<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED September 30, 1997
COMMISSION FILE NUMBER 000-22581
STAR TELECOMMUNICATIONS, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0362681
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification Number)
223 East De La Guerra, Santa Barbara, California, 93101
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (805) 899-1962
None
(Former name, former address and
former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of September 30,1997, the number of the registrant's Common Shares of $.001
par value outstanding was 15,798,254.
<PAGE> 2
STAR TELECOMMUNICATIONS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION:
Item 1: Financial Statements
Consolidated Balance Sheets As Of
December 31, 1996 And September 30, 1997 3
Consolidated Statements Of Income
For The Three And Nine Month Periods
Ended September 30, 1996 And 1997 5
Consolidated Statements Of Stockholders' Equity
For The Years Ended December 31, 1994, 1995 And
1996 And For The Nine Month Period Ended September 30, 1997 6
Consolidated Statements Of Cash Flows For The
Nine Month Periods Ended September 30, 1996
And 1997 7
Notes To Consolidated Financial Statements 9
Item 2: Management's Discussion And Analysis Of Financial
Condition And Results Of Operations 11
PART II - OTHER INFORMATION 15
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
STAR TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
-------- -------------
1996 1997
-------- --------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,719 $ 7,386
Marketable securities 1,630 20,862
Accounts receivable, net of allowance of
$5,733 at December 31, 1996 and $7,668
at September 30, 1997 22,888 32,794
Receivable from related parties 115 955
Prepaid expenses and other assets 1,729 4,981
Prepaid taxes 677 --
Deferred income taxes -- 1,165
-------- --------
Total current assets 28,758 68,143
-------- --------
Property and Equipment:
Operating equipment 8,653 22,953
Leasehold improvements 4,214 4,537
Computer equipment 1,604 2,782
Furniture and fixtures 435 953
-------- --------
14,906 31,225
Less-accumulated depreciation and
amortization (1,201) (3,916)
-------- --------
Total property and equipment, net 13,705 27,309
-------- --------
Investments 153 179
Deposits 5,630 3,429
Other 428 --
-------- --------
6,211 3,608
-------- --------
Total assets $ 48,674 $ 99,060
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE> 4
STAR TELECOMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except for share data)
<TABLE>
<CAPTION>
December 31, September 30,
----------- ------------
1996 1997
--------- -----------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Revolving line of credit $ 7,814 $ --
Revolving lines of credit with stockholder 26 186
Current portion of long-term debt 267 888
Current portion of capital lease obligations 827 1,841
Accounts payable 6,260 7,808
Accrued network costs 19,494 32,536
Accrued expenses 1,621 2,456
Income taxes payable -- 248
-------- --------
Total current liabilities 36,309 45,963
-------- --------
Long-Term Liabilities:
Long-term debt, net of current portion 466 3,137
Capital lease obligations, net of current portion 4,808 7,933
Deferred compensation 116 50
Deposits 88 73
-------- --------
Total long-term liabilities 5,478 11,193
-------- --------
Stockholders' Equity:
Preferred Stock $.001 par value:
Authorized - 1,367,050 shares
Issued and outstanding -
1,367,047 shares at December 31,1996 and 1 --
none at September 30, 1997
Common Stock $.001 par value:
Authorized - 30,000,000 shares
Issued and outstanding -
10,914,396 shares at December 31,
1996 and 15,798,254 at September 30, 1997 11 16
Additional paid-in capital 13,637 44,614
Deferred compensation (118) (58)
Retained deficit (6,644) (2,668)
-------- --------
Stockholders' equity 6,887 41,904
-------- --------
Total liabilities and stockholders' equity $ 48,674 $ 99,060
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE> 5
STAR TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1996 1997 1996 1997
--------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 61,169 $ 88,515 $ 139,688 $ 242,230
Cost of services 56,527 78,150 127,567 215,372
--------- --------- --------- ---------
Gross profit 4,642 10,365 12,121 26,858
Operating expenses:
Selling, general and
administrative expenses 3,665 6,416 8,041 16,981
Depreciation and amortization 343 1,097 607 2,715
--------- --------- --------- ---------
4,008 7,513 8,648 19,696
--------- --------- --------- ---------
Income from operations 634 2,852 3,473 7,162
