the second quarter of 1999 from $10.2 million in the
second quarter of 1998. The decrease in general and administrative expenses was
due primarily to the elimination of general and administrative expenses of TSFL
Holdings, Inc. (as discussed below) and decreased fees for professional
services, offset by increased costs associated with hiring additional personnel
to support the Company's continuing growth. During the second quarter of 1999,
the Company incurred $21.2 million of promotional, marketing and advertising
expense to expand its online customer base. During the second quarter of 1998,
the Company incurred $37.6 million of promotional, marketing and advertising
expense, including $8.5 million related to the AOL Agreement, $5.2 million for
the performance warrants issued to AOL on June 30, 1998 and $23.9 million of
other AOL related marketing and advertising efforts. During the second quarter
of 1999, the Company sold the last remaining division of TSFL Holdings, Inc.
(formerly Symetrics Industries, Inc.), resulting in a gain of $1.5 million,
which was included in significant other charges (income).
Investment and Other Income (Expense), Net. Investment and other income
(expense), net was $(0.9) million in the second quarter of 1999 versus $1.0
million in the second quarter of 1998. During the second quarter of 1999,
investment and other income (expense), net consists primarily of interest income
offset by interest expense related to the Company's convertible debt.
11
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Sales. Sales increased by 12.6% to $227.7 million in the first six months
of 1999 from $202.2 million in the first six months of 1998. The increase in
sales primarily reflected an increase in the number of customers under the AOL
Agreement. The AOL-related sales increase was partially offset by a decrease in
the Company's non-AOL sales.
Cost of Sales. Cost of sales decreased by 12.7% to $148.1 million in the
first six months of 1999 from $169.6 million in the first six months of 1998.
This decrease was primarily due to lower network usage costs for OBN services on
a per minute basis and lower partition costs due to the Company's decrease in
non-AOL sales.
Gross Margin. Gross margin increased to 35.0% in the first six months of
1999 from 16.1% in the first six months of 1998. The increase in gross margin
was primarily due to lower network usage costs for OBN services on a per minute
basis and lower partition costs due to the Company's decrease in non-AOL sales.
Other Operating Expenses. General and administrative expenses decreased by
3.2% to $19.2 million in the first six months of 1999 from $19.8 million in the
first six months of 1998. The decrease in general and administrative expenses
was due primarily to the elimination of general and administrative expenses of
TSFL Holdings, Inc. (as discussed below) and decreased fees for professional
services, offset by increased costs associated with hiring additional personnel
to support the Company's continuing growth. During the first six months of 1999,
the Company incurred $35.8 million of promotional, marketing and advertising
expense to expand its online customer base. During the first six months of 1998,
the Company incurred $84.9 million of promotional, marketing and advertising
expense, including $33.4 million related to the AOL Agreement, $16.1 million for
the performance warrants issued to AOL during the first six months of 1998 and
$35.4 million of other AOL related marketing and advertising efforts. During the
first six months of 1999, the Company sold TSFL Holdings, Inc. (formerly
Symetrics Industries, Inc.), resulting in a gain of $2.7 million which was
included in significant other charges (income). During the first six months of
1998, the Company allocated $21.0 million of the acquisition cost of TSFL
Holdings, Inc. to purchased research and development expense, which was included
in significant other charges (income).
Investment and Other Income (Expense), Net. Investment and other income
(expense), net was $(1.0) million in the first six months of 1999 versus $(3.8)
million in the first six months of 1998. During the first six months of 1999,
investment and other income (expense), net consists primarily of interest income
offset by interest expense related to the Company's convertible debt.
Extraordinary gain. During the first six months of 1999, the Company
recorded an extraordinary gain of $19.0 million from the acquisition of the
Company's convertible debt at a discount from its aggregate principal amount.
12
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $35.2 million and $13.1 million at June
30, 1999 and December 31, 1998, respectively. This increase in working capital
is primarily a result of the cash generated during the first six months 1999
from the Company's operations.
The Company expended an aggregate of $126.0 million of cash, Company common
stock and other consideration for the repurchase of Convertible Notes during the
first six months of 1999. The Company (a) purchased from Mr. Borislow and two
trusts for the benefit of Mr. Borislow's children $76,557,000 aggregate
principal amount of the Company's Convertible Notes for $65.4 million in cash;
(b) exchanged the $53.7 million remaining on the WorldxChange Notes to a trust
for the benefit of Mr. Borislow's children for $62,545,000 aggregate principal
amount of the Company's Convertible Notes and (c) purchased $9,000,000 aggregate
principal amount of the Company's Convertible Notes for $6.9 million in Company
common stock. As of June 30, 1999, the Company had reduced the principal amount
outstanding of its Convertible Notes to $94.3 million ($66.9 million of 4 1/2%
notes and $27.4 million of 5% notes) of which approximately $52.4 million
continues to be held by one of such trusts. The Company also purchased from Mr.
Borislow approximately 639,000 shares of common stock for approximately $7.7
million during the first six months of 1999 with proceeds from the exercise of
stock options pursuant to agreements with Mr. Borislow.
On January 5, 1999, pursuant to an Investment Agreement between AOL and
the Company, AOL acquired 4,121,372 shares of common stock for $55.0 million in
cash and the surrender of rights to acquire up to 5,076,016 shares of common
stock pursuant to various warrants held by AOL. Under the terms of the
Investment Agreement with AOL, the Company has agreed to reimburse AOL for
losses AOL may incur on the sale of any of the 4,121,372 shares during the
period from June 1, 1999 through September 30, 2000. The Company has the first
right to purchase any of the 4,121,372 shares of common stock at the market
value on the day that AOL notifies the Company of their intent to sell any of
the shares plus an amount, if any, equal to the Company's reimbursement
obligation described below. The reimbursement amount would be determined by
multiplying the number of shares, if any, that AOL sells during the applicable
period by the difference between the purchase price per share paid by AOL, or
$19 per share, and the price per share that AOL sells the shares for, if less
than $19 per share. The reimbursement amount may not exceed $14 per share for
2,894,737 shares or $11 per share for 1,226,635 shares. Accordingly, the maximum
amount payable to AOL as reimbursement on the sale of AOL's shares would be
approximately $54.0 million plus AOL's reasonable expenses incurred in
connection with the sale. The Company has the option of issuing a six-month 10%
note payable to AOL to satisfy the reimbursement amount or other amounts payable
on exercise of its first refusal rights. Assuming AOL were to sell all of its
shares subject to the Company's reimbursement obligation at the closing price of
the Company's common stock as of June 30, 1999, the reimbursement amount would
be approximately $31.9 million. At June 30, 1999, the Company recorded $31.9
million for the contingent redemption value of this common stock with a
corresponding reduction in additional paid-in capital. AOL also has the right on
termination of long distance exclusivity under the AOL marketing agreements to
require the Company to repurchase the warrants to purchase 2,721,984 shares of
common stock of the Company held by AOL for a minimum price of $36.3 million,
which repurchase price can be paid in Company common stock, cash or a six-month
note. The Company has pledged the stock of its subsidiaries and has agreed to
fund an escrow account of up to $35 million from 50% of the proceeds of any debt
financing, other than a bank, receivable or other asset based financing of up to
$50 million, to secure its obligations under the Investment Agreement with AOL.
AOL has agreed that it will subordinate its security interests to permit the
securitization of certain future financings by the Company. Mr. Borislow has
agreed to guarantee up to $20,000,000 of the Company's reimbursement obligations
under the Investment Agreement with AOL.
The Company is subject to certain restrictions under the terms of certain
registration rights agreements that could affect the Company's ability to raise
capital. Under these agreements, entered into by the Company for the benefit of
Mr. Borislow and two trusts for the benefit of his children (the "Trusts"), the
Company has agreed that as long as Mr. Borislow continues to own at least 2% of
the Company's outstanding common stock, the Company will use up to 40% of the
proceeds from the sale of any public or private debt securities, excluding
borrowings from a commercial bank or financial institution, to repurchase the
Company's Convertible Notes held by Mr. Borislow or the Trusts and that until
June 2000, the Company will not sell any shares of capital stock of the Company
without the consent of Mr. Borislow (other than sales of common stock on
exercise of options or rights as long as the proceeds are used to repurchase
common stock of the Company held by Mr. Borislow or the Trusts). Mr. Borislow
13
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
has agreed to subordinate his rights to require the Company to repurchase the
Company's Convertible Notes held by him or the Trusts until the AOL escrow is
fully funded.
The Company generally does not have a significant concentration of credit
risk with respect to accounts receivable due to the large number of end users
comprising the Company's customer base and their dispersion across different
geographic regions. The Company maintains reserves for potential credit losses
and, to date, such losses have been within the Company's expectations.
The Company does not, and has not historically, required significant
amounts of working capital for its day-to-day operations. The Company believes
that its current cash position and the cash flow expected to be generated from
operations will be sufficient to fund its capital expenditures, working capital
and other cash requirements for at least the next twelve months. The Company
believes that, assuming the current market price of its common stock, its cash
flow from operations will be sufficient to fund any reimbursement amount in the
event that AOL elects to sell its shares of the Company's common stock at a
price below $19 per share and that, alternatively, it has the ability to obtain
the necessary financing to fund its obligations under the AOL Investment
Agreement. Should the Company seek to raise additional capital, there can be no
assurance that, given current market conditions, the Company would be able to
raise such additional capital on terms acceptable to the Company.
