-----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, B/22dXoIGYfX99emkb9bDRXbL8I1Z5Fn22AXOFBPi5YzNNZ3kscyACIdD8SGBDlj qIXSN8M+o0UfmyWsHlrfYw== 0000944209-97-001585.txt : 19971117 0000944209-97-001585.hdr.sgml : 19971117 ACCESSION NUMBER: 0000944209-97-001585 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: 97720875 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 September 30, 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: Voting, No par value 16,464,300, as of November 10, 1997. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SMARTALK TELESERVICES, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, ASSETS 1997 1996 ----------------- ----------------- Current assets: Cash and cash equivalents $ 150,817,327 $ 44,830,487 Trade accounts receivable, net 11,664,768 2,254,192 Inventories 1,487,296 601,020 Prepaid expenses 2,023,768 327,696 Other current assets 4,270,655 1,682,768 ----------------- ----------------- Total current assets 170,263,814 49,696,163 Non-current assets: Property and equipment, net 4,338,795 744,748 Goodwill, net 93,012,218 -- Debt issuance costs, net 4,664,977 -- Other non-current assets 881,025 90,509 ----------------- ----------------- Total assets $ 273,160,829 $ 50,531,420 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,287,733 $ 3,527,192 Deferred revenue 18,060,812 2,699,640 Accrued marketing costs -- 136,931 Other accrued expenses 3,752,826 352,226 Excise and sales tax payable 3,638,229 -- Current portion of long-term debt 60,249 -- ----------------- ----------------- Total current liabilities 31,799,849 6,715,989 Long-term debt less current portion 150,951,111 -- ----------------- ----------------- Total liabilities 182,750,960 6,715,989 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 16,433,033 and 12,829,459 shares, respectively 97,879,224 50,786,781 Accumulated deficit <7,469,355> <6,971,350> ----------------- ----------------- Total shareholders' equity 90,409,869 43,815,431 ----------------- ----------------- Total liabilities and shareholders' equity $ 273,160,829 $ 50,531,420 ================= ================= The accompanying notes are an integral part of these consolidated financial statements.
2 SMARTALK TELESERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30, ------------------------------- ------------------------------- 1997 1996 1997 1996 ----------- ------------ ------------ ----------- Revenue $20,565,622 $ 4,588,844 $ 39,730,845 $ 8,266,864 Cost of revenue 11,796,487 3,459,440 23,761,289 6,201,555 ----------- ----------- ------------ ----------- Gross profit 8,769,135 1,129,404 15,969,556 2,065,309 Sales and marketing 4,672,415 1,199,140 10,213,879 2,842,566 General and administrative 3,667,800 1,010,184 7,188,175 2,469,477 ----------- ----------- ------------ ----------- Operating income (loss) 428,920 (1,079,920) (1,432,498) (3,246,734) Interest income 790,142 3,431 1,899,666 28,503 Interest expense 740,425 85,695 965,173 215,139 ----------- ----------- ------------ ----------- Income (loss) before income taxes 478,637 (1,162,184) (498,005) (3,433,370) Provision for income taxes -- -- -- -- ----------- ----------- ------------ ----------- Net income (loss) $ 478,637 $(1,162,184) $ (498,005) $(3,433,370) =========== =========== ============ =========== Net income (loss) per share $ 0.03 $ (0.12) $ (0.03) $ (0.37) =========== =========== ============ =========== Weighted average number of shares 16,846,271 9,335,348 14,396,661 9,335,348 =========== =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. 3 SMARTALK TELESERVICES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (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 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 194,287 716,814 -- -- 716,814 GTI Telecom acquisition 2,580,001 34,830,000 -- -- 34,830,000 SmarTel Communications acquisition 714,286 9,375,004 -- -- 9,375,004 Cardinal Voicecard LTD acquisition 115,000 2,170,625 -- -- 2,170,625 Net Loss -- -- -- (498,005) (498,005) ---------- ------------ ------------ ------------ ------------ September 30, 1997 16,433,033 $ 97,879,224 $ -- $ (7,469,355) $ 90,409,869 ========== ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 4 SMARTALK TELESERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, ------------------------------- 1997 1996 ------------ ------------ Cash flows from operating activities: Net loss $ (498,005) $ (3,433,370) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 433,378 51,801 Amortization 1,585,785 -- Provision for bad debt 276 -- Sublease termination fee (325,810) -- Compensation expense associated with stock options issued -- 24,000 Changes in assets and liabilities which increase (decrease) cash: Accounts receivable (2,667,337) (1,506,925) Inventories (227,061) 104,795 Prepaid expenses (3,277,229) (97,366) Other current assets 1,202,037 (9,575) Deposits -- (63,325) Other non-current assets (726,039) (318,577) Accounts payable (3,903,643) 1,829,419 Deferred revenue (324,247) 