-----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, BDyhP1EBu34/OsS71ENxr1QSHNJBYjTQf/ELlBLNKvSChnIRp1hR46rAiveiKTOc L8JEuKA7yED5kMEzS6x7bw== 0000950150-98-001163.txt : 19980710 0000950150-98-001163.hdr.sgml : 19980710 ACCESSION NUMBER: 0000950150-98-001163 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19980709 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: S-3 SEC ACT: SEC FILE NUMBER: 333-58781 FILM NUMBER: 98663387 BUSINESS ADDRESS: STREET 1: 5080 TUTTLE CROSSING BLVD CITY: DUBLIN STATE: OH ZIP: 43017 BUSINESS PHONE: 6147642933 MAIL ADDRESS: STREET 1: 5080 TUTTLE CROSSING BLVD CITY: DUBLIN STATE: OH ZIP: 43017 S-3 1 FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1998 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ SMARTALK TELESERVICES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA(1) 4899 95-4502740 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
------------------------ 5500 FRANTZ ROAD, SUITE 125 DUBLIN, OHIO 43017 (614) 764-2933 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) THADDEUS BEREDAY 5500 FRANTZ ROAD, SUITE 125 DUBLIN, OHIO 43017 (614) 799-4538 (NAME AND ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPY TO: ROBERT M. SMITH DEWEY BALLANTINE LLP 333 SOUTH HOPE STREET LOS ANGELES, CALIFORNIA 90071 (213) 626-3399 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF SECURITY AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF TO BE REGISTERED REGISTERED PER SHARE(2) PRICE(2) REGISTRATION FEES - ------------------------------------------------------------------------------------------------------------------------ Common Stock, no par value per 2,715,000 100% $38,519,063 $11,364 share........................... - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
(1) A proposal to effect the reincorporation of SmarTalk TeleServices, Inc. from California to Delaware was approved by the shareholders of the Registrant on December 31, 1997. Accordingly, subject to receipt of all requisite regulatory approval, the Registrant's state of incorporation will change from California to Delaware and Registrant will be a Delaware corporation. (2) Based upon the average of the high and low sale price of the Common Stock as reported by the Nasdaq Stock Market's National Market on July 6, 1998, estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PROSPECTUS SMARTALK TELESERVICES, INC. 2,715,000 SHARES OF COMMON STOCK The shares offered hereby (the "Registrable Shares") consist of 2,715,000 shares of common stock, no par value per share (the "Common Stock"), of SmarTalk Teleservices, Inc. ("SmarTalk" or the "Company"), which are owned by the selling shareholders listed herein under "Selling Securityholders" (the "Selling Shareholders"). The Registrable Shares may be offered from time to time by the Selling Shareholders for a period not to exceed one year after the date of this Prospectus, except as may be limited by SmarTalk in accordance with the Registration Rights Agreement dated June 10, 1998, among SmarTalk and certain former stockholders of Worldwide Direct, Inc. SmarTalk shall pay its own legal and accounting fees, all registration and filing fees attributable to the registration of the Registrable Shares, all legal fees and filing fees relating to state securities or "blue sky" filings, the filing fee payable to the Nasdaq Stock Market's National Market ("Nasdaq") and all printing fees incurred in connection herewith. SmarTalk will not receive any of the proceeds from the sale of the Registrable Shares by the Selling Shareholders. The Selling Shareholders have not informed SmarTalk of any specific plans for the distribution of the Registrable Shares covered by this Prospectus, but it is anticipated that the Registrable Shares will be sold from time to time primarily in transactions (which may include block transactions) on Nasdaq at the market price then prevailing, although sales may also be made in negotiated transactions or otherwise. The Selling Shareholders and the brokers and dealers through whom sale of the Registrable Shares may be made may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), and their commissions or discounts and other compensation may be regarded as underwriters' compensation. See "Plan of Distribution." On July 8, 1998, the last reported sale price of the Company's Common Stock on Nasdaq (where it trades under the symbol "SMTK") was $17.125 per share. ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THE PROSPECTUS FOR CERTAIN INFORMATION RELATING TO THE SALE OF THE REGISTRABLE SHARES. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ July 9, 1998 3 AVAILABLE INFORMATION The Company is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC" or the "Commission"). Reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained by mail from the Public Reference Section of the Commission at 450 West Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The reports, proxy statements and other information may also be obtained from the Web site that the Commission maintains at http://www.sec.gov. The Common Stock is listed on Nasdaq and such materials may be inspected at the offices of Nasdaq, National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Company has filed with the Commission a Registration Statement on Form S-3 (herein, together with all amendments and exhibits, referred to as the "Registration Statement") under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which were omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement. Any statements contained herein concerning the provisions of any document filed as an exhibit to the Registration Statement or otherwise filed with the Commission are not necessarily complete, and in each instance reference is made to the copy of such document so filed. Each such statement is qualified in its entirety by such reference. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The following documents filed by the Company with the Commission are incorporated herein by reference: 1. The description of the Company's Common Stock contained in the Company's Report on Form 8-A, filed October 11, 1996; 2. The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997; 3. The financial statements contained in the Company's Current Reports on Form 8-K dated November 24, 1997 and December 22, 1997 (as amended on Form 8-K/A); and 4. The Company's Proxy Statement for the 1998 Annual Meeting of the SmarTalk shareholders. All other documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the filing of a post-effective amendment which indicates that all securities offered have been sold or which deregisters all securities then remaining unsold, shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing such documents. Any statement contained in this Prospectus or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained in this Prospectus or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. 2 4 The Company will provide without charge to each person, including any beneficial owner of Registrable Shares, to whom a copy of this Prospectus is delivered, upon the written or oral request of such person, a copy of any and all information that has been incorporated by reference in the Prospectus not including exhibits to the information that is incorporated by reference (unless such exhibits are specifically incorporated by reference into such documents). Requests should be directed to Thaddeus Bereday, the Company's General Counsel, at the Company's principal executive offices located at 5500 Frantz Road, Suite 125, Dublin, Ohio 43017. The telephone number is (614) 764-2933. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained herein regarding matters that are not historical facts are forward-looking statements (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act). Because such forward-looking statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those discussed under "RISK FACTORS." 3 5 RISK FACTORS Prospective investors should carefully consider the risk factors set forth below, as well as the other information contained in this Prospectus, in evaluating an investment in the securities offered hereby. This Prospectus contains certain forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this Prospectus. ACQUISITION STRATEGY The Company regularly pursues opportunities to expand through acquisitions. The Company plans to continue to seek acquisitions that complement its services, broaden its consumer base and improve its operating efficiencies. Acquisitions may result in potentially dilutive issuances of equity securities, the incurrence of additional debt and the amortization of expenses related to goodwill and other intangible assets, all of which could have a material adverse effect on the Company. Acquisitions also involve numerous additional risks, including difficulties in assimilation of the operations, services, products and personnel of acquired companies, which could result in charges to earnings or otherwise adversely affect the Company's operating results. There can be no assurance that acquisition opportunities will continue to be available, that the Company will have access to the capital required to finance potential acquisitions, that the Company will continue to acquire businesses or that any acquired businesses will be profitable. ABILITY TO INTEGRATE THE OPERATIONS OF SMARTALK, WORLDWIDE DIRECT, INC., AMERICAN EXPRESS TELECOM, INC., CONQUEST TELECOMMUNICATION SERVICES CORP., THE SELECTED ASSETS OF THE RETAIL PREPAID PHONE CARD BUSINESS OF FRONTIER CORPORATION, GTI TELECOM, INC. AND SMARTEL COMMUNICATIONS, INC. SmarTalk recently acquired Worldwide Direct, Inc., American Express Telecom, Inc., ConQuest Telecommunication Services Corp., ("ConQuest"), the selected assets of the retail prepaid phone card business of Frontier Corporation ("Frontier"), GTI Telecom, Inc. and SmarTel Communications, Inc. Because of the inherent uncertainties associated with integrating the assets, operations and personnel of several companies, there can be no assurance that operating efficiencies will be realized as a result of the mergers and acquisitions or that the combination of such businesses will be successful. LIMITED OPERATING HISTORY; NET LOSSES; ABILITY TO UTILIZE NET OPERATING LOSS CARRYFORWARDS; ACCUMULATED DEFICIT The Company was formed in October 1994 and has had only a limited operating history upon which investors may base an evaluation of its performance. As a result of operating expenses and development expenditures, the Company has incurred significant operating and net losses to date. Net losses for the years ended December 31, 1995, 1996 and 1997 were approximately $1.3 million, $3.1 million and $61.9 million, respectively. In addition, the ability of the Company or the Company's subsidiaries, as the case may be, to utilize their net operating loss carryforwards to offset future taxable income may be subject to certain limitations contained in the Internal Revenue Code of 1986, as amended (the "Code"), which may have a material adverse effect on the Company. As of December 31, 1997, the Company had an accumulated deficit of approximately $68.9 million. COMPETITION The telecommunications industry is highly competitive, rapidly evolving and subject to constant technological change. Currently, there are numerous companies selling prepaid calling cards, and the Company expects competition to increase in the future. Other providers currently offer one or more of each of the services offered by the Company. As a service provider in the long distance telecommunications industry, the Company's key competitors in the long distance telecommunications industry are MCI Communications Corporation ("MCI"), AT&T Corp. ("AT&T") and Sprint Corporation ("Sprint"), all of which are substantially larger and have: (i) greater financial, technical, engineering, personnel and marketing resources; (ii) longer operating histories; (iii) greater name recognition; and (iv) larger consumer bases than the Company. These advantages afford the Company's competitors pricing flexibility. Telecommunications 4 6 services companies may compete for consumers based on price, with the dominant providers conducting extensive advertising campaigns in order to capture market share. Competitors with greater financial resources may also be able to provide more attractive incentive packages to retailers in order to encourage them to carry products that compete with the Company's services. In addition, competitors with greater resources than the Company may be better situated to negotiate favorable contracts with retailers. The Company believes that existing competitors are likely to continue to expand their service offerings to appeal to retailers and their consumers. Moreover, because there are few, if any, substantial barriers to entry, the Company expects that new competitors are likely to enter the telecommunications market and attempt to market telecommunications services similar to the Company's services which would result in greater competition. The Company's ability to compete effectively in the telecommunications services industry will depend upon the Company's continued ability to provide high quality services at prices generally competitive with, or lower than, those charged by its competitors. Certain of the Company's