YEAR 2000
The "Year 2000 issue" refers to the potential harm from computer programs
that identify dates by the last two digits of the year rather than using the
full four digits. Such programs could fail due to misidentification of dates on
or after January 1, 2000. If such a failure were to occur to the Company's
internal computer-based systems or to the computer-based systems operated by
third parties that are critical to the Company's operations, the Company could
be unable to continue to provide telecommunications services, to sign up new
customers or to bill existing customers for services. Such failures, if they
occurred, would have a material adverse effect on the Company's business,
results of operations and financial condition. However, because of the
complexity of the issues, the number of parties involved and the fact that many
of the issues are outside the Company's control, the Company cannot reasonably
predict with certainty the nature or likelihood of such effects.
The Company, using its internal staff, has conducted a review and test of
most of the internal computer-based systems. Most of the Company's systems are
relatively new. Much of the software used by the Company has been developed
internally and is regularly modified and updated to meet the changing
requirements of its business. The Company expects that its critical internal
systems will be able to process relevant date information in the future to
permit the Company to continue to provide its services without significant
interruption or material adverse effect on its business, results of operations
and financial condition. However, there can be no assurances that the Company
will not experience unanticipated negative consequences caused by undetected
errors or defects in the technology used in its internal systems.
Notwithstanding the Company's expectation that its own systems will be able
to process Year 2000 date information, the Company's business depends
significantly on receiving uninterrupted services by other parties. The
principal service suppliers to the Company include other switch-based
long-distance providers, the local exchange carriers throughout the country and
AOL. Other parties whose ability to deal with Year 2000 issues could affect the
Company include the Company's partitions and the credit and debit card companies
through which most of the Company's AOL customers are billed. The Company has
made inquiry of some of these parties regarding their respective levels of
preparedness for Year 2000 issues as they may affect the Company. The Company
will continue to make such inquiries and will monitor the public disclosures of
such companies regarding their Year 2000 status. So far, the responses to such
inquiries have been generally non-committal regarding levels of preparedness or
willingness to provide assurances to the Company. In almost all cases, the
Company is not in a position to require either affirmative action or assurances
by these parties regarding continued provision of services in the Year 2000.
Accordingly, while the Company has not been advised by any of these other
companies on which it depends that they do not expect to be ready for Year 2000
issues, the Company does not believe it is in a position to project the
likelihood of such parties' abilities to provide uninterrupted services to the
Company. The Company has considered possible contingency plans. Although the
Company has entered into multiple contracts with long-distance service providers
to support its OBN network, the failure of any of the significant suppliers to
provide uninterrupted service to the Company would likely have a material
adverse effect on the Company's business and its results of operations and
financial condition.
14
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
The Company does not separately identify costs incurred in connection with
Year 2000 compliance activities. To date, however, the Company does not believe
such costs to be significant because they generally have been incurred in the
normal course of internally modifying and updating the Company's software
programs. Future expenditures are not expected to be significant and will be
funded out of operating cash flows.
* * * * *
Certain of the statements contained herein may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements are identified by the use of forward-looking words or phrases,
including, but not limited to, "estimates," "expects," "expected,"
"anticipates," and "anticipated." These forward-looking statements are based on
the Company's current expectations. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, there
can be no assurance that such expectations will prove to have been correct.
Forward-looking statements involve risks and uncertainties and the Company's
actual results could differ materially from the Company's expectations. In
addition to those factors discussed elsewhere herein, important factors that
could cause such actual results to differ materially include, among others,
adverse developments in the Company's relationship with AOL, increased price
competition for long distance services, failure of the marketing of long
distance services under the AOL Agreement, attrition in the number of end users,
and changes in government policy, regulation and enforcement. The Company
undertakes no obligations to update its forward-looking statements.
15
<PAGE>
TALK.COM INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 16, 1998, a purported shareholder class action was filed in the
United States District Court for the Eastern District of Pennsylvania against
the Company and certain of its officers alleging violation of the securities
laws in connection with certain disclosures made by the Company in its public
filings and seeking unspecified damages. Thereafter, additional lawsuits making
substantially the same allegations were filed by other plaintiffs in the same
court. At this point, no classes have been certified. A motion to dismiss was
recently granted as to certain officers of the Company and denied as to the
Company. There are currently no officers of the Company who is a party to these
actions. The Company believes the allegations in the complaints are without
merit and intends to defend the litigations vigorously. The Company also is a
party to certain legal actions arising in the ordinary course of business.
The Company believes that the ultimate outcome of the foregoing actions
will not result in liability that would have a material adverse effect on the
Company's financial condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment Agreement by and among Vincent W. Talbert and
Talk.com Inc. and Talk.com Holding Corp. dated as of June
8, 1999.
10.2 Indemnification Agreement by and between Vincent W. Talbert
and Talk.com Inc. dated as of June 8, 1999.
10.3 Non-Qualified Stock option Agreement for Vincent W. Talbert.
11 Computation of Net Income Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
Since March 31, 1999, the Company has not filed any Current Reports on
Form 8-K.
16
<PAGE>
SIGNATURES
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.
Date: August 13, 1999 TALK.COM INC.
---------------
(Registrant)
By: /s/ Gabriel Battista
--------------------
Gabriel Battista
Chairman of the Board,
Chief Executive Officer and President
By: /s/ Edward B. Meyercord, III
--------------------
Edward B. Meyercord, III
Chairman Financial Officer and Treasurer
By: /s/ Kevin R. Kelly
--------------------
Kevin R. Kelly
Controller
17
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
the 8th day of June, 1999 among Talk.com Inc., a Delaware corporation
("Talk.com") and Talk.com Holding Corp., a Pennsylvania corporation and a wholly
owned subsidiary of Talk.com (the "Company") and Vincent W. Talbert
("Employee").
WHEREAS, Talk.com and Company desires to employ Employee as Executive
Vice President of Marketing of Talk.com and the Company and in certain other
capacities, and Employee desires to be employed by Talk.com and Company; and
WHEREAS, Talk.com and Company and Employee desire to enter into this
Agreement that sets forth the terms and conditions of said employment.
NOW THEREFORE, in consideration of the foregoing, the mutual covenants
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the undersigned hereby agree as
follows:
1. EMPLOYMENT. Company agrees to employ Employee, and Employee accepts
such employment and agrees to serve Company, on the terms and conditions set
forth herein. Except as otherwise specifically provided herein, Employee's
employment shall be subject to the employment policies and practices of Company
in effect from time to time during the term of Employee's employment hereunder
(including, without limitation, its practices as to tax reporting and
withholding).
2. TERM OF AGREEMENT. The term of Employee's employment hereunder shall
commence on July 6, 1999 (the "Commencement Date") and shall continue in effect
for a period of three years thereafter, except as hereinafter provided (the
"Term"). Employee agrees to and shall present himself at the offices of Company
in Reston, Virginia (or such other location as Employee may be directed by Mr.
Gabe Battista) prepared to commence performing his duties hereunder on or before
the Commencement Date ("Employment Presentment").
3. POSITIONS AND DUTIES.
3.1 OFFICER POSITIONS. Except as may otherwise be agreed upon between
Company and Employee, Employee shall perform such duties and have such
responsibilities as Executive Vice President of Marketing and such other duties
and responsibilities consistent with the foregoing duties and responsibilities
as may be reasonably assigned or delegated to him from time to time by Company's
Chief Executive Officer or Company's Board of Directors (the "Board"),
including, without limitation, service as an employee, officer or director of
affiliates (as that term is defined in Rule 405 under the Securities Act of
1933, as amended (the "Act")) (hereinafter,
<PAGE>
"Affiliates") of Company, without additional compensation. References in this
Agreement to Employee's employment with Company shall be deemed to refer to
employment with Company and/or, as the case may be, an Affiliate, as the context
requires. Employee shall perform his duties and responsibilities to the best of
his abilities hereunder in a diligent, trustworthy, businesslike and efficient
manner. Employee shall devote substantially all of his working time and efforts
to the business and affairs of Company; provided, however, that nothing in this
Agreement shall preclude Employee from (a) engaging in charitable activities and
community affairs, and (b) managing his personal investments and affairs
(subject to the limitations in Section 10 hereof.
4. COMPENSATION AND RELATED MATTERS.
4.1 BASE SALARY. During the Term, Company shall pay to Employee a base
salary ("Base Salary") at the rate of Two Hundred Fifty Thousand Dollars
($250,000) per year, which Base Salary shall be paid to Employee in accordance
with Company's usual and customary payroll practices.
4.2 BENEFIT PLANS AND ARRANGEMENTS. Employee shall be entitled to
participate in and to receive benefits under Company's employee benefit plans
and arrangements (including, but not limited to, bonus plans) as are made
available to the Company's senior executive officers during the Term, which
employee benefit plans and arrangements may be altered from time to time at the
discretion of the Board (the "Benefits"). Employee acknowledges and agrees that
bonuses, annual or otherwise, are performance based and discretionary with the
Board of Directors or a Committee thereof.
4.3 PERQUISITES. During the Term, Employee shall be entitled to receive
fringe benefits as are made available to Company's senior executive officers.
4.4 EXPENSES. Company shall promptly reimburse Employee for all
out-of-pocket expenses related to Company's business that are actually paid or
incurred by him in the performance of his services under this Agreement and that
are incurred, reported and documented in accordance with Company's policies. In
addition, during the Term, Company will provide Employee with an automobile or
an automobile allowance, as Company shall determine, and if the Company
determines to provide Employee with an automobile, Company shall keep such
automobile fully insured in accordance with Company's practices for similarly
situated employees.
