-----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, J75Uk7XzhbAbjvdCXKdrzUxmry4BDVfBAaDjL8EiznhA3H1ZX24t1lTfZqkDqDRT 8e4fydEfZ6w+kiY0TfZo1A== 0000944209-98-001034.txt : 19980518 0000944209-98-001034.hdr.sgml : 19980518 ACCESSION NUMBER: 0000944209-98-001034 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21579 FILM NUMBER: 98623496 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, 1998 Commission File No. 0-21579 SMARTALK TELESERVICES, INC. -------------------------- Incorporated under the laws IRS Employer Identification of California No. 95-4502740 5080 Tuttle Crossing Blvd. Dublin, Ohio 43017 Telephone: 614-764-2933 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: Voting, No par value: 22,600,440 As of May 13, 1998 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SMARTALK TELESERVICES, INC. BALANCE SHEETS (UNAUDITED)
March 31, December 31, ----------------- ----------------- ASSETS 1998 1997 ----------------- ----------------- Current assets: Cash and cash equivalents $ 48,102,465 $ 62,900,673 Trade accounts receivable (less allowance for doubtful accounts of $593,026 and $182,206, respectively) 35,503,661 32,699,249 Receivable from American Express Company -- 2,570,000 Inventories 6,478,537 4,301,487 Prepaid expenses 1,396,650 1,377,844 Other current assets 7,922,867 7,637,849 ----------------- ----------------- Total current assets 99,404,180 111,487,102 Non-current assets: Property and equipment, net 16,637,656 13,805,984 Intangibles, net 225,677,905 222,536,934 Note receivable from ACMI L.L.C. net 2,493,104 2,234,763 Other non-current assets 20,430,858 10,438,043 ----------------- ----------------- Total assets $ 364,643,703 $ 360,502,826 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 18,504,292 $ 15,081,532 Deferred revenue 27,825,780 40,248,400 Accrued marketing costs 1,382,574 1,811,817 Accrued interest payable 557,834 2,615,480 Other accrued expenses 9,071,681 5,571,728 Excise and sales tax payable 6,001,222 5,565,072 Restructure reserve 22,729,069 23,943,070 Reserve for discontinued operations 2,700,000 -- Accrued litigation settlement -- 4,500,003 Current portion of long-term debt 7,866,497 7,285,401 ----------------- ----------------- Total current liabilities 96,638,949 106,622,503 Long-term debt less current portion 150,874,753 150,874,753 ----------------- ----------------- Total liabilities 247,513,702 257,497,256 Shareholders' equity: 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 22,461,749 and 21,350,852 shares, 189,331,351 171,732,584 respectively Accumulated deficit (72,242,000) (68,870,824) Cumulative translation adjustment 40,650 143,810 ----------------- ----------------- Total shareholders' equity 117,130,001 103,005,570 ----------------- ----------------- Total liabilities and shareholders' equity $ 364,643,703 $ 360,502,826 ================= =================
The accompanying notes are an integral part of these financial statements. 2 SMARTALK TELESERVICES, INC. STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, ----------------------------- 1998 1997 ------------- ------------- Revenue $ 39,612,521 $ 7,368,333 Cost of revenue 23,908,488 4,760,748 ------------ ------------ Gross profit 15,704,033 2,607,585 Sales and marketing 5,450,629 2,545,414 General and administrative 9,084,480 901,231 ------------ ------------ Operating income (loss) 1,168,924 (839,060) Interest income 1,129,006 528,763 Interest expense (2,390,958) -- ------------ ------------ Loss from continuing operations before income taxes (93,028) (310,297) Provision for income taxes -- -- ------------ ------------ Loss from continuing operations (93,028) (310,297) Discontinued operations: Loss from discontinued operations (578,148) -- Loss on disposal of discontinued operations (2,700,000) -- ------------ ------------ Net loss $ (3,371,176) $ (310,297) ============ ============ Per share: Continuing operations $ (0.00) $ (0.02) Discontinued operations (0.15) -- ------------ ------------ Total basic $ (0.15) $ (0.02) ============ ============ Weighted average number of shares 21,902,362 12,897,674 ============ ============
The accompanying notes are an integral part of these financial statements. 3 SMARTALK TELESERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
COMMON STOCK CUMULATIVE ----------------------- STOCK ACCUMULATED TRANSLATION SHARES AMOUNT SUBSCRIPTION DEFICIT ADJUSTMENT TOTAL ---------- ------------ ------------ ------------ ----------- ------------ December 31, 1995............. 8,824,834 $ 315,000 $(300,000) $ (1,394,774) $ -- $ (1,379,774) Issuance of subscribed shares..................... -- -- 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..... 227,398 851,485 -- -- -- 851,485 Distribution agreement...... 330,205 7,596,093 -- -- -- 7,596,093 Acquisitions: ConQuest Telecommunications. 4,488,935 64,528,441 -- -- -- 64,528,441 GTI Telecom, Inc............ 2,580,001 34,830,000 -- -- -- 34,830,000 SmarTel Telecommunications.. 714,286 9,375,004 -- -- -- 9,375,004 Cardinal VoiceCard Ltd...... 115,000 2,170,625 -- -- -- 2,170,625 Frontier Selected Assets.... 65,568 1,594,155 -- -- -- 1,594,155 Cumulative translation adjustment................. -- -- -- -- 143,810 143,810 Net loss.................... -- -- -- (61,899,474) -- (61,899,474) ---------- ------------ --------- ------------ -------- ------------ December 31, 1997............. 21,350,852 171,732,584 -- (68,870,824) 143,810 103,005,570 Licensing agreement......... 100,000 3,056,300 -- -- -- 3,056,300 USA Telecommunications Services, Inc.............. 81,302 2,500,037 -- -- -- 2,500,037 Cumulative translation adjustment................. -- -- -- -- (103,160) (103,160) Litigation settlement....... 215,569 4,500,003 -- -- -- 4,500,003 Stock options exercised..... 714,026 7,542,427 -- -- -- 7,542,427 Net loss.................... -- -- -- (3,371,176) -- (3,371,176) ---------- ------------ --------- ------------ -------- ------------ March 31, 1998................ 22,461,749 $189,331,351 $ -- $(72,242,000) $ 40,650 $117,130,001 ========== ============ ========= ============ ======== ============
