-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LTBFVdlELnV6cjBF32omfjou4jo60+IQmWtzgaEdroXRa37jUvj/bBlpI8k7ock6 2m0nVVCn0W2UpMcEEdGI/Q== 0000944209-97-000645.txt : 19970520 0000944209-97-000645.hdr.sgml : 19970520 ACCESSION NUMBER: 0000944209-97-000645 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMARTALK TELESERVICES INC CENTRAL INDEX KEY: 0001018730 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 954502740 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21579 FILM NUMBER: 97606521 BUSINESS ADDRESS: STREET 1: 1640 S. SEPULVEDA BLVD STREET 2: SUITE 500 CITY: LOS ANGELES STATE: CA ZIP: 90025 BUSINESS PHONE: 3104448800 MAIL ADDRESS: STREET 1: 1640 S. SEPULVEDA BLVD STREET 2: SUITE 500 CITY: LOS ANGELES STATE: CA ZIP: 90025 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 1997 Commission File No. 0-21579 SMARTALK TELESERVICES, INC. -------------------------- Incorporated under the laws IRS Employer Identification of California No. 95-4502740 1640 S. Sepulveda Boulevard Suite 500 Los Angeles, California 90025 Telephone: 310-444-8800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock at April 18, 1997: Voting, No par value: 12,959,679 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SMARTALK TELESERVICES, INC. BALANCE SHEETS (UNAUDITED)
March 31, ----------------------------------------- ASSETS 1997 1996 ----------------- ----------------- Current assets: Cash and cash equivalents $ 42,355,298 $ 1,894,648 Trade accounts receivable (less allowance for doubtful accounts of $89,724 and $70,286, respectively) 2,904,465 765,887 Inventories 809,237 686,494 Prepaid expenses 460,892 107,534 Other current assets 1,931,611 785,388 ----------------- ----------------- Total current assets 48,461,503 4,239,951 Non-current assets: Property and equipment, net 1,123,626 238,373 Other non-current assets 157,456 74,063 ----------------- ----------------- Total assets $ 49,742,585 $ 4,552,387 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 2,766,633 $ 1,199,433 Deferred revenue 2,638,091 3,783,915 Accrued marketing costs -- 265,891 Other accrued expenses 258,431 223,622 Note payable and current portion of long-term debt -- 265,234 ----------------- ----------------- Total current liabilities 5,663,155 5,738,095 Long-term debt less current portion -- 3,434,766 ----------------- ----------------- Total liabilities 5,663,155 9,172,861 Shareholders' equity (deficit): Preferred stock, no par value; authorized 10,000,000 shares; no shares issued and outstanding -- -- Common stock, no par value; authorized 100,000,000 shares; issued and outstanding 12,959,679 and 8,824,834 shares, 51,361,077 315,000 respectively Accumulated deficit (7,281,647) (4,935,474) ----------------- ----------------- Total shareholders' equity (deficit) 44,079,430 (4,620,474) ----------------- ----------------- Total liabilities and shareholders' equity (deficit) $ 49,742,585 $ 4,552,387 ================= =================
The accompanying notes are an integral part of these financial statements. 2 SMARTALK TELESERVICES, INC. STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, ------------ ------------ 1997 1996 ------------ ------------ Revenue $ 7,368,333 $ 1,139,366 Cost of revenue 4,760,748 812,878 ------------ ------------ Gross profit 2,607,585 326,488 Sales and marketing 2,545,414 661,040 General and administrative 901,231 697,307 ------------ ------------ Operating loss (839,060) (1,031,859) Interest income 528,763 14,910 Interest expense -- 59,723 ------------ ------------ Loss before income taxes (310,297) (1,076,672) Provision for income taxes -- -- ------------ ------------ Net loss $ (310,297) $ (1,076,672) ============ ============ Net loss per share $ (0.02) $ (0.12) ============ ============ Weighted average number of shares 12,897,674 9,335,348 ============ ============
The accompanying notes are an integral part of these financial statements. 3 SMARTALK TELESERVICES, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
Common Stock ----------------------------- Stock Accumulated Shares Amount Subscription Deficit Total ---------- ------------ ------------ ------------ ------------ December 31, 1995 8,824,834 $ 315,000 $ (300,000) $ (1,394,774) $ (1,379,774) Issuance of subscribed shared -- -- 300,000 -- 300,000 Purchase of assets of related entity -- -- -- (2,464,028) (2,464,028) Compensation under stock options issued -- 24,000 -- -- 24,000 Proceeds from sale of stock, net of costs 4,000,000 50,439,595 -- -- 50,439,595 Stock options exercised 4,625 8,186 -- -- 8,186 Net loss -- -- -- (3,112,548) (3,112,548) ---------- ------------ ------------ ------------ ------------ December 31, 1996 12,829,459 50,786,781 -- (6,971,350) 43,815,431 Stock options exercised 130,220 574,296 -- -- 574,296 Net loss -- -- -- (310,297) (310,297) ---------- ------------ ------------ ------------ ------------ March 31, 1997 12,959,679 $ 51,361,077 $ -- $ (7,281,647) $ 44,079,430 ========== ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. 4 SMARTALK TELESERVICES, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, ------------------------------- 1997 1996 ------------ ------------ Cash flows from operating activities: Net loss $ (310,297) $ (1,076,672) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 43,355 8,071 Provision for bad debt -- 58,826 Sublease termination fee (325,810) -- Changes in assets and liabililties which increase (decrease) cash: Accounts receivable (650,273) (599,739) Inventories (208,217) 31,551 Prepaid expenses (133,196) (104,456) Other current assets (248,843) (25,670) Other non-current assets (66,947) (57,963) Accounts payable (760,559) 275,533 Deferred revenue (61,549) 87,400 Accrued marketing costs (136,931) (115,538) Other accrued expenses (93,795) 3,940 ------------ ------------ Net cash used by operating activities (2,953,062) (1,514,717) Cash flows from investing activities: Purchase of LCN, net of equipment acquired -- (464,027) Capital expenditures (96,423) (241,959) ------------ ------------ Net cash used by investing activities (96,423) (705,986) ------------ ------------ Cash flows from financing activities: Common stock proceeds, net -- 300,000 Stock options exercised 574,296 -- Note payable to related party -- 1,200,000 Revolving line of credit with related party -- 500,000 ------------ ------------ Net cash from financing activities 574,296 2,000,000 ------------ ------------ Decrease in cash and cash equivalents (2,475,189) (220,703) Cash and cash equivalents at beginning of period 44,830,487 2,115,351 ------------ ------------ Cash and cash equivalents at end of period $ 42,355,298 $ 1,894,648 ============ ============ Supplemental disclosure of cash flow information: Cash paid for interest $ -- $ 59,723 ============ ============ Note payable for LCN purchase $ -- $ 2,000,000 ============ ============
The accompanying notes are an integral part of these financial statements. 5 SMARTALK TELESERVICES, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF INTERIM PRESENTATION The accompanying interim period financial statements are unaudited, pursuant to certain rules and regulations of the Securities and Exchange Commission, and include, in the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for a fair statement of the results for the periods indicated; which, however, are not necessarily indicative of results which may be expected for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The financial statements should be read in conjunction with the financial statements and the notes thereto for the year ended December 31, 1996 and other information included in the Company's Form 10-K as filed with the Securities and Exchange Commission. 2. DIVIDENDS There were no dividends declared or paid for the three months ended March 31, 1997 or 1996. SMARTALK TELESERVICES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION GENERAL SmarTalk provides convenient, easy to use, "cost-effective" telecommunications products and services to individuals and businesses primarily through its SmarTalk Card. The SmarTalk Card provides customers with a single point of access to prepaid telecommunications services at a fixed rate charge per minute regardless of the time of day or, in the case of domestic calls, the distance of the call. The Company's services currently include domestic calling, inbound and outbound international long distance calling, as well as enhanced features such as sequential calling, speed dial and message delivery. The SmarTalk Card may also be recharged on-line with a major credit card, allowing the user to add minutes as needed. SmarTalk services are delivered through proprietary switching, application and database access software which run on two interactive call processing platforms, one of which, the VoiceChoice Platform, the Company owns. The SmarTalk platforms and the Company's proprietary software allow users in the system to access SmarTalk services, and provide the Company with the flexibility to customize and add features to SmarTalk services on a platform-wide basis. SmarTalk's revenue originates from (i) Company and co-branded phone card sales through retailers, (ii) recharges of existing phone cards, (iii) cards sold for promotional marketing campaigns, (iv) corporate sales to businesses and (v) prepaid phone card services provided to one of the Company's strategic partners. Under sales agreements with the majority of retailers, the Company sells cards to the retailer at a set price with normal credit terms. The Company generally invoices the retailer upon shipment, recognizing deferred revenue. The Company recognizes revenue and reduces the deferred revenue account as the customer utilizes calling time or upon expiration of cards containing unused calling time. The Company also recognizes deferred revenue upon recharge of existing phone cards and recognizes the revenue upon the usage or expiration of the recharge minutes. 