<PAGE> 1
As filed with the Securities and Exchange Commission on July 25, 1997
Registration No. 333-_____
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
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 No.)
223 EAST DE LA GUERRA STREET
SANTA BARBARA, CALIFORNIA 93101
(Address of principal executive offices) (Zip Code)
-------------------
STAR TELECOMMUNICATIONS, INC.
1996 OUTSIDE DIRECTOR NONSTATUTORY STOCK OPTION PLAN
(Full title of the Plan)
-------------------
CHRISTOPHER E. EDGECOMB
CHIEF EXECUTIVE OFFICER
STAR TELECOMMUNICATIONS, INC.
223 EAST DE LA GUERRA STREET
SANTA BARBARA, CALIFORNIA 93101
(Name and address of agent for service)
---------------------------------
(Telephone number, including area code, of agent for service)
(805) 899-1962
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE`
================================================================================================================
Title of Proposed Maximum Proposed Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered(1) per Share(2) Price(2) Fee
---------- ------------- ------------ -------- ---
<S> <C> <C> <C> <C>
1996 Outside Director Nonstatutory
Stock Option Plan
Common Stock (par value $0.001) 20,000 $15.8125 $316,250 $100
================================================================================================================
</TABLE>
(1) This Registration Statement shall also cover any additional shares of
Common Stock which become issuable under the 1996 Outside Director
Nonstatutory Stock Option Plan by reason of any stock dividend, stock
split, recapitalization or other similar transaction effected without
the receipt of consideration which results in an increase in the number
of the outstanding shares of Common Stock of Star Telecommunications,
Inc.
(2) Calculated solely for purposes of this offering under Rule 457(h) of
the Securities Act of 1933, as amended, on the basis of the average of
the high and low prices per share of Common Stock of Star
Telecommunications, Inc. on July 21, 1997.
<PAGE> 2
EXPLANATORY NOTE
Pursuant to General Instruction C of Form S-8, this Registration
Statement contains a prospectus meeting the requirements of Part I of Form S-3
relating to the reoffer by certain individuals of shares of Common Stock, par
value $.001 per share, of Star Telecommunications, Inc. acquired pursuant to the
exercise of options granted under the 1996 Outside Director Nonstatutory Stock
Option Plan.
<PAGE> 3
STAR TELECOMMUNICATIONS, INC.
FORM S-8 CROSS REFERENCE SHEET SHOWING LOCATION OF INFORMATION REQUIRED BY
PART I OF FORM S-3
<TABLE>
<CAPTION>
Form S-3 Item Number Location/Heading in Prospectus
<S> <C> <C>
1. Forepart of Registration Statement and Outside Cover page
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Page of Available Information; Incorporation of Certain
Prospectus Information by Reference
3. Summary Information, Risk Factors and Ratio of Risk Factors
Earnings to Fixed Charges
4. Use of Proceeds Not applicable
5. Determination of Offering Price Not applicable
6. Dilution Not applicable
7. Selling Security Holders Selling Security Holders
8. Plan of Distribution Plan of Distribution
9. Description of Securities to be Registered Not Applicable
10. Interests of Named Experts and Counsel Not Applicable
11. Material Changes Not Applicable
12. Incorporation of Certain Information by Reference Incorporation of Certain Information by Reference
13. Disclosure of Commission Position on Indemnification
Indemnification for Securities Act Liabilities
</TABLE>
<PAGE> 4
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
Item 3. Incorporation of Documents by Reference
Star Telecommunications, Inc. (the "Registrant") hereby incorporates by
reference into this Registration Statement the following documents previously
filed with the Securities and Exchange Commission (the "SEC"):
(a) The Registrant's prospectus filed with the SEC pursuant to Rule
424(b) under the Securities Act of 1933, as amended (the "1933
Act"), in connection with Registration Statement No. 333-21325 on
Form S-1 filed with the SEC on June 12, 1997, together with any
amendment thereto filed, in which there are set forth audited
financial statements for the Registrant's fiscal year ended
December 31, 1996, and
(b) The description of the Registrant's outstanding Common Stock
contained in the Registrant's Registration Statement No. 000-22581
on Form 8-A filed with the SEC on May 16, 1997, pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), including any amendment or report filed for the
purpose of updating such description.
All reports and definitive proxy or information statements filed
pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act after the date of
this Registration Statement and prior to the filing of a post-effective
amendment which indicates that all securities offered hereby have been sold or
which deregisters all securities then remaining unsold shall be deemed to be
incorporated by reference into this Registration Statement and to be a part
hereof from the date of filing of such documents.
Item 4. Description of Securities
Not Applicable.
Item 5. Interests of Named Experts and Counsel
Not Applicable.
Item 6. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court
to award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the 1933 Act. The
Registrant's Bylaws provide for mandatory indemnification of its directors and
permissible indemnification of officers, employees and other agents to the
maximum extent permitted by the Delaware General Corporation Law. The
Registrant's Certificate of Incorporation provides that, pursuant to Delaware
law, its directors shall not be liable for monetary damages for breach of their
fiduciary duty as directors to the Registrant and its stockholders. This
provision in the Certificate of Incorporation does not eliminate the fiduciary
duty of the directors, and, in appropriate circumstances, equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The Registrant has
entered into Indemnification Agreements with its officers and directors. The
Indemnification Agreements provide the Registrant's officers and directors with
further indemnification to the maximum extent permitted by the Delaware General
Corporation Law.
II-2
<PAGE> 5
Item 7. Exemption from Registration Claimed
Not Applicable.
Item 8. Exhibits
<TABLE>
<CAPTION>
Exhibit Number Exhibit
- -------------- -------
<S> <C>
4 Instrument Defining Rights of Stockholders. Reference is made to Registrant's
Registration Statement No. 000-22581 on Form 8-A, which is incorporated herein
by reference pursuant to Item 3(b) of this Registration Statement.
5 Opinion and consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP.
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.2 Consent of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP is contained in
Exhibit 5.