competitors dominate the telecommunications industry and have the financial resources to enable them to withstand substantial price competition, which is expected to increase significantly, and there can be no assurance that the Company will be able to compete successfully in the future. Moreover, there can be no assurance that certain of the Company's competitors will not be better situated to negotiate contracts with suppliers of telecommunications services which are more favorable than contracts negotiated by the Company. In addition, there can be no assurance that competition from existing or new competitors or a decrease in the rates charged for telecommunications services by the major long distance carriers or other competitors would not have a material adverse effect on the Company. RAPID TECHNOLOGICAL CHANGE, DEPENDENCE ON NEW SERVICES The telecommunications services industry is characterized by rapid technological change, new product introduction and evolving industry standards. The Company's success will depend, in significant part, on its ability to make timely and cost-effective enhancements and additions to its technology and introduce new services that meet consumer demands. The Company expects new products and services, and enhancements to existing products and services, to be developed and introduced in order to compete with the Company's services. The Company currently is in the process of completing development of technology that will permit it to market and deliver prepaid cellular phone service. The proliferation of new telecommunications technology, including personal communications services and voice communication over the Internet, may reduce demand for long distance services, including prepaid calling cards. There can be no assurance that the Company will be successful in developing and marketing new services or enhancements to services that respond to these or other technological changes or evolving industry standards. In addition, there can be no assurance that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of its existing services or that its new services or enhancements thereto will adequately meet the requirements of the marketplace and achieve market acceptance. Delay in the introduction of new services or enhancements, the inability of the Company to develop such new services or enhancements or the failure of such services or enhancements to achieve market acceptance could have a material adverse effect on the Company. VOLATILITY OF STOCK PRICE The market price of the Common Stock has been highly volatile and may continue to be subject to wide fluctuations in response to quarterly variations in operating results, changes in financial estimates by securities analysts, or other events or factors. In addition, the U.S. stock market has experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many telecommunications companies and that often have been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of the Common Stock. DIFFICULTIES OF MANAGING RAPID GROWTH Although the Company has experienced substantial growth in revenue in the last year and intends to continue to grow rapidly, there can be no assurance that the growth experienced by the Company will continue or that the Company will be able to achieve the growth contemplated by its business strategy. The Company's 5 7 ability to continue to grow may be affected by various factors, many of which are not within the Company's control, including competition and federal and state regulation of the telecommunications industry. This growth has placed, and is expected to continue to place, significant demands on all aspects of the Company's business, including its administrative, technical and financial personnel and systems. The Company's future operating results will substantially depend on the ability of its officers and key employees to manage such anticipated growth, to attract and retain additional highly qualified management, technical and financial personnel and to implement and/or improve its technical, administrative, financial control and reporting systems. The Company's financial controls and reporting systems will require enhancement and further investment in the future in order to accommodate the Company's anticipated growth. There can be no assurance that the Company will not encounter difficulties in expanding its financial controls and reporting systems in order to meet the Company's future needs. If the Company is unable to respond to and manage changing business conditions, then the quality of services, its ability to retain key personnel and its results of operations could be materially adversely affected. Difficulties in managing continued growth could have a material adverse effect on the Company. DEPENDENCE ON MAJOR RETAILERS The Company's business is dependent upon its relationships with leading regional and national retailers. The Company's arrangements with retailers are often pursuant to short-term arrangements. If the Company is unsuccessful in providing competitive pricing, meeting the requirements of its retailers, developing new products that are attractive to such retailers or complying with the terms of its arrangements with such retailers, such retailers may fail to market aggressively the Company's services or may terminate their relationships with the Company, either of which could have a material adverse effect on the Company. Substantially all of the Company's revenue to date has been derived from the sale of the SmarTalk Card to retailers. Certain of those retailers have, from time to time, accounted for a significant percentage of the Company's revenue. The inability of any such retailer to pay the Company for cards shipped or the loss of any such retailer could have a material adverse effect on the Company. DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL The Company's success is largely dependent upon its executive officers, the loss of one or more of whom could have a material adverse effect on the Company. The Company believes that its continued success will depend to a significant extent upon the efforts and abilities of Robert H. Lorsch, Chairman of the Board of Directors (the "Board"), Erich L. Spangenberg, Chief Executive Officer and Vice Chairman of the Board, Jeff Lindauer, President and Chief Operating Officer, and Richard M. Teich, Executive Vice President. Although the Company believes its new management structure will solidify the Company's infrastructure, there can be no assurance that the anticipated benefits will be realized or that the new management structure will be successful. Additionally, although the Company believes that it would be able to locate suitable replacements for these executives if their services were lost, there can be no assurance it would be able to do so. Accordingly, the loss of services of any of these individuals could have a material adverse effect on the Company. The Company maintains, and is the sole beneficiary of, "key man" life insurance on Messrs. Lorsch and Teich in the amounts of $3.0 million and $1.0 million, respectively. DEPENDENCE UPON TELECOMMUNICATIONS PROVIDERS; NO GUARANTEED SUPPLY The Company does not own a transmission network and, accordingly, depends primarily on Frontier, MCI, WorldCom, Inc. and, to a lesser extent, other carriers for transmission of its long distance calls. Further, the Company is dependent upon local exchange carriers for call origination and termination. The Company's ability to maintain and expand its business depends, in part, on its ability to continue to obtain telecommunications services on favorable terms from long distance carriers and other such suppliers, as well as the cooperation of both interexchange and local exchange carriers in originating and terminating service for its consumers in a timely manner. The Company has not experienced significant losses in the past because of interruptions of service at any of its carriers, but no assurance can be given in this regard with respect to the future. In addition, no assurance can be given that the Company will be able to obtain long distance services in the future at favorable prices, and a material increase in the price at which the Company obtains long distance service could have a material adverse effect on the Company. See "-- Competition." 6 8 DEPENDENCE ON FACILITIES AND PLATFORMS; DAMAGE TO FACILITIES AND PLATFORMS; FAILURE AND DOWNTIME The Company owns and operates the Ohio Platform, a call processing platform site located in Columbus, Ohio, and the VoiceChoice Platform, a call processing platform site located in San Francisco, California. Additionally, the Company utilizes two additional call processing platforms owned and operated by West Teleservices. The Company's network service operations are dependent upon its ability to protect the equipment and data at such facilities against damage that may be caused by fire, power loss, technical failures, unauthorized intrusion, natural disasters, sabotage and other similar events. Although the Company has taken precautions to protect itself and its consumers from events that could interrupt delivery of services, there can be no assurance that a fire, act of sabotage, technical failure, human error, natural disaster or a similar event would not cause the failure of a significant technical component, thereby resulting in an outage. Such an outage could have a material adverse effect on the Company. The Company believes that technical failures have not resulted in any material downtime of the Company's platforms since the Company's inception. Although the Company maintains business interruption insurance providing for aggregate coverage of approximately $1.0 million per occurrence, there can be no assurance that the Company will be able to maintain its insurance, that such insurance would continue to be available at reasonable prices, that such insurance would cover all such losses or that such insurance would be sufficient to compensate the Company for losses it experiences due to the Company's inability to provide services to its consumers. SEASONALITY; FACTORS AFFECTING OPERATING RESULTS; POTENTIAL FLUCTUATIONS IN PERIOD-TO-PERIOD RESULTS The Company's sales have been, and the Company expects that its sales will continue to be, somewhat seasonal, due to holiday purchases of the SmarTalk Card. In addition, the Company's operating results have varied significantly in the past and may vary significantly in the future. Traditional operator-assisted long distance services produce peak revenues during the summer months, coincident with domestic travel and vacation patterns. Though less severe than call center services, prepaid calling cards are also affected by seasonal demand fluctuations with demand peaking in the spring and summer months. Factors that may cause the Company's operating results to vary include: (i) changes in operating expenses; (ii) the timing of the introduction of services; (iii) market acceptance of new and enhanced versions of services; (iv) potential acquisitions; (v) changes in legislation and regulation which affect the competitive environment for services; (vi) general economic factors; and (vii) the ability to recognize revenue on the unused portion of expired SmarTalk Cards. Moreover, for many of the Company's retailers, services represent a new merchandising category, with the attendant concerns regarding shelf space positioning, sales force education and effective marketing and, with respect to arrangements with certain retailers requiring customized services, there may be significant lead-time to provide such services following receipt of customer orders. As a result of these factors, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. RISK OF LOSS FROM RETURNED TRANSACTIONS; FRAUD; BAD DEBT; THEFT OF SERVICES The Company utilizes national credit card clearance systems for electronic credit card settlement. The Company generally bears the same credit risks normally assumed by other users of these systems arising from returned transactions caused by closed accounts, frozen accounts, unauthorized use, disputes, theft or fraud. The Company's relationships with providers of merchant card services such as VISA and MasterCard could be adversely affected by excessive uncollectibles or chargebacks, which are generally higher in the telephone industry than in other industries, particularly with respect to recharges because the transaction typically is not on a face-to-face basis in which a cardholder signature is captured. Termination of the Company's ability to offer recharge through merchant card services would have a material adverse effect on the Company. In order to minimize its financial exposure, the Company limits the amount that consumers can recharge within specified timeframes and generally charges a higher rate for recharge services than for the initial purchase. From time to time, persons have obtained services without rendering payment to the Company by unlawfully utilizing the Company's access numbers and personal identification numbers ("PINs"). Although to date the Company has not experienced material losses due to such unauthorized use of access numbers and customized PINs, no assurance can be given 7 9 that future losses due to unauthorized use will not be material. The Company attempts