The accompanying notes are an integral part of these consolidated financial statements. 4 SMARTALK TELESERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, ----------------------------- 1998 1997 ------------- ------------ Cash flows from operating activities: Net loss.................................................................................. $ (3,371,176) (310,297) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation............................................................................. 474,473 43,355 Amortization............................................................................. 2,553,558 -- Loss from discontinued operations........................................................ 2,700,000 -- Provision for bad debt................................................................... 410,820 -- Lease termination fee.................................................................... -- (325,810) Changes in assets and liabilities, net of effects from acquisitions, dispositions, and foreign currency adjustments which increase (decrease) cash: Trade accounts receivable............................................................... (3,201,804) (650,273) Inventories............................................................................. (2,074,880) (208,217) Prepaid expenses........................................................................ (18,804) (133,196) Other current assets.................................................................... 733,746 (248,843) Other non-current assets................................................................ (7,874,217) (66,947) Accounts payable........................................................................ 3,409,555 (760,559) Deferred revenue........................................................................ (12,422,620) (61,549) Accrued marketing costs................................................................. (429,243) (136,931) Accrued interest........................................................................ (2,057,646) -- Other accrued expenses.................................................................. 3,302,681 (124,257) Restructure reserve..................................................................... (1,214,001) -- Litigation settlement in connection with ConQuest acquisition........................... (4,500,003) -- Excise and sales tax payable............................................................ 436,150 30,462 ------------ ------------ Net cash used by operating activities.................................................... (23,143,411) (2,953,062) ------------ ------------ Cash flows from investing activities: Note receivable from ACMI, L.L.C......................................................... (258,341) -- Capital expenditures..................................................................... (3,217,949) (96,423) Litigation settlement in connection with ConQuest acquisition............................ 4,500,003 -- Acquisition costs, net of cash acquired.................................................. (90,645) -- ------------ ------------ Net cash provided (used) by investing activities........................................ 933,068 (96,423) ------------ ------------ Cash flows from financing activities: Stock options exercised.................................................................. 7,542,427 574,296 Payments on capital lease obligations.................................................... (27,132) -- ------------ ------------ Net cash provided by financing activities............................................... 7,515,295 574,296 ------------ ------------ Effect of currency exchange rate change.................................................. (103,160) -- ------------ ------------ Decrease in cash and cash equivalents...................................................... (14,798,208) (2,475,189) Cash and cash equivalents at beginning of period........................................... 62,900,673 44,830,487 ------------ ------------ Cash and cash equivalents at end of period................................................. $ 48,102,465 $ 42,355,298 ============ ============ Supplemental disclosure of cash flow information: Cash paid for interest................................................................... $ 2,057,647 $ -- ============ ============ Issuance of stock for litigation settlement.............................................. $ 4,500,003 $ -- ============ ============ Issuance of stock for licensing agreement................................................ $ 3,056,300 $ -- ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 5 SMARTALK TELESERVICES, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF INTERIM PRESENTATION The accompanying interim period consolidated 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 adjustments) necessary for a fair presentation 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, 1997 and other information included in SmarTalk TeleServices, Inc.'s (the "Company") Form 10-K and Forms 8-K, as filed with the Securities and Exchange Commission. 2. RESTRUCTURING The company recorded a $25,000,000 restructuring charge at December 31, 1997. Utilization against this reserve is as follows:
Three Months Ended ------------------------- December 31, March 31, Total 1997 1998 Charges ------------ --------- --------- Personnel reductions $ 250,672 $ 494,079 $ 744,751 Facilities and equipment realignments 703,040 324,269 1,027,309 Product conformity and sole branding 103,218 395,653 498,871 ---------- ---------- ---------- Total $1,056,930 $1,214,001 $2,270,931 ========== ========== ==========
3. DISCONTINUED OPERATIONS On February 28, 1998 (the "Measurement Date") the Company's board of directors adopted a plan to sell the Company's call center business located in Butler, Pennsylvania. The call center operations up to the Measurement Date have been classified as a loss from discontinued operations. The estimated loss from operations after the measurement date until the anticipated date of sale have been recorded as a loss on disposal of discontinued operations. Summarized financial information for the discontinued operations is as follows:
Two Months One Month Three Months Ended Ended Ended February 28, 1998 March 31, 1998 March 31, 1998 ----------------- -------------- -------------- Revenues $3,705,218 $1,852,609 $5,557,827 Loss before income taxes (578,148) (363,943) (942,091) Net loss (578,148) (363,943) (942,091) As of March 31, 1998 --------- Current assets 4,085,208 Total assets 9,557,884 Current liabilities 1,428,909 Total liabilities 9,557,884 ---------- Net assets of discontinued operations $ - ==========
SmarTalk did not own the call center business at March 31, 1997. 4. LICENSING AGREEMENT On March 30, 1998, the Company entered into a new licensing agreement with AudioFax IP LLC to license certain voice-fax mailbox technology. The Company paid a one-time fee to license the technology until the patents expire in 2008. Prior to this agreement, the Company licensed this technology by paying a per card fee for cards containing voice-fax mailbox services. 5. ACQUISITION On March 23, 1998, the Company acquired USA Telecommunication Services, Inc., a North Carolina based prepaid cellular card company, for 81,302 shares of common stock and $1,500,000 in cash. This acquisition has been accounted for using the purchase method of accounting. Accordingly, the operating results of the acquired business are included in the Company's consolidated results since the date of acquisition. 6. DIVIDENDS There were no dividends declared or paid for the three months ended March 31, 1998 or 1997. SMARTALK TELESERVICES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION GENERAL 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. SmarTalk provides convenient, easy-to-use, "cost-effective" telecommunications products and services to individuals and businesses primarily through the SmarTalk prepaid phone 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, content delivery, speed dial and message delivery and on selected cards, voice and fax mail services. 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 interactive call processing platforms. 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) SmarTalk branded, co-branded, and private label prepaid calling card sales through retailers; (ii) sales of cards through alternate distribution channels; (iii) recharges of existing prepaid calling cards; (iv) prepaid calling services provided to one of the Company's strategic partners, West Interactive Corporation and (v) call processing services. The Company operates in a highly competitive market. Future revenues and earnings may be impacted by, among other factors, the Company's ability to address competition, its ability to sign new accounts, its ability to introduce new products such as its prepaid cellular product offering, and its ability to integrate its operations successfully. Under sales agreements with the majority of its retailers, the Company sells cards to the retailer at a set price. The Company generally invoices the retailer upon shipment of the cards. The Company also offers pay-on-sale and pay-on-activation programs to certain retailers whereby the retailers are invoiced upon sale to or activation by a retailer's customer, respectively. The Company anticipates that its pay-on-sale and pay-on-activation programs will be increasingly utilized by its retail customers. Deferred revenue is recognized when the retailer is invoiced. The Company recognizes revenue and reduces deferred revenue as the customer utilizes calling time or upon expiration of cards containing unused calling time ("breakage"). The Company also records deferred revenue upon recharge of existing prepaid calling cards and recognizes the revenue upon the usage or expiration of the recharge minutes. Call processing revenues are recognized as these services are rendered. SmarTalk's cost of revenue consists primarily of the cost of providing long distance services and related enhanced services, as well as the cost of manufacturing and delivering the cards, excise taxes and Universal Service Fund fees. The cost of providing long distance services represents obligations to carriers that provide minutes of long distance over their networks in order to facilitate use of SmarTalk's product. SmarTalk seeks to leverage its competitive advantages in implementing the key elements of its growth strategy, including: (i) increasing penetration of retailers; (ii) developing new products and services; and (iii) continuing to pursue selected acquisitions. Sales and marketing expenses consist primarily of commissions and advertising costs. The Company pays commissions to its sales representatives based on sales to retailers. The Company also pays commissions to its sales representatives and retailers based on the number of minutes recharged on the SmarTalk cards sold by