4.5 STOCK OPTIONS.
(a) GRANT OF OPTIONS. Effective on the date hereof, Employee
shall be granted an award of an option to purchase 350,000 shares of the Common
Stock (the "Option") in accordance with the stock option agreement in
substantially in the form thereof attached hereto as Exhibit A. The Option shall
have an exercise price equal to $10 1/8, which is equal to the fair market value
(as defined below) of the Common Stock on the date hereof. The Option expires on
the tenth anniversary of the date hereof and shall vest and become exercisable,
subject to accelerated vesting in the event of a Change
2
<PAGE>
in Control (defined as provided below) of Company in installments, as follows:
(i) options with respect to 100,000 shares of Common Stock shall vest and become
exercisable upon Employment Presentment; (ii) options with respect to 125,000
shares of Common Stock shall vest and become exercisable on the first
anniversary of the date hereof and (iii) options with respect to 125,000 shares
of Common Stock shall vest and become exercisable on the second anniversary of
the date hereof. In the event of a Change in Control of Company, all of the
options issued under the Option which are not then vested and exercisable shall
immediately become vested and exercisable. The fair market value of Common Stock
for purposes of this Agreement shall mean the last reported sale price of a
share of the Common Stock on the Nasdaq National Market System preceding the
date in question or if no sale took place on such day, such last reported sale
price on the then next preceding date on which such sale took place.
Notwithstanding the foregoing, the Option shall be forfeited by Employee if an
Employment Presentment does not take place on or before July 6, 1999. For the
purposes of this Agreement, a "Change of Control" shall be deemed to have
occurred if:
(i) any Person (as defined in Section 3(a)(9)
under the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), other than
the Company, becomes the Beneficial Owner
(as defined in Rule 13d-3 under the Exchange
Act; provided, that a Person shall be deemed
to be the Beneficial Owner of all shares
that any such Person has the right to
acquire pursuant to any agreement or
arrangement or upon exercise of conversion
rights, warrants, options or otherwise,
without regard to the 60 day period referred
to in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the
Company or any Significant Subsidiary (as
defined below) representing 50% or more of
the combined voting power of the Company's,
or such subsidiary's, as the case may be,
then outstanding securities;
(ii) during any period of two years, individuals
who at the beginning of such period
constitute the Board and any new director
(other than a director designated by a
person who has entered into an agreement
with the Company to effect a transaction
described in clauses (i), (iii), or (iv) of
this Section 2(a)) whose election by the
Board or nomination for election by
stockholders was approved by a vote of at
least two-thirds (2/3) of the directors then
still in office who either were directors at
the beginning of the two-year period or
whose election or nomination for election
was previously so approved, but excluding
for this purpose any such new director whose
initial assumption of office occurs as a
result of either an actual or threatened
election contest or other actual or
threatened solicitation of proxies or
3
<PAGE>
consents by or on behalf of an individual,
corporation, partnership, group, association
or other entity other than the Board, cease
for any reason to constitute at least a
majority of the Board of either or the
Company or a Significant Subsidiary;
(iii) the consummation of a merger or
consolidation of the Company or any
subsidiary of the Company owning directly or
indirectly all or substantially all of the
consolidated assets of the Company (a
"Significant Subsidiary") with any other
entity, other than a merger or consolidation
which would result in the voting securities
of the Company or a Significant Subsidiary
outstanding immediately prior thereto
continuing to represent more than fifty
percent (50%) of the combined voting power
of the surviving or resulting entity
outstanding immediately after such merger or
consolidation;
(v) (iv) the shareholders of the Company approve
a plan or agreement for the sale or
disposition of fifty percent (50%) or more
of the consolidated assets of the Company in
which case the Board shall determine the
effective date of the Change of Control
resulting therefrom; and
(vi) any other event occurs which the Board
determines, in its discretion, would
materially alter, the structure of the
Company or its ownership.
(b) REGISTRATION STATEMENT. Company will file with the Securities and
Exchange Commission and any applicable state securities regulatory authorities a
Registration Statement on the applicable form to register the resale of the
Award and Form S-8 (or if unavailable, a registration statement on Form S-3) to
register the shares issuable upon exercise of the Option under the Act and any
applicable state securities or "Blue Sky" laws as soon as practicable after the
date hereof. Notwithstanding the foregoing, Company shall be entitled to
postpone for a reasonable period of time the filing or the effectiveness of such
registration statement if the Board shall determine in good faith that such
filing or effectiveness would be materially detrimental to the Company's
business interests.
4.6 BONUSES. Company shall pay Employee on September 30, 1999 and
December 31, 1999 the sum of One Hundred Twenty-five Thousand Dollars
($125,000).
4
<PAGE>
5. TERMINATION. The Term of Employee's employment hereunder may be
terminated under the following circumstances:
5.1 DEATH. The Term of Employee's employment hereunder shall terminate
upon his death.
5.2 DISABILITY. If Employee becomes physically or mentally disabled
during the term hereof so that he is unable to perform services required of him
pursuant to this Agreement for an aggregate of six (6) months in any twelve (12)
month period (a `Disability"), Company, at its option, may terminate Employee's
employment hereunder.
5.3 CAUSE. Upon written notice, Company may terminate Employee's
employment hereunder for Cause (as defined below). For purposes of this
Agreement, Company shall have "Cause" to terminate Employee's employment
hereunder upon (a) a material breach by Employee of any material provision of
this Agreement, (b) willful misconduct by Employee in connection with
misappropriating any funds or property of Company, (c) attempting to obtain any
personal profit from any transaction in which Employee has an interest that is
adverse to the interests of Company without prior written disclosure thereof to
the Board or (d) Employee's gross neglect in the performance of the duties
required to be performed by Employee under this Agreement.
5.4 BY EMPLOYEE. Employee may terminate his employment hereunder:
(a) Upon sixty (60) days' prior written notice to Company, provided
that, upon the giving of such notice by Employee, Company may establish an
earlier date for such termination under this Section 5.4 (a).
(b) For Good Reason (as defined below) immediately and with notice to
Company. "Good Reason" for termination by Employee shall include, but is not
limited to, the following:
(i) Material breach of any provision of this Agreement by
Company, which breach shall not have been cured by
Company within thirty (30) days of receipt of written
notice of said material breach;
(ii) Failure by Company to maintain Employee in a position
commensurate with that referred to in Section 3 of
this Agreement; or
(iii) The assignment to Employee of any duties inconsistent
with Employee's position, authority, duties or
responsibilities as contemplated by Section 3 hereof
or any other action by Company that results in a
diminution of such position, authority, duties or
responsibilities.
5
<PAGE>
5.5 WITHOUT CAUSE. Company may otherwise terminate the Term of
Employee's employment at any time upon written notice to Employee.
6. COMPENSATION IN THE EVENT OF TERMINATION. In the event that
Employee's employment hereunder terminates prior to the end of the Term, Company
shall make payments to Employee as set forth below:
6.1 BY EMPLOYEE FOR GOOD REASON; BY COMPANY WITHOUT CAUSE. In the event
that Employee's employment hereunder is terminated by Company without Cause or
by Employee for Good Reason, then the Company shall (a) pay to Employee all
amounts due to Employee pursuant to any bonus that was due to Employee as of the
date of such termination, pursuant to the terms of such bonus (a "Due Bonus"),
(b) continue to pay to Employee the Base Salary and Benefits to which Employee
would be entitled hereunder in the manner provided for herein for the period of
time ending on the earlier of the date when the Term would otherwise have
expired in accordance with Section 2 hereof and the second anniversary of the
date of such termination, (c) reimburse Employee for expenses that may have been
incurred, but which have not been paid as of the date of termination, subject to
the requirements of Section 4.4 hereof and (d) one hundred percent (100%) of the
outstanding stock options granted to the Employee that are unvested shall
immediately vest and become exercisable.
6.2 BY COMPANY FOR CAUSE; BY EMPLOYEE WITHOUT GOOD REASON. In the event
that Company shall terminate Employee's employment hereunder for Cause pursuant
to Section 5.3 hereof or Employee shall terminate his employment hereunder
without Good Reason, all compensation and Benefits, as specified in Section 4 of
this Agreement, theretofore payable or provided to Employee shall cease to be
payable or provided, except for any Due Bonus and any Benefits that may have
been due and payable but that have not been paid as of the date of termination
and reimbursement of expenses that may have been incurred, but which have not
been paid as of the date of termination, subject to the requirements of Section
4.4 hereof.
6.3 DEATH. In the event of Employee's death, Company shall not be
obligated to pay Employee or his estate or beneficiaries any compensation except
for (a) any Due Bonus or any Benefits that may have been earned and are due and
payable as of the date of death, but which have not been paid as of such date,
(b) reimbursement of expenses that may have been incurred, but which have not
been paid as of the date of death, subject to the requirements of Section 4.4
hereof, and (c) all outstanding stock options granted to Employee that are
unvested shall immediately vest and become exercisable and Employee's estate or
beneficiaries, as the case may be, shall have the right to exercise any of such
stock options during the period commencing on the date of death and ending on
the second anniversary of the date of such termination or for the remainder of
the period set forth in the option agreement applicable to the option in
question (the "Exercise Period'), if less.
6.4 DISABILITY. In the event of Employee's Disability, Company shall
not be obligated to pay Employee or his estate or beneficiaries any additional
compensation
6
<PAGE>
except for: (a) any Due Bonus and Benefits that may have been earned and are due
and payable as of the date of such Disability, but which have not been paid as
of such date, and (b) reimbursement for expenses that may have been incurred but
which have not been paid as of the date of Disability, subject to the
requirements of Section 4.4 hereof. Upon termination due to Disability, fifty
percent (50%) of the outstanding stock options granted to Employee that are
unvested shall immediately vest and become exercisable and Employee or his
estate or beneficiaries, as the case may be, shall have the right to exercise
any of such stock options during the period commencing on the date of Disability
and ending on the second anniversary of the date of the Disability or for the
remainder of Exercise Period, if less.