6 The Company was formed in October 1994 and had limited operations until June 1995. On October 23, 1996, the Company completed the sale of 4,000,000 shares of its stock in a public offering on the NASDAQ national stock market. The Company raised proceeds of $53,940,000 after deducting the underwriting discount. A portion of the proceeds were used to repay all of the Company's indebtedness. RESULTS OF OPERATIONS QUARTER ENDED MARCH 31, 1997 COMPARED WITH QUARTER ENDED MARCH 31, 1996 Revenue. Revenue increased to $7,368,333 for the quarter ended March 31, 1997 from $1,139,366 for the quarter ended March 31, 1996. The substantial increase in revenue reflects an increase in usage of SmarTalk services by users of the SmarTalk Card, an increase in the number of retail storefronts in which the Company's product is distributed, greater brand awareness and consumer acceptance, and revenue attributable to a distribution and processing agreement entered into on June 1, 1996 with West Interactive Corporation. Revenue attributable to the distribution and processing agreement was $3,850,049 in the first quarter of 1997 and zero for the same period last year. In addition, 11% of total revenue for the quarter ended March 31, 1997 consisted of revenue recognized on the unused portion of expired cards (breakage revenue) as compared to 2.9% for the quarter ended March 31, 1996. Excluding the revenue from the distribution and processing agreement and from breakage revenue, the recharge percentage is 12.1% and 13.4% for the quarters ended March 31, 1997 and 1996, respectively. This percentage decreased slightly year over year as the Company significantly increased its credit card fraud detection procedures. Cost of Revenue. Cost of revenue increased to $4,760,748 for the quarter ended March 31, 1997 from $812,878 for the quarter ended March 31, 1996. The increase was primarily attributable to greater use of the Company's services. The gross profit percentage for the quarter ended March 31, 1997 was 35.4% as compared to 28.7% for the quarter ended March 31, 1996. The gross margin percentage increased primarily due to lower transport costs from the acquisition of the VoiceChoice platform on June 15, 1996 and the Company's ability to recognize breakage revenue. Sales and Marketing Expenses. Sales and marketing expenses increased to $2,545,414 (or 34.5% of revenue) for the quarter ended March 31, 1997 from $661,040 (or 58.0% of revenue) for the quarter ended March 31, 1996. The decrease as a percentage of revenue was due to revenue growth in 1997. The increased dollar amount was primarily due to the continued expansion of the Company's marketing activities, which include co-op advertising, manufacturers development funds and promotional goods. Additionally, commission expense was higher in 1997 than in 1996 due to increased sales activity. General and Administrative Expenses. General and administrative expenses increased to $901,231 (or 12.2% of revenue) for the quarter ended March 31, 1997 from $697,307 (or 61.2% of revenue) for the quarter ended March 31, 1996. The increase in dollar amount was primarily due to the addition of personnel and costs associated with the growth in the Company's business. The decrease as a percentage of revenue was due to increased revenue growth in 1997. General and administrative costs for the quarter ended March 31, 1997 included rent associated with the Company's move into a new office on March 1, 1996, credit card processing fees associated with the Company's on-line recharge feature, as well as increased general operating expenses. Additionally, quarter ended March 31, 1997 expense was reduced as the Company received enhanced feature equipment, with a net fair value of $325,810, in exchange for early termination of a facility sublease with a strategic partner. Interest Income (Expense). Interest income, net of interest expense for the quarter ended March 31, 1997 was $528,763 as compared to ($44,813) for the quarter ended March 31, 1996. This increase was primarily due to the investment of the proceeds from the initial public offering and the subsequent repayment of all of the Company's debt in November 1996. Income Tax. The Company had losses for the quarters ended March 31, 1997 and 1996. Accordingly, there was no provision for income taxes. 7 Net Loss. As a result of the above items, net loss decreased to $310,297 for the quarter ended March 31, 1997 from $1,076,672 for the quarter ended March 31, 1996. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- On October 23, 1996, the Company completed the sale of 4,000,000 shares of its stock in a public offering (the "Offering"), pursuant to which the Common Stock is now listed on the NASDAQ national stock market. The Company raised proceeds of $53,940,000 after deducting the underwriting discount. A portion of the proceeds were used to repay all of the Company's outstanding loans. From inception through December 31, 1996, the Company has funded operations primarily from cash generated by operations, borrowings under its debt agreements and the sale of its stock. The Company's operating activities used net cash of $2,953,062 for the quarter ended March 31, 1997. The cash used by operating activities is primarily attributable to the Company's continued efforts to increase its penetration of the retail distribution channel. In December 1996, the Company entered into a revolving credit facility with Southern California Bank ("SCB Line of Credit"). Pursuant to the terms of the SCB Line of Credit, the Company can borrow up to $1,000,000 secured by an assignment of a deposit account with SCB. Interest on the outstanding principal balance, calculated from the date of each advance to the repayment of each advance is at a fixed rate of 7.12%. The credit facility was undrawn at March 31, 1997. The Company believes that the proceeds from the Offering, together with the funds anticipated to be generated from operations, will be sufficient to finance the Company's operations for the next 12 months. 8 SMARTALK TELESERVICES, INC. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K. 10.1 Employment agreement of Glen A. Folck dated January 1, 1997. 10.2 Employment agreement of David A. Hamburger dated March 17, 1997. 27.1 Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Company for the three months ended March 31, 1997. 9 SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SmarTalk TeleServices, Inc. --------------------------- (Registrant) Date: April 14, 1997 By: /s/ Andrew Folck --------------------------- Andrew Folck Chief Financial Officer 10 EX-10.B 2 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 1st day of January, 1997 between SMARTALK TELESERVICES, INC., a California corporation (the "Company") and GLEN ANDREW FOLCK (the "Executive"). WHEREAS, the parties hereto wish to enter into an employment agreement to employ the Executive as the Chief Financial Officer, Vice President of Finance, and Assistant Secretary of the Company and to set forth certain additional agreements between the Executive and the Company. NOW, THEREFORE, in consideration of the mutual covenants and representations contained herein, the parties hereto agree as follows: 1. Term. ----- The Company will employ the Executive, and the Executive will serve the Company, under the terms of this Agreement for an initial term of two years, commencing on the date hereof. Effective as of the expiration of such initial two-year term and as of each anniversary date thereof, the term of this Agreement shall be extended for an additional one-year period unless, not later than three months prior to each such respective date, either party hereto shall have given notice to the other that the term shall not be so extended. Notwithstanding the foregoing, the Executive's employment hereunder may be earlier terminated, as provided in Section 4 hereof. The term of this Agreement, as in effect from time to time in accordance with the foregoing, shall be referred to herein as the "Term". The period of time between the commencement and the termination of the Executive's employment hereunder shall be referred to herein as the "Employment Period." 