55,429 Accrued marketing costs (136,931) (226,359) Other accrued expenses 2,987,397 354,100 Deposit from customer (4,060,958) -- Excise and sales tax payable 711,116 -- ------------ ------------ Net cash used by operating activities (9,227,271) (3,235,953) ------------ ------------ Cash flows from investing activities: Purchase of LCN, net of equipment purchased -- (464,027) Capital expenditures (1,429,976) (545,809) Acquisitions costs (2,366,458) -- ------------ ------------ Net cash used by investing activities (3,796,434) (1,009,836) ------------ ------------ Cash flows from financing activities: Common stock proceeds, net -- 300,000 Stock options exercised 716,814 -- Note payable to related party -- 1,200,000 Revolving line of credit with related party -- 500,000 Payment to LCN -- (22,943) Payment of note payable to Worldcom (6,383,691) -- Revolving line of credit with a Bank -- 210,000 Payment on term loan with Pacific Bell Information Services -- (50,000) Term loan with related party -- 250,000 Payment on debt issued for acquisition (20,614,686) -- Issuance of convertible debt, net of costs 145,335,023 -- Capital lease payments (42,915) -- ------------ ------------ Net cash, provided from financing activities 119,010,545 2,387,057 ------------ ------------ Increase (decrease) in cash and cash equivalents 105,986,840 (1,858,732) Cash and cash equivalents at beginning of period 44,830,487 2,115,351 ------------ ------------ Cash and cash equivalents at end of period $150,817,327 $ 256,619 ============ ============ Supplemental disclosure of cash flow information: Cash paid for interest $ 675,205 $ 215,139 ============ ============ Note payable for LCN purchase $ -- $ 2,000,000 ============ ============ Issuance of stock for acquisitions $ 46,375,629 $ -- ============ ============ Issuance of debt for acquisitions, net $ 20,614,686 $ -- ============ ============ Purchase of Voice Choice Platform through issuance of note payable $ -- $ 125,000 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 5 SMARTALK TELESERVICES, INC. NOTES TO CONSOLIDATED 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, 1996 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. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of SmarTalk TeleServices, Inc. and its wholly owned subsidiaries. All significant intercompany accounts have been eliminated. 3. GOODWILL Costs in excess of fair value of net assets acquired is recorded as goodwill and amortized on a straight-line basis over a twenty year period beginning at the date of acquisition. Amortization expense for the nine months ended September 30, 1997 and 1996 was $1,585,785 and zero, respectively. Amortization expense for the quarter ended September 30, 1997 and 1996 was $1,190,069 and zero, respectively. 4. LONG TERM DEBT Long term debt consists of the following at September 30, 1997: Convertible subordinated notes due September 15, 2004, $150,000,000 interest payable semi-annually beginning March 15, 1998 at 5 3/4% per annum. Subordinated notes due June 1, 2001, interest payable 530,000 quarterly beginning September 1, 1997 at 10% per annum. Capital lease obligations 481,360 ------------ Total 151,011,360 Less - current portion (60,249) ------------ Long - term portion $150,951,111 ============
There was no debt outstanding as of December 31, 1996. Convertible subordinated notes The notes are unsecured general obligations of the Company which are subordinated in right of payment. At any time on or after the 90th day following September 17, 1997, the date of issuance, and prior to the close of business on the stated maturity date, unless previously redeemed or repurchased, at a conversion price of $26.25 per share (equivalent to a conversion rate of 38.0952 per $1,000 principal amount of notes) the notes may be converted at the option of the holder into shares of Common Stock of the Company. The notes are redeemable, in whole or in part, at the option of the Company, at any time on or after September 15, 2000, at a specified redemption price plus accrued and unpaid interest and liquidated damages, if any, to the date of redemption. The Company is required to offer to purchase the notes upon a change of control (as defined) at 100% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, to the date of purchase. The notes were issued through a 144A placement under the Securities Act. As of September 30, 1997 the Company incurred $4,664,977 of debt issuance costs associated with this placement. This amount is being amortized over the term of the notes. Subordinated notes due June 1, 2001 The notes are unsecured general obligations of the Company which are subordinated in right of payment. The notes were issued in connection with the GTI Telecom, Inc. acquisition. Capital lease obligations Includes office equipment which is leased under capital lease agreements. 