24 Power of Attorney. Reference is made to page II-4 of this Registration Statement.
</TABLE>
Item 9. Undertakings
A. 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 1933 Act, (ii) to reflect in the prospectus any facts or events
arising after the effective date of this 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 this
Registration Statement and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in this
Registration Statement or any material change to such information in this
Registration Statement; provided, however, that clauses (1)(i) and (1)(ii) shall
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 SEC by the Registrant pursuant to Section 13 or Section 15(d)
of the 1934 Act that are incorporated by reference in this Registration
Statement; (2) that for the purpose of determining any liability under the 1933
Act 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 and (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 Registrant's 1996 Outside Director Nonstatutory Stock Option
Plan.
B. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the 1933 Act, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the 1934 Act that is
incorporated by reference in this 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.
C. Insofar as indemnification for liabilities arising under the 1933
Act may be permitted to directors, officers or controlling persons of the
Registrant pursuant to the indemnification provisions summarized in Item 6 or
otherwise, the Registrant has been advised that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the 1933 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 1933 Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-8 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Santa Barbara, State of California on this 22nd
day of July, 1997.
STAR TELECOMMUNICATIONS, INC.
By: /s/ Christopher E. Edgecomb
----------------------------------
Christopher E. Edgecomb
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of Star Telecommunications,
Inc., a Delaware corporation, do hereby constitute and appoint Christopher E.
Edgecomb and Kelly D. Enos, and either of them, the lawful attorneys-in-fact and
agents with full power and authority to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, and either one
of them, determine may be necessary or advisable or required to enable said
corporation to comply with the Securities Act of 1933, as amended, and any rules
or regulations or requirements of the Securities and Exchange Commission in
connection with this Registration Statement. Without limiting the generality of
the foregoing power and authority, the powers granted include the power and
authority to sign the names of the undersigned officers and directors in the
capacities indicated below to this Registration Statement, to any and all
amendments, both pre-effective and post-effective, and supplements to this
Registration Statement, and to any and all instruments or documents filed as
part of or in conjunction with this Registration Statement or amendments or
supplements thereof, and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents, or either one of them, shall do or cause to
be done by virtue hereof. This Power of Attorney may be signed in several
counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Christopher E. Edgecomb Chairman of the Board, Chief Executive July 22, 1997
- ---------------------------------------- Officer and Director
Christopher E. Edgecomb (Principal Executive Officer)
/s/ Kelly D. Enos Chief Financial Officer, Treasurer July 22, 1997
- ---------------------------------------- and Assistant Secretary
Kelly D. Enos (Principal Financial and Accounting Officer)
</TABLE>
II-4
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<TABLE>
<S> <C> <C>
/s/ Mary A. Casey President, Secretary and Director July 10, 1997
- -----------------------------------------
Mary A. Casey
/s/ Gordon Hutchins, Jr. Director July 22, 1997
- -----------------------------------------
Gordon Hutchins, Jr.
/s/ John R. Snedegar Director July 22, 1997
- -----------------------------------------
John R. Snedegar
/s/ Roland A. Van der Meer Director July 22, 1997
- -----------------------------------------
Roland A. Van der Meer
</TABLE>
II-5
<PAGE> 8
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Number Exhibit Numbered Page
- -------------- ------- -------------
<S> <C> <C>
4 Instrument Defining Rights of Stockholders. Reference is made to
Registrant's Registration Statement No. 000-22581 on Form 8-A,
which is incorporated herein by reference pursuant to Item 3(b)
of this Registration Statement.
5 Opinion and consent of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP.
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.2 Consent of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP is contained in Exhibit 5.
24 Power of Attorney. Reference is made to page II-4 of this
Registration Statement.
</TABLE>
<PAGE> 9
Exhibit 5
---------
July 22, 1997
Star Telecommunications, Inc.
223 East De La Guerra Street
Santa Barbara, California 93101
Re: Star Telecommunications, Inc. Registration Statement
for Offering of 20,000 Shares of Common Stock
Ladies and Gentlemen:
We refer to your registration on Form S-8 (the "Registration
Statement") under the Securities Act of 1933, as amended, of 20,000 shares of
Common Stock issued under the Company's 1996 Outside Director Nonstatutory Stock
Option Plan. We advise you that, in our opinion, when such shares have been
issued and sold pursuant to the applicable provisions of the 1996 Outside
Director Nonstatutory Stock Option Plan and in accordance with the Registration
Statement, such shares will be validly issued, fully paid and nonassessable
shares of the Company's Common Stock.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Gunderson Dettmer Stough
------------------------------------
Villeneuve Franklin & Hachigian, LLP
Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
<PAGE> 10
Exhibit 23.1
------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
use of our report and to all references to our firm included in or made a part
of this registration statement on Form S-8.
Los Angeles, California
July 23, 1997 /s/ Arthur Andersen LLP
----------------------------------
ARTHUR ANDERSEN LLP
<PAGE> 11
REOFFER PROSPECTUS
20,000 Shares
Star Telecommunications, Inc.
Common Stock
This Reoffer Prospectus relates to the offer and sale of up to 20,000
shares of the common stock, par value $.001 (the "Common Stock"), of Star
Telecommunications, Inc. (the "Company"), which may be offered from time to time
by the registered stockholders named herein (the "Selling Security Holders"). It
is anticipated that the Selling Security Holders will offer shares for sale at
prevailing prices on the Nasdaq National Market System on the date of sale. The
Company will receive no part of the proceeds of sale made hereunder. All
expenses of registration incurred in connection with this offering are being
borne by the Company, but all selling and other expenses incurred by the Selling
Security Holders will be borne by such Selling Security Holders.
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol STRX. On July 21, 1997, the average of the high and low selling
prices of the Common Stock was $15.8125 per share.
The Selling Security Holders and any broker executing selling orders on
behalf of the Selling Security Holders may be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended (the "1933 Act"), in which
event commissions received by such broker may be deemed to be underwriting
commissions under the 1933 Act.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE CONSIDERED
ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 3.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
No person is authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offering described herein, and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or any Selling Security Holder. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, nor shall there be any sale of these
securities by any person in any jurisdiction in which it is unlawful for such
person to make such offer, solicitation or sale. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create an
implication that the information contained herein is correct as of any time
subsequent to the date hereof.
