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Exhibit 4.1
TERMS OF
CONTINGENT VALUE RIGHTS
1. This Certificate of Contingent Value Rights ("CVRs") entitles the
holder hereof to ____ CVRs.
2. Not later than the forty-fifth calendar day following the end of each
Six Month Period, SmarTalk shall mail to each holder of a CVR with respect to
each CVR the CVR Payable (subject to withholding as provided herein). The
Payment shall be made in shares of SmarTalk Common Stock, without interest
thereon; provided, that, notwithstanding the price at which SmarTalk Common
Stock may then be trading, for purposes hereof SmarTalk Common Stock shall be
deemed to have a value of $14.00 per share; and provided, further, in lieu of
any resulting fractional shares, the number of shares shall be rounded upward to
the nearest whole number.
3. There shall be withheld from each January/June Payment an amount
equal to 25% of such January/June Payment. In the event that the January/June
Payment actually paid is less than the January/June Payment that (but for the
25% withholding) would have been payable based on Actual Results, such
difference shall be paid to the holder of a CVR at the time of the next
July/December Payment. In the event that the January/June Payment actually paid
is more than the January/June Payment would have been payable if based on Actual
Results, such difference shall be deducted from the next Payment, if any, to
which such holder is entitled.
4. The rights represented by a CVR are non-transferable, except as
required by law. Holders of CVRs shall have no voting or equity rights by virtue
thereof.
5. In addition to any other amounts which may be withheld pursuant to
the terms hereof, SmarTalk may make appropriate withholding for taxes or similar
items to the extent required by law.
6. SmarTalk will make available to the CVR Designee financial and other
information with respect to the computations hereunder. In the event that there
shall be a dispute with respect to such computations that cannot be resolved
despite good faith efforts, the dispute shall be submitted by either party to
J.A.M.S./Endispute (the "Arbitrator") for final and binding arbitration in New
York pursuant to the Arbitrator's arbitration rules, with the costs thereof
borne equally by the holders of the CVRs and SmarTalk unless it is determined by
the Arbitrator that either party did not have a substantial basis for submitting
the matter to arbitration, in which event such party shall pay all costs and
expenses associated with the arbitration.
7. In the event that, after the date of issuance hereof, there shall
have been a Change of Control, payments of all remaining CVR Payables for Six
Month Periods not
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then completed shall be deemed to have been accelerated and, in settlement
thereof and in lieu of any future Payments (other than the Payment, if any,
which may then be payable with respect to the most recently completed Six Month
Period), there shall be paid to the holder of a CVR an amount equal to the
Settlement Amount.
8. As used herein, the following terms shall have the definitions
ascribed to them:
a. "Actual Results" with respect to a January/June Period shall
mean the Average Annual Revenues and Gross Margin for such January/June
Period as determined by reference to the audited consolidated financial
statements of SmarTalk.
b. "Average Annual Revenues" means (a) the aggregate of the
Revenues for all completed Six Month Periods divided by (b) one-half of
the number of Six Month Periods which shall have occurred, in each case
through and including the Six Month Period for which a Payment is then
being computed.
c. "Change of Control" means (i) any transaction as a result of
which SmarTel shall no longer be a direct or indirect wholly-owned
subsidiary or the parent of SmarTalk or any successor thereto by means
of merger, reorganization, acquisition or otherwise, (ii) any
transaction(s) involving the sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all or
substantially all of the assets of SmarTel or (iii) any liquidation or
dissolution of SmarTel.
d. "CVR" means one of the contingent value rights issued pursuant
hereto.
e. "CVR Designee" shall mean Jonathan Slater or such other person
as from time to time may be designated as such by the holders of a
majority of the CVRs by written notice to SmarTalk.
f. "CVR Payable" means an amount determined by multiplying (a)
the Target Amount times (b) the Earned Amount times (c) the CVR
Percentage. Calculation of the CVR Payable with respect to a
January/June Period shall be based on an Interim Estimate.
g. "CVR Percentage" means an amount equal to one (1) divided by
one hundred (100) CVRs.