2. Employment. ---------- (a) Positions and Reporting. The Company hereby employs the ----------------------- Executive for the Employment Period as its Chief Financial Officer, Vice President of Finance, and Assistant Secretary on the terms and conditions set forth in this Agreement. During the Employment Period, the Executive shall report directly to the Chief Executive Officer of the Company. (b) Authority and Duties. The Executive shall exercise such -------------------- authority, perform such executive duties and functions and discharge such responsibilities as are 1 reasonably associated with the Executive's positions, commensurate with the authority vested in the Executive pursuant to this Agreement and consistent with the By-Laws of the Company. During the Employment Period, the Executive shall devote full business time, skill and efforts to the business of the Company. Notwithstanding the foregoing, the Executive may (i) make and manage personal business investments of his choice and serve in any capacity with any civic, educational or charitable organization, or any trade association, without seeking or obtaining approval by the Board of Directors of the Company (the "Board"), provided such activities and service do not materially interfere or conflict with the performance of his duties hereunder and (ii) with the approval of the Board, serve on the boards of directors of other corporations. 3. Compensation and Benefits. ------------------------- (a) Salary. During the Employment Period, the Company shall pay to ------ the Executive, as compensation for the performance of his duties and obligations under this Agreement, a base salary at the rate of $150,000 per annum, payable in arrears not less frequently than monthly in accordance with the normal payroll practices of the Company (the "Base Salary"). Such Base Salary shall be subject to review each year for possible increase by the Board in its sole discretion, but shall in no event be decreased from its then-existing level during the Employment Period. (b) Annual Bonus. The Executive shall earn bonus amounts in the form ------------ of cash and stock awards, to be paid to the Executive within sixty (60) days following the year-end audit, based upon the satisfaction of performance criteria that will be established by a committee of the Board (the "Compensation Committee") in its discretion and upon consultation with the Executive at the beginning of each year, but in no case after January 31, subject to the approval of the Board. Such performance criteria will include corporate performance goals consistent with the Company's business plan for the year, as well as individual objectives for the Executive's performance that are separate from, but are consistent with, the Company's business plan. The final determinations as to the actual corporate and individual performance against the pre- established goals and objectives, and the amounts of any additional bonus payout in relationship to such performance, shall be made by the Compensation Committee in its sole discretion. The cash and stock components of the Executive's bonus awards shall be in the same average proportion as the awards granted to the other senior management of the Company. For purposes of this Agreement, senior management of the Company shall be the president, the executive vice president, and the general counsel. (c) Car Allowance. Employer shall pay to Executive as an automobile ------------- allowance the sum of $600 per month during the Employment Period in lieu of any other provision for an automobile, insurance, maintenance, gasoline and expenses. (d) Insurance Policies. The Company shall purchase for up to an ------------------ annual 2 premium amount of $5,000 and maintain in force during the Employment Period, life and disability insurance on the Executive, the beneficiary of which shall be designated by the Executive (the "Executive Policies"). In the event that the Company cancels the Executive Policies, the Executive shall have the option to continue them in force at his own expense. The Executive Policies shall be assigned to the Executive upon the termination of this Agreement. The Company may also purchase "key-person" life insurance policies on the Executive's life in such amounts and of such types as is determined by the Board. The Executive shall cooperate fully with the Company in obtaining such insurance and shall submit to such physical examinations and provide such information as is reasonably required to obtain and maintain such policies. Neither the Executive nor his successor-in-interest or estate shall have any interest in any such key- person policies so obtained. (e) Other Benefits. During the Employment Period, the Executive -------------- shall receive such other life insurance, pension, disability insurance, health insurance, holiday, vacation and sick pay benefits and other benefits which the Company extends, as a matter of policy, to its executive employees and, except as otherwise provided herein, shall be entitled to participate in all deferred compensation and other incentive plans of the Company on the same basis as other like employees of the Company. Without limiting the generality of the foregoing, the Executive shall be entitled to three (3) weeks vacation during each year of the Employment Period, which shall be scheduled in the Executive's discretion, subject to and taking into account the business exigencies of the Company. Unused vacation may be accrued up to a maximum of six (6) weeks of unused vacation, and thereafter the Executive shall cease to accrue vacation thereafter until used. (f) Business Expenses. During the Employment Period, the Company ----------------- shall promptly reimburse the Executive for all documented reasonable business expenses incurred by the Executive in the performance of his duties under this Agreement, in accordance with the Company's policies and standards of similar or comparable companies. (g) Stock Options. Concurrently with the execution of this Agreement, ------------- the Company and Executive will enter into a Stock Option Agreement, attached hereto as Exhibit A, pursuant to which the Company shall grant to the Executive an option to purchase up to 50,000 shares of common stock of the Company on the terms and conditions set forth therein. 4. Termination of Employment. -------------------------- (a) Termination for Cause. The Company may terminate the Executive's --------------------- employment hereunder for cause. For purposes of this Agreement and subject to the Executive's opportunity to cure as provided in Section 4(c) hereof, the Company shall have "cause" to terminate the Executive's employment hereunder if: 3 (i) The Executive has materially breached a material provision of this Agreement, and, if such breach is curable, it has not been cured or reasonably commenced being cured within thirty (30) days after written notice from the Company; (ii) The Executive is convicted of or pleads guilty to a felony involving financial misconduct or moral turpitude. (b) Termination for Good Reason. The Executive shall have the --------------------------- right at any time to terminate his employment with the Company for any reason. For purposes of this Agreement and subject to the Company's opportunity to cure as provided in Section 4(c) hereof, the Executive shall have "good reason" to terminate his employment hereunder if such termination shall be the result of: (i) a material diminution during the Employment Period in the Executive's duties or responsibilities as set forth in Section 2 hereof; (ii) a breach by the Company of the compensation and benefits provisions set forth in Section 3 hereof; (iii) termination by the Executive for any reason within 12 months following the occurrence of a Change in Control (as defined in Section 4(e) hereof); (iv) a material breach by the Company of any material terms of this Agreement. (c) Notice and Opportunity to Cure. Notwithstanding the foregoing, ------------------------------ it shall be a condition precedent to the Company's right to terminate the Executive's employment for "cause" and the Executive's right to terminate his employment for "good reason" that (1) the party seeking the termination shall first have given the other party written notice stating with specificity the reason for the termination ("breach") and (2) if such breach is susceptible of cure or remedy, a period of 30 days from and after the giving of such notice shall have elapsed without the breaching party having effectively cured or remedied such breach during such 30-day period, unless such breach cannot be cured or remedied within 30 days, in which case the period for remedy or cure shall be extended for a reasonable time (not to exceed 30 days) provided the breaching party has made and continues to make a diligent effort to effect such remedy or cure. (d) Termination Upon Death or Permanent and Total Disability. The ------------------------------------------------------- Employment Period shall be terminated by the death of the Executive. The Employment Period may be terminated by the Company if the Executive shall be rendered incapable of performing his duties to the Company by reason of any medically determined physical or mental impairment that can be expected to result in death or 4 that can be expected to last for a period of six or more consecutive months from the first date of the disability ("Disability"). If the Employment Period is terminated by reason of Disability of the Executive, the Company shall give 30- days' advance written notice to that effect to the Executive. (e) Definition of Change in Control. A "Change in Control" shall be ------------------------------ deemed to have taken place if: (i) there shall be consummated any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's capital stock are converted into cash, securities or other property (other than a consolidation or merger of the Company in which the holders of the Company's voting stock immediately prior to the consolidation or merger shall, upon consummation of the consolidation or merger, own at least 50% of the voting stock) or any sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company; or (ii) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) shall, after the date hereof, become the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the voting power of all of the then outstanding securities of the Company having the right under ordinary circumstances to vote in an election of the Board (including, without limitation, any securities of the Company that any such person has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, shall be deemed beneficially owned by such person); or (iii) individuals who as of the date hereof constitute the entire Board and any new directors whose election by the Company's shareholders, or whose nomination for election by the Company's board, shall have been approved by a vote of at least a majority of the directors then in office who either were directors at the date hereof or whose election or nomination for election shall have been so approved (the "Continuing Directors") shall cease for any reason to constitute a majority of the members of the Board. 