6.5 NO MITIGATION. In the event of any termination of employment under
Section 5 hereof, Employee shall be under no obligation to seek other
employment; provided; however, that to the extent that Employee does obtain
other employment subsequent to the termination of Employee's employment
hereunder, the obligations of Company to pay Benefits under this Agreement from
and after the date of commencement of such other employment shall terminate.
7. UNAUTHORIZED DISCLOSURE. Employee shall not, without the prior
written consent of Company, disclose or use in any way, either during Employee's
employment with Company or thereafter, except as required in the course of such
employment, any confidential business or technical information or trade secret
acquired in the course of such employment, whether or not conceived of or
prepared by him, which is related to any service or business of Company or any
Affiliate; provided, however, that the foregoing shall not apply to (a)
information that is not unique to the Company or that is generally known to the
industry or the public other than as a result of Employee's breach of this
covenant, (b) information known to Employee other than from information provided
by Company or (c) information that Employee is required to disclose to, or by,
any governmental or judicial authority; provided, however, if Employee should be
required in the course of judicial or other governmental proceedings to disclose
any information, Employee shall give Company prompt written notice thereof so
that Company may seek an appropriate protective order and/or waive in writing
compliance with the confidentiality provisions of this Agreement. If, in the
absence of a protective order or the receipt of a waiver by Company, Employee is
compelled to disclose information to, or pursuant to the requirements of, a
court or other governmental authority, Employee may disclose such information to
such court or other governmental authority without liability to any other party
hereto.
8. TANGIBLE ITEMS. All files, records, documents, manuals, books,
forms, reports, memoranda, studies, data, calculations, recordings and
correspondence, in whatever form they may exist, and all copies, abstracts and
summaries of the foregoing and all physical items related to the business of
Company and its affiliates, other than merely personal items, whether of a
public nature or not, and whether prepared by Employee or not, and which are
received by Employee from, or on behalf of Company or an Affiliate in the course
of his employment hereunder are and shall remain the exclusive property of
Company and any such Affiliate and shall not be removed from the premises
7
<PAGE>
of the Company or such Affiliate, as the case may be, except as required in the
course of Employee's employment hereunder, without the prior written consent of
the Company's Chief Executive Officer or the Board, and the same shall be
promptly returned by Employee upon the termination of Employee's employment with
Company or at any time prior thereto upon the request of the Company's Chief
Executive Officer or the Board.
9. INVENTIONS AND PATENTS. Employee agrees, except as provided in
Schedule 9 hereto, that all inventions, innovations, improvements, developments,
methods, designs, analyses, drawings, reports, and all similar or related
information that relates to Company's actual or anticipated business, research
and development or existing or future products or services and that are
conceived, developed or made by or at the direction of Employee while Employee
is employed by Company will be owned by Company. Employee also agrees to
promptly perform, at the expense of Company, all reasonable actions (whether
before, during or after the Term) necessary to establish and confirm such
ownership.
10. CERTAIN RESTRICTIVE COVENANTS. During the Term, and for a period
ending twelve (12) months after the earlier of Employee's termination of
employment hereunder and the end of the Term for which the Employee is being
compensated at an annual rate equal to the Base Salary, Employee agrees that he
will not act, either directly or indirectly, as a partner, officer, director,
substantial stockholder (an equity interest of 5% or more) or employee of, or
render advisory or other services for, or in connection with, or become
interested in, or make any substantial financial investment in any firm,
corporation, business entity or business enterprise that is a provider of
telecommunication services (each, a "Competitor"), except with the express
written consent of the Board. Employee further agrees that in the event of the
termination of his employment under Section 5 hereof, for a period of twelve
(12) months thereafter, he will not, directly or indirectly, employ, offer to
employ, or actively interfere with the relationship of Company or an Affiliate
with, any employee of Company or any employee of any Affiliate.
8
<PAGE>
11. EMPLOYEE REPRESENTATIONS AND COVENANTS. Employee hereby represents,
warrants and covenants to Company that (a) the execution, delivery and
performance of this Agreement by Employee does not and will not conflict with,
breach, violate or cause a default under any employment, non-competition or
confidentiality contract or agreement, instrument; order, judgment or decree to
which Employee is a party or by which he is bound; (b) Employee, in performing
this Agreement and the duties of Employee's employment with Company, will not
disclose or utilize any trade secrets of a former employer, unless Employee has
first obtained express written authorization from any such former employer for
their disclosure or use; (c) Employee has not brought, and will not bring to
Company, any documents, records, information or other materials of a former
employer that are not generally available to the public, unless Employee has
first obtained express written authorization from any such former employer for
their possession and use; and (d) upon the execution and delivery of this
Agreement by Company, this Agreement shall be the valid and binding obligation
of Employee, enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency and similar laws affecting the rights of creditors
generally.
12. COMPANY REPRESENTATIONS. Company represents and warrants (a) that
it is duly authorized and empowered to enter into this Agreement, (b) the
execution, delivery and performance of this Agreement by Company does not and
will not conflict with, breach, violate or cause a default under any contract,
agreement, instrument, order, judgment or decree to which Company is a party or
by which it is bound, and (c) upon the execution and delivery of this Agreement
by Employee, this Agreement shall be the valid and binding obligation of
Company, enforceable in accordance with its terms, subject to applicable
bankruptcy, insolvency and similar laws affecting the rights of creditor
generally.
13. INDEMNIFICATION. Prior to the Commencement Date, Company and
Employee shall enter into an indemnification agreement in a form mutually
acceptable to Company and Employee and containing terms no less favorable to
Employee than those contained in any indemnification or similar agreement
currently in effect between Company and any of its officers.
14. REMEDIES. Employee acknowledges that the restrictions and
agreements contained in this Agreement are reasonable and necessary to protect
the legitimate interests of Company, and that any violation of this Agreement
will cause substantial and irreparable injury to Company that would not be
quantifiable and for which no adequate remedy would exist at law and agrees that
injunctive relief, in addition to all other remedies, shall be available
therefor.
15. EFFECT OF AGREEMENT ON OTHER BENEFITS. Except as specifically
provided in this Agreement, the existence of this Agreement shall not be
interpreted to preclude, prohibit or restrict Employee's participation in any
other employee benefit plan or other plans or programs provided to officers,
directors or employees of Company.
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<PAGE>
16. RIGHTS OF EMPLOYEE'S ESTATE. If Employee dies prior to the payment
of all amounts due and owing to him under the terms of this Agreement, such
amounts shall be paid to such beneficiary or beneficiaries as Employee may have
last designated in writing filed with the Secretary of Company or, if Employee
has made no beneficiary designation, to Employee's estate. Such designated
beneficiary or the executor of Employee's estate, as the case may be, may
exercise all of Employee's rights hereunder. If any beneficiary designated by
Employee shall predecease Employee, the designation of such beneficiary shall be
deemed revoked, and any amounts which would have been payable to such
beneficiary shall be paid to Employee's estate. If any designated beneficiary
survives Employee, but dies before payment of all amounts due hereunder, such
payments shall, unless Employee has designated otherwise, be made to such
beneficiary's estate. In the event of Employee's death or judicial determination
of his incompetence, reference in this Agreement to Employee shall be deemed
where appropriate, to refer to his beneficiary, estate or other legal
representative.
17. SEVERABILITY. It is the intent and understanding of the parties
hereto that if, in any action before any court or other tribunal of competent
jurisdiction legally empowered to enforce this Agreement, any term, restriction,
covenant, or promise is held to be unenforceable as a result of being
unreasonable or for any other reason, then such term, restriction, covenant, or
promise shall not thereby be terminated, but, that it shall be deemed modified
to the extent necessary to make it enforceable by such court or other tribunal
and, if it cannot be so modified, that it shall be deemed amended to delete
therefrom such provision or portion adjudicated to be invalid or unenforceable,
and this agreement shall be deemed to be in full force and effect as so modified
and such modification or amendment in any event shall apply only with respect to
the operation of this Agreement in the particular jurisdiction in which such
adjudication is made.
18. NOTICES. Any notices or demands given in connection herewith shall
be in writing and deemed given when (a) personally delivered, (b) sent by
facsimile transmission to a number provided in writing by the addressee and a
confirmation of the transmission is received by the sender or (c) two (2) days
after being deposited for delivery with a recognized overnight courier, such as
Federal Express, and addressed or sent, as the case may be, to the address or
facsimile number set forth below or to such other address or facsimile number as
such party may in writing designate:
If to Employee: Vincent W. Talbert
8307 Tally Ho Road
Lutherville, MD 21093
If to Company: Talk.com Inc.
12020 Sunrise Valley Drive
Suite 250
Reston, VA 20190
Attn: President
Fax No.: (703) 391-7524
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<PAGE>
Either party may change its address for notices by written notice to the other
party in accordance with this Section 17.
19. WAIVER. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in a
writing executed by Employee and Company. No waiver by any party hereto at any
time of any breach by another party hereto of, or compliance with, any condition
or provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same or
at any prior or subsequent time.
20. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of Pennsylvania
relating to contracts made and to be performed entirely therein.
21. HEADINGS. The headings in this Agreement are inserted for
convenience only and shall have no significance in the interpretation of this
Agreement.
22. SUCCESSORS. Company may not assign any of its rights or obligations
under this Agreement hereunder. Employee may assign his rights, but not his
obligations, hereunder and all of Employee's rights hereunder shall inure to the
benefit of his estate, personal representatives, designees or other legal
representatives. All of the rights of Company hereunder shall inure to the
benefit of, and be enforceable by the successors of Company. Any person, firm or
corporation succeeding to the business of Company by merger, purchase,
consolidation or otherwise shall be deemed to have assumed the obligations of
Company hereunder; provided, however, that Company shall, notwithstanding such
assumption by a successor, remain primarily liable and responsible for the
fulfillment of its obligations under this Agreement.