The date of this Reoffer Prospectus is July 25, 1997.
<PAGE> 12
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of
the Securities Exchange Act of 1934, as amended (the "1934 Act") and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the "SEC"). Such reports, proxy and information statements
and other information can be inspected and copied at the Public Reference Room
of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's
regional offices at 219 South Dearborn Street, Chicago, IL 60604; 26 Federal
Plaza, New York, NY 10007; and 5757 Wilshire Boulevard, Los Angeles, CA 90036,
at prescribed rates. The SEC maintains a Web site that contains reports, proxy
and information statements and other information regarding companies that file
electronically with the SEC at http://www.sec.gov. The Common Stock of the
Company is quoted on the Nasdaq National Market System. Reports, proxy
statements, information statements and other information concerning the Company
can be inspected at the offices of the National Association of Securities
Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
A copy of any document incorporated by reference in the Registration
Statement (not including exhibits to the information that is incorporated by
reference unless such exhibits are specifically incorporated by reference into
the information that the Registration Statement incorporates) of which this
Reoffer Prospectus forms a part but which is not delivered with this Reoffer
Prospectus will be provided by the Company without charge to any person
(including any beneficial owner) to whom this Reoffer Prospectus has been
delivered upon the oral or written request of such person. Such requests should
be directed to Kelly D. Enos, Chief Financial Officer, Star Telecommunications,
Inc., 223 East De La Guerra Street, Santa Barbara, California 93101. The
Company's telephone number at that location is (805) 899-1962.
TABLE OF CONTENTS
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Page
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THE COMPANY.................................................................3
RISK FACTORS................................................................3
SELLING SECURITY HOLDERS...................................................13
PLAN OF DISTRIBUTION.......................................................13
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE..........................14
INDEMNIFICATION............................................................14
</TABLE>
2
<PAGE> 13
THE COMPANY
STAR Telecommunications, Inc. (the "Company") is an international long
distance provider offering highly reliable, low cost switched voice services on
a wholesale basis, primarily to U.S.-based long distance carriers. The Company
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. The Company has grown its revenues
rapidly by capitalizing on the deregulation of international telecommunications
markets, by combining sophisticated information systems with flexible routing
techniques and by leveraging management's industry expertise. The Company
commenced operations as an international long distance provider in August 1995
and increased its revenues from $16.1 million in 1995 to $208.1 million in 1996.
The Company serves the large and growing international long distance
telecommunications market. The Company markets to small and medium size long
distance companies that do not have the critical mass to invest in their own
international transmission facilities or to obtain volume discounts from the
larger facilities-based carriers. The Company also markets to larger long
distance companies seeking lower rates and overflow capacities. The Company
provided switched long distance services to 88 customers in the first quarter of
1997. The Company operates international gateway switching facilities in New
York and Los Angeles and holds ownership positions in eight digital undersea
fiber optic cables. The Company has installed an international gateway switch in
London, England, and plans to invest in additional undersea fiber optic cables.
The Company's switching facilities are linked to a proprietary reporting system,
which the Company believes provides it with a competitive advantage by
permitting management on a real-time basis to determine the most cost-effective
termination alternatives, monitor customer usage and manage gross margins by
route.
In 1995 and 1996, the Company rapidly built its wholesale customer
base, traffic volume and revenue by offering favorable rates compared to other
long distance providers. The Company now seeks to lower its cost of services and
improve its gross margin by negotiating lower rates with domestic and foreign
providers of transmission capacity and, when justified by traffic volume, invest
in network facilities and enter into fixed cost arrangements, including long
term leases. In addition, the Company intends to market its international long
distance services directly to commercial customers overseas, with an initial
focus on the U.K. and selected European cities.
The Company's executive offices are located at 223 East De La Guerra
Street, Santa Barbara, California 93101. The Company's telephone number is (805)
899-1962.
RISK FACTORS
Risk Associated with Limited Operating History in the International
Telecommunications Market.
The Company was incorporated in September 1993, but did not commence
its current business as an international long distance provider until the third
quarter of 1995. As a result, the Company's business must be considered in light
of the risks faced by early stage companies in the rapidly evolving
international telecommunications market. Early stage companies must respond to
external factors, such as competition and changing regulations, without the
resources, infrastructure and broader business base of more established
companies. Early stage companies also must respond to these risks while
simultaneously developing systems, adding personnel and entering new markets. As
a result, these risks can have a much greater effect on early stage companies.
If the Company does not successfully address such risks, the Company's business,
operating results and financial condition would be materially adversely
affected.
Operating Results Subject to Significant Fluctuations.
The Company's quarterly operating results are difficult to forecast
with any degree of accuracy because a number of factors subjects these results
to significant fluctuations. As a result, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
3
<PAGE> 14
Factors Influencing Operating Results, Including Revenues, Costs and
Margins. The Company's revenues, costs and expenses have fluctuated
significantly in the past and are likely to continue to fluctuate significantly
in the future as a result of numerous factors. The Company's revenues in any
given period can vary due to factors such as call volume fluctuations,
particularly in regions with relatively high per-minute rates; the addition or
loss of major customers, whether through competition, merger, consolidation or
otherwise; the loss of economically beneficial routing options for the
termination of the Company's traffic; financial difficulties of major customers;
pricing pressure resulting from increased competition; and technical
difficulties with or failures of portions of the Company's network that impact
the Company's ability to provide service to or bill its customers. The Company's
cost of services and operating expenses in any given period can vary due to
factors such as fluctuations in rates charged by carriers to terminate the
Company's traffic; increases in bad debt expense and reserves; the timing of
capital expenditures, and other costs associated with acquiring or obtaining
other rights to switching and other transmission facilities; changes in the
Company's sales incentive plans; and costs associated with changes in staffing
levels of sales, marketing, technical support and administrative personnel. In
addition, the Company's operating results can vary due to factors such as
changes in routing due to variations in the quality of vendor transmission
capability; loss of favorable routing options; the amount of, and the accounting
policy for, return traffic under operating agreements; actions by domestic or
foreign regulator entities; the level, timing and pace of the Company's
expansion in international and commercial markets; and general domestic and
international economic and political conditions. Since the Company does not
generally have long term arrangements for the purchase or resale of long
distance services, and since rates fluctuate significantly over short periods of
time, the Company's gross margins are subject to significant fluctuations over
short periods of time. The Company's gross margins also may be negatively
impacted in the longer term by competitive pricing pressures.