5. Consequences of Termination. --------------------------- (a) Termination Without Cause or for Good Reason. In the event of -------------------------------------------- termination of the Executive's employment hereunder by the Company without "cause" (other than upon death or Disability) or by the Executive for "good reason" (each as defined in Section 4 hereof), the Executive shall be entitled to the following severance pay and benefits: 5 (i) Severance Pay - a lump sum amount equal to three (3) times -------------- the Executive's Base Salary as in effect immediately prior to such termination and the highest bonus paid to the Executive during the Employment Period. (ii) Benefits Continuation - continuation for the longer of (A) --------------------- the then remainder of the Term (as if a timely non-renewal notice has been given) and (B) 24 months (the "Severance Period") of coverage under the group medical care, disability and life insurance benefit plans or arrangements in which the Executive is participating at the time of termination; provided, however, that the Company's obligation to provide such coverages shall be terminated if the Executive obtains comparable substitute coverage from another employer at any time during the Severance Period. The Executive shall be entitled, at the expiration of the Severance Period, to elect continued medical coverage in accordance with Section 4980B of the Internal Revenue Code of 1986, as amended (or any successor provision thereto). (b) Termination Upon Disability. In the event of termination of --------------------------- the Executive's employment hereunder by the Company on account of Disability, the Executive shall be entitled to the following severance pay and benefits: (i) Severance Pay - severance payments in the form of ------------- continuation of the Executive's Base Salary as in effect immediately prior to such termination for a period of the longer of 12 months following the first date of Disability and the then remainder of the Term (as if a timely non-renewal notice has been given); (ii) Benefits Continuation - the same benefits as provided in --------------------- Section 5(a)(ii) above, to be provided during the Employment Period while the Executive is suffering from Disability and for a period of 12 months following the effective date of termination of employment by reason of Disability. In addition to the foregoing, the Company shall remit to the Executive any benefits received by the Company, as beneficiary, pursuant to any additional disability insurance policy which was maintained by the Executive prior to his employment with the Company. (c) Termination Upon Death. In the event of termination of the ---------------------- Executive's employment hereunder on account of the Executive's death, the Executive's heirs, estate or personal representatives under law, as applicable, shall be entitled to the payment of the Executive's Base Salary as in effect immediately prior to death for a period of not less than two calendar months and not more than the earlier of six calendar months or the payment of benefits pursuant to the Executive's life insurance policy, as provided for in Section 3(d) above. The Executive's beneficiary or 6 estate shall not be required to remit to the Company any payments received pursuant to any life insurance policy purchased pursuant to Section 3(d) above. (d) Other Terminations. In the event of termination of the ------------------ Executive's employment hereunder for any reason other than those specified in subsection (a) through (c) of this Section 5, the Executive shall not be entitled to any severance pay or benefits continuation contemplated by the foregoing, except as may otherwise be provided under the applicable benefit plans or award agreements relating to the Executive. (e) Accrued Rights. Notwithstanding the foregoing provisions of this -------------- Section 5, in the event of termination of the Executive's employment hereunder for any reason, the Executive shall be entitled to payment of any unpaid portion of his Base Salary through the effective date of termination, and payment of any accrued but unpaid rights solely in accordance with the terms of any incentive bonus or employee benefit plan or program of the Company. (f) Conditions to Severance Benefits. (i) The Company shall have the -------------------------------- right to seek repayment of the severance payments and benefits provided by this Section 5 in the event that the Executive fails to honor in accordance with their terms the provisions of Sections 6, 7 and 8 hereof. (ii) For purposes only of this Section, Employee shall be treated as having failed to honor the provisions of Sections 6, 7 or 8 hereof only upon the vote of two-thirds of the Board following notice of the alleged failure by the Company to the Executive, an opportunity for the Executive to cure the alleged failure for a period of 30 days from the date of such notice and the Executive's opportunity to be heard on the issue by the Board. 6. Confidentiality. The Executive agrees that he will not at any --------------- time during the Employment Period or at any time thereafter for any reason, in any fashion, form or manner, either directly or indirectly, divulge, disclose or communicate to any person, firm, corporation or other business entity, in any manner whatsoever, any confidential information or trade secrets concerning the business of the Company, including, without limiting the generality of the foregoing, the techniques, methods or systems of its operation or management, any information regarding its financial matters, or any other material information concerning the business of the Company (including customer lists), its manner of operation, its plans or other material data (the "Business"). The provisions of this Section 6 shall not apply to (i) information disclosed in the performance of the Executive's duties to the Company based on his good faith belief that such a disclosure is in the best interests of Company; (ii) information that is, at the time of the disclosure, public knowledge; (iii) information disseminated by the Company to third parties in the ordinary course of business; (iv) information lawfully received by the Executive from a third party who, based upon inquiry by the Executive, is not bound by a confidential relationship to the Company; or (v) information disclosed 7 under a requirement of law or as directed by applicable legal authority having jurisdiction over the Executive. 7. Inventions. The Executive is hereby retained in a capacity such ---------- that the Executive's responsibilities may include the making of technical and managerial contributions of value to Company. The Executive hereby assigns to Company all rights, title and interest in such contributions and inventions made or conceived by the Executive alone or jointly with others during the Employment Period which relate to the Business. This assignment shall include (a) the right to file and prosecute patent applications on such inventions in any and all countries, (b) the patent applications filed and patents issuing thereon, and (c) the right to obtain copyright, trademark or trade name protection for any such work product. The Executive shall promptly and fully disclose all such contributions and inventions to Company and assist Company in obtaining and protecting the rights therein (including patents thereon), in any and all countries; provided, however, that said contributions and inventions will be the property of Company, whether or not patented or registered for copyright, trademark or trade name protection, as the case may be. Inventions conceived by the Executive which are not related to the Business, will remain the property of the Executive. 