--------- --------- --------- ---------
Other income (expense):
Interest income 42 285 70 359
Interest expense (173) (419) (360) (1,198)
Other -- -- (100) 48
--------- --------- --------- ---------
(131) (134) (390) (791)
--------- --------- --------- ---------
Income before provision
for income taxes 503 2,718 3,083 6,371
Provision for income taxes 217 1,251 1,246 2,395
--------- --------- --------- ---------
Net income $ 286 $ 1,467 $ 1,837 $ 3,976
========= ========= ========= =========
Net income per share (Note 3) $ 0.02 $ 0.09 $ 0.16 $ 0.27
========= ========= ========= =========
Weighted average number of
common shares outstanding (Note 3) 12,497 17,023 11,303 14,489
========= ========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE> 6
STAR TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------------------- ------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 -- $ -- -- $ -- $ --
Issuance of common stock -- -- 8,100,810 8 2
Net loss -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1994 -- -- 8,100,810 8 2
Issuance of common stock -- -- 899,190 1 102
Conversion of debt to equity -- -- -- -- 990
Net loss -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 -- -- 9,000,000 9 1,094
Effect of termination of the
S-Corporation election -- -- -- -- (690)
Compensation expense relating
to stock options -- -- -- -- 168
Issuance of common stock -- -- 1,914,396 2 5,566
Issuance of preferred stock 1,367,047 1 -- -- 7,499
Net loss -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 1,367,047 1 10,914,396 11 13,637
Conversion of redeemable preferred
stock to common stock (1,367,047) (1) 911,358 1 --
Initial public offering of common
stock -- -- 3,950,000 4 35,546
Costs associated with initial public
offering of common stock -- -- -- -- (4,636)
Exercise of stock options -- -- 22,500 -- 67
Compensation expense relating to
stock options -- -- -- -- --
Net income -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, September 30, 1997
(unaudited) -- $ -- 15,798,254 $ 16 $ 44,614
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
RETAINED
DEFERRED EARNINGS
COMPENSATION (DEFICIT) TOTAL
------------ ---------- ----------
<S> <C> <C> <C>
Balance, December 31, 1993 $ -- $ -- $ --
Issuance of common stock -- -- 10
Net loss -- (122) (122)
---------- ---------- ----------
Balance, December 31, 1994 -- (122) (112)
Issuance of common stock -- -- 103
Conversion of debt to equity -- -- 990
Net loss -- (568) (568)
---------- ---------- ----------
Balance, December 31, 1995 -- (690) 413
Effect of termination of the
S-Corporation election -- 690 --
Compensation expense relating
to stock options (118) -- 50
Issuance of common stock -- -- 5,568
Issuance of preferred stock -- -- 7,500
Net loss -- (6,644) (6,644)
---------- ---------- ----------
Balance, December 31, 1996 (118) (6,644) 6,887
Conversion of redeemable preferred
stock to common stock -- -- --
Initial public offering of common
stock -- -- 35,550
Costs associated with initial public
offering of common stock -- -- (4,636)
Exercise of stock options -- -- 67
Compensation expense relating to
stock options 60 -- 60
Net income -- 3,976 3,976
---------- ---------- ----------
Balance, September 30, 1997
(unaudited) $ (58) $ (2,668) $ 41,904
========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE> 7
STAR TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1996 1997
-------- --------
(Unaudited)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 1,837 $ 3,976
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 607 2,715
Compensation expense relating to stock options -- 60
Provision for doubtful accounts 1,970 4,068
Deferred income taxes -- (1,165)
Deferred compensation 57 (66)
Decrease (increase) in assets:
Accounts receivable (28,641) (13,974)
Receivable from related parties (52) (840)
Prepaid expenses and other assets (431) (3,252)
Prepaid taxes (933) 677
Deposits (6,890) 2,201
Increase (decrease) in liabilities:
Accounts payable 7,735 1,548
Accrued network costs 15,290 13,042
Accrued expenses 722 835
Taxes payable 969 248
-------- --------
Net cash provided by (used in)
operating activities (7,760) 10,073
-------- --------
Cash Flows From Investing Activities:
Capital expenditures (4,944) (6,282)
Purchases of investments, net (153) (26)
Marketable securities, net (2,247) (19,232)
Decrease in other long-term assets -- 428
Increase (decrease) in other long-term liabilities 87 (15)
-------- --------
Net cash used in investing
activities $ (7,257) $(25,127)
-------- --------
</TABLE>
See accompanying notes to the consolidated financial statements.