to manage these credit, theft and fraud risks through its internal controls, monitoring and blocking systems. The Company also maintains reserves which it deems adequate for such risks. Past experience in estimating and establishing reserves and the Company's historical losses are not necessarily accurate indications of the Company's future losses or the adequacy of the reserves established by the Company in the future. Although the Company believes that its risk management and bad debt reserve practices are adequate, there can be no assurance that the Company's risk management practices or reserves will be sufficient to protect the Company from unauthorized or returned transactions or thefts of services which could have a material adverse effect on the Company. SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS As of July 6, 1998, the Company had 22,753,948 shares of Common Stock outstanding. Of these shares, 18,393,342 shares of Common Stock are freely tradable without restriction or further registration under the Securities Act. The remaining 4,360,606 shares of Common Stock outstanding are "restricted securities" as that term is defined in Rule 144 under the Securities Act ("Rule 144"). If the Company proposes to register any of its securities under the Securities Act of 1933, as amended (the "Securities Act"), the Company generally must notify SmarTalk Partners, LLC ("SmarTalk Partners"), the holder of 1,595,000 shares of Common Stock (the "Partners Registrable Shares") of the Company's intent to register such Common Stock and allow SmarTalk Partners an opportunity to include the Partners Registrable Shares in the Company's registration. SmarTalk Partners also has the right to require the Company to prepare and file a registration statement under the Securities Act pertaining to the Partners Registrable Shares. On September 17, 1997, the Company sold $150 million aggregate principal amount of 5 3/4% convertible subordinated notes due September 15, 2004 (the "5 3/4% Notes") in an offering pursuant to Rule 144A under the Securities Act (the "5 3/4% Notes Offering"). In connection with the 5 3/4% Notes Offering, the Company has filed and the Commission declared effective a shelf registration statement on Form S-3, covering a total of 5,714,286 shares of Common Stock issuable upon conversion of the 5 3/4% Notes. The Company is obligated to use all reasonable efforts to keep the registration statement effective until the shelf registration statement is no longer required for resales of the 5 3/4% Notes or the Common Stock issued upon conversion thereof. If the shelf registration statement ceases to be effective or usable, the Company will accrue liquidated damages which could have a material adverse effect on the Company. POSSIBLE INABILITY TO RECOGNIZE A PORTION OF DEFERRED REVENUE The sale of long distance domestic and outbound international telephone service through prepaid calling cards may be subject to "escheat" laws in various states. These laws generally provide that payments or deposits received in advance or in anticipation of the provision of utility (including telephone) services that remain unclaimed for a specific period of time after the termination of such services are deemed "abandoned property" and must be submitted to the state. Although the Company is not aware of any case in which such laws have been applied to the sale of prepaid calling cards, and does not believe that such laws are applicable, in the event that such laws are deemed applicable, the Company may be unable to recognize the portion of its deferred revenue remaining upon the expiration of the cards with unused calling time. In such event, the Company may be required to deliver such amounts to certain states in accordance with these laws, which could have a material adverse effect on the Company. GOVERNMENT REGULATION The Company is currently subject to federal and state government regulation of its long distance telephone services. The Company is regulated at the federal level by the Federal Communications Commission (the "FCC") and is currently required to maintain both domestic and international tariffs for its services containing the currently effective rates, terms and conditions of service. The FCC ordered elimination of the tariffing requirement for domestic interstate non-dominant carriers. The FCC's order is pending review and approval by the Court of Appeals for the D.C. Circuit following long-standing appeals by the FCC's past mandatory detariffing policies. In addition, the Company is required to maintain a certificate of authority, issued by the FCC, to provide international telecommunications services. The intrastate long distance telecommunications operations of the 8 10 Company are also subject to various state laws and regulations, including prior certification, notification or registration requirements. The Company generally must obtain and maintain certificates of public convenience and necessity from regulatory authorities in most states in which it offers service. In most of these jurisdictions, the Company must file and obtain prior regulatory approval of tariffs for intrastate services. In addition, the Company must update or amend the tariffs and, in some cases, the certificates of public convenience and necessity when rates are adjusted or new products are added to the long distance services offered by the Company. The FCC and numerous state agencies also impose prior approval requirements on transfers of control, including corporate reorganizations and assignments of certain regulatory authorizations. If the federal and state regulations requiring the local exchange carriers to provide equal access for the origination and termination of calls by long distance subscribers (such as the Company's consumers) change or if the regulations governing the fees to be charged for such access services change, particularly if such regulations are changed to allow variable pricing of such access fees based upon volume, such changes could have a material adverse effect on the Company. In early 1997, the FCC instituted significant changes to the current incumbent local exchange carrier access charge structure. These changes were meant, in part, to bring access charges closer to their actual costs. While there has been a general trend toward access charge reductions, new primary interexchange charges (PICCs) were authorized by the FCC to be imposed on interexchange carriers serving presubscribed customers. PICCs are a flat-rate, per presubscribed line, per month access charge imposed on all facilities based carriers (although they may be passed on to resellers such as the Company). Facilities based interexchange carriers were assessed interstate PICCs effective January 1, 1998. Intrastate PICCs have also been adopted in the five-state Ameritech region (Michigan, Wisconsin, Illinois, Indiana, and Ohio). PICCs will affect the Company only to the extent that it offers presubscribed services. At the same time, the Company may pursue underlying carriers for pass throughs of any access charge reductions they may realize from incumbent local exchange carriers. Through the ConQuest acquisition, the Company is subject to additional federal, state and international regulation of its long distance, operator services and prepaid calling card services. The Company is in compliance with the requirements of the TelePhone Operator Consumer Services Improvement Act of 1990 ("TOCSIA") and the FCC's implementing regulations regarding unblocking, branding and posting for operator services. The Company maintains informational tariffs for its operator services and maintains on file tariffs for its long distance and prepaid calling card services. The Company is licensed in the states in which it operates as a long-distance operator-services provider, and is not aware of any instance in which there has been a substantial violation of federal or state telecommunications regulation in connection with the Company's services. While the Company believes that it is in compliance with the applicable federal, state and international regulations governing telecommunications services, there can be no assurance that the FCC or the regulatory authorities in one or more states or foreign countries will not raise material issues with regard to the Company's compliance with applicable regulations, will not institute new regulation or modify existing regulation, or that federal, state and international regulatory activities will not otherwise have a material adverse effect on the Company. The Telecommunications Act of 1996 mandated the establishment of Universal Service for the promotion of nationwide access to telecommunications services in rural, insular and high cost areas that are reasonably comparable in price and type to those found in urban areas and the promotion of access to advanced services for schools, libraries and certain health care providers. Telecommunications providers of interstate services, including payphone aggregators and private network operators that offer service to others for a fee on a non-common carrier basis, must contribute toward the funding of Universal Service. Certain government and public entities are exempt, as are entities whose contribution would be less than $100.00 per year. Although the Company's competition will be similarly situated, the Universal Service Fund annual assessment may have a material adverse effect on the long term financial condition of the Company. The Telecommunications Act of 1996 (Section 276) further mandated that the FCC promulgate rules to establish a per call compensation plan in order to ensure that all payphone providers are fairly compensated for each completed intrastate and interstate payphone initiated call, including calls on which payphone providers had not heretofore received compensation. Such calls included those placed to toll free numbers (800/888) such as operator-assisted and prepaid calling card calls, and calls placed through network access codes. In 9 11 September 1996, the FCC promulgated rules in order to implement Section 276 of the Telecommunications Act of 1996 which established a three-phase compensation plan for payphone providers. Under the first phase, interexchange carriers with annual toll revenues of more than $100 million were to pay a total of $45.85 per payphone per month for all toll free access code calls for the first year, commensurate with their portion of total interexchange revenues. All switch-based and facilities-based interexchange carriers were to pay $0.35 per call to each payphone provider during the second year (although payments could subsequently be recovered from resellers by the carriers), after which per call compensation rates were to be left to individual market-driven rates negotiated between payphone providers and interexchange carriers. On July 1, 1997, the D.C. Circuit Court of Appeals vacated significant portions of the FCC's rules including the $0.35 per call rate which was found to be arbitrary and capricious, and remanded the matter to the FCC for reconsideration. On remand, the FCC in September 1997, established a two-year "default" compensation rate of $0.284 per payphone-originated toll free or access code call. At the end of the two-year interim period, the per call payphone compensation rate will be the deregulated market-based local coin rate less $0.066. This amount is payable by all "switch-based" interexchange carriers (but again may be passed through to nonfacilities-based resellers). The revised FCC rules became effective on October 7, 1997, but continue to be subject to regulatory and legal challenges. The Company is unable to predict whether this regulation or other potential changes in the regulatory environment could have a material adverse effect on the Company. CONTROL OF THE COMPANY The directors, executive officers and their respective affiliates beneficially own 4,760,327 shares (approximately 19.58%) of the outstanding Common Stock, which includes 1,553,750 shares issuable upon the exercise of stock options exercisable within 60 days of the date of this Prospectus. Mr. Lorsch beneficially owns 3,250,393 shares (approximately 13.95%) of the outstanding Common Stock. As a result, these shareholders in general, and Mr. Lorsch in particular, are able to exercise significant influence over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing a change in control of the Company. ANTI-TAKEOVER CONSIDERATIONS The Company's Board has authority to issue up to 10,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of the preferred stock without further vote or action by the Company's shareholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The Company's Amended and Restated Articles of Incorporation (the "Articles") and Amended and Restated Bylaws (the "Bylaws") require that any action required or permitted to be taken by shareholders of the Company must be effected at a duly called annual or special meeting of shareholders of the Company and may not be effected by written consent. In addition, the Company's charter documents eliminate cumulative voting, which may make it more difficult for a third party to gain control of the Company's Board. Moreover, the Company's Board has the authority, without action by, or consent of, the shareholders, to