23. 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.
24. CERTAIN WORDS. As used in this Agreement, the words "herein,"
"hereunder," "hereof" and similar words shall be deemed to refer to this
Agreement in its entirety, and not to any particular provision of this Agreement
unless the context clearly requires otherwise.
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IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the day and year first written above.
Talk.com Inc. Talk.com Holding Corp.
By: /s/ Alyosius T.Lawn By: /s/ Alyosius T.Lawn
------------------------ -----------------------
Name: Alyosius T.Lawn Name: Alyosius T.Lawn
Title: General Counsel and Title: General Counsel and
Secretary Secretary
/s/ Vincent W. Talbert
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Vincent W. Talbert
12
EXHIBIT 10.2
TALK.COM INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of
June 8, 1999, by and between Talk.com Inc., a Delaware corporation (the
"Company"), and Vincent Talbert ("Indemnitee").
WHEREAS, pursuant to that certain employment agreement between
the Company, Talk.com Holding Corp. and Indemnitee dated June 8, 1999 (the
"Employment Agreement") Indemnitee will commence service, on or prior to July 6,
1999 as Executive Vice President Marketing of the Company and will perform a
valuable service in such capacity for the Company; and
WHEREAS, the Company desires to attract and retain the
services of highly qualified individuals, such as Indemnitee, to serve the
Company and, in order to induce Indemnitee to enter into the Employment
Agreement, the Company agreed to enter into an agreement with Indemnitee
providing for the indemnification of Indemnitee as provided herein.
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants set forth herein and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the undersigned hereby
agree as follows:
1. Indemnification.
(a) Indemnification of Indemnitee. The Company shall indemnify and hold
harmless Indemnitee to the fullest extent permitted by law if Indemnitee was or
is or becomes a party to, or witness or other participant in, or is threatened
to be made a party to, or witness or other participant in, any threatened,
pending or completed action, suit, proceeding or alternative dispute resolution
mechanism, or any hearing, inquiry or investigation that Indemnitee in good
faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other (collectively, hereinafter a "Claim") by
reason of, or arising in whole or in part out of, any event or occurrence
related to the fact that Indemnitee is or was a director, officer, manager,
employee, agent, representative or fiduciary of the Company, a subsidiary of the
Company (a "Subsidiary") or an affiliate (as defined in Rule 405 under the
Securities Act of 1933, as amended) of the Company (an "Affiliate"), or is or
was serving at the request of the Company or any Subsidiary or Affiliate as a
director, officer, manager, employee, agent, representative or fiduciary of
another corporation, limited liability company, partnership, joint venture,
employee benefit plan, trust or other entity or enterprise (collectively, an
"Other Entity"), or by reason of any action or inaction on the part of
Indemnitee while serving in any of such capacities, whether or not the basis of
the Claim is an alleged action in an official capacity as a director, officer,
manager, employee, agent, representative or fiduciary of the Company, or any
Subsidiary, Affiliate or Other Entity (any of the foregoing capacities
referenced in this Section 1(a), an "Indemnified Capacity"), against any and all
costs, expenses and other amounts actually and reasonably incurred and/or, as
the case may be, paid (including, without limitation, attorneys' fees and all
other costs, expenses and obligations actually and reasonably incurred in
connection with
<PAGE>
investigating, defending, being a witness in, or otherwise participating in
(including on appeal), or preparing to defend, any Claim), and judgements,
fines, penalties and amounts paid in connection with the settlement of any Claim
and any federal, state, local or foreign taxes imposed on the Indemnitee as a
result of the actual or deemed receipt of any payments under this Agreement,
including all interest, assessments and other charges paid or payable by the
Indemnitee in connection with or in respect of such costs, expenses and other
amounts (collectively, hereinafter, the "Expenses"). Without limiting the rights
of Indemnitee under Section 2(a) below, the payment of Expenses actually paid by
Employee shall be made by the Company as soon as practicable, but in any event
no later than thirty (30) days after written demand by Indemnitee therefor is
presented to the Company. Any event giving use to the right of Indemnitee to be
indemnified hereinafter is referred to herein as an "Indemnifiable Event."
(b) Reviewing Party. Notwithstanding the foregoing, (i) the obligations
of the Company under Section 1(a) hereof shall be subject to the condition that
the Reviewing Party (as defined in Section 10(e) hereof) shall not have
determined (in a written opinion, in any case in which the Independent Legal
Counsel (as defined in Section 10(d) hereof) is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) the obligation
of the Company to make an advance payment of Expenses to Indemnitee pursuant to
Section 2(a) hereof (an "Expense Advance") shall be subject to the condition
that, if, when and to the extent that the Reviewing Party determines that
Indemnitee would not be permitted to be so indemnified under applicable law, the
Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to
so reimburse the Company) for all such amounts theretofore paid; provided,
however, that if Indemnitee has commenced or thereafter commences legal
proceedings in a court of competent jurisdiction to secure a determination that
Indemnitee could be indemnified under applicable law, any determination made by
the Reviewing Party that Indemnitee would not be permitted to be indemnified
under applicable law shall not be binding and Indemnitee shall not be required
to reimburse the Company for any Expense Advance until a final judicial
determination is made with respect thereto (as to which all rights of appeal
therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse
the Company for any Expense Advance shall be unsecured and no interest shall be
charged thereon. If there has not been a Change in Control (as defined in
Section 10(c) hereof), the Reviewing Party shall be selected by members of the
Board of Directors who are not or were not, as the case may be, a party or
parties, as the case may be, to the Claim in respect of which indemnification is
sought, and if there has been a Change in Control (other than a Change in
Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control), the
Reviewing Party shall be the Independent Legal Counsel. If, within thirty (30)
days after the Company's receipt of written notice from Indemnitee demanding
such indemnification (the "30-Day Period") (i) the Reviewing Party determines
that Indemnitee substantively would not be permitted to be indemnified in whole
or in part under applicable law or makes no determination in that regard or,
(ii) Indemnitee shall not have received full indemnification from the Company,
Indemnitee shall have the right to commence litigation seeking a determination
by a court of competent jurisdiction as to the propriety of indemnification
under the circumstances involved or challenging any such determination (or lack
thereof) by the Reviewing Party or any aspect thereof, including the legal or
factual bases therefor or the failure of the Company to fully indemnify the
Indemnitee, and the Company hereby consents to service of process and to appear
in any such proceeding and hereby appoints the Secretary of the Company (or, if
such office is not filled at a time in question, any Assistant
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<PAGE>
Secretary of the Company or, if such office is not filled at a time in question,
any Vice President of the Company - each, a "Service Receiver") as its agent for
such service of process. Any determination by the Reviewing Party not otherwise
so challenged shall be conclusive and binding on the Company and Indemnitee.
(c) Change in Control. The Company agrees that if there is a Change in
Control (other than a Change in Control which has been approved by a majority of
the Company's Board of Directors who were directors immediately prior to such
Change in Control), then, with respect to all matters thereafter arising
concerning the rights of Indemnitee to payments of Expenses and Expense Advances
under this Agreement or any other agreement or under the Company's Certificate
of Incorporation or Bylaws as now or hereafter in effect, the Company shall seek
legal advice only from the Independent Legal Counsel. Such counsel, among other
things, shall render its written opinion to the Company and Indemnitee as to
whether and to what extent Indemnitee would be permitted to be indemnified under
applicable law. The Company agrees to pay the reasonable fees of the Independent
Legal Counsel referred to above and to fully indemnify such counsel against any
and all expenses (including attorneys' fees), claims, liabilities and damages
arising out of or relating to this Agreement or its engagement pursuant hereto.
(d) Mandatory Payment of Expenses. Notwithstanding any other provision
of this Agreement, to the extent that Indemnitee has been successful on the
merits or otherwise, including, without limitation, the dismissal of an action
without prejudice, in connection with any Claim, Indemnitee shall be indemnified
against all Expenses actually and reasonably incurred by Indemnitee in
connection therewith.
2. Expenses; Indemnification Procedure.
(a) Advancement of Expenses. The Company shall advance all Expenses
incurred by Indemnitee so that the Company, and not Indemnitee, shall be
obligated to pay such incurred Expenses. The advances of Expenses to be made
hereunder shall be paid by the Company to Indemnitee as soon as practicable, but
in any event no later than five (5) days after written demand by Indemnitee
therefor to the Company.
(b) Notice and Cooperation by Indemnitee. Indemnitee shall, as a
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
Claim made against Indemnitee for which indemnification will or could be sought
under this Agreement; but the Indemnitee's failure to so notify the Company
shall not relieve the Company from any liability that it may have to Indemnitee
under this Agreement, except to the extent that the Company is able to establish
that its ability to avoid liability under such Claim was prejudiced in a
material respect by such failure. Notice to the Company shall be directed to a
Service Receiver at the address of the Company shown on the signature page of
this Agreement (or such other address as the Company shall designate in writing
to Indemnitee). In addition, Indemnitee shall, at the expense of the Company,
provide the Company with such information and cooperation with respect to a
Claim, or any matters related to such Claim, as it may reasonably require in
connection with the indemnification provided for herein and as shall be within
Indemnitee's power. Any costs or expenses (including attorneys' fees and
disbursements) actually and reasonably incurred by
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<PAGE>
Indemnitee in so cooperating shall be borne by the Company (irrespective of the
determination as to Indemnitee's entitlement to indemnification), which shall
pay any such amount within fifteen (15) days after receiving a request therefor
from Indemnitee, and the Company hereby indemnifies and agrees to hold
Indemnitee harmless therefrom.