7
<PAGE> 8
STAR TELECOMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1996 1997
-------- --------
(Unaudited)
<S> <C> <C>
Cash Flows From Financing Activities:
Borrowings under lines of credit $ 7,445 $ 33,946
Repayments under lines of credit (3,460) (41,760)
Borrowings under lines of credit
with stockholder 521 583
Repayments under lines of credit
with stockholder (1,379) (423)
Borrowings under long-term debt -- 193
Repayments under long-term debt -- (752)
Payments under capital lease obligations (188) (2,047)
Issuance of common stock 5,568 30,914
Issuance of preferred stock 7,500 --
Stock options exercised -- 67
-------- --------
Net cash provided by
financing activities 16,007 20,721
-------- --------
Increase in cash and cash equivalents 990 5,667
Cash and cash equivalents,
beginning of period 164 1,719
-------- --------
Cash and cash equivalents,
end of period $ 1,154 $ 7,386
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
8
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
The financial statements included herein are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and Securities Exchange Commission ("SEC") regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the financial statements reflect all adjustments (of a normal and
recurring nature) which are necessary to present fairly the financial position,
results of operations, stockholders' equity and cash flows for the interim
periods. These financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1996, and the
unaudited financial statements for the quarter ended March 31, 1997, each as set
forth in the Registration Statement on Form S-1 of STAR Telecommunications, Inc.
("STAR" or the "Company") Registration No. 333-21325, which was declared
effective by the SEC on June 12, 1997, and with the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997. The results for the three and
nine month periods ended September 30, 1997 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1997.
(2) BUSINESS AND PURPOSE
Star is an international long distance service provider offering low cost
switched voice services on a wholesale basis primarily to U. S.-based long
distance carriers. Star provides international long distance service to over 275
foreign countries through a flexible network of resale arrangements with long
distance providers, various foreign termination relationships, international
gateway switches and leased and owned transmission facilities.
(3) NET INCOME PER COMMON SHARE
Net income per common share for the three and nine month periods ended September
30, 1996 and 1997 is based on the weighted average number of common shares
outstanding giving effect of the conversion of the preferred stock (Note 4). Per
share information was computed pursuant to the rules of the SEC, which require
that common shares issued by the Company during the twelve months immediately
preceding the Company's initial public offering plus the number of shares
issuable pursuant to the grant of options issued during the same period, be
included in the calculation of the shares outstanding using the treasury stock
method from the beginning of all periods presented.
The following schedule summarizes the information used to compute weighted
average number of common shares outstanding at September 30, 1996 and 1997 (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1996 1997 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted number of common shares
outstanding 10,856 14,887 10,064 12,532
Effect of stock options 956 1,225 956 1,046
Conversion of preferred stock 685 911 283 911
------ ------ ------ ------
Weighted average number of common shares
used to compute net income per share 12,497 17,023 11,303 14,489
====== ====== ====== ======
</TABLE>
9
<PAGE> 10
In February 1997, the Financial Accounting Standards Board introduced SFAS No.
128 "Earnings per Share" and SFAS No. 129 "Disclosure of Information About
Capital Structure". SFAS No. 128 revises and simplifies the computation of
earnings per share and requires certain additional disclosures. SFAS No. 129
requires additional disclosure regarding the Company's capital structure. Both
standards will be adopted in the fourth quarter of the fiscal year 1997.
Management does not expect the adoption of SFAS No. 129 to have a material
effect on the Company's financial position or results of operations. The Company
has not yet evaluated the impact of adopting SFAS No. 128 on earnings per share.
(4) SIGNIFICANT EVENTS
In June 1997, the Company completed an initial public offering of 4,600,000
shares of common stock of which 3,950,000 were sold by the Company and 650,000
shares were sold by certain selling shareholders. The net proceeds to the
Company (after deducting underwriting discounts and offering expenses) from the
sale of the shares was approximately $30.9 million. Through September 30, 1997,
the Company used approximately $18.0 million of the net proceeds from the
initial public offering. Approximately $14.2 million was used to repay
indebtedness, $2.8 million was used to purchase switching and transmission
related equipment and $979,000 was used to finance the Company's operations of
the U.K. subsidiary. The Company intends to use the remaining proceeds to
finance the expansion of its international network facilities, to invest in
direct termination arrangements, strategic alliances or acquisitions and for
working capital and general corporate purposes. In connection with the initial
public offering, all outstanding preferred shares were converted to common
shares at a rate of three preferred shares to two common shares.