fix the rights and preferences of and issue shares of preferred stock. These and other charter provisions may deter a third party who would propose to acquire the Company or to engage in a similar transaction affecting control of the Company in which the shareholders might receive a premium for their shares over the then current market value. Further, the Company may consider additional anti-takeover defenses, including the implementation of a shareholder rights plan. FORWARD-LOOKING STATEMENTS This Prospectus contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act concerning the Company's future operations, economic performances and financial condition, including such things as business strategy and measures to implement strategy, competitive strengths, goals, expansion and growth of the Company's business and operations and references to future success. These statements are based on certain assumptions and analyses made by the 10 12 Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. However, whether actual results and developments will conform with the Company's expectations and predictions is subject to a number of risks and uncertainties, in addition to the risk factors discussed above, including a global economic slowdown in the telecommunications industry, unpredictable difficulties or delays in the development of new product programs, difficulties and unanticipated expense of assimilating newly-acquired businesses, technological shifts away from the Company's technologies and core competencies, unforeseen interruptions to the Company's business with its largest customers and distributors resulting from, but not limited to, strikes, financial instabilities, unexpected government policies and regulations affecting the Company or its significant customers, the effects of extreme changes in monetary and fiscal policies in the U.S. and abroad, including extreme currency fluctuations and unforeseen inflationary pressures, drastic and unforeseen price pressures on the Company's services or significant cost increases that cannot be recovered through price increases or productivity improvements, significant changes in interest rates or in the availability of financing for the Company or certain of its customers, rapid escalation of the cost of regulatory compliance and litigation, unforeseen intergovernmental conflicts or actions, including but not limited to armed conflict and trade wars, any difficulties in obtaining or retaining the management or other human resource competencies that the Company needs to achieve its business objectives, and other factors, many of which are beyond the control of the Company. Consequently, all of the forward-looking statements made in this Prospectus are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or that they will have the expected consequences to or effects on the Company and its subsidiaries or their business or operations. USE OF PROCEEDS SmarTalk will not receive any proceeds from the sale of the Registrable Shares by the Selling Shareholders. SELLING SECURITY HOLDERS The following table sets forth the name of each Selling Shareholder and relationship, if any, with the Company and: (i) the number of shares owned by each Selling Shareholder as of May 13, 1998; (ii) the number of shares being offered for sale by each Selling Shareholder under this Prospectus; (iii) the number of shares owned by each Selling Shareholder after the offering; and (iv) the percentage of the Common Stock of the Company owned by each Selling Shareholder after the offering.
NUMBER OF NUMBER OF NUMBER OF PERCENTAGE OF SHARES OWNED SHARES BEING SHARES OWNED SHARES OWNED BEFORE THE OFFERED AFTER THE AFTER THE NAME OF SELLING SECURITYHOLDER OFFERING FOR SALE OFFERING OFFERING ------------------------------ ------------ ------------ ------------ ------------- Victor Grillo, Jr. Raymond Wysocki, Jr. Lloyd Lapidus
- --------------- * Because the Selling Shareholders may, pursuant to this Prospectus, offer all or some portion of the Common Stock presently held, no estimate can be given as to the amount of the Common Stock that will be held by the Selling Shareholders upon termination of any such sales. In addition, the Selling Shareholders identified above may have sold, transferred or otherwise disposed of all or a portion of the Common Stock since the date on which the information regarding the Common Stock was provided in transactions exempt from the registration requirements of the Securities Act. See "Plan of Distribution." Only the Selling Shareholders identified above who beneficially own the Common Stock set forth opposite each such Selling Shareholder's name in the foregoing table on the effective date of the Registration Statement may sell such Common Stock pursuant to this Prospectus. 11 13 PLAN OF DISTRIBUTION The Selling Shareholders may from time to time sell all or a portion of the Registrable Shares in transactions on Nasdaq, in the over-the-counter market, in negotiated transactions, or a combination of such methods of sale, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. The Registrable Shares may be sold directly or through underwriters or broker-dealers. If the Registrable Shares are sold through underwriters or broker-dealers, the Selling Shareholder may pay underwriting discounts or brokerage commissions and charges. The methods by which the Registrable Shares may be sold include: (i) a block trade in which the broker or dealer so involved will attempt to sell the securities as agent but may position and resell a portion of the block as principle to facilitate the transaction; (ii) purchases by a broker or dealer as principle and resale by such broker or dealer for its own account pursuant to this Prospectus; (iii) exchange distributions and/or secondary distributions in accordance with the rules of Nasdaq; (iv) ordinary brokerage transactions and transactions in which the broker solicits purchasers; and (v) privately negotiated transactions. Pursuant to the provisions of the Agreement and Mutual Release, the Company will pay the costs and expenses incident to its registration and qualification of the Shares offered hereby, including registration and filing fees. Any securities covered by this Prospectus that qualify for sale pursuant to Rule 144 or Rule 144A may be sold under Rule 144 or Rule 144A rather than pursuant to this Prospectus. There can be no assurance that any Selling Shareholder will sell any or all of the Registrable Shares described herein, and any Selling Shareholder may transfer, devise or gift such securities by other means not described herein. LEGAL MATTERS Certain legal matters relating to the validity of the Common Stock offered hereby will be passed upon for the Company by Dewey Ballantine LLP, Los Angeles, California. Mr. Robert M. Smith, a director of the Company, is a member of the law firm of Dewey Ballantine LLP. EXPERTS The consolidated financial statements of the Company incorporated in this Prospectus by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 have been so incorporated in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of SmarTel and subsidiaries as of December 31, 1995 and 1996 and for the three years in the period ended December 31, 1996 incorporated herein by reference in the Company's Current Report on Form 8-K dated November 24, 1997 have been audited by Arthur Andersen LLP, independent accountants, as indicated in their report to opinion with respect thereto, and are incorporated herein by reference in reliance upon the authority of said firm as experts in giving said report. The financial statements of GTI as of December 31, 1996 and for the year then ended, incorporated herein by reference in the Company's Current Report on Form 8-K, dated November 24, 1997, have been audited by KPMG Peat Marwick LLP, independent auditors, as stated in their report incorporated herein by reference. The report of KPMG Peat Marwick LLP covering the December 31, 1996 financial statements of GTI contains explanatory paragraphs which state that GTI's financial statements have been restated and that recurring losses from operations and net capital deficiency raise substantial doubt about GTI's ability to continue as a going concern. The 1996 GTI financial statements do not include any adjustments that might result from the outcome of that uncertainty. The financial statements of GTI as of December 31, 1995 and 1994 and for the years then ended, incorporated in this Prospectus by reference to the Company's Current Report on Form 8-K, dated November 24, 1997, have been so incorporated in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. 12 14 The financial statements referred to above and the reports of each of the accountants referred to above are incorporated herein by reference in reliance upon said firms as experts in accounting and auditing. The consolidated financial statements of ConQuest at December 31, 1995 and 1996, and for each of the three years in the period ended December 31, 1996, incorporated herein by reference to the Company's Current Report on Form 8-K, dated November 24, 1997, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon incorporated herein by reference, and are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of Amex Telecom as of December 31, 1996 and December 31, 1997 and for the years then ended, incorporated herein by reference in the Company's Current Report on Form 8-K, dated December 22, 1997, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Section 317 of the California General Corporation Law (the "CGCL"), a corporation may indemnify its directors, officers, employees and agents and its former directors, officers, employees and agents and those who serve, at the corporation's request, in such capacities with another enterprise, against expenses (including attorney's fees), as well as judgements, fines and settlements in nonderivative lawsuits, actually and reasonably incurred in connection with the defense of any action, suit or proceeding in parties by reason of their serving or having served in such capacity. The CGCL provides, however, that such person must have acted in good faith and in a manner he or she reasonably believed to be in (or not opposed to) the best interests of the corporation and, in the case of a criminal action, such person must have had no reasonable cause to believe his or her conduct was unlawful. In addition, the CGCL does not permit indemnification in an action or suit by or in the right of the corporation, where such person has been adjudged liable to the corporation, unless, and only to the extent that, a court determines that such person fairly and reasonably is entitled to indemnity for expenses the court deems proper in light of liability adjudication. With respect to present or former directors and officers, indemnity is mandatory to the extent a claim, issue or matter has been successfully defended. The Company's Amended and Restated Bylaws (the "Bylaws") provide for mandatory indemnification of directors and officers generally to the same extent authorized by the CGCL. Under the Bylaws, the Company shall advance expenses incurred by an officer or director in defending any such action if the director or officer undertakes to repay such amount if it is determined that he or she is not entitled to indemnification. The Company has obtained directors' and officers' liability insurance. The Company has entered into separate indemnification agreements with its directors and officers. Each indemnification agreement provides for, among other things: (i) indemnification against any and all expenses, liabilities and losses (including attorney's fees, judgements, fines, taxes, penalties and amounts paid in settlement) of any claim against an indemnified party unless it is determined, as provided in the indemnification agreement, that indemnification is not permitted under applicable law; and (ii) prompt advancement of expenses to any indemnified party in connection with his or her defense against any claim. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 13 15 - ------------------------------------------------------------ - ------------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ------------------------ TABLE OF CONTENTS
PAGE ---- Additional Information..................... 2 Documents Incorporated by Reference........ 2 Cautionary Statement Regarding Forward- Looking Statements....................... 3 Risk Factors............................... 4 Use of Proceeds............................ 11 Selling Security Holders................... 11 Plan of Distribution....................... 12 Legal Matters.............................. 12 Experts.................................... 12
- ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ 2,715,000 SHARES SMARTALK TELESERVICES, INC. COMMON STOCK ------------------------ PROSPECTUS ------------------------ JULY 9, 1998 - ------------------------------------------------------------ - ------------------------------------------------------------ 16 PART II ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses in connection with the registration of the Common Stock offered hereby. The Company will bear all of such expenses. All amounts are estimated except for the Securities and Exchange Commission registration fee and Nasdaq entry fee.