5. ACQUISITIONS On May 28, 1997 the Company acquired SmarTel Communications Inc., a Boston based prepaid promotions phone card company, for 714,286 shares of common stock. On May 31, 1997 the Company acquired GTI Telecom, Inc., a Florida based prepaid phone card company for 2,580,001 shares of common stock and $26,500,000 in subordinated debt. On August 13, 1997, the Company acquired Cardinal Voicecard LTD, a Toronto, Ontario based Canadian prepaid phone card company, for 115,000 shares of common stock. These acquisitions have been accounted for using the purchase method of accounting. Accordingly, the results of operations of the acquired businesses are included in the Company's consolidated results of operations from the date of acquisition. 6. PENDING ACQUISITIONS The Company has entered into a merger agreement to purchase all of the outstanding shares of ConQuest Telecommunications Services Corp ("ConQuest"). This agreement is subject to approval by both companies shareholders. Therefore the Company has filed proxy/prospectus materials with the Securities and Exchange Commission and is awaiting approval thereof. Certain shareholders of ConQuest have granted the Company irrevocable proxies to vote all shares of ConQuest common stock held by them in favor of the merger. ConQuest is located in Dublin, Ohio and is a provider of value-added telecommunications services to businesses and individuals. These services include prepaid calling card services, call center services and international value-added telecommunications services. On October 22, 1997, the Company entered into a definitive agreement with Frontier Corporation, ("Frontier"), a New York-based long distance phone company, to acquire selected assets of its retail prepaid phone card business. If the pending acquisition is consummated, the Company will pay $35,000,000 in cash, subject to adjustments, to Frontier. Further, the Company may be required to pay Frontier an additional $1,500,000 in the Company's common stock if certain conditions are met. 7. DIVIDENDS There were no dividends declared or paid for the nine months ended September 30, 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, content delivery, 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 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 was formed in October 1994 and had limited operations until June 1995. On October 23, 1996, SmarTalk completed the sale of 4,000,000 shares of its stock in a public offering on Nasdaq. SmarTalk raised proceeds of $50,471,781 after deducting the underwriting discount and other costs. SmarTalk's revenue originates from: (i) SmarTalk and co-branded prepaid calling card sales through retailers; (ii) recharges of existing prepaid calling cards; (iii) cards sold for promotional marketing campaigns; (iv) corporate sales to businesses; and (v) prepaid calling card services provided to one of SmarTalk's strategic partners, West Teleservices. Under sales agreements with the majority of retailers, SmarTalk sells cards to the retailer at a set price. SmarTalk generally invoices the retailer upon shipment of the cards. SmarTalk also offers Pay-on-Sale and Pay-on- Activation programs to retailers whereby the retailers are invoiced upon sale to or activation by a retailer's customer, respectively. Deferred revenue is recognized when the retailer is invoiced. SmarTalk recognizes revenue and reduces the deferred revenue account as the customer utilizes calling time or upon expiration of cards containing unused calling time ("breakage"). SmarTalk also recognizes deferred revenue upon recharge of existing prepaid calling cards and recognizes the revenue upon the usage or expiration of the recharge minutes. 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 and excise taxes. 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. Sales and marketing expenses consist primarily of commissions and advertising costs. SmarTalk pays commissions to its sales representatives based on sales to retailers. SmarTalk 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, SmarTalk provides advertising funds to retailers to promote sales of SmarTalk products and services. The amount of funds SmarTalk 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. Corporation advertising expense includes trade and consumer advertising, trade show expenses, promotional goods and the costs of providing to retailers SmarTalk's turnkey merchandising supplies. 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 each of the individual platforms. 