The Company entered into an agreement to acquire LD Services, Inc., a long
distance provider which focuses on commercial customers and has programs which
sell to customers with strong international usage. Under the terms of the
definitive agreement, LD Services stockholders will receive 500,000 shares of
STAR common stock, subject to adjustment. The acquisition will be accounted for
as a pooling of interests and the Company expects the transaction to be
completed in the fourth quarter of 1997.
(5) COMMITMENTS
The Company is obligated under various service agreements with long distance
carriers to pay minimum usage charges of approximately $9,320,000 for the three
month period between October 1, 1997 and December 31, 1997, and $30,951,000 and
$5,626,000 for the twelve months ending December 31, 1998 and 1999,
respectively. The Company anticipates exceeding the minimum usage volume with
these vendors.
During the three months ended September 30, 1997, the Company entered into
various foreign exchange contracts to match transactions denominated in foreign
currencies. At September 30, 1997, approximately $840,000 of foreign currency
contracts were outstanding, maturing through March 1998.
(6) STATEMENTS OF CASH FLOWS
During the nine month periods ended September 30, 1996 and 1997, cash paid for
interest was $339,000 and $1,082,000, respectively. For the same periods, cash
paid for income taxes amounted to $1,210,000 and $2,635,000, respectively.
10
<PAGE> 11
Non-cash investing and financing activities are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Equipment purchased through
notes and capital leases $ 1,699,000 $10,037,000
=========== ===========
</TABLE>
(7) SUBSEQUENT EVENTS
Effective as of September 30, 1997, the Company executed an agreement with Sanwa
Bank, California for a $25 million, 2 year revolving line of credit. The
facility which has certain financial and non-financial covenants is limited to
75% of eligible Accounts Receivable and will be secured by substantially all of
the assets of the Company. The credit facility provides for borrowings at an
interest rate based upon the Bank's cost of funds plus 1.75% and will be used to
support letters of credit and for working capital and general corporate
purposes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements are statements other than historical information or statements of
current condition. Some forward looking statements may be identified by use of
such terms as "believes", "anticipates", "intends", or "expects". These
forward-looking statements relate to the plans, objectives and expectations of
the Company for future operations. In light of the risks and uncertainties
inherent in all such projected operation matters, the inclusion of
forward-looking statements in this report should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved or that any of the Company's operating
expectations will be realized. The Company's revenues and results of operations
are difficult to forecast and could differ materially from those projected in
the forward-looking statements contained in this report as a result of numerous
factors including among others, the following: (i) changes in customer rates per
minute; (ii) foreign currency fluctuations; (iii) termination of certain service
agreements or inablility to enter into additional service agreements; (iv)
inaccuracies in the Company's forecast of traffic growth; (v) changes in or
developments under domestic or foreign laws, regulations, licensing requirements
or telecommunications standards; (vi) foreign political or economic instability;
(vii) changes in the availability of transmission facilities; (viii) loss of the
services of key officers; (ix) loss of a customer which provides significant
revenues to the Company; (x) highly competitive market conditions in the
industry, (xi) concentration of credit risk. The foregoing review of the
important factors should not be considered as exhaustive; the Company undertakes
no obligation to release publicly the results of any future revisions it may
make to forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
11
<PAGE> 12
The following table sets forth income statement data as a percentage of revenues
for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------ ------------------
1996 1997 1996 1997
------ ----- ----- -----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of services 92.4 88.3 91.3 88.9
----- ----- ----- -----
Gross profit 7.6 11.7 8.7 11.1
Operating expenses:
Selling, general and administrative 6.0 7.2 5.8 7.0
Depreciation and amortization 0.6 1.2 0.4 1.1
----- ----- ----- -----
6.6 8.5 6.2 8.1
----- ----- ----- -----
Income from operations 1.0 3.2 2.5 3.0
----- ----- ----- -----
Other income (expense):
Interest income 0.1 0.3 0.0 0.1
Interest expense (0.3) (0.5) (0.3) (0.5)
Other -- -- 0.1 0.0
----- ----- ----- -----
(0.2) (0.2) (0.3) (0.3)
Income before provision for income taxes 0.8 3.1 2.2 2.6
----- ----- ----- -----
Provision for income taxes 0.4 1.4 0.9 1.0
===== ===== ===== =====
Net income 0.5% 1.7% 1.3% 1.6%
===== ===== ===== =====
</TABLE>
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996.