Recent Examples of Factors Affecting Operating Results. The Company has
recently encountered significant difficulties in the collection of accounts
receivable from certain of its major customers. In the fourth quarter of 1996,
Hi-Rim Communications, Inc. ("Hi-Rim"), one of the Company's major customers,
informed the Company that it was experiencing financial difficulties and would
be unable to pay in full, on a timely basis, approximately $6.0 million in
outstanding accounts receivable. The Company accepted a secured note in the
amount of $3.4 million in lieu of a portion of past due payments and was able to
offset a portion of the amounts due by sending traffic to Hi-Rim. The Company
believes that it is unlikely to receive any additional payment from Hi-Rim under
the note or otherwise. As a result, the full amount of approximately $5.3
million owed to the Company by Hi-Rim as of December 31, 1996, which was not
subsequently collected or for which no offsetting value was received, was
written-off in the fourth quarter of 1996. In the first quarter of 1997, Cherry
Communications, Inc. ("CCI"), the Company's largest customer in 1996, also
informed the Company that it was unable to pay in full, on a timely basis, its
accounts receivable balance. To account for the potential inability to collect
on the accounts receivable and outstanding deposits which the Company had made
to CCI, the Company increased its reserve against accounts receivable and
reserve against deposits by $3.5 million and $2.0 million, respectively. In
addition, the Company wrote off $820,000 of intangible assets relating to this
customer. These reserves and write-off reflect the full amount of future
benefits to have been received by the Company from assets related to CCI
recorded on the Company's Balance Sheet at December 31, 1996. The Company
continued to provide service to CCI through March 1997 and has received payment
for services provided in the first quarter of 1997 through a combination of cash
receipts from CCI and offsetting payables from the Company to CCI resulting from
the Company's use of CCI as a vendor. While the Company no longer provides
services to CCI, the Company is continuing to utilize CCI as a vendor and has
entered into various other contractual arrangements with CCI in order to
continue to offset outstanding accounts receivables. However, there can be no
assurance that the Company will be able to collect or continue to offset any
significant portion of the accounts receivable either through utilizing CCI as a
vendor or otherwise. The Company's ability to collect or offset the CCI accounts
receivable would be adversely affected to the extent that CCI's financial
condition deteriorates or CCI becomes subject to voluntary or involuntary
bankruptcy proceedings. In the event bankruptcy proceedings are commenced, CCI's
creditors or a bankruptcy trustee would likely assert that any payments
(including offsets) received by the Company in the 90 day period prior to the
commencement of the bankruptcy proceeding are "preference payments" and should
be returned to CCI for distribution among creditors. As a result, if bankruptcy
proceedings were commenced with respect to CCI prior to September 1997, the
Company could be required to repay amounts it received (including through
accounts payable offsets) during the 90 day preference period. In such event,
the Company's reserves may be inadequate and the Company may incur a higher than
anticipated bad debt expense, which could have a material adverse effect on the
Company's results of operations. The Company also took a $1.6 million write-off
in the first quarter of 1997 due to the failure of one of its customers,
NetSource, Inc., to pay its outstanding accounts receivable. The Company has
4
<PAGE> 15
commenced litigation against NetSource, Inc. for all outstanding amounts. If the
Company experiences similar difficulties in the collection of accounts
receivable from its other major customers, the Company's financial condition and
results of operations could be materially adversely affected.
In addition, the Company's revenue growth slowed in the fourth quarter
of 1996 and the first quarter of 1997 relative to the third quarter of 1996
primarily due to the Company significantly reducing the traffic it received from
Hi-Rim and CCI due to financial difficulties of these companies, an additional
relatively smaller decrease in traffic from CCI due to pricing changes and
transmission quality problems on several high volume routes, primarily as a
result of call set-up delay and an ability to transmit facsimiles, that caused
customers to choose alternate routes. If similar events occur in the future,
such events could have a material adverse effect on the Company's business,
operating results or financial condition.
No Assurance that Recent Growth Will Continue; Potential Impact on Net
Income and Market Expectations. Although the Company's revenues have increased
in each of the last seven quarters, such growth should not be considered
indicative of future revenue growth or operating results. If revenue levels fall
below expectations, net income is likely to be disproportionately adversely
affected because a proportionately smaller amount of the Company's operating
expenses varies with its revenues. This effect is likely to increase as a
greater percentage of the Company's cost of services are associated with owned
and leased facilities. There can be no assurance that the Company will be able
to achieve or maintain profitability on a quarterly or annual basis in the
future.
Due to all of the foregoing factors, it is likely that in some future
quarter the Company's operating results will be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially adversely affected.
Risks of International Telecommunications Business.
The Company has to date generated substantially all of its revenues by
providing international telecommunications services to its customers on a
wholesale basis. The international nature of the Company's operations involves
certain risks, such as changes in U.S. and foreign government regulations and
telecommunications standards, dependence on foreign partners, tariffs, taxes and
other trade barriers, the potential for nationalization and economic downturns
and political instability in foreign countries. In addition, the Company's
business could be adversely affected by a reversal in the current trend toward
deregulation of telecommunications carriers. The Company will be increasingly
subject to these risks to the extent that the Company proceeds with the planned
expansion of its international operations.
Risks of Dependence on Foreign Partners. The Company will increasingly
rely on foreign partners to terminate its traffic in foreign countries and to
assist in installing transmission facilities and network switches, complying
with local regulations, obtaining required licenses, and assisting with customer
and vendor relationships. The Company may have limited recourse if its foreign
partners do not perform under their contractual arrangements with the Company.
The Company's arrangements with foreign partners may expose the Company to
significant legal, regulatory or economic risks.
