Phone card phenomenon fuels SmarTalk's growth.

Robert Lorsch, founder and chief executive of SmarTalk TeleServices Inc. in Westwood, likes to think of his success as a real Horatio Alger tale.

"Think about it," Lorsch says. "I put $5,000 in the bank in October 1994 and now have a company with almost a quarter of a billion-dollar market cap. That is a growth story."

Indeed, SmarTalk's revenue growth last year outperformed all other publicly-traded companies in Los Angeles County, going from about $500,000 in revenues in 1995 to about $15 million in 1996. In the first quarter of 1997 the company's revenues were nearly half of those for all of 1996.

"Our growth is 25 to 50 percent per quarter," Lorsch said.

Part of the company's success lies in being in the fight place at the fight time, Lorsch concedes. SmarTalk is in the pre-paid telephone card business, selling cards through retail outlets and direct to businesses that distribute them as promotional goods to customers.

Nationally, the pre-paid telephone card industry generated about $1 billion in revenues last year, and is expected to grow to about $2.6 billion within three years, according to the Yankee Group, a Boston-based consultancy.

Though they may sound high-tech, pre-paid phone cards are usually just a piece of plastic with a toll-free telephone number printed on the back. A user, typically calling from a pay phone, punches in the toll-free number - which puts him in touch with the card company's computer system - a personal identification number, and the telephone number the caller wants to reach.

Behind the scenes, the provider will then calculate how much time the card has on it and forward the call through a national carrier.

SmarTalk initially contracted with go-between companies to do that switching for them, and still relies on go-betweens to handle about 20 percent of its business. But last June the company bought a switching system located in San Francisco from Pacific Bell Information Services.

The system offers far more capacity than SmarTalk currently needs, but it has already cut the company's processing costs and will allow it to expand for some time to come without significant equipment investment, Lorsch said.

Though once considered mainly a means for people without credit cards to place long distance calls from pay phones, the cards are increasingly used as a standard payment method.

"A lot of people using these things have other calling options" such as a credit card or a phone card from their long distance carrier, said Fred Voit, an analyst at Yankee Group. "But people are starting to make the conscious choice to use pre-paid calling."

SmarTalk's success lies in its success in infiltrating the retail market. Now among the four largest providers of pre-paid telephone cards nationally, along with AT&T, MCI and Sprint, SmarTalk sells its cards through about 13,000 outlets across the country. In some chains like Staples, Office Depot and Office Max, SmarTalk has exclusive distribution deals to keep competitors out.

"We own the home office channel," Lorsch said.

Lorsch's retail savvy comes from two decades in the advertising and sales promotion business. Los Angeles-based Lorsch Creative Network, which he founded in 1970, represented big-name clients like American Izusu Motors and Van de Kamp's Foods.

In 1994 one of Lorsch's clients asked him to put together a business plan for a pre-paid telephone card venture. When the client opted not to pursue the business, Lorsch said, he decided to take the plunge himself.

Contracting with a telecom services company in Nebraska, Lorsch was able to start buying chunks of phone time from major carders and reselling it through the cards.

As part of its subsequent expansion, SmarTalk in early May purchased Boston-based SmarTel Communications Inc., another pre-paid phone card finn, for an undisclosed sum, and in June acquired GTI Telecom Inc. for $70 million.