(c) No Presumptions; Burden of Proof. For purposes of this Agreement,
the termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has met any particular standard of conduct or had any
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law, shall be a defense to a claim for indemnification by Indemnitee hereunder
or create a presumption that Indemnitee has not met any particular standard of
conduct or did not have any particular belief. In connection with any
determination by the Reviewing Party or otherwise as to whether Indemnitee is
entitled to be indemnified hereunder, the burden of proof shall be on the
Company to establish that Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the Company
of a notice of a Claim pursuant to Section 2(b) hereof, the Company has one or
more policies of liability insurance in effect which may cover such Claim, the
Company shall give prompt notice of the commencement of such Claim to the
applicable insurer(s) in accordance with the procedures set forth in the
applicable policies. The Company shall thereafter take all action necessary or
desirable to cause such insurers to pay, on behalf of Indemnitee, all amounts
payable as a result of such Claim in accordance with the terms of such policies.
(e) Selection of Counsel. In the event that the Company shall be
obligated hereunder to pay the Expenses with respect to any Claim, the Company,
except as otherwise provided below, shall be entitled to assume the defense of
such Claim at its own expense with counsel approved by Indemnitee, upon the
delivery to Indemnitee of written notice of its election so to do. Indemnitee's
approval of such counsel shall not be unreasonably withheld. After delivery of
such notice, approval of such counsel by Indemnitee and the retention of such
counsel by the Company, the Company will not be liable to the Indemnitee under
this Agreement for any fees of counsel subsequently incurred by the Indemnitee
with respect to such Claim, other than as provided below. Indemnitee shall have
the right to employ Indemnitee's own counsel in connection with a Claim, but the
fees and expenses of such counsel incurred after written notice from the Company
of its assumption of the defense thereof shall be at the expense of Indemnitee,
unless (i) the employment of counsel by Indemnitee has been previously
authorized by the Company, or, following a Change in Control (other than a
Change in Control approved by a majority of the members of the Board of
Directors who were directors immediately prior to such Change in Control), the
employment of counsel by Indemnitee has been approved by the Independent Legal
Counsel, (ii) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (iii) the Company shall not, in fact, have employed or retained
or
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<PAGE>
continued to employ or retain counsel to assume the defense of such Claim, in
each of which cases the fees and expenses of Indemnitee's counsel shall be at
the expense of the Company. The Company shall not be entitled to assume or
control the defense of any Claim brought by or on behalf of the Company or as to
which the Indemnitee has reached the conclusion that there may be a conflict of
interest between the Company and Indemnitee. The Company shall not settle any
Claim in any manner which would impose any penalty or limitation on Indemnitee
without the Indemnitee's written consent (which approval shall not be
unreasonably withheld).
(f) Settlement of Claims. The Company shall not be required to
indemnify Indemnitee under this Agreement for any amounts paid in settlement of
any Claim effected without the Company's written consent; provided, however,
that consent by the Company to the settlement of any claim shall not be
unreasonably withheld. Notwithstanding the foregoing, however, if a Change in
Control has occurred (other than a Change in Control approved by a majority of
the members of the Board of Directors who were directors immediately prior to
such Change in Control), then the Company shall be required to indemnify
Indemnitee for amounts paid in settlement of any Claim if the Independent Legal
Counsel has approved such settlement or has not made a determination with
respect to such settlement within (30) days after the effective date of such
Change in Control.
3. Additional Indemnification Rights; Non-Exclusivity.
(a) Scope. The Company hereby agrees to indemnify Indemnitee
to the fullest extent permitted by law, notwithstanding that such
indemnification is not specifically authorized by the Company's Certificate of
Incorporation or Bylaws or by statute. In the event of any change after the date
of this Agreement in any applicable law, statute or rule which expands the right
of the Company to indemnify Indemnitee, it is the intent of the parties hereto
that Indemnitee shall enjoy under this Agreement the greater benefits afforded
by such change. In the event of any change in any applicable law, statute or
rule which narrows the right of the Company to indemnify the Indemnitee, such
change, to the extent not otherwise required by such law, statute or rule to be
applied to this Agreement, shall have no effect on this Agreement or the
parties' rights and obligations hereunder.
(b) Non-Exclusivity. The indemnification provided by this
Agreement shall be in addition to any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation or Bylaws, any agreement, vote
of stockholders or directors, the General Corporation Law of the State of
Delaware, or otherwise. The indemnification provided under this Agreement shall
continue as to Indemnitee for any Indemnifiable Event while serving in an
Indemnified Capacity even though Indemnitee may have ceased to serve in such
Indemnified Capacity.
4. No Duplication of Payments. The Company shall not be liable under
this Agreement to make any payment in connection with any Claim to the extent
Indemnitee has otherwise actually received payment (under any insurance policy
or otherwise) of the amounts otherwise indemnifiable hereunder.
5. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for a portion of
any of the Expenses in
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<PAGE>
connection with the investigation, appeal or settlement of any Claim, but not
for the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for such portion of the Expenses.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
that, in certain instances, applicable law or public policy may prohibit the
Company from indemnifying Indemnitee under this Agreement or otherwise.
Indemnitee understands and acknowledges that the Company has undertaken or may
be required in the future to undertake with the Securities and Exchange
Commission to submit the question of indemnification to a court in certain
circumstances for a determination of the Company's right under public policy to
indemnify Indemnitee.
7. Liability Insurance. To the extent the Company or any Subsidiary or
Affiliate maintains liability insurance applicable to directors, officers,
managers, employees, agents, representatives or fiduciaries of the Company or
such Subsidiary or Affiliate (collectively, the "Covered Persons"), Indemnitee
shall be covered by such policies in such a manner as to provide Indemnitee the
same rights and benefits as are accorded to the most favorably insured of the
Covered Persons who is then serving in the same capacity or capacities, as the
case may be, as Indemnitee.
8. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for
any Expenses resulting from acts, omissions or transactions from which
Indemnitee may not be indemnified under applicable law, or for any Expenses
resulting from Indemnitee's conduct which is finally adjudged to have been
willful misconduct or knowingly fraudulent conduct;
(b) Claims Initiated by Indemnitee. To indemnify or advance
Expenses to Indemnitee with respect to Claims initiated or brought voluntarily
by Indemnitee and not by way of defense, regardless of whether Indemnitee
ultimately is determined to be entitled to such indemnification, Expense Advance
or insurance recovery, as the case may be, except (i) with respect to
proceedings brought to establish or enforce (a) a right to, or for, Expense
Advances and/or, as the case may be, (b) any other right of Indemnitee under
this Agreement or any other agreement or insurance policy or under the Company's
Certificate of Incorporation or Bylaws now or hereafter in effect, (ii) in
specific cases, if the Board of Directors has approved the initiation or
bringing of such suit or (iii) as otherwise required under applicable law or
statute;
(c) Lack of Good Faith. To indemnify Indemnitee for any
Expenses incurred by Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(d) Claims Under Section 16(b). To indemnify Indemnitee for
Expenses and the payment of profits arising from the purchase and sale or, sale
and purchase, by Indemnitee of securities in violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any similar
successor statute.
-6-
<PAGE>
9. Period of Limitations. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company with respect to
the matters addressed in this Agreement against Indemnitee, or Indemnitee's
estate, spouse, heirs, executors or personal or legal representatives after the
expiration of two(2) years from the date of accrual of such cause of action, and
any claim or cause of action of the Company shall be extinguished and deemed
released unless asserted by the timely filing of a legal action within such
two-year period; provided, however, that if any shorter period of limitations is
otherwise applicable to any such cause of action, such shorter period shall
govern.
10. Construction of Certain Phrases.
(a) Company. For purposes of this Agreement, references to the
"Company" shall include, in addition to the resulting entity, any constituent
entity (including any constituent of a constituent) absorbed in a consolidation
or merger which, if its separate existence had continued, would have had power
and authority to indemnify its directors, officers, managers, employees, agents,
representation or fiduciaries, so that if Indemnitee is or was a director,
officer, employee, agent or fiduciary of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, manager, employee, agent or fiduciary of an Other Entity, Indemnitee
shall stand in the same position under the provisions of this Agreement with
respect to the resulting or surviving entity as Indemnitee would have stood with
respect to such constituent entity if its separate existence had continued. The
consummation of any transaction described in this Section 10(a) shall be subject
to the requirements of Section 12, below.
(b) Miscellaneous Terms. For purposes of this Agreement,
references to "fines" shall include any excise taxes assessed on Indemnitee with
respect to an employee benefit plan; and references to "serving at the request
of the Company or any Subsidiary or Affiliate" or words of similar import shall
include any service as a director, officer, manager, employee, agent,
representative or fiduciary of the Company which imposes duties on, or involves
services by, such director, officer, manager, employee, representative, agent or
fiduciary with respect to an employee benefit plan, or its participants or its
beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan, Indemnitee shall be deemed to have acted in a
manner "not opposed to the best interests of the Company" as referred to in this
Agreement or under any applicable law or statute.
(c) Change in Control. For purposes of this Agreement, a
"Change in Control" shall be deemed to have occurred if (i) any "person" (as
such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or a corporation owned directly or indirectly by the stockholders of
the Company in substantially the same proportions as their ownership of stock of
the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of Voting Securities (as
defined below) of the Company representing more than twenty percent (20%) of the
total voting power represented by the Company's then outstanding Voting
Securities, (ii) during any period of two (2) consecutive years, individuals who
at the beginning of such period constitute the Board of Directors of the Company
and any new director (other than a director designated by a person who has
entered
-7-
<PAGE>
into an agreement with the Company to effect a transaction described in clauses
(i), (iii) and (iv) of this Section 10(c)) whose election by the Board of
Directors or nomination for election by the Company's stockholders was approved
by a vote of at least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof, or (iii) the stockholders of the Company approve
a merger or consolidation of the Company with any other corporation other than a
merger or consolidation which would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power of the resulting or
surviving entity outstanding immediately after such merger or consolidation, or
(iv) the stockholders of the Company approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition by the Company (in one
transaction or a series of transactions) of all or substantially all of the
Company's assets. For purposes of this Agreement, "Voting Securities" shall mean
any securities the holders of which vote generally in the election of directors.