Revenues: Revenues increased 44.7% to $88.5 million in the third quarter of 1997
from $61.2 million in the third quarter of 1996. Minutes of use increased 59.1%
to 219.6 million in the third quarter of 1997, as compared to 138.0 million
minutes of use in the comparable quarter of the year prior. The average rate per
minute of use declined to $0.40 for the current quarter as compared to $0.44 for
the quarter ended September 30, 1996. The increase in revenue resulted from
increased usage by existing customers offset by a lower average customer rate
per minute. The average customer rate per minute fell due to price decreases in
selected countries combined with increases in traffic terminating to lower
priced countries. As global deregulation continues to open up new countries to
competition for long distance telecommunication services, management expects
revenue growth to be driven by prevailing trends of accelerated growth in
international traffic volumes coupled with declining customer rates per minute,
although there can be no assurance in that regard.
Gross Margin: Gross profit increased to $10.4 million in the third quarter of
1997 from $4.6 million in the third quarter of 1996. Gross margin improved to
11.7% from 7.6% reflecting the negotiation of lower rates on routes with
significant traffic as well as lower costs on direct termination arrangements in
selected countries.
Selling, General and Administrative: Selling, general and administrative
expenses increased 75.1% to $6.4 million during the third quarter of 1997 from
$3.7 million in the comparable quarter one year earlier, and increased as a
percentage of revenue to 7.2% from 6.0% in the prior period. Selling, general
and administrative expenses increased between comparable periods as the Company
continues to increase its employee base and incurs payroll, employee benefits,
commissions and related expenses. Operating expenses associated with expanding
transmission and switch facilities also increased in support of the Company's
growing telecommunications network. Bad debt expense remained stable as a
percentage of revenues at 1.5%. The planned buildout of the Company's network
includes switch sites in Dallas, Miami,
12
<PAGE> 13
Chicago and Seattle. The establishment of licensed carrier operations in Germany
and Australia will continue to increase the Company's operating expenses related
to revenues.
Depreciation: Depreciation increased to $1.1 million in the third quarter of
1997 from $343,000 in the third quarter of 1996. Depreciation increased as a
result of the Company's continued expansion of its transmission network,
leasehold improvements associated with the Los Angeles, New York and London
switching facilities and switch site buildout.
Other Income (Expense): Other expense, net, increased slightly to $134,000 in
the third quarter of 1997 from $131,000 in the third quarter of 1996. Interest
expense grew to $419,000 in the third quarter of 1997 from $173,000 in the third
quarter of 1996 as a result of increased financing for switches, undersea cables
and other property and equipment. Interest income of $285,000 was earned in the
third quarter of 1997 on the invested balance of proceeds remaining from the
initial public offering.
Provision for Income Taxes: The Company's provision for income taxes increased
to $1.3 million in the third quarter of 1997 from $217,000 in the third quarter
of 1996 reflecting strong growth in pre-tax earnings.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996.
Revenues: Revenues increased 73.4% to $242.2 million in the nine month period
ending September 30, 1997 from $139.7 million for the comparable period of the
prior year. Minutes of use increased to 77.4% to 580.8 million in the first nine
months of 1997 from 327.4 million in the first nine months of 1996. The increase
reflects both increased sales to existing customers as well as an increase in
the number of wholesale carrier customers offset by a slight decrease in the
average customer rate per minute.
Gross Margin: Gross profit increased to $26.9 million in the nine month period
ending September 30, 1997 from $12.1 million for the same period of the prior
year. Gross margin improved to 11.1% from 8.7%, reflecting the negotiation of
lower rates on routes with significant traffic and the benefit of the Company's
lower cost direct termination arrangements.
Selling, General and Administrative: Selling, general and administrative
expenses increased 111.2% to $17.0 million during the first nine months of 1997
from $8.0 million in the comparable period one year earlier, and increased as a
percentage of revenue to 7.0% from 5.8% in the prior period. Selling, general
and administrative expenses increased between comparable periods as the Company
continues to expand its employee base and incurs payroll, employee benefits,
commissions and related expenses. Operating expenses associated with expanding
transmission and switch facilities also increased in support of the Company's
growing telecommunications network. Bad debt expense increased as a percentage
of revenues to 1.7% from 1.4%.
Depreciation: Depreciation increased to $2.7 million in the first nine months of
1997 from $607,000 in the first nine months of 1996. Depreciation increased as a
result of the Company's continued expansion of its transmission network and the
switching facilities located in Los Angeles, New York and London.