each retailer. These commissions are capitalized and amortized based on customer usage. Advertising consists primarily of trade, consumer and cooperative advertising ("co-op"), and Manufacturer's Development Funds ("MDF"). Under the typical co-op advertising program, the Company provides advertising funds to retailers to promote sales of SmarTalk products and services. The amount of funds the Company provides in co-op advertising is based on a percentage of sales of SmarTalk products to retailers. MDF consists of promotional and marketing funds to access shelf space. Corporate advertising expense includes trade and consumer advertising, trade show expenses, promotional goods and the costs of providing to retailers the Company's turnkey merchandising materials and services. General and administrative expenses consist primarily of salaries and related benefits, sales and use taxes, rent, insurance, bank card processing fees, and other general expenses including depreciation and amortization. Sales and use taxes for the SmarTalk platforms are incurred based on customer usage of long distance minutes which are processed through the Company's platforms. The Company completed the following acquisitions from January 1, 1997 to March 31, 1998: American Express Telecom, Inc. ("Amex Telecom"). On December 31, 1997, SmarTalk acquired Amex Telecom, a provider of prepaid calling products, including the FirstClass Phonecard(TM) sold through the U.S. Postal Service and the PhoneFunds(TM) card sold through the National Park Foundation, American Express Travel Service Offices ("AmEx TSO's"), and certain Foreign Exchange offices. In consideration for the outstanding shares of Amex Telecom, SmarTalk paid $44 million in cash, which was provided from SmarTalk's working capital with a portion thereof held in escrow pending regulatory approval to Amex Telecom's sole stockholder, American Express Travel Related Services, Inc. Additionally, SmarTalk purchased the profit and cost sharing agreement between Amex Telecom and the U.S. Postal Service. The Amex Telecom acquisition secured for SmarTalk distribution rights to certain AmEx TSO's, distribution through the U.S. Postal Service and the National Park Foundation and an agreement with American Express to be the exclusive provider of a co-branded prepaid calling card for American Express. In addition, SmarTalk was granted exclusive access to the American Express point-of-sale system for activation and recharge of prepaid phone cards. Under the purchase agreement American Express Company agreed to reimburse SmarTalk for the estimated unused minutes as of December 31, 1997. The Company has recorded this amount as a reduction to the purchase price and a receivable of $2,570,000 at December 31, 1997. ConQuest Telecommunication Service Corp. ("ConQuest"). On December 3, 1997, SmarTalk entered into an interim operating agreement which transferred all risks and rewards from ConQuest to SmarTalk. SmarTalk assumed responsibility for operating the ConQuest business and the employees of ConQuest became employees of SmarTalk on this date. On December 31, 1997, SmarTalk acquired 100% of ConQuest's outstanding common stock. In consideration for each outstanding share of ConQuest common stock, ConQuest stockholders received 7.63 shares of SmarTalk Common Stock (approximately 4.5 million shares of Common Stock in total). SmarTalk also assumed $6,139,679 of ConQuest's debt. Additionally, in connection with this acquisition SmarTalk paid $350,000 in cash in 1997 and issued 215,569 shares of Common Stock in January 1998 to obtain an agreement and mutual release from a group of individuals that had brought a lawsuit against ConQuest prior to the acquisition. ConQuest was a developer and marketer of prepaid calling cards and other enhanced telecommunication services and technology, including domestic and international calling services for the tour and travel industry. The acquisition of ConQuest added significantly to SmarTalk's technological infrastructure, customer base, platform operations and management infrastructure. Selected Assets of Frontier Corporation. On December 9, 1997, SmarTalk acquired selected assets ("Frontier Selected Assets") of the retail prepaid phone card business of Frontier Corporation, a New York corporation ("Frontier"). In consideration for the Frontier Selected Assets, SmarTalk paid $35 million in cash and 65,568 shares of common stock. The acquisition of the Frontier Selected Assets added to SmarTalk's size, scale and scope, and helped establish SmarTalk's presence on the East Coast. Cardinal VoiceCard, Ltd. On August 13, 1997, SmarTalk issued 115,000 shares of Common Stock to purchase this Toronto, Ontario based company. This acquisition provided the Company with access to the Canadian marketplace and added to the Company's customer base. GTI Telecom, Inc. ("GTI") On May 31, 1997, SmarTalk issued 2,580,001 shares of Common Stock and $26,500,000 in subordinated 10% per annum term notes which mature June 1, 2001 (the "GTI Notes") to purchase this Florida based company. $25,970,000 of the GTI Notes were repaid in September 1997 at $20,614,686. The difference of $5,355,314 was recorded as a reduction to goodwill. This acquisition expanded the Company's customer base and added human resource, technical and manufacturing infrastructure. SmarTel Communications, Inc. On May 28, 1997, the Company acquired SmarTel Communications, Inc., a Delaware corporation ("SmarTel") operating as a Boston based prepaid promotions phone card company, for 714,286 shares of common stock. On March 23, 1998, the Company acquired USA Telecommunication Services, Inc. (dba Debit Cellular Network), a North Carolina based prepaid cellular card company, for 81,302 shares of common stock and $1,500,000 in cash. Collectively these purchases are the "Acquisitions". The Acquisitions have been accounted for using the purchase method of accounting. Accordingly, the operating results of the Acquistions have been included in the Company's consolidated results since the date of acquisition. 