6 The Company purchased GTI Telecom, Inc., SmarTel Communications, Inc., and Cardinal Voicecard LTD. (collectively "the Acquisitions") on May 31, 1997, May 28, 1997, and August 13, 1997, respectively. The Acquisitions have been accounted for using the purchase method of accounting. Accordingly, the results of operations of the Acquisitions are included in the Company's consolidated results of operations from the date of acquisition. Financial comparisons to prior periods are not necessarily meaningful due to the impact of the Acquisitions. A significant portion of the Company's business strategy is to pursue additional distribution opportunities through the retail and alternate distribution channels and through strategic acquisitions. RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 1997 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1996 Revenue. Revenue increased to $20,565,622 for the quarter ended September ------- 30, 1997 from $4,588,844 for the quarter ended September 30, 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, 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 $5,147,196 in the third quarter of 1997 and $2,222,897 for the same period last year. Recharge revenue for the quarter ended September 30, 1997 and 1996 was $1,607,639 and $427,347, respectively. This increase is attributable to the Acquisitions and increased consumer demand. For the three months ended September 30, 1997, SmarTalk recorded $2,020,592 in breakage revenue as compared with $105,730 for the three months ended September 30, 1996. This represented approximately 9.8% and 2.3% of total revenues for the periods then ended, respectively. Cost of Revenue. Cost of revenue increased to $11,796,487 for the quarter --------------- ended September 30, 1997 from $3,459,440 for the quarter ended September 30, 1996. The increase was primarily attributable to greater use of the Company's services and the Acquisitions. The gross profit percentage for the quarter ended June 30, 1997 was 42.6% as compared to 24.6% for the quarter ended June 30, 1996. The gross margin percentage increased due to lower transport costs associated with operating the Company's own platforms, the Company leveraging its size, scale and scope and the Company's ability to recognize breakage revenue. Sales and Marketing Expenses. Sales and marketing expenses increased to ---------------------------- $4,672,415 (or 22.7% of revenue) for the quarter ended September 30, 1997 from $1,199,140 (or 26.1% of revenue) for the quarter ended September 30, 1996. The decrease as a percentage of revenue was due to revenue growth in 1997. The increased dollar amount was primarily due to the Acquisitions and 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 $3,667,800 (or 17.8% of revenue) for the quarter ended September 30, 1997 from $1,010,184 (or 22.0% of revenue) for the quarter ended September 30, 1996. The increase in dollar amount was primarily due to the Acquisitions, which includes goodwill amortization, and 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 and the Company's ability to recognize synergies associated with the Acquisitions. Interest Income (Expense). Interest income, net of interest expense for ------------------------- the quarter ended September 30, 1997 was $49,717 as compared to $(82,264) for the quarter ended September 30, 1996. This increase was primarily due to the interest earned on the Company's cash investments, net of interest expense on the convertible debt offering and on acquisition indebtedness. Income Tax. The Company had income for the quarter ended September 30, ---------- 1997 which has been offset by losses from previous quarters including the loss for the quarter ended September 30, 1996. Accordingly, there was no provision for income taxes. Net Income (Loss). As a result of the above items, the net income ----------------- increased to $478,637 for the quarter ended September 30, 1997 from net loss of $1,162,184 for the quarter ended September 30, 1996. Decremented Minutes and PIN Activations. Decremented minutes, which represent actual call traffic over the SmarTalk platforms, were 91,207,466 for the three months ended September 30, 1997 as compared with 23,510,042 for the three months ended September 30, 1996. PIN activations were 1,770,574 and 262,872 for the three months ended September 30, 1997 and 1996, respectively. These increases are due to increased usage of the Company's services and the Acquisitions. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1996 Revenue. Revenue increased to $39,730,845 for the nine months ended ------- September 30, 1997 from $8,266,864 for the nine months ended September 30, 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, 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 $13,766,587 and $2,682,897 for the nine months ended September 30, 1997 and 1996, respectively. Recharge revenue for the nine months ended September 30, 1997 and 1996 was $2,790,361 and $1,019,584, respectively. This increase is attributable to the Acquisitions and increased consumer demand. For the nine months ended September 30, 1997, SmarTalk recorded $4,112,422 in breakage revenue as compared with $216,000 for the nine months ended September 30, 1996. This represented approximately 10.4% and 2.6% of total revenues for the periods then ended, respectively. Cost of Revenue. Cost of revenue increased to $23,761,289 for the nine --------------- months ended September 30, 1997 from $6,201,555 for the nine months ended September 30, 1996. The increase was