Risks Associated with Foreign Government Control and Highly Regulated
Markets. Governments of many countries exercise substantial influence over
various aspects of the telecommunications market. In some cases, the government
owns or controls companies that are or may become competitors of the Company or
companies (such as national telephone companies) upon which the Company and its
foreign partners may depend for required interconnections to local telephone
networks and other services. Accordingly, government actions in the future could
have a material adverse effect on the Company's operations. In highly regulated
countries in which the Company is not dealing directly with the dominant local
exchange carrier, the dominant carrier may have the ability to terminate service
to the Company or its foreign partner and, if this occurs, the Company may have
limited or no recourse. In countries where competition is not yet fully
established and the Company is dealing with an alternative carrier, foreign laws
may prohibit or impede the entry of such new carriers in the market.
Risks Associated with International Settlement Rates, International
Traffic and Foreign Currency Fluctuations. The Company's revenues and cost of
long distance services are sensitive to changes in international
5
<PAGE> 16
settlement rates, imbalances in the ratios between outgoing and incoming traffic
and foreign currency fluctuations. International rates charged to customers are
likely to decrease in the future for a variety of reasons, including increased
competition between existing long distance providers, new entrants into the
market and the consummation of joint ventures among large international long
distance providers that facilitate targeted pricing and cost reductions. There
can be no assurance that the Company will be able to increase its traffic volume
or reduce its operating costs sufficiently to offset any resulting rate
decreases. In addition, the Company expects that an increasing portion of the
Company's net revenue and expenses will be denominated in currencies other than
U.S. dollars, and changes in exchange rates may have a significant effect on the
Company's results of operations. As the Company continues to pursue a strategy
of entering into operating agreements where it is economically advantageous to
do so, the Company's results of operations will become increasingly subject to
the risks of changes in international settlement rates and foreign currency
fluctuations.
Foreign Corrupt Practices Act. The Company is also subject to the
Foreign Corrupt Practices Act ("FCPA"), which generally prohibits U.S. companies
and their intermediaries from bribing foreign officials for the purpose of
obtaining or keeping business. The Company may be exposed to liability under the
FCPA as a result of past or future actions taken without the Company's knowledge
by agents, strategic partners and other intermediaries. Such liability could
have a material adverse effect on the Company's business, operating results and
financial condition.
Potential Adverse Effects of Government Regulation.
The Company's business is subject to various U.S. federal laws,
regulations, agency actions and court decisions. The Company's international
facilities-based and resale services are subject to regulation by the Federal
Communications Commission (the "FCC"). The FCC requires authorization prior to
leasing capacity, acquiring international facilities, and/or initiating
international service. Prior FCC approval is also required to transfer control
of an authorized carrier. The Company is also subject to the FCC rules that
regulate the manner in which international services may be provided, including,
for instance, the circumstances under which carriers may provide international
switched services by using private lines or route traffic through third
countries.
The FCC's Private Line Resale Policy. The FCC's private line resale
policy prohibits a carrier from reselling international private leased circuits
to provide switched services to a country unless the FCC has found that the
country affords U.S. carriers equivalent opportunities to engage in similar
activities in that country. Certain of the Company's arrangements with foreign
carriers involve the transmission of switched services for termination in a
country that has not been found by the FCC to offer equivalent resale
opportunities. These arrangements are with foreign carriers that are not the
dominant carriers in their respective foreign countries. There can be no
assurance that the FCC, upon viewing these alternate carrier arrangements, would
permit these arrangements under its private line resale policy. If the FCC finds
that these arrangements conflict with its policy, among other measures, it may
issue a cease and desist order or impose fines on the Company, which could have
a material adverse effect on the Company's business, operating results and
financial condition. It is also possible that the regulatory agency of the
foreign government would find that foreign law does not permit the operation of
alternate carriers or that the alternate carriers have not met foreign law
requirements for such operations. Such a finding could have a material adverse
effect on the Company's business, operating results and financial condition.
FCC Policies on Transit and Refile. The FCC is currently considering
whether to limit or prohibit the practice whereby a carrier routes, through its
facilities in a third country, traffic originating from one country and destined
for another country. The FCC has permitted third country calling where all
countries involved consent to the routing arrangements (referred to as
"transiting"). Under certain arrangements referred to as "refiling," the carrier
in the destination country does not consent to receiving traffic from the
originating country and does not realize the traffic it receives from the third
country is actually originating from a different country. The FCC to date has
made no pronouncement as to whether refile arrangements comport either with U.S.
or International Telecommunications Union ("ITU") regulations. It is possible
that the FCC will determine that refiling, as defined, violates U.S. and/or
international law, which could have a material adverse effect on the Company's
business, operating results and financial condition.
The FCC's International Settlements Policy. The Company is also
required to conduct its international business in compliance with the FCC's
international settlements policy (the "ISP"). The ISP establishes the
6
<PAGE> 17
permissible arrangements for U.S.-based carriers and their foreign counterparts
to settle the cost of terminating each other's traffic over their respective
networks. It is possible that the FCC would take the view that some of the
Company's arrangements with alternative foreign carriers do not comply with the
existing ISP rules. If the FCC, on its own motion or in response to a challenge
filed by a third party, determines that the Company's foreign carrier
arrangements do not comply with FCC rules, among other measures, it may issue a
cease and desist order or impose fines on the Company. Such action could have a
material adverse effect on the Company's business, operating results and
financial condition.
Recent and Potential FCC Actions. Regulatory action that has been and
may be taken in the future by the FCC may enhance the intense competition faced
by the Company. The FCC recently enacted certain changes in its rules designed
to permit more flexibility in its ISP as a method of achieving lower cost-based
accounting rates as more facilities-based competition is permitted in foreign
markets. Specifically, the FCC has decided to allow U.S. carriers, subject to
certain competitive safeguards, to propose methods to pay for international call
termination that deviate from traditional bilateral accounting rates and the
ISP. The FCC has also proposed to establish lower ceilings ("benchmarks") for
the rates that U.S. carriers will pay foreign carriers for the termination of
international services. In separate proceedings, the FCC is considering
equivalency determinations for Australia, Chile, Denmark, Finland, Hong Kong and
Mexico. While these rule changes may provide more flexibility to the Company to
respond more rapidly to changes in the global telecommunications market, it will
also provide similar flexibility to the Company's competitors. The FCC has also
proposed to implement the WTO Agreement by, among other things, relaxing the
limitation on the entry of foreign carriers from WTO-member countries into the
U.S. market. There can be no assurance that the FCC will adopt such rule
changes. The FCC is also considering certain other international policy issues
in several rulemaking proceedings and in response to specific applications and
petitions filed by other telecommunications carriers, including mandating lower
international accounting rates. The resolution of these proceedings could have
an adverse effect on the Company's business.