Other Income (Expense): Other expense, net, increased to $791,000 in the first
nine months of 1997 from $390,000 in the first nine months of 1996. This
increase results from $1.2 million in interest expense incurred in 1997 under
the Company's bank line of credit as well as long term financing for switches,
undersea cable and other equipment. This expense was offset by $359,000 in
interest income and a $48,000 gain on the sale of short-term investments.
Provision for Income Taxes: The Company's provision for income taxes increased
to $2.4 million in the first nine months of 1997 from $1.2 million in the first
nine months of 1996. The effective tax rate decreased to 37.6% in the first nine
months of 1997 from 40.4% in the year prior reflecting the write-off of customer
account receivables as well as an increase in net deferred tax assets of $1.2
million.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $10.1 million in net cash from operating activities during
the first nine months of 1997 primarily through net income plus depreciation and
the provision for doubtful accounts. Increases in accrued network costs and
decreases in deposits largely offset increases in accounts receivable, prepaid
expenses and other assets. The Company's investing activities used cash of $25.1
million during the first nine months of 1997, primarily resulting from capital
expenditures and investing the net proceeds of the initial public offering in
marketable securities. The Company's financing activities provided net cash of
approximately $20.7 million which included the net proceeds from the initial
public offering of common stock of approximately $30.9 million offset by net
repayments under lines of credit, debt and capital lease obligations.
As of September 30, 1997, the Company had cash and cash equivalents of
approximately $7.4 million and short term investments of $20.9 million. Working
capital at the end of the third quarter was $22.2 million. The Company had
approximately $9.8 million outstanding for capital leases relating primarily to
the Company's switching equipment as of the current quarter end.
Through September 30, 1997, the Company used approximately $18.0 million of the
net proceeds from the initial public offering. Approximately $14.2 million was
used to repay indebtedness, $2.8 million was used to purchase switching and
transmission related equipment and $979,000 was used to finance the Company's
operations of the U.K. subsidiary. The Company anticipates making capital
expenditures of approximately $80.0 million over the next 18 months to expand
the Company's global network. The Company believes that the remaining proceeds
from the initial public offering, cash generated from operations, as well as
funding under its bank line of credit will satisfy a significant portion of the
Company's liquidity requirements. Effective as of September 30, 1997, the
Company executed an agreement with Sanwa Bank, California for a $25 million, 2
year revolving line of credit. As appropriate, the Company will use capital
lease financing or raise additional debt or equity capital to finance new
projects and or acquisitions. The Company intends to consummate the acquisition
of LD Services, a reseller of long distance telecommunications services, in the
fourth quarter of 1997. This acquisition will require working capital support
from the Company to finance expansion of its operations.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Through September 30, 1997, the Company used approximately $18.0 million
of the net proceeds from the initial public offering. Approximately
$14.2 million was used to repay indebtedness, $2.8 million was used to
purchase switching and transmission related equipment and $979,000 was
used to finance the Company's operations of the U.K.
subsidiary.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAR TELECOMMUNICATIONS, INC.
Dated: November 12, 1997
By: /s/ Christopher E. Edgecomb
------------------------------------
Christopher E. Edgecomb
Chief Executive Officer and Director
(Duly Authorized Officer)
By: /s/ Kelly D. Enos
-----------------------------------
Kelly D. Enos
Chief Financial Officer
(Principal Financial & Accounting
Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF INCOME,
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, AND CONSOLIDATED STATEMENTS OF
CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SCHEDULES.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,386
<SECURITIES> 20,862
<RECEIVABLES> 40,462
<ALLOWANCES> (7,668)
<INVENTORY> 0
<CURRENT-ASSETS> 68,143
<PP&E> 31,225
<DEPRECIATION> (3,916)
<TOTAL-ASSETS> 99,060
<CURRENT-LIABILITIES> 45,963
<BONDS> 13,799
0
0
<COMMON> 16
<OTHER-SE> 41,888
<TOTAL-LIABILITY-AND-EQUITY> 99,060
<SALES> 242,230
<TOTAL-REVENUES> 242,230
<CGS> 215,372
<TOTAL-COSTS> 19,696
<OTHER-EXPENSES> 48
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<INTEREST-EXPENSE> 1,198
<INCOME-PRETAX> 6,371
<INCOME-TAX> 2,395
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<NET-INCOME> 3,976
<EPS-PRIMARY> .27
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