primarily attributable to greater use of the Company's services and the Acquisitions. The gross profit percentage for the nine months ended September 30, 1997 was 40.2% as compared to 25.0% for the nine months ended September 30, 1996. The gross margin percentage increased due to lower transport costs associated with operating the Company's own platforms, the Company leveraging its size, scale and scope, and the Company's ability to recognize breakage revenue. Sales and Marketing Expenses. Sales and marketing expenses increased to ---------------------------- $10,213,879 (or 25.7% of revenue) for the nine months ended September 30, 1997 from $2,842,566 (or 34.4% of revenue) for the nine months ended September 30, 1996. The increase in dollar amount was primarily due to the Acquisitions, and continued expansion of the Company's marketing activities, which include co-op advertising, Manufacturers Development Funds, and free promotional goods. Additionally, commissions were higher in 1997 than in 1996 due to increased sales activity. General and Administrative Expenses. General and administrative expenses ----------------------------------- increased to $7,188,175 (or 18.1% of revenue) for the nine months ended September 30, 1997 from $2,469,477 (or 29.9% of revenue) for the nine months ended September 30, 1996. The increase in dollar amount was primarily due to the Acquisitions, which includes goodwill amortization, depreciation expense, and 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 and the Company's ability to recognize synergies associated with the Acquisitions. 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 income, net of interest expense for ------------------------- the nine months ended September 30, 1997 was $934,493 as compared to $(186,636) for the nine months ended September 30, 1996. This increase was primarily due to the interest earned on the Company's cash investments, net of interest expense on the convertible debt offering and acquisition indebtedness. Income Taxes. The Company had losses for the nine months ended September ------------ 30, 1997 and 1996. Accordingly, there was no provision for income taxes. Net Loss. As a result of the above items, net loss decreased to $498,005 -------- for the nine months ended September 30, 1997 from $3,433,370 for the nine months ended September 30, 1996. Decremented Minutes and PIN Activations. Decremented minutes, which represent actual call traffic over the SmarTalk platforms, were 181,253,093 for the nine months ended September 30, 1997 as compared with 39,411,135 for the nine months ended September 30, 1996. PIN activations were 2,901,076 and 576,343 for the nine months ended September 30, 1997 and 1996, respectively. These increases are due to increased usage of the Company's services and the Acquisitions. 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 $50,471,781 after deducting the underwriting discount and other related offering costs. A portion of the proceeds were used to repay all of the Company's then existing indebtedness. On May 28, 1997 the Company issued 714,286 shares of common stock to purchase SmarTel Communications, Inc. On May 31, 1997 the Company issued 2,580,001 shares of common stock and $26,500,000 in subordinated 10% per annum term notes which mature June 1, 2001 to purchase GTI Telecom, Inc. (the "GTI Notes") Interest payments on the notes are due quarterly beginning September 1, 1997. On August 13, 1997 the Company issued 115,000 shares of common stock to purchase Cardinal Voicecard, Ltd. 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 September 30, 1997. On September 17, 1997, SmarTalk issued $150,000,000 in principal amount of convertible subordinated notes. The net proceeds to SmarTalk from the Convertible Subordinated Notes Offering (after deducting the underwriting discounts and estimated expenses) was approximately $145,335,023. SmarTalk used a portion of these proceeds to repurchase $25,970,000 of the outstanding GTI Notes for $20,614,686; the difference of $5,355,314 was recorded as a reduction to goodwill. From inception through December 31, 1996, 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 $(9,227,271) for the nine months ended September 30, 1997. 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 convertible subordinated notes offering, together with existing sources of liquidity, will be sufficient to fund its capital expenditures, working capital and other cash requirements through the foreseeable future. Short-term and long-term funding needs for SmarTalk relate principally to acquisitions, additional market penetration, liquidity, operations and capital expenditures. These requirements principally have been met through the proceeds of the Offering in October 1996 and the Convertible Subordinated Notes Offering in September 1997. The following table sets forth selected finanical data from the statements of cash flows:
Cash (used in) provided by: --------------------------- Operations Investing Financing ---------- --------- ---------- Nine months ended September 30, 1996 $ (3,235,953) $(1,009,836) $ 2,387,057 Nine months ended September 30, 1997 (9,227,271) (3,796,434) 119,010,545 Year ended December 31, 1996 (4,762,535) (1,169,110) 48,646,781
Working capital, current assets and current liabilities are illustrated in the table below:
Current Current Working Assets Liabilities Capital --------- ----------- -------- September 30, 1996 $ 3,471,504 $ 8,789,420 $ (5,317,916) September 30, 1997 170,263,814 31,799,849 138,463,965 December 31, 1996 49,696,163 6,715,989 42,980,174
The increase in working capital at September 30, 1997 is directly attributable to the proceeds raised from the debt offering netted against the related changes in deferred revenues recorded from acquisitions, other current liabilities in excess of current assets, and the related cash expended for acquisition costs. Impact of Inflation SmarTalk does not consider inflation to have had a material impact on the results of operations. 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 with Gene Russell dated June 11, 1997. 10.2 Employment agreement with Lauren Becker dated July 30, 1997. 27.1 Financial Data Schedule (b) Reports on Form 8-K SmarTalk filed Form 8-K on August 15, 1997 pertaining to the acquisition of ConQuest Telecommunications Services Corp. containing item number 2 and item number 7(c) exhibits 2.1, 4.1 and 99.1. 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: November 14, 1997 By: /s/ Andrew Folck --------------------------- Andrew Folck Chief Financial Officer 10 EX-10.1 2 EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 11th day of June, 1997 between SMARTALK TELESERVICES, INC., a California corporation (the "Company") and GENE RUSSELL (the "Executive"); and WHEREAS, the parties hereto wish to enter into an employment agreement to employ the Executive as the 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 two and one-half 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 - 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 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) Insurance Policies. The Company shall purchase for up to an ------------------ annual premium amount of $3,000 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. (d) 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 2 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. (e) 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. (f) 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 sixty thousand (60,000) shares of common stock of the Company on the terms and conditions set forth therein. (g) Signing Bonus. The Company shall pay to the Executive upon the ------------- execution of this Agreement fifteen thousand dollars ($15,000) as a signing bonus which amount 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, Executive shall promptly remit any unearned portion of this signing bonus. 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 3 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 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 one-half (.5) the ------------- Executive's annual Base Salary; and 4 (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; 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 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 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, 5 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 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 -------- ------- 6 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 7 (b) If to the Executive, to: Gene Russell 26392 Houston Trail Laguna Hills, CA 92653 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 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. 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. 8 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 California, 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 June 11, 1997. SMARTALK TELESERVICES, INC. /s/ ERICH L. SPANGENBERG ------------------------------------------- By: Erich L. Spangenberg Its: President and Chief Operating Officer /s/ GENE RUSSELL ----------------------------------------- Gene Russell 9 EX-10.2 3 EMPLOYMENT AGREEMENT EXHIBIT 10.2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made this 30th day of July, 1997 between SMARTALK TELESERVICES, INC., a California corporation (the "Company") and LAUREN BECKER (the "Executive"); and WHEREAS, the parties hereto wish to enter into an employment agreement to employ the Executive as the 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 Vice President - Marketing 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, the President of the Company, or any designee thereof. (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, including senior marketing responsibilities. 