Foreign Regulations. The Company may also be subject to regulation in
foreign countries in connection with certain of its business activities. For
example, the Company's use of transit, international simple resale ("ISR") or
other routing arrangements may be affected by laws or regulations in either the
transited or terminating foreign jurisdiction. Foreign countries, either
independently or jointly as members of the ITU, may have adopted or may adopt
laws or regulatory requirements regarding such services for which compliance
would be difficult or expensive, that could force the Company to choose less
cost-effective routing alternatives and that could adversely affect the
Company's business, operating results and financial condition.
In the United Kingdom ("U.K."), the Company's services are subject to
regulation by the Office of Telecommunications ("Oftel"). The regulatory regime
currently being introduced by Oftel to facilitate competition has a direct and
material effect on the ability of the Company to conduct its business in the
U.K. The Company has been granted licenses to provide international
facilities-based voice services from the U.K. ISR services over leased lines to
all international points from the U.K. There can be no assurance that the
Company will be granted the ISR license in the immediate future, or at all.
Failure to obtain such authority would prevent the Company from providing
certain resale services in the U.K. and would limit the Company's ability to
expand its operations. Future changes in government regulation could have a
material adverse effect on the Company's business, operating results or
financial condition.
To the extent that it seeks to provide telecommunications services in
other non-U.S. markets, the Company is subject to the developing laws and
regulations governing the competitive provision of telecommunications services
in those markets. The Company currently plans to provide a limited range of
services in Belgium, France, Germany and Mexico, as permitted by regulatory
conditions in those markets, and to expand its operations as these markets
implement scheduled liberalization to permit competition in the full range of
telecommunications services in the next several years. The nature, extent and
timing of the opportunity for the Company to compete in these markets will be
determined, in part, by the actions taken by the governments in these countries
to implement competition and the response of incumbent carriers to these
efforts. There can be no assurance that the regulatory regime in these countries
will provide the Company with practical opportunities to compete in the near
future, or at all, or that the Company will be able to take advantage of any
such liberalization in a timely manner.
Regulation of Customers. The Company's customers are also subject to
actions taken by domestic or foreign regulatory authorities that may affect the
ability of customers to deliver traffic to the Company. Regulatory
7
<PAGE> 18
sanctions have been imposed on certain of the Company's customers in the past.
While such sanctions have not adversely impacted the volume of traffic received
by the Company from such customers to date, future regulatory actions could
materially adversely affect the volume of traffic received from a major
customer, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Availability of Transmission Capacity.
During fiscal 1996, substantially all of the Company's revenue was
derived from the sale of international long distance services terminated through
resale arrangements with other long distance providers. The Company purchased
capacity from 51 vendors in the quarter ended March 31, 1997, six of which
accounted for a majority of the Company's capacity during the same period. There
can be no assurance that such resale arrangements will continue to be available
to the Company on a cost-effective basis or at all. Currently, most transmission
capacity used by the Company is obtained on a variable, per minute basis,
subjecting the Company to the possibility of unanticipated price increases and
service cancellations. The Company also requires high voice quality transmission
capacity, which may not always be available at cost-effective rates. If the
Company is not able to continue to enter into cost-effective resale arrangements
with its primary vendors, or is unable to locate suitable replacement vendors
that offer sufficient, high quality alternative capacity, the Company's
business, operating results and financial condition could be materially
adversely affected. For instance, to the extent that the Company's variable
costs increase, the Company may experience reduced or, in certain circumstances,
negative margins for some services. As its traffic volume increases on
particular routes, the Company expects to decrease its reliance on variable
usage arrangements and enter into fixed monthly or longer-term leasing or
ownership arrangements, subject to obtaining any requisite authorization. To the
extent that the Company does so, and incorrectly projects traffic volume in a
particular geographic area, the Company would experience higher fixed costs
without a related increase in revenue. The Company has invested substantial
resources and intends to continue to invest in developing its own global
transmission and switching facilities, which is a capital intensive and
time-consuming process. There can be no assurance that the Company will
successfully complete development of its global network in a timely manner and
within budget.
Management of Changing Business.
Increased Demands on Management and Need to Continue to Improve
Systems. The Company has recently experienced significant revenue growth and has
expanded the number of its employees and the geographic scope of its operations.
These factors have resulted in increased responsibilities for management
personnel and placed increased demands upon the Company's operating and
financial systems. The Company expects that its expansion into foreign countries
will lead to increased financial and administrative demands, such as increased
operational complexity associated with expanded network facilities,
administrative burdens associated with managing an increasing number of
relationships with foreign partners and expanded treasury functions to manage
foreign currency risks. The Company's accounting systems and policies have been
developed as the Company has experienced significant growth, and the Company
will require additional personnel, systems and policies to comply with the
reporting requirements of a publicly held company. Although the Company has
recently implemented a new financial accounting system in 1997, there can be no
assurance that the Company's personnel, systems, procedures and controls will be
adequate to support the Company's future operations. Difficulties encountered in
the Company's transition to a new accounting system or the failure to implement
and improve the Company's operation, financial and management systems as needed
to accommodate any expansion of the Company's business could have a material
adverse effect on the Company's business, operating results and financial
condition.
Risks of Expansion into Commercial Market. While the Company has
focused to date solely on the wholesale market, the Company intends to expand
into the commercial market and such expansion will increase the risk of bad debt
exposure and lead to higher operating costs. The Company also may be required to
update and improve its billing systems and procedures and/or hire new management
personnel to handle the demands of the commercial market. There can be no
assurance that the Company will be able to effectively manage the costs of and
risks associated with expansion into the commercial market.