PAYABLE BY REGISTRANT ------------- SEC registration fee........................................ $11,364 Nasdaq entry fee............................................ 17,500 Accounting fees and expenses................................ 5,000 Legal fees and expenses..................................... 7,500 Miscellaneous fees and expenses............................. 3,636 ------- Total............................................. $45,000 =======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Section 317 of the California General Corporation Law (the "CGCL"), a corporation may indemnify its directors, officers, employees and agents and its former directors, officers, employees and agents and those who serve, at the corporation's request, in such capacities with another enterprise, against expenses (including attorney's fees), as well as judgements, fines and settlements in nonderivative lawsuits, actually and reasonably incurred in connection with the defense of any action, suit or proceeding in parties by reason of their serving or having served in such capacity. The CGCL provides, however, that such person must have acted in good faith and in a manner he or she reasonably believed to be in (or not opposed to) the best interests of the corporation and, in the case of a criminal action, such person must have had no reasonable cause to believe his or her conduct was unlawful. In addition, the CGCL does not permit indemnification in an action or suit by or in the right of the corporation, where such person has been adjudged liable to the corporation, unless, and only to the extent that, a court determines that such person fairly and reasonably is entitled to indemnity for expenses the court deems proper in light of liability adjudication. With respect to present or former directors and officers, indemnity is mandatory to the extent a claim, issue or matter has been successfully defended. The Company's Amended and Restated Bylaws (the "Bylaws") provide for mandatory indemnification of directors and officers generally to the same extent authorized by the CGCL. Under the Bylaws, the Company shall advance expenses incurred by an officer or director in defending any such action if the director or officer undertakes to repay such amount if it is determined that he or she is not entitled to indemnification. The Company has obtained directors' and officers' liability insurance. The Company has entered into separate indemnification agreements with its directors and officers. Each indemnification agreement provides for, among other things: (i) indemnification against any and all expenses, liabilities and losses (including attorney's fees, judgements, fines, taxes, penalties and amounts paid in settlement) of any claim against an indemnified party unless it is determined, as provided in the indemnification agreement, that indemnification is not permitted under applicable law; and (ii) prompt advancement of expenses to any indemnified party in connection with his or her defense against any claim. II-1 17 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 Agreement and Plan of Reorganization and Merger, dated as of June 10, 1998, by and among SmarTalk TeleServices, Inc., SMTK Acquisition corp. IV and Worldwide Direct, Inc.(1) 2.2 Agreement and Plan of Reorganization and Merger, dated as of July 30, 1997, by and among Conquest Telecommunication Services, Corp., SmarTalk TeleServices, Inc. and SMTK Acquisition Corp. II.(2) 2.3 Agreement and Plan of Merger, dated May 24, 1997, among SmarTalk TeleServices, Inc., SMTK Acquisition Corporation, SmarTel Communications, Inc. and each of the stockholders of Smartel Communications, Inc.(3) 2.4 Stock Purchase Agreement, dated as of May 31, 1997, by and among SmarTalk TeleServices, Inc., GTI Telecom, Inc., Waterton Investment Group I, LLC and William R. Harger.(4) 2.5 Asset Purchase Agreement, dated October 22, 1997, among SmarTalk TeleServices, Inc., SMTK NY-1 Corp. and Frontier Corporation.(5) 2.6 Stock Purchase Agreement, dated as of December 22, 1997, by and among SmarTalk TeleServices, Inc., American Express Telecom, Inc. and American Express Travel Related Services Company, Inc. (without schedules).(8) 3.1 Amended and Restated Articles of Incorporation.(6) 3.2 Amended and Restated Bylaws.(6) 4.1 Registration Rights Agreement.(6) 4.2 Specimen Stock Certificate.(6) 4.3 Terms of Contingent Value Rights.(3) 4.4 Form of SmarTalk TeleServices, Inc. 10% Subordinated Note Due 2001.(4) 4.5 Registration Rights Agreement, dated as of May 31, 1997, among SmarTalk TeleServices, Inc., William R. Harger and Waterton Investment Group I, LLC.(4) 4.6 Indenture, dated as of September 17, 1997, between SmarTalk TeleServices, Inc. and Wilmington Trust Company, as Trustee.(7) 4.7 Registration Rights Agreement, dated as of September 12, 1997, among SmarTalk TeleServices, Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Salomon Brothers Inc.(7) 4.8 Registration Rights Agreement, dated as of June 10, 1998, among SmarTalk TeleServices, Inc. and certain former stockholders of Worldwide Direct, Inc. 5.1 Opinion of Dewey Ballantine LLP regarding legality of shares being registered.* 23.1 Consent of Price Waterhouse LLP.* 23.2 Consent of Arthur Anderson LLP.* 23.3 Consent of KPMG Peat Marwick LLP.* 23.4 Consent of Price Waterhouse LLP.* 23.5 Consent of Ernst & Young LLP.* 23.6 Consent of Ernst & Young LLP.* 23.7 Consent of Dewey Ballantine LLP (included in its opinion filed as Exhibit 5.1).* 24.1 Powers of Attorney (included on the signature page of this Registration Statement).
- --------------- * To be filed by amendment (1) Incorporated by reference to SmarTalk's Form 8-K, dated June 10, 1998. (2) Incorporated by reference to SmarTalk's Form 8-K, dated July 30, 1997. II-2 18 (3) Incorporated by reference to SmarTalk's Form 8-K, dated May 28, 1997 (as amended on Form 8-K/A). (4) Incorporated by reference to SmarTalk's Form 8-K, dated June 1, 1997 (as amended on Form 8-K/A). (5) Incorporated by reference to SmarTalk's Form 8-K, dated October 22, 1997. (6) Incorporated by reference to SmarTalk's Registration Statement on Form S-1, registration number 333-10391, filed with the Securities and Exchange Commission on August 19, 1996 and the amendments thereto. (7) Incorporated by reference to SmarTalk's Form 8-K, dated September 17, 1997. (8) Incorporated by reference to SmarTalk's Form 8-K, dated December 22, 1997 (as amended on Form 8-K/A). (b) FINANCIAL STATEMENT SCHEDULES. Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or Section 15(d) of the Exchange Act that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 19 (5) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-4 20 SIGNATURES Pursuant to the requirements of the Securities Act, the Company certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dublin, State of Ohio, on the seventh day of July, 1998. SMARTALK TELESERVICES, INC. By: /s/ ERICH L. SPANGENBERG -------------------------------------- Name: Erich L. Spangenberg Title: Vice Chairman of the Board of Directors and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Robert H. Lorsch, Erich L. Spangenberg and Thaddeus Bereday his true and lawful attorney-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ ROBERT H. LORSCH Chairman of the Board July 7, 1998 - -------------------------------------------------------- of Directors Robert H. Lorsch /s/ ERICH L. SPANGENBERG Vice Chairman of the Board July 7, 1998 - -------------------------------------------------------- of Directors and Erich L. Spangenberg Chief Executive Officer (Principal Executive Officer) /s/ GLEN ANDREW FOLCK Chief Financial Officer and July 7, 1998 - -------------------------------------------------------- Vice President Glen Andrew Folck Finance/Operations (Principal Financial and Accounting Officer) /s/ FRED F. FIELDING Director July 7, 1998 - -------------------------------------------------------- Fred F. Fielding /s/ KENNETH A. VIELLIEU Director July 7, 1998 - -------------------------------------------------------- Kenneth A. Viellieu /s/ ROBERT M. SMITH Director July 7, 1998 - -------------------------------------------------------- Robert M. Smith
II-5 EX-4.8 2 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 4.8 EXHIBIT B REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered into as of June 10, 1998 by and among SmarTalk TeleServices, Inc., a California corporation (the "Company"), and those parties executing this Agreement and listed on Exhibit "A" attached hereto (each referred to herein as a "Holder" and collectively as the "Holders"). WHEREAS, pursuant to that certain Agreement and Plan of Reorganization and Merger, dated as of June 10, 1998 (the "Merger Agreement") by and among the Company, Worldwide Direct, Inc., a Delaware corporation ("Worldwide"), and SMTK Acquisition Corp. IV, a Delaware corporation and wholly owned subsidiary of the Company, the Company will purchase all issued and outstanding shares of common and preferred stock of Worldwide, $0.01 par value per share, and in connection therewith the Holders will receive such number of shares of the Company's common stock, no par value (the "Common Stock") as contemplated by the Merger Agreement; and WHEREAS, the Company has agreed to provide the registration rights set forth in this Agreement and the execution and delivery of this Agreement by the Company is a condition to the obligations of the Holders under the Merger Agreement; NOW THEREFORE, in consideration of the mutual covenants herein contained and for other good and valuable consideration, the parties hereto agree as follows: ARTICLE I DEFINITIONS Section 1.1. Definitions. Capitalized terms used herein and not otherwise defined herein have the meanings ascribed to them in the Merger Agreement. In addition, the following capitalized terms shall have the meanings ascribed to them below: "Affiliate," as applied to any specified Person, shall mean any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person and, in the case of a Person who is an individual, shall include: (i) members of such specified Person's immediate family (as defined in Instruction 2 of Item 404(a) of Regulation S-K under the Securities Act); and (ii) trusts, the trustee and all beneficiaries of which are such specified Person or members of such Person's immediate family as determined in accordance with the foregoing clause (i). For the purposes of this definition, "control," when used with respect to any Person, means the power to direct the management and policies of such Person, directly or 2 indirectly, whether through the ownership of voting securities, by contact or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Business Day" means any day that is not a Saturday, Sunday or a day on which banking institutions in New York, New York or Los Angeles, California are not required to be open. "Closing" is defined in the Merger Agreement. "Effectiveness Date" is defined in Section 2.1. "Effectiveness Period" is defined in Section 2.1 "Event Date" is defined in Section 2.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Filing Date" is defined in Section 2.1. "Holders" means the holders of stock or warrants of Worldwide who have executed this Agreement, together with their transferees. "Indemnified Holder" is defined in Section 4.1. "Indemnified Party" is defined in Section 4.3. "Indemnifying Party" is defined in Section 4.3. "Person" means an individual, partnership, corporation, limited liability company, trust or unincorporated organization, or a government or agency or political subdivision thereof. "Prospectus" means the prospectus included in a Registration Statement, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. "Public Distribution" shall mean any bona fide underwritten public distribution of Stock pursuant to an effective registration statement under the Securities Act or any other applicable law. "Public Offering" shall mean any bona fide underwritten public distribution of Stock pursuant to an effective registration statement under the Securities Act or any other applicable law. 2 3 "Registrable Securities" means each share of Stock acquired by the Holders pursuant to the Merger Agreement (or as set forth in clause (ii) of the definition of "Stock" below), until it has been effectively registered under the Securities Act and disposed of by such Holders pursuant to an effective registration statement; provided, however, that "Registrable Securities" shall not include any share of Stock or other security that has been issued under clause (ii) of the definition of "Stock" below if such share of Stock or security was issued pursuant to a Registration Statement filed with the SEC and is not "restricted" within the meaning of Rule 144 under the Securities Act. "Registration Expenses" is defined in Section 3.2 "Registration Statement" means any registration statement of the Company relating to a Shelf Registration pursuant to Section 2.1, including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendment) and all exhibits and material incorporated by reference therein. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Selling Holder" means a Holder who sells or proposes to sell Registrable Securities pursuant to a Registration Statement under the Securities Act. "Shelf Registration" or "Shelf Registration Statement" is defined in Section 2.1. "Stock" means the following securities: (i) the Common Stock; or (ii) any security or other instrument: (a) received as a dividend on, or other payment made to the holders of, the Common Stock (or any other security or instrument referred to in this definition); or (b) issued in connection with a split of the Common Stock (or any other security or instrument referred to in this definition) or as a result of any exchange or reclassification of the Common Stock (or any other security or instrument referred to in this definition), reorganization, consolidation, merger or recapitalization. ARTICLE II REGISTRATION RIGHTS Section 2.1. Shelf Registration. (a) Filing and Effectiveness. The Company shall cause to be filed with the SEC as soon as reasonably practicable, but in no event later than 30 days following the Closing (the date of such filing is referred to herein as the "Filing Date"), a shelf registration statement pursuant to Rule 415 under the Securities Act (a "Shelf Registration" or a "Shelf Registration Statement"), which Shelf Registration Statement 3 4 shall provide for resales of all Registrable Securities held by each of the Holders who shall have provided the information required pursuant to Section 3.1(b). The Company shall use reasonable efforts to have such Shelf Registration declared effective within 60 days of the Filing Date (the date of such effectiveness is referred to herein as the "Effectiveness Date") and to keep such Shelf Registration Statement continuously effective, supplemented and amended to the extent necessary to ensure that it is available for resales of Registrable Securities by such Holders, and to ensure that it conforms with the requirements of this Agreement, the Securities Act and the policies, rules and regulations of the SEC as announced from time to time, for a period of one (1) year (the "Effectiveness Period"). (b) Effective Registration. A registration will not be deemed to have been effected as a Shelf Registration unless it has been declared effective by the SEC and the Company has complied in all material respects with its obligations under this Agreement with respect thereto; provided that if, after it has become effective, the offering of Registrable Securities pursuant to such registration is or becomes the subject of any stop order, injunction or other order or requirement of the SEC or any other governmental or administrative agency, or if any court prevents or otherwise limits the sale of Registrable Securities pursuant to the registration (for any reason other than the acts or omissions of the Holders), such registration will be deemed not to have been effected. If: (i) the Shelf Registration is deemed not to have been effected in accordance with the provisions of the preceding sentence; or (ii) the Shelf Registration does not remain continuously effective for the period described in subsection (a) above, then such Shelf Registration Statement shall not count as a Shelf Registration and the Company shall continue to be obligated to effect a registration pursuant to this Section 2.1. (c) Public Offering. (1) In addition to the other provisions of this Section 2.1, on demand of the Holders of at least 600,000 shares of the Registrable Securities, on or after August 1, 1998, an offering of Registrable Securities pursuant to the Registration Statement may be effected on one occasion in the form of a Public Offering. (2) If any of the Registrable Securities are to be sold in a Public Offering, Donaldson, Lufkin & Jenrette shall be the investment banker in interest that will administer the offering. No Holder may participate in any Public Offering hereunder unless such Person (i) agrees to sell its Registrable Securities on the basis provided in any underwriting agreements approved by the Persons entitled hereunder to approve such agreements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such agreements. (d) Piggyback Registration. (1) If at any time prior to the Effectiveness Date the Company proposes to register under the Securities Act any of its equity securities, either for its own account or the account of a security holder or holders, other than (i) a registration relating solely to employee benefit plans, or (ii) a registration 4 5 relating solely to a Rule 145 transaction, or a registration on any registration form that does not permit secondary sales, the Company shall: (i) promptly give to each Holder at least 30 days prior written notice thereof, which notice shall include the anticipated filing date for the related registration statement and the approximate amount of securities anticipated to be included in such registration statement; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request by each Holder, received by the Company within 20 days after receipt from the Company of such written notice, subject to the provision below. (2) Notwithstanding the foregoing, if a piggyback registration is an underwritten registration, and the managing underwriters advise the Company in writing that in their opinion the total amount of securities requested to be included in such registration would materially adversely affect the success of such proposed public offering, then the Registrable Securities shall be subject to pro rata cutbacks with other selling securityholders. ARTICLE III REGISTRATION PROCEDURES Section 3.1. Registration Procedures. (a) General Provisions. In connection with any Registration Statement and any related Prospectus required by this Agreement to permit the sale or resale of Registrable Securities, the Company shall: (1) prepare and file with the SEC a registration statement with respect to such Registrable Securities within the time periods specified herein, make all required filings with the NASD and use its best efforts to cause such registration statement to become effective within the time periods specified herein; (2) promptly prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement as may be necessary to keep the Registration Statement effective for the applicable period set forth in Section 2.1, or such shorter period as will terminate when all Registrable Securities covered by such Registration Statement have been sold; cause the Prospectus to be supplemented by a required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act, and to comply fully with the applicable provision of Rules 424 and 430A under the Securities Act in a timely manner, and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; 5 6 (3) use its best efforts to keep such Registration Statement continuously effective for the time periods specified herein and provide all requisite financial statements for the period specified in Section 2.1; upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein: (A) to contain a material misstatement or omission; or (B) not to be effective and usable for resale of Registrable Securities during the period required by this Agreement, the Company shall file promptly an appropriate amendment to such Registration Statement, in the case of clause (A), correcting any such misstatement or omission, and, in the case of either clause (A) or (B), use its best efforts to cause such amendment to declared effective and such Registration Statement and related Prospectus to become usable for their intended purpose(s) as soon as practicable thereafter; (4) provide: (A) the Holders of Registrable Securities participating in the registration; (B) the sale or placement agent therefor, if any, (C) counsel for such agent; and (D) counsel for each of the Holders thereof, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the SEC, and each amendment or supplement thereto, and for a reasonable period prior to the filing of such registration statement make available for inspection by the parties referred to in (A) through (D) above such financial and other information and books and records of the Company, provide access to properties of the Company and cause the officers, directors, employees, counsel and independent certified public accountants of the Company to respond to such inquiries as shall be reasonably necessary to conduct a reasonable investigation within the meaning of Section 11 of the Securities Act; (5) advise the Selling Holders promptly and, if requested by such Selling Holders, to confirm such advice in writing: (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to any Registration Statement or any post-effective amendment thereto, when the same has become effective; (B) of any request by the SEC for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto; (C) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement under the Securities Act or of the suspension by any state securities commission of the qualification of the Registrable Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes; (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto, or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading. If at any time the SEC shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Registrable Securities under state securities or Blue Sky laws, the 6 7 Company shall use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time; (6) furnish to each Selling Holder named in any Registration Statement or Prospectus such number of copies of any Registration Statement or Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including all documents incorporated by reference after the initial filing of such Registration Statement and all exhibits filed therewith), reasonably requested by such Selling Holder; (7) if requested by any Selling Holders, promptly include in any Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as such Selling Holders may reasonably request to have included therein, including, without limitation, information relating to the "Plan of Distribution" of the Registrable Securities, information with respect to the principal amount of Registrable Securities being sold, the purchase price being paid therefor and any other terms of the offering of the Registrable Securities to be sold in such offering, and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company is notified of the matters to be included in such Prospectus supplement or post-effective amendment; provided, however, that the Company shall not be required to take any action pursuant to this Section 3.1(a)(7) that would, in the opinion of counsel to the Company, violate applicable law or be materially detrimental to the business prospects of the Company; (8) deliver to each Selling Holder, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons reasonably may request; the Company hereby consents to the use of the Prospectus and any amendment or supplement thereto by each of the Selling Holders in connection with the offering and the sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto; (9) prior to any Public Offering of Registrable Securities, cooperate with the Selling Holders and their respective counsel in connection with the registration and qualification of the Registrable Securities under the securities or Blue Sky laws of such jurisdictions as the Selling Holders may request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions or the Registrable Securities covered by the applicable Registration Statement; provided, however, that the Company shall not be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process in suits or to taxation, except as is required as a result of the Registration Statement, in any jurisdiction where it is not now so subject; (10) in connection with any sale of Registrable Securities that will result in such securities no longer being Registrable Securities, cooperate with the Selling Holders to facilitate the timely preparation and delivery of certificates 7 8 representing Registrable Securities to be sold and not bearing any restrictive legends; and to register such Registrable Securities in such denominations and such names as the Selling Holders may request at least two Business Days prior to such sale of Registrable Securities; (11) participate in good faith in any meetings with potential investors or securities analysts (including "road shows") as the Holders of a majority