6 RESULTS OF OPERATIONS QUARTER ENDED MARCH 31, 1998 COMPARED WITH THE QUARTER ENDED MARCH 31, 1997 Revenue. Revenue increased to $39,612,521 for the quarter ended March 31, 1998 compared to $7,368,333 for the quarter ended March 31, 1997. 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, the Acquisitions, 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 $4,509,588 in the first quarter of 1998 and $3,850,049 for the same period last year. In addition, 15.1% of total revenue for the quarter ended March 31, 1998 consisted of revenue recognized on the unused portion of expired cards (breakage revenue) as compared to 11.0% for the quarter ended March 31, 1997. Recharge revenues for the quarters ended March 31, 1998 and 1997 was $1,101,499 and $437,055, respectively. Cost of Revenue. Cost of revenue increased to $23,908,488 for the quarter ended March 31, 1998 from $4,760,748 for the quarter ended March 31, 1997. The increase was primarily attributable to greater use of the Company's services, the Acquisitions and an increase in taxes and fees. The gross profit percentage for the quarter ended March 31, 1998 was 39.6% as compared to 35.4% for the quarter ended March 31, 1997. The gross margin percentage increased primarily due to lower transport and card costs and the increase in breakage revenue which has minimal cost of revenues associated with it. Sales and Marketing Expenses. Sales and marketing expenses increased to $5,450,629 (or 13.8% of revenue) for the quarter ended March 31, 1998 from $2,545,414 (or 34.5% of revenue) for the quarter ended March 31, 1997. The decrease as a percentage of revenue was due to revenue growth in 1998. The increased dollar amount was primarily due to the Acquisitions and the continued expansion of the Company's marketing activities, which include co-op advertising, manufacturers development funds and promotional goods. General and Administrative Expenses. General and administrative expenses increased to $9,084,480 (or 22.9% of revenue) for the quarter ended March 31, 1998 from $901,231 (or 12.2% of revenue) for the quarter ended March 31, 1997. The increase in dollar amount was primarily due to the Acquisitions, which includes intangible assets amortization, depreciation expense, and the addition of personnel and costs associated with the growth in the Company's business. Additionally, expense was reduced in the first quarter of 1997 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 expense, net of interest income for the quarter ended March 31, 1998, was $(1,261,952) as compared to $528,763 for the quarter ended March 31, 1997. This decrease was primarily due to interest expense on the Company's subordinated debt that was issued September 17, 1997. Interest expense for the three months ended March 31, 1998 and 1997 included $228,651 and $0 of debt issue costs amortization, respectively. Income Tax. The Company had losses for the quarters ended March 31, 1998 and 1997. Accordingly, there was no provision for income taxes. Decremented Minutes and PIN Activations. Decremented minutes, which represent actual call traffic over the SmarTalk platforms, were 160,854,041 for the three months ended March 31, 1998 as compared with 35,221,086 for the three months ended March 31, 1997. PIN activations were 3,483,123 and 437,055 for the three months ended March 31, 1998 and 1997, respectively. These increases are due to increased usage of the Company's services and the Acquisitions. 7 Discontinued Operations. On February 28, 1998 (the "Measurement Date") the Company's board of directors adopted a plan to sell the Company's call center business located in Butler, Pennsylvania. The call center operations up to the Measurement Date have been classified as a loss from discontinued operations. The estimated loss from operations after the measurement date until the anticipated date of sale have been recorded as a loss on disposal of discontinued operations. Net Loss. As a result of the above items, net loss increased to $3,371,176 for the quarter ended March 31, 1998 from $310,297 for the quarter ended March 31, 1997. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- On September 17, 1997, SmarTalk issued 5 3/4% per annum convertible subordinated notes due September, 2004 with a principal amount of $150,000,000. The net proceeds to SmarTalk from the convertible subordinated notes offering (after deducting the underwriting discounts and other expenses) was $144,946,319. Interest on the Notes is payable semi-annually on March 15 and September 15 of each year commencing March 15, 1998. On August 6, 1997, ConQuest entered into a revolving credit facility with Star Bank, N.A. ("Star Line of Credit"). Pursuant to the terms of the Star Line of Credit, ConQuest could borrow up to $9,500,000 as secured by various accounts receivable. Interest is based on the ninety-day LIBOR plus one percent. This credit facility was assumed by SmarTalk upon the acquisition of ConQuest and had an outstanding balance of $7,291,575 at March 31, 1998. There are no additional borrowings available under this facility. 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 Southern California Bank. 