h. "Earned Amount" means the following percentage (i) 0% if
Average Annual Revenues are less than $6.0 million; (ii) 25% if Average
Annual Revenues are at least $6.0 million but less than $7.0 million;
(iii) 75% if Average Annual Revenues are at least $7.0 million but less
than $8.0 million; (iv) 90% if Average Annual Revenues are at least $8.0
million but less than $9.0 million; (v) 95% if
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Average Annual Revenues are at least $9.0 million but less than $10.0
million; and (vi) 100% if Average Annual Revenues are at least $10
million. The Earned Amount thereafter shall increase by 5% for each $1.0
million increment of Annual Revenues above $10 million. Notwithstanding
the foregoing, if the Gross Margin for the relevant Six Month Period
shall not equal or exceed the Threshold Amount, the Earned Amount shall
be 0%.
i. "Effective Time" shall be the date on which the merger of
SmarTel Telecommunications Inc. with SmarTalk Acquisition Corporation
shall have occurred.
j. "Exempted Revenues" shall mean those Revenues which are from
time to time designated as such in writing by SmarTalk and the CVR
Designee.
k. "Fulfillment Costs" mean (a) the aggregate of the plastic
production, shipping, packaging and similar costs for all completed Six
Month Periods divided by (b) one-half of the number of Six Month Periods
which shall have occurred, in each case through and including the Six
Month Period for which a Payment is then being computed.
l. "Gross Margin" means the average gross margin from the date of
issuance calculated with respect to Revenues after allocation of related
Transport Costs and Fulfillment Costs; provided, that such calculation
shall not take into account Exempted Revenues or the Transport Costs and
Fulfillment Costs specifically related thereto.
m. "Interim Estimate" means SmarTalk's good faith estimate of the
Average Annual Revenues and Gross Margin for a January/June Period.
n. "January/June Period" means a period of six months beginning
with January 1 and ending June 30, the first of which shall occur in
1998 and the last of which shall occur in 2002.
o. "January/June Payment" means the Payment with respect to the
most recently completed January/June Period.
p. "July/December Payment" means the payment with respect to the
most recently completed July/December Period.
q. "July/December Period" means a period of six months beginning
with July 1 and ending December 31, the first of which shall occur in
1997 and the last of which shall occur in 2001.
r. "Payment" means the payment of the CVR Payable with respect to
a Six Month Period.
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s. "Revenues" means the revenues of SmarTalk or SmarTel or any
affiliate (as defined in Section 12b-2 of the Securities Exchange Act of
1934, as amended) attributable to SmarTel following July 1, 1997 by
virtue of (i) business relationships of SmarTel that generated revenue
prior to July 1, 1997, (ii) business relationships for which employees
of SmarTel are the procuring cause, and (iii) such other business
relationships as SmarTalk and the CVR Designee may from time to time
agree in writing. Revenues shall be based upon the revenue recognition
method then utilized by SmarTel (as adjusted to reflect any change in
such revenue recognition method), which revenue recognition method shall
be reasonably acceptable to SmarTalk.
t. "Settlement Amount" means the product obtained by multiplying
(a) the number of Six Month Periods not completed as of the date of the
Change of Control times (b) the Target Amount times (c) the CVR
Percentage.
u. "Six Month Period" means a January/June Period or a
July/December Period.
v. "SmarTalk" means SmarTalk TeleServices, Inc., a California
corporation, or any entity with which it may be merged or consolidated.
w. "SmarTalk Common Stock" shall mean the common stock, no par
value, of SmarTalk. In the event of a stock split, reverse stock split,
stock dividend, subdivision, reclassification, combination, exchange,
recapitalization or other similar transaction by SmarTalk, appropriate
adjustments will be made.
x. "Target Amount" shall mean $600,000.
y. "Threshold Amount" means a Gross Margin that equals, (i) with
respect to the initial July/December Period, 30%; (ii) with respect to
the five Six Month Periods immediately thereafter, 40%; (iii) with
respect to the two Six Month Periods immediately thereafter, 39%; and
(iv) with respect to the two Six Month Periods immediately thereafter,
38%.
z. "Transport Costs" means, with respect to a Six Month Period,
for the first Six Month Period, the lower of (i) $0.15 per minute and
(ii) the actual transport costs of SmarTel; and thereafter the lower of
(i) $0.115 per minute (plus any applicable taxes) and (ii) the actual
transport costs of SmarTalk.
SMARTALK TELESERVICES, INC.
By:__________________________
Name:
Title:
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