of the Registrable Securities may from time to time reasonably request; (12) enter into any customary agreements (including an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities; (13) if requested by the Selling Holders, provide a CUSIP number for all Registrable Securities not later than the effective date of the Registration Statement covering such Registrable Securities and provide the Company's transfer agent(s) and registrar(s) for the Registrable Securities with printed certificates for the Registrable Securities; (14) cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter (including any "qualified independent underwriter") that is required to be retained in accordance with the rules and regulations of the NASD, and use their best efforts to cause such Registration Statement to become effective and approved by such governmental agencies or authorities as may be necessary to enable the Selling Holders or to consummate the disposition of such Registrable Securities; (15) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make generally available to its security holders, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 under the Securities Act (which need not be audited) covering a period of at least twelve months, but not more than eighteen months, beginning with the first month of the Company's first quarter commencing after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; and (16) cause all Registrable Securities covered by the Registration Statement to be listed on each securities exchange on which securities of the same class issued by the Company are then listed if requested by the Selling Holders holding a majority of the Registered Securities or the managing underwriter(s), if any. (b) Provision by Holders of Certain Information. No Holder of Registrable Securities may include any of its Registrable Securities in any Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Company in writing, within 20 days after receipt of a request therefor, such information as the Company may reasonably request specified in Item 507 of Regulation S-K under 8 9 the Securities Act for use in connection with any Registration Statement or Prospectus or preliminary Prospectus included therein. Each Holder as to which any Registration Statement is being effected agrees to furnish promptly to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. Section 3.2. Registration Expenses. (a) All expenses incident to the Company's performance of or compliance with this Agreement will be paid by the Company, regardless of whether any Registration Statement required hereunder becomes effective, including, without limitation the following (referred to herein as "Registration Expenses"); (1) all registration and filing fees; (2) fees and expenses of compliance with securities or blue sky laws (including, without limitation, reasonable fees and disbursements of counsel for the Selling Holders in connection with blue sky qualifications of the Registrable Securities and determination of their eligibility for investment under the laws of such jurisdictions as the Holders of Registrable Securities being sold may designate); (3) printing (including, without limitation, expenses of printing or engraving certificates for the Registrable Securities in a form eligible for trading on the New York Stock Exchange or for deposit with the Depository Trust Company and of printing prospectuses), messenger, telephone and delivery expenses; (4) reasonable fees and disbursements of counsel for the Company and for the Selling Holders (subject to the provisions of Section 3.2(c) hereof); (5) reasonable fees and disbursements of all independent certified public accountants of the Company (including, without limitation, the expenses of any special audit and "cold comfort" letters required by or incident to such performance); (6) fees and expenses of other Persons retained by the Company; and (7) fees and expenses associated with any NASD filing required to be made in connection with the registration of the Registrable Securities. (b) The Company will, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the Registrable Securities to be registered on NASDAQ or on each national securities exchange on which similar 9 10 securities issued by the Company are then listed, rating agency fees and the fees and expenses of any Person, including special experts, retained by the Company. (c) In connection with each Registration required hereunder, the Company will reimburse the Holders of Registrable Securities being registered pursuant to a registration statement required hereunder for the reasonable fees and disbursements of not more than one counsel chosen by the holders of a majority in number of such Registrable Securities. (d) If the Holders demand a Public Offering pursuant to the terms of this Agreement, the Company shall be responsible for all costs, fees, and expenses in connection therewith, except for the fees and disbursements of the underwriters (including any spread, underwriting commissions and discounts and other expenses charged by the underwriters) and their legal counsel and accountants (which shall be borne by the Holders); provided, however, that in no case shall payments by the Company for fees and expenses under this Section 3.2 (d) exceed $75,000. Therefore, in such circumstances the Holder shall bear the expenses of the fees and disbursements of any legal counsel or accounting firm retained by the underwriters in connection with such Public Offering and the costs of any determination (but not filing) by the underwriters of the eligibility of the Registrable Securities for investment under the applicable state securities laws. By way of illustration which is not intended to diminish from the provisions of Sections 3.2(a)-(c), the Holders shall not be responsible for, and the Company shall be required to pay the fees or disbursements incurred by the Company (including by its legal counsel and accountants) in connection with the preparation and filing of a Registration Statement and related Prospectus for such offering, the maintenance of such Registration Statement in accordance with the terms of this Agreement, the listing of the Registrable Securities in accordance with the requirements of this Agreement and printing expenses incurred in compliance with the requirements of this Agreement. Section 3.3. Hold-Back Agreements. (a) Restrictions on Public Distribution by Holder of Registrable Securities. (1) Upon the written request of the managing underwriter or underwriters of a Public Offering, each Holder of Registrable Securities shall not effect any Public Distribution of such securities, or any securities convertible into or exchangeable or exercisable for such securities, during the 14-day period prior to, and during the 90-day period following, the offering date for each Public Offering made pursuant to such registration statement (as identified by such underwriter or underwriters or the Company in good faith). The foregoing provisions shall not apply to any Holder that is prevented by applicable statute or regulation from entering into any such agreement; provided, however, that any such Holder shall undertake not to effect any Public Distribution of the class of securities covered by such registration statement 10 11 (except as part of such Public Offering) during such period unless it has provided 60 days' prior written notice of such Public Distribution to the managing underwriter. (2) Each Holder agrees, upon a request of the Company made after the Effectiveness Date in writing, not to effect any public sale or distribution of Common Stock or otherwise conduct marketing activities with respect to the Stock for a period not to exceed 90 days (the "90-Day Period") if the Company proposes to make a securities offering or other corporate financing transaction not in the ordinary course of business, if the Board of Directors of the Company determines in good faith as evidenced by a resolution of the Board of Directors that the continuation of public sales or a distribution or other marketing activities could adversely affect the Company's ability to complete such other transactions; provided, however, that the restriction contained in this Section 3.3(a)(2) shall not apply in connection with a transaction by the Company the primary purpose of which is to raise capital for a specifically identifiable acquisition. The Holders will be subject to the requirements of this subparagraph only during the period commencing on the Effectiveness Date and ending on the last day of the Effectiveness Period, provided, however, that the Company shall not be permitted to designate more than one such 90-Day Period and the Effectiveness Period will be extended by such number of days equal to the number of days the Holders were subject to the requirements of this subparagraph. ARTICLE IV 11 12 INDEMNIFICATION AND CONTRIBUTION Section 4.1. Indemnification by the Company. The Company agrees to indemnify and hold harmless each Selling Holder, each person, if any, who controls such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) (hereinafter referred to as a "controlling person"), the respective officers, directors, partners, employees, representatives and agents of any Holder or any controlling person (each an "Indemnified Holder"), to the fullest extent lawful, from and against any and all losses, claims, damages, liabilities, judgments, actions and expenses (including without limitation and as incurred, reimbursement of all reasonable costs of investigating, preparing, pursuing or defending any claim or action, or any investigation or proceeding by any governmental agency or body, commenced or threatened, including the reasonable fees and expenses of counsel to any Indemnified Holder) directly or indirectly caused by, related to, based upon, arising out of or in connection with any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus (or any amendment or supplement thereto), or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses are caused by an untrue statement or omission or alleged untrue statement or omission that is made in reliance upon and in conformity with information relating to any of the Holders furnished in writing to the Company by any of the Holders expressly for use therein. Section 4.2. Indemnification by Holders of Registrable Securities. Each Selling Holder agrees, severally and not jointly, to indemnify and hold harmless the Company and its directors, officers and any person controlling (within the meaning of Section l5 of the Securities Act or Section 20 of the Exchange Act) the Company and its respective officers, directors, partners, employees, representatives and agents of each such person, to the same extent as the foregoing indemnity from the Company to each of the Indemnified Holders, but only with respect to losses, claims, damages, liabilities, judgments, actions and expenses (including without limitation and as incurred, reimbursement of all reasonable costs of investigating, preparing, pursuing or defending any claim or action, or any investigation or proceeding by any governmental agency or body, commenced or threatened, including the reasonable fees and expenses of counsel to the Company) directly or indirectly caused by, related to, based upon, arising out of or in connection with any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus (or any amendment or supplement thereto), or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in any information relating to such Holder furnished in writing by such Holder expressly for use in any Registration Statement or Prospectus. In case any action or proceeding shall be brought against the Company or its directors or officers or any such controlling person in respect of which 12 13 indemnity may be sought against a Holder of Registrable Securities, such Holder shall have the rights and duties given the Company, and the Company or its directors or officers or such controlling person shall have the rights and duties given to each Holder by the preceding paragraph. Each Selling Holder also agrees to indemnify and hold harmless each other Selling Holder or underwriters participating in the distribution on substantially the same basis as that of the indemnification of the Company provided in this Section 4.2. In no event shall the liability of any Selling Holder hereunder be greater in amount than the dollar amount of the proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such Persons specifically for inclusion in any Registration Statement or Prospectus. Section 4.3. Conduct of Indemnification Proceedings. Any Person entitled to indemnification hereunder (an "Indemnified Party") will: (i) promptly give notice of any claim, action