(d) Independent Legal Counsel. For purposes of this Agreement,
"Independent Legal Counsel" shall mean an attorney or firm of attorneys, who
shall not have otherwise performed services for the Company or Indemnitee within
the then prior three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other indemnitees under similar
indemnity agreements) selected by the Company and approved by Indemnitee in
writing, which approval shall not be unreasonably withheld. Notwithstanding the
foregoing, the term "Independent Legal Counsel" shall not include any firm or
person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the Company
or Indemnitee in an action to determine Indemnitee's right to indemnification
under this Agreement.
(e) Reviewing Party. For purposes of this Agreement, a
"Reviewing Party" shall mean (i) any person or group of persons consisting of a
member or members of the Company's Board of Directors and/or, as the case may
be, or any other person appointed by the Board of Directors who is not a party
to the particular Claim for which Indemnitee is seeking indemnification, or (ii)
Independent Legal Counsel.
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original and all of which,
together, shall constitute one and the same document.
12. Binding Effect; Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors and permitted assigns, heirs and personal
and legal representatives. The Company may not assign its obligations under this
Agreement to any individual or entity except by operation of law to an entity
acquiring all or substantially all of the business and/or, as the case may be,
assets of the Company (a "Successor") and, in any such case, the Company shall
continue to be obligated hereunder. The Company shall require and cause any
Successor by written agreement in form and substance satisfactory to Indemnitee,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform if no such
succession had taken place. This Agreement shall
-8-
<PAGE>
continue in effect regardless of whether Indemnitee continues to serve in an
Indemnified Capacity.
13. Attorneys' Fees. In the event that any action is instituted by
Indemnitee in a court of competent jurisdiction under this Agreement or under
any liability insurance policies maintained by the Company to enforce, or
interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be
paid all Expenses actually and reasonably incurred by Indemnitee with respect to
such action, regardless of whether Indemnitee is ultimately successful in such
action, and shall be entitled to an advance of such Expenses in the manner
provided in Section 2 (a), above, with respect to such action, unless, as a part
of such action, the court in which such action is brought determines that each
of the material assertions made by Indemnitee as a basis for such action was not
made in good faith or was frivolous. In the event of an action instituted by or
in the name of the Company under this Agreement to enforce or interpret any of
the terms of this Agreement, Indemnitee shall be entitled to be paid all
Expenses actually and reasonably incurred by Indemnitee in defense of such
action (including costs and expenses incurred with respect to Indemnitee's
counterclaims and cross-claims made in such action), and shall be entitled to an
advance of such Expenses in the manner provided in Section 2 (a), above, with
respect to such action, unless as a part of such action such court determines
that each of Indemnitee's material defenses to such action were made in bad
faith or were frivolous.
14. Notice. Any notices or demands given in connection herewith shall
be in writing and deemed given when (a) personally delivered, (b) sent by
facsimile transmission to a number provided in writing by the addressee and a
confirmation of the transmission is received by the sender or (c) two (2) days
after being deposited for delivery with a recognized overnight courier, such as
Fed Ex, and addressed or sent, as the case may be, to the address or facsimile
number set forth below or to such other address or facsimile number as such
party may in writing designate:
If to Indemnitee: Vincent W. Talbert
8307 Tally Ho Road
Lutherville, MD 21093
If to Company: Talk.com Inc.
12020 Sunrise Valley Drive
Suite 250
Reston, VA 20190
Attn: Secretary
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the Commonwealth of
Pennsylvania for all purposes in connection with any action or proceeding which
arises out of or relates to this Agreement and agree that any action instituted
under this Agreement shall be commenced, prosecuted and continued only in the
courts of the Commonwealth of Pennsylvania in and for the County of
Philadelphia, which shall be the exclusive and only proper forum for
adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be severable
in the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise
-9-
<PAGE>
unenforceable, and the remaining provisions shall remain enforceable to the
fullest extent permitted by law. Furthermore, to the fullest extent possible,
the provisions of this Agreement (including, without limitation, each portion of
this Agreement containing any provision held to be invalid, void or otherwise
unenforceable, that is not itself held to be invalid, void or unenforceable)
shall be construed so as to give effect to the intent manifested by the
provision held invalid, illegal or unenforceable.
17. Choice of Law. This Agreement shall be governed by and its
provisions construed and enforced in accordance with the laws of the State of
Delaware, without regard to the conflict of laws principles thereof.
18. Subrogation. In the event of payment to, or on behalf of Indemnitee
under this Agreement, the Company shall be subrogated to the extent of such
payment to all of the rights of recovery of Indemnitee, who shall, at Company's
expense, execute all documents required and shall do all acts that may be
necessary to secure such rights and to enable the Company effectively to bring
suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination
or cancellation of this Agreement shall be effective unless it is in writing
signed by both of the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed to, or shall constitute a waiver of, any other
provisions hereof (whether or not similar thereto), nor shall such waiver
constitute a continuing waiver. Except as specifically set forth herein, no
failure to exercise, or any delay in exercising, any right or remedy hereunder
shall constitute a waiver thereof.
20. Integration and Entire Agreement. This Agreement sets forth the
entire understanding between the parties hereto and supersedes all previous
written and oral negotiations, commitments, understandings and agreements
relating to the subject matter hereof between the parties hereto.
21. No Construction as Employment Agreement. Nothing contained in this
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any Subsidiaries.
22. Certain Words. As used in this Agreement, the words "herein,"
"hereunder," "hereof" and similar words shall be deemed to refer to this
Agreement in its entirety, and not to any particular provision of this Agreement
unless the context clearly requires otherwise.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
TALK.COM INC.
By: Alyosius T. Lawn
---------------------------------
Title: General Counsel and Secretary
--------------------------------
AGREED TO AND ACCEPTED
INDEMNITEE:
/s/ Vincent W. Talbert
- ---------------------------------
Vincent W. Talbert
-11-
EXHIBIT 10.3
NON-QUALIFIED STOCK OPTION AGREEMENT
To: Vincent W. Talbert ("Employee")
-----------------------------------------
Name
8307 Tally Ho Road Lutherville, MD 21093
-----------------------------------------
Address
Date of Grant: June 8, 1999
----------------------
Exercise Price: $10 1/8 per share
----------------------
Employee is hereby granted the option described below, effective as of
the above date of grant, to purchase shares of common stock, $.01 par value per
share ("Stock"), of Talk.com, Inc. (the "Company") at the exercise price shown
above. Capitalized terms used herein without definition have the meanings
assigned in the employment agreement dated as of the above date of grant between
the Company, Talk.com Holding Corp. and Employee (the "Employment Agreement").
1. Employee is hereby granted options to purchase 350,000 shares of
Stock (the "Option"). The Option shall have an exercise price equal to ten
dollars and 1/8 ($10.125) per share (the "Exercise Price") and, subject to
Section 2, below, shall vest with respect to the indicated number of shares of
Stock according to the following schedule:
(a) one hundred thousand (100,000) shares of Stock shall vest
and become exercisable upon the date that Employee makes the Employment
Presentment.
(b) one hundred twenty-five thousand (125,000) shares of Stock
shall vest and become exercisable upon the first anniversary of the date of
grant.
(c) one hundred twenty-five thousand (125,000 shares of Stock
shall vest and become exercisable upon the second anniversary of the date of
grant.
(d) Notwithstanding the foregoing, (i) any portion of the
Option that was not previously vested and exercisable shall become fully vested
and exercisable on the effective date of any termination of the employment of
Employee under the Employment Agreement by the Company without Cause (as defined
in Section 6.3 of the Employment Agreement) or by Employee for Good Reason (as
defined in Section 6.4(b) of the Employment Agreement) and (ii) the Board of
Directors of the Company (the "Board") or its designees may accelerate or waive
the aforesaid scheduled vesting dates with respect to any or all of the shares
of Stock covered by the Option.