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 her 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 her 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 her duties and obligations under this Agreement, a base salary at the rate of $125,000 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. Assuming Executive performs her duties in a manner satisfactory to the Compensation Committee, Executive shall receive bonus amounts in proportion to similarly situated employees and shall be paid such monies at the time other similarly situated employees receive their awards, if any. (c) Benefits. During the Employment Period, the Executive shall -------- receive such 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 simarly situated executives 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. (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 her duties under this Agreement, in accordance with the 2 Company's policies and standards of similar or comparable companies. (e) Stock Options. Concurrent with the commencement of the term, 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 Company common stock on the terms and conditions set forth therein. (f) Moving Allowance. The Company shall pay to the Executive upon ---------------- the execution of this Agreement thirty-five thousand dollars ($35,000) as a moving allowance which amount 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, Executive shall promptly remit any unearned portion of this signing bonus. (g) Car Allowance. Employer 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 her 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) 3 hereof, the Executive shall have "good reason" to terminate her 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; or (iv) a relocation of the Executive's principal business office by more than fifty (50) miles from its existing location; or (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 her 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 her 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 4 (ii) Benefits Continuation - continuation for one (1) year (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 one (1) year 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 one (1) year 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 her 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 a life insurance policy provided in accordance with 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) Termination Following a Change of Control. In addition to the ----------------------------------------- amounts set forth in Section 5(a), 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) within one (1) year following a "Change of Control", all of the unvested options to purchase Company common stock held by the Executive shall immediately vest. A "Change in Control" shall be deemed to have taken place if: (i) there shall be consummated any consolidation or merger of the 5 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. (e) Other Terminations. In the event of termination of the ------------------ Executive's employment hereunder for any reason other than those specified in subsection (a) through (d) 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. (f) 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 her 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. (g) 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 6 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 she 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 her 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. (iv) The Executive agrees that she 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 7 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 she 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: Lauren Becker 1022 Palisades Beach Road Santa Monica, CA 90405 With a copy to: David R. Altshuler, Esq. 520 Broadway - Suite 680 Santa Monica, CA 90401 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. 8 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 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. 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 her -------------------------- or its rights or delegate her 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; 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 9 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. 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 California, 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 July 30, 1997. SMARTALK TELESERVICES, INC. /s/ Erich L. Spangenberg ------------------------------------------- By: Erich L. Spangenberg Its: President and Chief Operating Officer /s/ Lauren Becker ------------------------------------------- Lauren Becker 10 EX-27 4 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 150,817,327 0 11,938,244 273,476 1,487,296 170,263,814 6,093,734 1,754,939 273,160,829 31,799,849 0 0 0 97,879,224 0 273,160,829 39,730,845 39,730,845 23,761,289 23,761,289 17,402,054 0 965,173 (498,005) 0 (498,005) 0 0 0 (498,005) (0.03) (0.03)
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