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, 1998. Throughout 1997 to March 31, 1998, the Company has paid approximately $90,000,000 in cash, paid $21,144,686 for acquisition indebtedness, and has issued approximately 8,700,000 shares of Common Stock for the Acquisitions, distribution and licensing agreements. From inception through March 31, 1998, the Company has funded operations primarily from borrowings under its debt agreements and the sale of its stock. The Company's operating activities used net cash of $23,143,411 for the three months ended March 31, 1998. The cash used by operating activities is primarily attributable to the Company's continued efforts to increase its penetration of the retail and alternate distribution channels. Additionally, the Company believes that the net proceeds from the Notes offering, together with existing sources of liquidity, will be sufficient to fund its capital expenditures, working capital, selected acquisitions, and other cash requirements through the next twelve months. Part II. Other Information Item 1. Legal Proceedings On April 20, 1998, Intrine Communications ("Intrine"), filed a complaint against the Company and USA Telecommunications Services, Inc. (dba Debit Cellular Network), a wholly-owned subsidiary of the Company ("DCN"), in the Superior Court of California in Los Angeles County. In the complaint, Intrine alleges that, by virtue of the Company's acquisition of DCN, the Company and DCN breached written and oral agreements not to circumvent and appropriate for themselves the benefits of a purported deal by Intrine to acquire DCN. The lawsuit seeks damages and injunctive relief. Management of the Company believes that the claims against the Company and DCN are without merit and does not at present expect this lawsuit to have a material adverse effect on the Company's financial position, liquidity, cash flow or results of operations. Item 2. Changes in Securities and Use of Proceeds In March 1998, the Company issued 81,302 shares of its common stock in connection with an acquisition. The shares were issued in reliance upon the exemption from registration provided for under Section 4(2) of the Securities Act of 1933, as amended (the "Act"). In March 1998, the Company issued 100,000 shares of its common stock in connection with an amendment to a license agreement. The shares were issued in reliance upon the exemption from registration provided for under Section 4(2) of the Act. In January, February and March of 1998, the Company granted 176,300 options to purchase its common stock to certain directors, officers and employees of the Company and certain other persons in consideration for their services. All of the sales by the Company of these unregistered securities were made by the Company in reliance upon Section 4(2) of the Act. On October 23, 1996, the Company's initial public offering of its common stock was declared effective by the Securities and Exchange Commission (the "SEC"). The SEC registration number assigned to the registration statement was 333-10391. The use of these proceeds did not materially change from the use of proceeds description in the Prospectus. Additionally, as of March 31, 1998, these proceeds had been used in their entirety for the acquisition of other businesses, purchase of machinery and equipment, and general working capital obligations. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits required by Item 601 of Regulation S-K. 10.1 Employment Agreement dated, January 2, 1998 between SmarTalk TeleServices, Inc. and Jack Feingold. 10.2 Employment Agreement dated March 5, 1998 between SmarTalk TeleServices, Inc. and Joseph Borocz. 27.1 Financial Data Schedule (b) Reports on Form 8-K SmarTalk filed a Form 8-K on January 15, 1998 pertaining to the consummation of the acquisition of ConQuest Telecommunications Services Corp. containing item number 2 and item 7(c) exhibits 2.1, 99.1 and 99.2. SmarTalk filed a Form 8-K on January 6, 1998 pertaining to the consummation of the acquisition of American Express Telecom, Inc. containing item number 2 and item 7(c) exhibit 2.1. 8 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: May 15, 1998 By: /s/ Glen Andrew Folck --------------------- Glen Andrew Folck Vice President of Finance, Chief Financial Officer and Assistant Secretary 9 EX-10.1 2 EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of January 2, 1998 between SMARTALK TELESERVICES, INC., a California corporation (the "Company") and JACK FEINGOLD (the "Executive"); and WHEREAS, the parties hereto wish to enter into an employment agreement to employ the Executive as the Senior Vice President--Sales 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 Senior Vice President--Sales on the terms and conditions set forth in this Agreement. (b) Authority and Duties. The Executive shall exercise such authority, -------------------- 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 bylaws 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 $175,000 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 the levels set forth above during the Initial Term, or 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 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, subject to the approval of the Board. Such criteria for the first year is set forth on Schedule A hereto. Performance criteria will include corporate performance goals consistent with the Company's business plan for the year, as well as individual objectives for the Employee'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. Executive's bonus shall be paid to Executive at such time as other executive bonuses are paid. (c) 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 four (4) weeks of unused vacation, and thereafter the Executive shall cease to accrue vacation thereafter until used. (d) 