8
<PAGE> 19
Risk Associated with Complex Switching and Information Systems Hardware and
Software.
The Company's information systems and its Northern Telecom and
Stromberg-Carlson switching equipment are expensive to purchase, complex to
install and maintain, and subject to hardware defects and software bugs. The
Company may experience technical difficulties with its hardware or software
which could adversely affect the Company's ability to provide service to its
customers, manage its network, collect billing information, or perform other
vital functions. For example, in the fourth quarter of 1996 the Company
experienced difficulties associated with the installation of a software upgrade
to its switching equipment. If similar events occur in the future, such events
could have a material adverse effect on the Company's business, operating
results or financial condition.
Dependence on Key Personnel.
The Company's success depends to a significant degree upon the efforts
of senior management personnel and a group of employees with long-standing
relationships and technical knowledge of the Company's operations, in
particular, Christopher E. Edgecomb, the Company's Chief Executive Officer. Mr.
Edgecomb is bound by the terms of a Non-Compete Agreement, which restricts the
Company's ability to offer domestic interexchange products and services until
September 1997 and solicit certain customers for an 18-month period thereafter.
Several of the Company's key management personnel joined the Company in the past
six months, including the Company's Chief Financial Officer and Executive Vice
President - Operations and Engineering. The Company maintains and is the
beneficiary under a key person life insurance policy in the amount of $10.0
million with respect to Mr. Edgecomb. The Company's management team has limited
experience working together and there can be no assurance that they can
successfully integrate as a management team. The Company believes that its
future success will depend in large part upon its continuing ability to attract
and retain highly skilled personnel. Competition for qualified, high-level
telecommunications personnel is intense and there can be no assurance that the
Company will be successful in attracting and retaining such personnel. The loss
of the services of one or more of the Company's key individuals, or the failure
to attract and retain other key personnel, could materially adversely affect the
Company's business, operating results and financial condition.
Significant Competition.
The international telecommunications industry is intensely competitive
and subject to rapid change. The Company's competitors in the international
wholesale switched long distance market include large, facilities-based
multinational corporations and smaller facilities-based providers in the U.S.
and overseas that have emerged as a result of deregulation (often referred to as
Post, Telephone and Telegraphs or "PTTs"), switched-based resellers of
international long distance services and international joint ventures and
alliances among such companies. International wholesale switched long distance
providers compete on the basis of price, customer service, transmission quality,
breadth of service offerings and value-added services. The number of the
Company's competitors is likely to increase as a result of the new competitive
opportunities created by the WTO Agreement. Under the terms of the WTO
Agreement, the United States and the other 68 countries participating in the
Agreement have committed to open their telecommunications markets to
competition, foreign ownership and adopt measures to protect against
anticompetitive behavior, effective starting on January 1, 1998. As a result,
the Company believes that competition will continue to increase, placing
downward pressure on prices. Such pressure could adversely affect the Company's
gross margins if the Company is not able to reduce its costs commensurate with
such price reductions.
Competition from Domestic and International Companies and Alliances.
The U.S.-based international telecommunications services market is dominated by
American Telephone & Telegraph Co. ("AT&T"), MCI Communications Corp. ("MCI")
and Sprint Communications Company L.P. ("Sprint"). The Company also competes
with WorldCom, Inc., Pacific Gateway Exchange, Inc., TresCom International, Inc.
and other U.S.-based and foreign long distance providers, many of which have
considerably greater financial and other resources and more extensive domestic
and international communications networks than the Company. The Company
anticipates that it will encounter additional competition as a result of the
formation of global alliances among large long distance telecommunications
providers. For example, MCI and British Telecommunications recently announced a
proposed merger that would create a global telecommunications company called
Concert, and additionally have announced an alliance with Telefonica de Espana.
The effect of the proposed merger and alliance could create significantly
increased competition. Many of the Company's current competitors are also the
Company's customers. The Company's business would be materially adversely
affected to the extent that a significant number
9
<PAGE> 20
of such customers limit or cease doing business with the Company for competitive
or other reasons. Consolidation in the telecommunications industry could not
only create even larger competitors with greater financial and other resources,
but could also adversely affect the Company by reducing the number of potential
customers for the Company's services.
Competition from New Technologies. The telecommunications industry is
in a period of rapid technological evolution, marked by the introduction of new
product and service offerings and increasing satellite and undersea cable
transmission capacity for services similar to those provided by the Company.
Such technologies include satellite-based systems, such as the proposed Iridium
and GlobalStar systems, utilization of the Internet for international voice and
data communications and digital wireless communication systems such as personal
communications services ("PCS"). The Company is unable to predict which of many
possible future product and services offerings will be important to maintain its
competitive position or what expenditures will be required to develop and
provide such products and services.
Increased Competition as a Result of a Changing Regulatory Environment.
The FCC recently granted AT&T's petitions to be classified as a non-dominant
carrier in the domestic interstate and international markets, which has allowed
AT&T to obtain relaxed pricing restrictions and relief from other regulatory
constraints, including reduced tariff notice requirements. These reduced
regulatory requirements could make it easier for AT&T to compete with the
Company. In addition, the Telecommunications Act of 1996 (the
"Telecommunications Act"), which substantially revises the Communications Act of
1934 (the "Communications Act"), permits and is designed to promote additional
competition in the intrastate, interstate and international telecommunications
markets by both U.S.-based and foreign companies, including the Regional Bell
Operating Companies ("RBOCs"). RBOCs, as well as other existing or potential
competitors of the Company, have significantly more resources that the Company.
The Company also expects that competition from carriers will increase in the
future along with increasing deregulation of telecommunications markets
worldwide. As a result of these and other factors, there can be no assurance
that the Company will continue to compete favorably in the future.
Dependence on Other Long Distance Providers; Customer Concentration and
Increased Bad Debt Exposure.