8. Non-Competition. (i) The Executive agrees that he shall not --------------- during the Employment Period and for a period of one (1) year thereafter, without the approval of the Board, directly or indirectly, alone or as partner, joint venturer, officer, director, employee, consultant, agent, independent contractor or stockholder (other than as provided below) of any company or business, engage in any "Competitive Business" within the United States. For purposes of the foregoing, the term "Competitive Business" shall mean any business directly involved in prepaid telecommunications services industry. Notwithstanding the foregoing, the Executive shall not be prohibited during the noncompetition period applicable above from acting as a passive investor where he owns not more than five percent (5%) of the issued and outstanding capital stock of any publicly-held company. During the period that the above noncompetition restriction applies, the Executive shall not, without the written consent of the Company, solicit any employee who is under contract with the Company or any current or future subsidiary or affiliate thereof to terminate his or her employment; nor shall the Executive solicit employees for any enterprise that competes with Company; but shall have the right to solicit employees not under contract with the Company for an enterprise that does not compete with the Company. 9. Breach of Restrictive Covenants. The parties agree that a ------------------------------- breach or violation of Sections 6, 7 or 8 hereof will result in immediate and irreparable injury and harm to the innocent party, and that such innocent party shall have, in addition to any and all remedies of law and other consequences under this Agreement, the right to seek an injunction, specific performance or other equitable relief to prevent the violation 8 of the obligations hereunder. 10. Notice. For the purposes of this Agreement, notices, demands and ------ all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Company, to: Attn: President SmarTalk TeleServices, Inc. 1640 South Sepulveda Blvd., Suite 500 Los Angeles, CA 90025 with a copy to: Robert M. Smith, Esq. Dewey Ballantine 333 South Hope Street, Suite 3000 Los Angeles, CA 90071-1406 (b) If to the Executive, to: Glen Andrew Folck 2677 South Centinela Blvd., Suite 406 Santa Monica, CA 90405 or to such other respective addresses as the parties hereto shall designate to the other by like notice, provided that notice of a change of address shall be effective only upon receipt thereof. 11. Excise Tax Limit. Notwithstanding anything in this Agreement to ---------------- the contrary, in the event it shall be determined that any payment or distribution by the Company or any other person or entity to or for the benefit of the Executive is a "parachute payment" (within the meaning of Section 280G of the Code, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment") in connection with, or arising out of, his employment with the Company or a change in ownership or effective control of the Company (within the meaning of Section 280G of the Code, and would be subject to the excise tax imposed by Section 4999 of the Code) (the "Excise Tax"), the Payments shall be reduced to the extent necessary so that such remaining Payment would not be subject to the excise tax imposed by Section 4999 of the Code. 9 12. Arbitration; Legal Fees. Except as provided in Section 9 hereof, ----------------------- any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Los Angeles County, California in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The Company shall reimburse Executive for all reasonable legal fees and costs and other fees and expenses which Executive may incur in respect of any dispute or controversy arising under or in connection with this Agreement; provided, however, that the Company shall not reimburse any such fees costs and expenses if the fact finder determines that the action brought by the Executive was frivolous. 13. Waiver of Breach. Any waiver of any breach of this Agreement ---------------- shall not be construed to be a continuing waiver or consent to any subsequent breach on the part either of the Executive or of the Company. 14. Non-Assignment; Successors. Neither party hereto may assign his -------------------------- or its rights or delegate his or its duties under this Agreement without the prior written consent of the other party; provided, however, that: (i) this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company upon any sale of all or substantially all of the Company's assets, or upon any merger, consolidation or reorganization of the Company with or into any other corporation, all as though such successors and assigns of the Company and their respective successors and assigns were the Company; and (ii) this Agreement shall inure to the benefit of and be binding upon the heirs, assigns or designees of the Executive to the extent of any payments due to them hereunder. As used in this Agreement, the term "Company" shall be deemed to refer to any such successor or assign of the Company referred to in the preceding sentence. 15. Withholding of Taxes. All payments required to be made by the -------------------- Company to the Executive under this Agreement shall be subject to the withholding of such amounts, if any, relating to tax, and other payroll deductions as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. 16. Severability. To the extent any provision of this Agreement or ------------ portion thereof shall be invalid or unenforceable, it shall be considered deleted therefrom and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. 17. Director and Officer Insurance. The Company shall use its best ------------------------------ 10 efforts to obtain and maintain director's and officer's insurance for the Executive (in such amounts as are appropriate for executives of businesses comparable to that of the Company) pursuant to Board of Directors indemnity agreements then in force and shall give timely notice to the Executive of termination of any such insurance policy. 18. Payments; Mitigation. All amounts payable by the Company to the -------------------- Executive under this Agreement shall be paid promptly on the dates required for such payment in this Agreement without notice or demand. There shall be no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment to the Executive, his dependents, beneficiaries or estate provided for in this Agreement. Any salary, benefits or other amounts paid or to be paid to Executive or provided to or in respect of the Executive pursuant to this Agreement shall not be reduced by amounts owing from Executive to the Company. Executive shall not be obligated to seek other employment in mitigation of the amounts payable or the arrangements made under any provision of this Agreement. 19. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 20. Governing Law. This Agreement shall be construed, interpreted ------------- and enforced in accordance with the laws of the State of California, without giving effect to the choice of law principles thereof. 21. Entire Agreement. This Agreement constitutes the entire ---------------- agreement by the Company and the Executive with respect to the subject matter hereof and supersedes any and all prior agreements or understandings between the Executive and the Company with respect to the subject matter hereof, whether written or oral. This Agreement may be amended or modified only by a written instrument executed by the Executive and the Company. * * * IN WITNESS WHEREOF, the parties have executed this Agreement as of January 1, 1997. SMARTALK TELESERVICES, INC. 11 ----------------------------------------- By: Robert H. Lorsch Its: President and Chief Executive Officer ---------------------------------------- Glen Andrew Folck 172017L.1 12 EX-10.C 3 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 17 day of March, 1997 between SMARTALK TELESERVICES, INC., a California corporation (the "Company") and DAVID ANDREW HAMBURGER (the "Executive"); and WHEREAS, the parties hereto wish to enter into an employment agreement to employ the Executive as the Vice President - Legal Affairs and General Counsel of the Company and to set forth certain additional agreements between the Executive and the Company. NOW, THEREFORE, in consideration of the mutual covenants and representations contained herein, the parties hereto agree as follows: 1. Term. ---- The Company will employ the Executive, and the Executive will serve the Company, under the terms of this Agreement for an initial term of three years (the "Initial Term"), commencing on the date hereof (the "Effective Date"). Effective as of the expiration of the Initial Term and as of each anniversary date thereof, the term of this Agreement shall be extended for an additional one-year period unless, not later than three months prior to each such respective date, either party hereto shall have given notice to the other that the term shall not be so extended. Notwithstanding the foregoing, the Executive's employment hereunder may be earlier terminated, as provided in Section 4 hereof. The term of this Agreement, as in effect from time to time in accordance with the foregoing, shall be referred to herein as the "Term". The period of time between the Effective Date and the termination of the Executive's employment hereunder shall be referred to herein as the "Employment Period." 