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. (e) 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 one hundred thousand (100,000) shares of common stock of the Company on the terms and conditions set forth therein. (f) Moving Bonus. The Company shall pay to the Executive one hundred ------------ thousand dollars ($100,000) as a moving bonus as follows: fifty thousand dollars ($50,000) upon Executive's commencement of his duties at the Company and fifty thousand dollars ($50,000) at such time as Executive shall sign a contract to purchase a house in or about Columbus, Ohio. Such amounts shall be earned by Executive pro rata over the first year of the Employment Period. Should Executive cease to be employed during the first year of the Employment Period (other than a termination for good reason or without cause, as such terms are defined below), Executive shall promptly remit any unearned portion of this moving bonus. (g) Car Allowance. The Company 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. 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 Executive shall commit any of the following: (i) any act or omission which shall represent a material breach in any material respect of any of the terms of this Agreement; (ii) gross misconduct that, in the reasonable good faith opinion of the Company that is or is likely to be significantly injurious to the Company; (iii) gross negligence or wanton and reckless acts or omissions in the performance of Executive's duties, in any such case which are to the material detriment of the Company; (iv) bad faith in the performance of Executive's duties, consisting of willful acts or omissions, to the material detriment of the Company; (v) addiction to illegal drugs or chronic alcoholism; or (vi) any conviction or pleading of guilty to a crime that constitutes a felony under the laws of the United States or any political subdivision thereof. (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) 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 reasonably can be expected to cause the Executive's continued incapacity to perform his duties for a period of six or more consecutive months from the first date of the disability ("Disability"). In the event of a dispute as to whether the Executive is impaired within the meaning of this Section 4(d), or as to the likely duration of any incapacity of the Executive either party may request a medical examination of the Executive by a doctor appointed by the Chief of Staff of a hospital selected by mutual agreement of the parties, or as the parties may otherwise agree, and the written medical opinion of such doctor shall be conclusive and binding upon the parties. The cost of such examination shall be borne by the Company. 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. 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 the Executive's ------------- annual Base Salary; (ii) Benefits Continuation - continuation for six (6) 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 with the Company continuing to pay its share of premiums and associated costs as if Executive continued in the employ of the Company; 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); and (iii) Pro Rata Bonus Amounts - a lump sum amount equal to the pro ---------------------- rata portion of any guaranteed bonus amounts. (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 six (6) months following the first date of Disability: (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 six (6) 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 i 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(c) 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(c) above. (d) Other Termination. 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 and 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 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 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 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: David Hamburger General Counsel SmarTalk TeleServices, Inc. 1640 South Sepulveda Blvd., Suite 500 Los Angeles, CA 90025 (b) If to the Executive, to: Jack Feingold 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. 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 Columbus, Ohio in accordance with the rules of the American Arbitration Association then in effect. Judgement may be entered on the arbitrator's award in any court having jurisdiction. 12. 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. 13. 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. 14. 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. 15. 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. 16. Payment. 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. 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. 17. 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. 18. 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. 19. Governing Law. This Agreement shall be construed, interpreted and ------------- enforced in accordance with the laws of the State of Ohio, without giving effect to the choice of law principles thereof. 20. 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 ______, 1998. SMARTALK TELESERVICES, INC. ---------------------------- By: Erich L. Spangenberg Its: Chief Executive Officer ---------------------------- Jack Feingold EX-10.2 3 EMPLOYMENT AGREEMENT EXHIBIT 10.2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 5th day of March, 1998 between SMARTALK TELESERVICES, INC., a California corporation (the "Company") and JOSEPH BOROCZ (the "Executive"); and WHEREAS, the parties hereto wish to enter into an employment agreement to employ the Executive as the Senior Vice President - Marketing 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 Senior Vice President - Marketing 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, -------------------- 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 bylaws 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 companies. 