<PAGE>
2. In the event of a "Change in Control" (as hereafter defined) of the
Company, any portion of the Option that was not previously vested and
exercisable on the effective date of the Change in Control, shall become fully
vested and exercisable on such effective date of such Change in Control. A
"Change in Control" shall be deemed to have occurred upon the happening of any
of the following events:
(a) any Person (as defined in Section 3(a)(9) under the
Securities Exchange Act of 1934, as amended (the
"Exchange Act")), other than the Company, becomes the
Beneficial Owner (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities
of the Company or any Significant Subsidiary (as
defined below) representing fifty percent (50%) or
more of the combined voting power of the Company's,
or such Significant Subsidiary's, as the case may be,
then outstanding securities; provided, that a Person
shall be deemed to be the Beneficial Owner of all
shares that any such Person has the right to acquire
pursuant to any agreement or arrangement or upon
exercise of conversion rights, warrants, options or
otherwise, without regard to the sixty (60)-day
period referred to in Rule 13d-3 under the Exchange
Act);
(b) during any period of two years, individuals who at
the beginning of such period constitute the Board and
any new director (other than a director designated by
a person who has entered into an agreement with the
Company to effect a transaction described in clauses
(a), (b) or (d) of this Section 2) whose election by
the Board or nomination for election by stockholders
was approved by a vote of at least two-thirds (2/3)
of the directors then still in office who either were
directors at the beginning of the two-year period or
whose election or nomination for election was
previously so approved, but excluding for this
purpose any such new director whose initial
assumption of office occurs as a result of either an
actual or threatened election contest or other actual
or threatened solicitation of proxies or consents by
or on behalf of an individual, corporation,
partnership, group, association or other entity other
than the Board, cease for any reason to constitute at
least a majority of the Board of either or the
Company or a Significant Subsidiary;
(c) the consummation of a merger or consolidation of the
Company or any subsidiary of the Company owning
directly or indirectly all or substantially all of
the consolidated assets of the Company ( a
"Significant Subsidiary") with any other entity,
other than a merger or consolidation which would
result in the voting securities of the Company or a
Significant Subsidiary outstanding immediately prior
thereto continuing to represent more than fifty
percent (50%) of the combined voting power of the
surviving or resulting entity outstanding immediately
after such merger or consolidation;
(d) the shareholders of the Company approve a plan or
agreement for the sale or disposition of fifty
percent (50%) or more of the consolidated assets of
the Company in which case the Board shall determine
the effective date of the
2
<PAGE>
Change of Control resulting therefrom;
(e) any other event occurs which the Board determines, in
its discretion, would materially alter, the structure
of the Company or its ownership; and
(f) a person other than Gabriel Battista is elected by
the Board of Directors to serve as the Company's
principal executive officer.
3. Employee may exercise the Option by giving written notice to the
Secretary of the Company on forms supplied by the Company at its then principal
executive office, accompanied by payment of the Exercise Price for the total
number of shares specified to be purchased by Employee. The payment may be in
any of the following forms: (a) cash, which may be evidenced by a check and
includes cash received from a so-called "cashless exercise" of the Option; (b)
certificates representing shares of Stock, which will be valued at the fair
market value (as defined in the Employment Agreement) per share of the Stock on
the date of the Option exercise in question, accompanied by an assignment of
such Stock to the Company; or (c) any combination of cash and Stock valued as
provided in clause (b), immediately above. Any assignment of Stock shall be in a
form and substance satisfactory to the Secretary of the Company, including
guarantees of signature(s) and payment of all transfer taxes, if the Secretary
of the Company deems such guarantees necessary or desirable.
4. The Option will, to the extent not previously exercised by Employee,
expire on June 8, 2009.
5. In the event of any change in the outstanding shares of the Stock by
reason of a stock dividend, stock split, consolidation, transfer of assets,
reorganization, conversion or what the Board deems in its reasonable discretion
to be similar circumstances, the number and kind of shares of Stock subject to
the Option and the Exercise Price shall be appropriately adjusted in a manner to
be determined in the reasonable discretion of the Board.
6. The Option is not transferable otherwise than by will or the laws of
descent and distribution, and is exercisable during Employee's lifetime only by
Employee, including, for this purpose, Employee's legal guardian or custodian in
the event of the disability of Employee. Until the Exercise Price has been paid
in full pursuant to due exercise of this Option and certificate(s) representing
Employee's ownership of the purchased shares are issued to Employee, Employee
does not have any rights as a shareholder of the Company. The Company reserves
the right not to deliver to Employee the certificate(s) representing shares
purchased by virtue of the exercise of the Option during any period of time in
which the Company deems, based on the written opinion of its counsel, that such
delivery would violate a federal, state, local or securities exchange rule,
regulation or law.
7. Notwithstanding anything to the contrary contained herein, the
Option is not exercisable:
(a) During any period of time in which the Company deems,
based on the written opinion of its counsel, that the exercisability of the
Option, the offer to sell the shares underlying the Option, or the sale thereof,
would violate a federal, state, local or securities exchange rule, regulation
3
<PAGE>
or law; or
(b) Until Employee has paid or made suitable arrangements to
pay all federal, state and local income tax withholding required to be withheld
by the Company in connection with the Option exercise.
8. The following two paragraphs shall be applicable if, on a date of
exercise of the Option, the Stock to be purchased pursuant to such exercise has
not been registered under the Securities Act of 1933, as amended (the "Act"),
and under applicable state securities laws, and shall continue to be applicable
for so long as such registration has not occurred:
(a) Employee hereby agrees, warrants and represents that he
will acquire the Stock to be issued hereunder for his own account for investment
purposes only, and not with a view to, or in connection with, any resale or
other distribution of any shares of such Stock, except as hereafter permitted.
Employee further agrees that he will not at any time make any offer, sale,
transfer, pledge or other disposition of such Stock to be issued hereunder
without an effective registration statement under the Act, and under any
applicable state securities laws or an opinion of counsel acceptable to the
Company to the effect that the proposed transaction will be exempt from such
registration. Employee shall execute such instruments, representations,
acknowledgments and agreements as the Company may, in its sole discretion, deem
advisable to avoid any violation of federal, state, local or securities exchange
rule, regulation or law.
(b) The certificates for Stock to be issued to Employee
hereunder shall bear the following legend:
"The shares represented by this certificate have not
been registered under the Securities Act of 1933, as amended,
or under applicable state securities laws. The shares have
been acquired for investment and may not be offered, sold,
transferred, pledged or otherwise disposed of without an
effective registration statement under the Securities Act of
1933, as amended, and under any applicable state securities
laws or an opinion of counsel acceptable to the Company that
the proposed transaction will be exempt from such
registration."
The foregoing legend shall be removed upon registration of the legended shares
under the Act and under any applicable state laws or upon receipt of an opinion
of counsel acceptable to the Company that said registration is no longer
required.
9. The sole purpose of the agreements, warranties, representations and
legend set forth in the two immediately preceding paragraphs is to prevent
violations of the Act, and any applicable state securities laws.
10. It is the intention of the Company and Employee that the Option
shall not be an "Incentive Stock Option" as that term is used in Section 422 of
the Internal Revenue Code of 1986, as amended, and the regulations thereunder.
The Option is not granted pursuant to any stock option plan.
4
<PAGE>
11. This agreement and the Employment Agreement constitute the entire
understanding between the Company and Employee with respect to the subject
matter hereof and no amendment, modification or waiver of this agreement, in
whole or in part, shall be binding upon the Company or Employee unless in
writing and signed by the Executive Vice President of the Company and Employee.
This agreement and the performances of the parties hereunder shall be construed
in accordance with, and governed by the laws of, the Commonwealth of
Pennsylvania.
Employee shall sign a copy of this agreement and return it to the
Company's Secretary, thereby indicating Employee's understanding of, and
agreement with its terms and conditions.
TALK.COM INC,
By: /s/ Alyosius T. Lawn
-------------------------
Alyosius T. Lawn
General Counsel and
Secretary
5
<PAGE>
I hereby acknowledge receipt of a copy of the foregoing stock option agreement
and, having read it, hereby signify my understanding of, and my agreement with,
its terms and conditions.
/s/ Vincent W. Talbert June ,1999
- ------------------------------------ ------------------
Vincent W. Talbert (Date)
6
EXHIBIT 11
TALK.COM INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------------------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary gain $14,038 $(96,154) $26,372 $(137,949)
Extraordinary gain -- -- 18,997 --
------------ ----------- ------------ -----------
Net income (loss) $14,038 $(96,154) $45,369 $(137,949)
============ =========== ============ ===========
BASIC
Weighted average common shares outstanding - Basic: 60,422 64,486 59,670 64,320
============ =========== =========== ==========
Income (loss) before extraordinary gain $ 0.23 $ (1.49) $ 0.44 $ (2.14)
Extraordinary gain -- -- 0.32 --
------------ ----------- ----------- ----------
Net income (loss) $ 0.23 $ (1.49) $ 0.76 $ (2.14)
============ =========== =========== ==========
DILUTED
Weighted average common and common equivalent
shares outstanding - Diluted:
Weighted average shares 60,422 64,486 59,670 64,320
Effect of assumed conversion of common stock options 2,938 -- 3,224 --
------------ ----------- ----------- ----------
Weighted average common and common equivalent
shares - Diluted 63,360 64,486 62,894 64,320
============ =========== =========== ==========
Income (loss) before extraordinary gain $ 0.22 $ (1.49) $ 0.42 $ (2.14)
Extraordinary gain -- -- 0.30 --
------------ ------------ ----------- ----------
Net income (loss) $ 0.22 $ (1.49) $ 0.72 $ (2.14)
============ ============ =========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE UNAUDITED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE UNAUDITED
CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999 OF
TALK.COM INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 000948545
<NAME> TALK.COM
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> $37,114,000
<SECURITIES> 0
<RECEIVABLES> 47,358,000
<ALLOWANCES> 1,342,000
<INVENTORY> 0
<CURRENT-ASSETS> 91,906,000
<PP&E> 67,113,000
<DEPRECIATION> 10,434,000
<TOTAL-ASSETS> 156,130,000
<CURRENT-LIABILITIES> 56,684,000
<BONDS> 94,285,000
0
0
<COMMON> 669,000
<OTHER-SE> (52,149,000)
<TOTAL-LIABILITY-AND-EQUITY> 156,130,000
<SALES> 0
<TOTAL-REVENUES> 227,711,000
<CGS> 0
<TOTAL-COSTS> 148,116,000
<OTHER-EXPENSES> 52,261,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,092,000
<INCOME-PRETAX> 26,372,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 26,372,000
<DISCONTINUED> 0
<EXTRAORDINARY> 18,997,000
<CHANGES> 0
<NET-INCOME> 45,369,000
<EPS-BASIC> 0.76
<EPS-DILUTED> 0.72
</TABLE>