2. Employment. ---------- (a) Positions and Reporting. The Company hereby employs the ----------------------- Executive for the Employment Period as its Vice President - Legal Affairs and General Counsel on the terms and conditions set forth in this Agreement. During the Employment Period, the Executive shall report directly to the President of the Company. (b) Authority and Duties. The Executive shall exercise such -------------------- authority, 1 perform such executive duties and functions and discharge such responsibilities as are reasonably associated with the Executive's positions, commensurate with the authority vested in the Executive pursuant to this Agreement and consistent with the By-Laws of the Company. During the Employment Period, the Executive shall devote full business time, skill and efforts to the business of the Company. Notwithstanding the foregoing, the Executive may (i) make and manage personal business investments of his choice and serve in any capacity with any civic, educational or charitable organization, or any trade association, without seeking or obtaining approval by the Board of Directors of the Company (the "Board"), provided such activities and service do not materially interfere or conflict with the performance of his duties hereunder and (ii) with the approval of the Board, serve on the boards of directors of other corporations. 3. Compensation and Benefits. ------------------------- (a) Salary. During the Employment Period, the Company shall pay to ------ the Executive, as compensation for the performance of his duties and obligations under this Agreement, a base salary at the rate of $125,000 per annum for the period from the Effective Date through the first anniversary of the Effective Date, at the rate of $140,000 per annum for the period from the first anniversary of the Effective Date through the second anniversary of the Effective Date, and at the rate of $160,000 per annum for the period from the second anniversary of the Effective Date through the third anniversary of the Effective Date, in each case payable in arrears not less frequently than monthly in accordance with the normal payroll practices of the Company (the "Base Salary"). Such Base Salary shall be subject to review each year for possible increase by the Board in its sole discretion, but shall in no event be decreased from the levels set forth above during the Initial Term, or from its then- existing level thereafter. (b) Annual Bonus. The Executive shall earn bonus amounts in the form ------------ of cash and stock awards based upon the satisfaction of performance criteria that will be established by a committee of the Board (the "Compensation Committee") in its discretion and upon consultation with the Executive at the beginning of each year, but in no case after January 31, subject to the approval of the Board. Such performance criteria will include corporate performance goals consistent with the Company's business plan for the year, as well as individual objectives for the Executive's performance that are separate from, but are consistent with, the Company's business plan. The final determinations as to the actual corporate and individual performance against the pre- established goals and objectives, and the amounts of any additional bonus payout in relationship to such performance, shall be made by the Compensation Committee in its sole discretion. The cash and stock components of the Executive's bonus awards shall be in the same average proportion as the awards granted to the other senior management of the Company and shall reflect compensation at least in proportion to the other senior management of the Company. For purposes of this Agreement, senior management of the Company shall be the president, the executive vice president, and the chief financial officer. 2 (c) Car Allowance. Employer shall pay to Executive as an automobile ------------- allowance the sum of $600 per month during the Employment Period in lieu of any other provision for an automobile, insurance, maintenance, gasoline and expenses. (d) Insurance Policies. The Company shall purchase for up to an ------------------ annual premium amount of $5,000 and maintain in force during the Employment Period, life and disability insurance on the Executive, the beneficiary of which shall be designated by the Executive (the "Executive Policies"). In the event that the Company cancels the Executive Policies, the Executive shall have the option to continue them in force at his own expense. The Executive Policies shall be assigned to the Executive upon the termination of this Agreement. The Company may also purchase "key-person" life insurance policies on the Executive's life in such amounts and of such types as is determined by the Board. The Executive shall cooperate fully with the Company in obtaining such insurance and shall submit to such physical examinations and provide such information as is reasonably required to obtain and maintain such policies. Neither the Executive nor his successor-in-interest or estate shall have any interest in any such key-person policies so obtained. (e) Other Benefits. During the Employment Period, the Executive -------------- shall receive such other life insurance, pension, disability insurance, health insurance, holiday, vacation and sick pay benefits and other benefits which the Company extends, as a matter of policy, to its executive employees and, except as otherwise provided herein, shall be entitled to participate in all deferred compensation and other incentive plans of the Company on the same basis as other like employees of the Company. Without limiting the generality of the foregoing, the Executive shall be entitled to three (3) weeks vacation during each year of the Employment Period, which shall be scheduled in the Executive's discretion, subject to and taking into account the business exigencies of the Company. Unused vacation may be accrued up to a maximum of six (6) weeks of unused vacation, and thereafter the Executive shall cease to accrue vacation thereafter until used. (f) Business Expenses. During the Employment Period, the Company ----------------- shall promptly reimburse the Executive for all documented reasonable business expenses incurred by the Executive in the performance of his duties under this Agreement, in accordance with the Company's policies and standards of similar or comparable companies. (g) Stock Options. Concurrently with the execution of this Agreement, ------------- the Company and Executive will enter into a Stock Option Agreement, attached hereto as Exhibit A, pursuant to which the Company shall grant to the Executive an option to purchase up to 60,000 shares of common stock of the Company on the terms and conditions set forth therein. 3 4. Termination of Employment. ------------------------- (a) Termination for Cause. The Company may terminate the Executive's --------------------- employment hereunder for cause. For purposes of this Agreement and subject to the Executive's opportunity to cure as provided in Section 4(c) hereof, the Company shall have "cause" to terminate the Executive's employment hereunder if: (i) The Executive has materially breached a material provision of this Agreement, and, if such breach is curable, it has not been cured or reasonably commenced being cured within thirty (30) days after written notice from the Company; (ii) The Executive is convicted of or pleads guilty to a felony involving financial misconduct or moral turpitude. (b) Termination for Good Reason. The Executive shall have the --------------------------- right at any time to terminate his employment with the Company for any reason. For purposes of this Agreement and subject to the Company's opportunity to cure as provided in Section 4(c) hereof, the Executive shall have "good reason" to terminate his employment hereunder if such termination shall be the result of: (i) a diminution during the Employment Period in the Executive's title, duties, reporting relationship or responsibilities as set forth in Section 2 hereof; (ii) a breach by the Company of the compensation and benefits provisions set forth in Section 3 hereof; (iii) termination by the Executive for any reason within 12 months following the occurrence of a Change in Control (as defined in Section 4(e) hereof); (iv) a relocation of the Executive's principal business office by more than fifty (50) miles from its existing location; or (v) a material breach by the Company of any material terms of this Agreement. (c) Notice and Opportunity to Cure. Notwithstanding the foregoing, ------------------------------ it shall be a condition precedent to the Company's right to terminate the Executive's employment for "cause" and the Executive's right to terminate his employment for "good reason" that (1) the party seeking the termination shall first have given the other party written notice stating with specificity the reason for the termination ("breach") and (2) if such breach is susceptible of cure or remedy, a period of 30 days from and after the giving of such notice shall have elapsed without the breaching party having effectively 4 cured or remedied such breach during such 30-day period, unless such breach cannot be cured or remedied within 30 days, in which case the period for remedy or cure shall be extended for a