or proceeding (including any governmental or regulatory investigation or proceeding) or the commencement of any such action or proceeding to the Person against whom such indemnity may be sought (an "Indemnifying Party"); provided that the failure to give such notice shall not relieve the Indemnifying Party of its obligations pursuant to this Agreement except to the extent that such Indemnifying Party has been prejudiced in any material respect by such failure; and (ii) permit the Indemnifying Party to assume the defense of such claim with counsel reasonably satisfactory to such Indemnified Party; provided that the Indemnified Party shall have the right to employ separate counsel and participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless: (a) the Indemnifying Party has agreed to pay for such fees and expenses; (b) the Indemnifying Party shall have failed to assume the defense of such claim and employ counsel reasonably satisfactory to such Indemnified Party; or (c) in the reasonable judgment of such Indemnified Party, based upon advice of its counsel, a conflict of interest may exist between such Indemnified Party and the Indemnifying Party with respect to such claims. If such defense is not assumed by the Indemnifying Party, the Indemnifying Party will not be subject to any liability for any settlement of any such claim effected without the Indemnifying Party's prior written consent, which consent shall not be unreasonably withheld. The Indemnifying Party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Indemnifying Party agrees to indemnify and hold harmless any Indemnified Party from and against any loss, claim damage, liability or expense by reason of any settlement of any such claim or action. No Indemnifying Party shall, without the prior written consent of each Indemnified Party, settle or compromise or consent to the entry of judgment in or otherwise seek to terminate any pending or threatened action, claim, litigation or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not any Indemnified Party is a party thereto), unless such settlement, compromise, consent or termination includes an 13 14 unconditional release of each Indemnified Party from all liability arising out of such action, claim, litigation or proceeding. An Indemnifying Party who is not entitled to, or elects not to, assume the defense of the claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such Indemnifying Party with respect to such claim, unless in the reasonable judgment of any Indemnified Party a conflict of interest may exist between such Indemnified Party and any other such Indemnified Parties with respect to such Claim, in which event the Indemnifying Party shall be obligated to pay the fees and expenses of such additional counsel or counsels. Section 4.4. Contribution. If the indemnification provided for in this Article IV is unavailable to an Indemnified Party (other than by reason of exceptions provided in those Sections) in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each applicable Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall have a joint and severable obligation to contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party, on the one hand, and of the Indemnified Party, on the other, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party, on the one hand, and of the Indemnified Party, on the other, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in the second paragraph of Section 4.1, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 4.4 were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or expenses referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 4.4, none of the Indemnified Holders shall be required to contribute, in the aggregate, any amount in excess of the amount by which the net proceeds received by such Holder with respect to the Registrable Securities exceeds the greater of (A) the amount paid by such Holder for its Registrable Securities and (B) the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. 14 15 No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligation to contribute pursuant to this Section 4.4 are several in proportion to the respective number of Registrable Securities held by each of the Holders hereunder and not joint. For purposes of this Article IV, each controlling person of a Holder shall have the same rights to contribution as such Holder, and each officer, director, and person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as the Company, subject in each case to the limitations set forth in the immediately preceding paragraph. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties under this Article IV, notify such party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party or parties from who contribution may be sought from any obligation it or they may have under this Article IV or otherwise except to the extent that it has been prejudiced in any material respect by such failure. No party shall be liable for contribution with respect to any action or claim settled without its written consent; provided, however, that such written consent was not unreasonably withheld. Section 4.5. Additional Indemnity. The indemnity, contribution and expense reimbursement obligations under this Article IV shall be in addition to any liability each Indemnifying Party may otherwise have; provided, however, that any payment made by the Company which results in an Indemnified Party receiving from any source(s) indemnification, contribution or reimbursement for an amount in excess of the actual loss, liability or expense incurred by such Indemnified Party, shall be refunded to the Company by the Indemnified Party receiving such excess payment. ARTICLE V MISCELLANEOUS Section 5.1. Specific Performance. Each Holder, in addition to being entitled to exercise all rights provided herein or granted by law, including recovery of liquidated or other damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. Section 5.2. No Inconsistent Agreements. The Company will not on or after the date of this Agreement enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not 15 16 in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's securities under any agreement in effect on the date hereof. Section 5.3. Charter Amendments Affecting the Company's Common Stock. The Company will not amend its Articles of Incorporation in any respect that would materially and adversely affect the rights of the Holders hereunder. Section 5.4. Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given unless the Company has obtained the written consent of each Holder. Section 5.5. Notices. Unless otherwise provided herein, any notice, request, instruction or other document to be given hereunder by any party to the others shall be made in writing, by hand-delivery, telegraph, telex, telecopier, registered first-class mail or air courier guaranteeing overnight deliver as follows: if to the Company, to: SmarTalk TeleServices, Inc. 5080 Tuttle Crossing Blvd. Dublin, Ohio 43017 Attention: Thaddeus Bereday Facsimile: (614) 764-4801 copy to: Dewey Ballantine LLP 333 South Hope Street, 30th Floor Los Angeles, California 90071 Attention: Robert M. Smith Facsimile: (213) 625-0562 if to any other Person who is then the registered Holder: To the address of such Holder as it appears in the stock transfer books of the Company or such other address as may be designated in writing hereafter, in the same manner, by such Person. copy to: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, Massachusetts 02111 16 17 Attention: Neil H. Aronson Facsimile: (617) 542-2241 or to such other place and with such other copies as any party hereto may designate as to itself by written notice to the others. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and on the next Business Day if timely delivered to an air courier guaranteeing overnight delivery. Section 5.6. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent holders of Registrable Securities, provided that the Company may not assign its rights or obligations under this Agreement to any other person or entity without the written consent of each of the Holders. Section 5.7. Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 5.8. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. Section 5.9. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to the choice of law provisions thereof. Section 5.10. Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. Section 5.11. Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings other than those set forth or referred to herein with respect to the registration rights granted by the Company with respect to the Registrable Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 17 18 Section 5.12. Pronouns. Whenever the context may require, any pronouns used herein shall be deemed also to include the corresponding neuter, masculine or feminine forms. Section 5.13. Attorney's Fees. In any action or proceeding brought to enforce any provision of this Agreement, the successful party shall be entitled to recover reasonable attorney's fees in addition to its costs and expenses and any other available remedy. Section 5.14. Securities Held by the Company or its Subsidiaries. Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or its Subsidiaries shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. Section 5.15. Further Assurances. Each party shall cooperate and take such action as may be reasonably requested by another party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. Section 5.16. Termination. Unless sooner terminated in accordance with its terms or as otherwise herein provided, this Agreement shall terminate upon the earlier to occur of: (i) the mutual agreement by the parties hereto; (ii) except with respect to Article IV, with respect to any Holder, such Holder ceasing to own any Registrable Securities; or (iii) the first anniversary of the Effectiveness Date. (signature page follows) 18 19 IN WITNESS HEREOF, the parties hereto have executed and delivered this Agreement as of the date first written above. SMARTALK TELESERVICES, INC. By: /s/ Erich Spangenberg --------------------------------- Name: ERICH SPANGENBERG Title: CEO Address: 5080 Tuttle Crossing Blvd. Dublin, Ohio 43017 FAX: (614) 764-4801 COMMON STOCKHOLDERS /s/ Victor Grillo, Jr. ------------------------------------------- [stockholder] /s/ Lloyd Lapidus ------------------------------------------- [stockholder] /s/ Raymond Wysocki ------------------------------------------- [stockholder] SERIES A PREFERRED STOCKHOLDERS /s/ Global Retail Partners, L.P. ------------------------------------------- [stockholder] /s/ DLJ Diversified Partners, L.P. ------------------------------------------- [stockholder] /s/ DLJ Diversified Partners-A, L.P. ------------------------------------------- [stockholder] /s/ GRP Partners, L.P. ------------------------------------------- [stockholder] /s/ Global Retail Partners Funding, Inc. ------------------------------------------- [stockholder] /s/ DLJ First ESC, L.L.C. ------------------------------------------- [stockholder] 19 20 /s/ Aspire Partners, L.P. ------------------------------------------- [stockholder] /s/ C.F. Partners, L.P. ------------------------------------------- [stockholder] /s/ Jane Sadowsky ------------------------------------------- [stockholder] /s/ Carl Pradelli ------------------------------------------- [stockholder] SERIES B PREFERRED STOCKHOLDERS /s/ Global Retail Partners, L.P. ------------------------------------------- [stockholder] /s/ DLJ Diversified Partners, L.P. ------------------------------------------- [stockholder] /s/ DLJ Diversified Partners-A, L.P. ------------------------------------------- [stockholder] /s/ GRP Partners, L.P. ------------------------------------------- /s/ Global Retail Partners Funding, Inc. ------------------------------------------- /s/ DLJ ESC-II, L.L.C. ------------------------------------------- /s/ Direct Capital Partners, L.P. ------------------------------------------- /s/ Richard Baum ------------------------------------------- /s/ Levey Partners, L.L.C. ------------------------------------------- /s/ Delta Omega Partners, L.L.C. ------------------------------------------- /s/ Aspire Partners, L.P. ------------------------------------------- /s/ Robert Gendelman ------------------------------------------- /s/ KRG Worldwide Direct, L.L.C. ------------------------------------------- /s/ C.F. Partners, L.P. ------------------------------------------- /s/ Jane Sadowsky ------------------------------------------- /s/ Carl Pradelli ------------------------------------------- /s/ Century Business Credit Corp. ------------------------------------------- 20 -----END PRIVACY-ENHANCED MESSAGE-----