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 the levels set forth above during the Initial Term, or 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 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, 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. (c) 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 four (4) weeks paid 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. (d) 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. (e) Stock Options. Concurrently with the execution of this Agreement, the ------------- Company and Executive will enter into a Stock Option Agreement, attached hereto as Exhibit 2 A, pursuant to which the Company shall grant to the Executive an option to purchase up to fifty thousand (50,000) shares of common stock of the Company on the terms and conditions set forth therein. (f) Moving Bonus. The Company shall pay to the Executive upon the ------------ commencement of work for the Company fifty thousand dollars ($50,000) as a moving bonus which amount shall be earned by Executive pro rata over the first three years of the Employment Period. Should Executive cease to be employed during the Employment Period, Executive shall promptly remit any unearned portion of this moving bonus. (g) Car Allowance. The Company shall pay to Executive as an automobile ------------- allowance the sum of $500 per month during the Employment Period in lieu of any other provision for an automobile, insurance, maintenance, gasoline and expenses. 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 Executive shall commit any of the following: (i) any act or omission which shall represent a breach in any material respect of any of the terms of this Agreement; (ii) gross misconduct that, in the reasonable good faith opinion of the Company could be significantly injurious to the Company; (iii) gross negligence or wanton and reckless acts or omissions in the performance of Executive's duties, in any such case which are to the material detriment of the Company; (iv) bad faith in the performance of Executive's duties, consisting of willful acts or omissions, to the material detriment of the Company; (v) addiction to illegal drugs or chronic alcoholism; or (vi) any conviction or pleading of guilty to a crime that constitutes a felony under the laws of the United States or any political subdivision thereof. (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: 3 (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) 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 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. 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 the Executive's ------------- annual Base Salary; and (ii) Benefits Continuation - continuation for twelve (12) 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 4 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 six (6) months following the first date of Disability; (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 twelve (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(c) 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(c) 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 5 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 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, 6 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 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: David Hamburger General Counsel SmarTalk TeleServices, Inc. 1640 South Sepulveda Blvd., Suite 500 Los Angeles, CA 90025 (b) If to the Executive, to: Joseph Borocz 3127 Denton Blvd. Roswell, GA 30075 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. 7 11. 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 Columbus, Ohio 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. 12. 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. 13. 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. 14. 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. 15. 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. 16. Payment. 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. 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. 17. 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. 8 18. 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. 19. Governing Law. This Agreement shall be construed, interpreted ------------- and enforced in accordance with the laws of the State of Ohio, without giving effect to the choice of law principles thereof. 20. 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 __, 1998. SMARTALK TELESERVICES, INC. ------------------------------------------ By: Jeff Lindauer Its: President and Chief Operating Officer ------------------------------------------ Joseph Borocz 9 EX-27 4 FINANCIAL DATA SCHEDULE
5 3-MOS YEAR DEC-31-1997 DEC-31-1997 JAN-01-1998 JAN-01-1997 MAR-31-1998 DEC-31-1997 48,102,465 62,900,673 0 0 36,096,687 32,717,455 593,026 182,206 6,478,537 4,301,487 99,404,180 111,487,102 18,006,889 14,700,744 1,369,233 894,760 364,643,703 360,502,826 96,638,949 106,622,503 0 0 0 0 0 0 189,331,351 171,732,584 40,650 143,810 364,643,703 360,502,826 39,612,521 71,862,445 39,612,521 71,862,445 23,908,488 40,431,418 23,908,488 40,431,418 14,535,109 92,950,042 0 0 2,390,958 3,590,187 (93,028) (61,899,474) 0 0 (93,028) (61,899,474) (3,278,148) 0 0 0 0 0 (3,371,176) (61,899,474) (0.15) (4.14) (0.15) (4.14)
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