reasonable time (not to exceed 30 days) provided the breaching party has made and continues to make a diligent effort to effect such remedy or cure. (d) Termination Upon Death or Permanent and Total Disability. The -------------------------------------------------------- Employment Period shall be terminated by the death of the Executive. The Employment Period may be terminated by the Company if the Executive shall be rendered incapable of performing his duties to the Company by reason of any medically determined physical or mental impairment that can be expected to result in death or that can be expected to last for a period of six or more consecutive months from the first date of the disability ("Disability"). If the Employment Period is terminated by reason of Disability of the Executive, the Company shall give 30-days' advance written notice to that effect to the Executive. (e) Definition of Change in Control. A "Change in Control" shall be ------------------------------- deemed to have taken place if: (i) there shall be consummated any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's capital stock are converted into cash, securities or other property (other than a consolidation or merger of the Company in which the holders of the Company's voting stock immediately prior to the consolidation or merger shall, upon consummation of the consolidation or merger, own at least 50% of the voting stock) or any sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company; or (ii) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) shall, after the date hereof, become the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the voting power of all of the then outstanding securities of the Company having the right under ordinary circumstances to vote in an election of the Board (including, without limitation, any securities of the Company that any such person has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, shall be deemed beneficially owned by such person); or (iii) individuals who as of the date hereof constitute the entire Board and any new directors whose election by the Company's shareholders, or whose nomination for election by the Company's board, shall have been approved by a vote of at least a majority of the directors then in office who either were directors at the date hereof or whose election or nomination for election 5 shall have been so approved (the "Continuing Directors") shall cease for any reason to constitute a majority of the members of the Board. 5. Consequences of Termination. --------------------------- (a) Termination Without Cause or for Good Reason. In the event of -------------------------------------------- termination of the Executive's employment hereunder by the Company without "cause" (other than upon death or Disability) or by the Executive for "good reason" (each as defined in Section 4 hereof), the Executive shall be entitled to the following severance pay and benefits: (i) Severance Pay - a lump sum amount equal to three (3) times ------------- the Executive's highest annual Base Salary and highest annual bonus; and (ii) Benefits Continuation - continuation for the longer of (A) --------------------- the then remainder of the Term (as if a timely non-renewal notice has been given) and (B) 24 months (the "Severance Period") of coverage under the group medical care, disability and life insurance benefit plans or arrangements in which the Executive is participating at the time of termination; provided, however, that the Company's obligation to provide such coverages shall be terminated if the Executive obtains comparable substitute coverage from another employer at any time during the Severance Period. The Executive shall be entitled, at the expiration of the Severance Period, to elect continued medical coverage in accordance with Section 4980B of the Internal Revenue Code of 1986, as amended (or any successor provision thereto). (b) Termination Upon Disability. In the event of termination of --------------------------- the Executive's employment hereunder by the Company on account of Disability, the Executive shall be entitled to the following severance pay and benefits: (i) Severance Pay - severance payments in the form of ------------- continuation of the Executive's Base Salary as in effect immediately prior to such termination for a period of the longer of 12 months following the first date of Disability and the then remainder of the Term (as if a timely non-renewal notice has been given); (ii) Benefits Continuation - the same benefits as provided in --------------------- Section 5(a)(ii) above, to be provided during the Employment Period while the Executive is suffering from Disability and for a period of 12 months following the effective date of termination of employment by reason of Disability. In addition to the foregoing, the Company shall remit to the Executive any benefits received by the Company, as beneficiary, pursuant to any additional disability insurance policy which was maintained by the Executive prior to his employment with 6 the Company. (c) Termination Upon Death. In the event of termination of the ---------------------- Executive's employment hereunder on account of the Executive's death, the Executive's heirs, estate or personal representatives under law, as applicable, shall be entitled to the payment of the Executive's Base Salary as in effect immediately prior to death for a period of not less than two calendar months and not more than the earlier of six calendar months or the payment of benefits pursuant to the Executive's life insurance policy, as provided for in Section 3(d) above. The Executive's beneficiary or estate shall not be required to remit to the Company any payments received pursuant to any life insurance policy purchased pursuant to Section 3(d) above. (d) Other Terminations. In the event of termination of the ------------------ Executive's employment hereunder for any reason other than those specified in subsection (a) through (c) of this Section 5, the Executive shall not be entitled to any severance pay or benefits continuation contemplated by the foregoing, except as may otherwise be provided under the applicable benefit plans or award agreements relating to the Executive. (e) Accrued Rights. Notwithstanding the foregoing provisions of this -------------- Section 5, in the event of termination of the Executive's employment hereunder for any reason, the Executive shall be entitled to payment of any unpaid portion of his Base Salary through the effective date of termination, and payment of any accrued but unpaid rights solely in accordance with the terms of any incentive bonus or employee benefit plan or program of the Company. (f) Conditions to Severance Benefits. (i) The Company shall have the -------------------------------- right to seek repayment of the severance payments and benefits provided by this Section 5 in the event that the Executive fails to honor in accordance with their terms the provisions of Sections 6, 7 and 8 hereof. (ii) For purposes only of this Section, Employee shall be treated as having failed to honor the provisions of Sections 6, 7 or 8 hereof only upon the vote of two-thirds of the Board following notice of the alleged failure by the Company to the Executive, an opportunity for the Executive to cure the alleged failure for a period of 30 days from the date of such notice and the Executive's opportunity to be heard on the issue by the Board. 6. Confidentiality. The Executive agrees that he will not at any --------------- time during the Employment Period or at any time thereafter for any reason, in any fashion, form or manner, either directly or indirectly, divulge, disclose or communicate to any person, firm, corporation or other business entity, in any manner whatsoever, any confidential information or trade secrets concerning the business of the Company, including, without limiting the generality of the foregoing, the techniques, methods or 7 systems of its operation or management, any information regarding its financial matters, or any other material information concerning the business of the Company (including customer lists), its manner of operation, its plans or other material data (the "Business"). The provisions of this Section 6 shall not apply to (i) information disclosed in the performance of the Executive's duties to the Company based on his good faith belief that such a disclosure is in the best interests of Company; (ii) information that is, at the time of the disclosure, public knowledge; (iii) information disseminated by the Company to third parties in the ordinary course of business; (iv) information lawfully received by the Executive from a third party who, based upon inquiry by the Executive, is not bound by a confidential relationship to the Company; or (v) information disclosed under a requirement of law or as directed by applicable legal authority having jurisdiction over the Executive. 7. Inventions. The Executive is hereby retained in a capacity such ---------- that the Executive's responsibilities may include the making of technical and managerial contributions of value to Company. The Executive hereby assigns to Company all rights, title and interest in such contributions and inventions made or conceived by the Executive alone or jointly with others during the Employment Period which relate to the Business. This assignment shall include (a) the right to file and prosecute patent applications on such inventions in any and all countries, (b) the patent applications filed and patents issuing thereon, and (c) the right to obtain copyright, trademark or trade name protection for any such work product. The Executive shall promptly and fully disclose all such contributions and inventions to Company and assist Company in obtaining and protecting the rights therein (including patents thereon), in any and all countries; provided, however, that said contributions and inventions will be the property of Company, whether or not patented or registered for copyright, trademark or trade name protection, as the case may be. Inventions conceived by the Executive which are not related to the Business, will remain the property of the Executive. 8. Non-Competition. (i) The Executive agrees that he shall not -------------- during the Employment Period and for a period of one (1) year thereafter, without the approval of the Board, directly or indirectly, alone or as partner, joint venturer, officer, director, employee, consultant, agent, independent contractor or stockholder (other than as provided below) of any company or business, engage in any "Competitive Business" within the United States. For purposes of the foregoing, the term "Competitive Business" shall mean any business directly involved in prepaid telecommunications services industry. Notwithstanding the foregoing, the Executive shall not be prohibited during the noncompetition period applicable above from practicing law as an employee of any law firm or from acting as a passive investor where he owns not more than five percent (5%) of the issued and outstanding capital stock of any publicly-held company. During the period that the above noncompetition restriction applies, the Executive shall not, without the written consent of the Company, solicit any employee who is under contract with the Company or any current or future subsidiary or affiliate thereof to 8 terminate his or her employment; nor shall the Executive solicit employees for any enterprise that competes with Company; but shall have the right to solicit employees not under contract with the Company for an enterprise that does not compete with the Company. 9. Breach of Restrictive Covenants. The parties agree that a ------------------------------- breach or violation of Sections 6, 7 or 8 hereof will result in immediate and irreparable injury and harm to the innocent party, and that such innocent party shall have, in addition to any and all remedies of law and other consequences under this Agreement, the right to seek an injunction, specific performance or other equitable relief to prevent the violation of the obligations hereunder. 10. Notice. For the purposes of this Agreement, notices, demands and ------ all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Company, to: Attn: President SmarTalk TeleServices, Inc. 1640 South Sepulveda Blvd., Suite 500 Los Angeles, CA 90025 with a copy to: Robert M. Smith, Esq. Dewey Ballantine 333 South Hope Street, Suite 3000 Los Angeles, CA 90071-1406 (b) If to the Executive, to: David Andrew Hamburger 555 South Barrington, #305 Los Angeles, CA 90049 or to such other respective addresses as the parties hereto shall designate to the other by like notice, provided that notice of a change of address shall be effective only upon receipt thereof. 9 11. Excise Tax Limit. Notwithstanding anything in this Agreement to ---------------- the contrary, in the event it shall be determined that any payment or distribution by the Company or any other person or entity to or for the benefit of the Executive is a "parachute payment" (within the meaning of Section 280G of the Code, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment") in connection with, or arising out of, his employment with the Company or a change in ownership or effective control of the Company (within the meaning of Section 280G of the Code, and would be subject to the excise tax imposed by Section 4999 of the Code) (the "Excise Tax"), the Payments shall be reduced to the extent necessary so that such remaining Payment would not be subject to the excise tax imposed by Section 4999 of the Code. 12. Arbitration; Legal Fees. Except as provided in Section 9 hereof, ----------------------- any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Los Angeles County, California in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The Company shall reimburse Executive for all reasonable legal fees and costs and other fees and expenses which Executive may incur in respect of any dispute or controversy arising under or in connection with this Agreement; provided, however, that the Company shall not reimburse any such fees costs and expenses if the fact finder determines that the action brought by the Executive was frivolous. 13. Waiver of Breach. Any waiver of any breach of this Agreement ---------------- shall not be construed to be a continuing waiver or consent to any subsequent breach on the part either of the Executive or of the Company. 14. Non-Assignment; Successors. Neither party hereto may assign his -------------------------- or its rights or delegate his or its duties under this Agreement without the prior written consent of the other party; provided, however, that: (i) this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company upon any sale of all or substantially all of the Company's assets, or upon any merger, consolidation or reorganization of the Company with or into any other corporation, all as though such successors and assigns of the Company and their respective successors and assigns were the Company; and (ii) this Agreement shall inure to the benefit of and be binding upon the heirs, assigns or designees of the Executive to the extent of any payments due to them hereunder. As used in this Agreement, the term "Company" shall be deemed to refer to any such successor or assign of the Company referred to in the preceding sentence. 15. Withholding of Taxes. All payments required to be made by the -------------------- 10 Company to the Executive under this Agreement shall be subject to the withholding of such amounts, if any, relating to tax, and other payroll deductions as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. 16. Severability. To the extent any provision of this Agreement or ------------ portion thereof shall be invalid or unenforceable, it shall be considered deleted therefrom and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. 17. Director and Officer Insurance. The Company shall use its best ------------------------------ efforts to obtain and maintain director's and officer's insurance for the Executive (in such amounts as are appropriate for executives of businesses comparable to that of the Company) pursuant to Board of Directors indemnity agreements then in force and shall give timely notice to the Executive of termination of any such insurance policy. 18. Payments; Mitigation. All amounts payable by the Company to the -------------------- Executive under this Agreement shall be paid promptly on the dates required for such payment in this Agreement without notice or demand. There shall be no right of set-off or counterclaim in respect of any claim, debt or obligation against any payment to the Executive, his dependents, beneficiaries or estate provided for in this Agreement. Any salary, benefits or other amounts paid or to be paid to Executive or provided to or in respect of the Executive pursuant to this Agreement shall not be reduced by amounts owing from Executive to the Company. Executive shall not be obligated to seek other employment in mitigation of the amounts payable or the arrangements made under any provision of this Agreement. 19. Authority. Each of the parties hereto hereby represents that --------- each has taken all actions necessary in order to execute and deliver this Agreement and the Stock Option Agreement attached hereto as Exhibit A. 20. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 21. Governing Law. This Agreement shall be construed, interpreted ------------- and enforced in accordance with the laws of the State of California, without giving effect to the choice of law principles thereof. 11 22. Entire Agreement. This Agreement constitutes the entire ---------------- agreement by the Company and the Executive with respect to the subject matter hereof and supersedes any and all prior agreements or understandings between the Executive and the Company with respect to the subject matter hereof, whether written or oral. This Agreement may be amended or modified only by a written instrument executed by the Executive and the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of March 17, 1997. SMARTALK TELESERVICES, INC. ----------------------------- By: Robert H. Lorsch Its: Chairman and President ----------------------------- David Andrew Hamburger 12 EX-27 4 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 42,355,298 0 2,994,189 89,724 809,237 48,461,503 1,257,161 133,535 49,742,585 5,663,155 0 0 0 51,361,077 0 49,742,585 7,368,333 7,368,333 4,760,748 4,760,748 3,446,645 0 528,763 (310,297) 0 (310,297) 0 0 0 (310,297) (0.02) (0.02)
-----END PRIVACY-ENHANCED MESSAGE-----