The Company's primary business as a wholesale long distance provider
makes it highly dependent upon traffic delivered to the Company by other long
distance providers pursuant to arrangements that can generally be terminated by
the provider on short notice. While the list of the Company's most significant
customers varies from quarter to quarter, the Company's five largest customers
accounted for approximately 43% of revenues in the year ended December 31, 1996
and 44% for the quarter ended March 31, 1997. During 1996, the Company's largest
customer, CCI, accounted for approximately 21% of the Company's revenue. The
Company ceased providing service to CCI in March 1997 due to its failure to pay
outstanding accounts receivable. No other customer accounted for more than 10%
of the Company's revenue in 1996. The Company could lose significant customer
traffic for many reasons, including the entrance into the market of significant
new competitors with lower rates than the Company, downward pressure on the
overall costs of transmitting international calls, transmission quality
problems, changes in U.S. or foreign regulations, or unexpected increases in the
Company's cost structure as a result of expenses related to installing a global
network or otherwise. Any significant loss of customer traffic would have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company's customer concentration also amplifies the risk of
non-payment by customers. The Company's two largest customers in 1996 accounted
for approximately 29% of the Company's gross accounts receivable as of December
31, 1996. The Company has recently encountered significant difficulties in the
collection of accounts receivable from certain of its major customers. In the
fourth quarter of 1996, Hi-Rim, one of the Company's major customers, informed
the Company that it was experiencing financial difficulties and would be unable
to pay in full, on a timely basis, approximately $6.0 million in outstanding
accounts receivable. The Company accepted a secured note in the amount of $3.4
million in lieu of a portion of past due payments and was able to offset a
portion of the amounts due by sending traffic to Hi-Rim. The Company believes
that it is unlikely to receive any additional payment from Hi-Rim under the note
or otherwise. As a result, the full amount of the approximately $5.3 million
owed to the Company by Hi-Rim as of December 31, 1996, which was not
subsequently collected or for which no offsetting value was received, was
written-off in the fourth quarter of 1996. In the first quarter of 1997, CCI,
the Company's largest customer in 1996, also informed the Company that it was
unable to pay in full, on a timely basis, its accounts receivable balance. To
account for the potential inability to collect on the
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<PAGE> 21
accounts receivable and outstanding deposits which the Company had made to CCI,
the Company increased its reserve against accounts receivable and reserve
against deposits by $3.5 million and $2.0 million, respectively. In addition,
the Company wrote-off $820,000 of intangible assets relating to this customer.
These reserves and write-off reflect the full amount of future benefits to have
been received by the Company from assets related to CCI recorded on the
Company's Balance Sheet at December 31, 1996. The Company also took a $1.6
million write-off in the first quarter of 1997 due to the failure of one of its
customers, NetSource, Inc., to pay its outstanding accounts receivable. The
Company has commenced litigation against NetSource, Inc. for all outstanding
amounts.
While the Company performs ongoing credit evaluations of its customers,
it generally does not require collateral to support accounts receivable from its
customers and there can be no assurance that reserves will be adequate in future
periods. If the Company experiences similar difficulties in the collection of
accounts receivable from its other major customers, the Company's financial
condition and results of operations could be materially adversely affected. In
addition, the identity of the Company's major customers can change significantly
over short periods of time. For example, while Hi-Rim accounted for
approximately 9% of the Company's business during 1996, Hi-Rim accounted for
less than 1% of the Company's revenues during the fiscal quarter ended March 31,
1997, and Cable & Wireless, which accounted for approximately 5% of the
Company's revenues during 1996, accounted for approximately 10% of the Company's
revenues for the fiscal quarter ended March 31, 1997. In addition, CCI, which
accounted for approximately 21% of the Company's revenues during 1996 ceased to
be a customer in March 1997.
Capital Expenditures; Potential Need for Additional Financing.
Expansion of the Company's network facilities will require a
significant investment in equipment and facilities. While the Company believes
that the proceeds of this offering, combined with other sources of liquidity,
will be sufficient to fund its capital requirements for the next 12 months, the
Company may be required to obtain additional financing depending on factors such
as the rate and extent of the Company's international expansion, increased
investment in ownership rights in fiber optic cable and increased sales and
marketing expenses to support international wholesale and commercial operations.
Issuance of additional equity securities would result in dilution to
stockholders. There can be no assurance that additional financing will be
available on terms acceptable to the Company, or at all. The Company's inability
to fund its capital requirements would have a material adverse effect on the
Company's business, operating results and financial condition.
Risk Related to STAR Trademark.
The Company has been advised that trademark registration may not be
available for the "STAR Telecommunications" mark because several companies in
telecommunications-related industries hold registered trademarks that include
the word "star." Such companies could allege that the Company's use of the STAR
Telecommunications mark is confusingly similar to existing trademarks. Although
the Company has not received any communication from a third party with respect
to its use of its trademark, there can be no assurance that a third party
utilizing a similar mark will not allege that the Company's use infringes its
rights, that the Company would successfully defend any claim of infringement or
that the Company would not be ordered to cease using the mark and/or pay any
damages. The adoption of a new trademark or any related litigation could be
costly, negatively affect customer relationships, result in confusion in the
market and have a material adverse effect on the Company's business, operating
results and financial condition.
Effects of Natural Disasters and Other Catastrophic Events.
The Company's business is susceptible to natural disasters such as
earthquakes, as well as other catastrophic events such as fire, terrorism and
war. Although the Company has taken a number of steps to prevent its network
from being affected by natural disasters, fire and the like, such as building
redundant systems for power supply to the switching equipment, there can be no
assurance that any such systems will prevent the Company's switches from
becoming disabled in the event of an earthquake, power outage or otherwise. The
failure of the Company's network, or a significant decrease in telephone traffic
resulting from effects of a natural or man-made disaster, could have a material
adverse effect on the Company's relationship with its customers and the
Company's business, operating results and financial condition.
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<PAGE> 22
Potential Volatility of Stock Price.
The market price of the shares of Common Stock is likely to be highly
volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, changes in federal
and international regulations, activities of the largest domestic providers,
industry consolidation and mergers, conditions and trends in the international
telecommunications market, adoption of new accounting standards affecting the
telecommunications industry, changes in recommendations and estimates by
securities analysts, general market conditions and other factors. In addition,
the stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the common
stock of emerging growth companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
the company. There can be no assurance that such litigation will not occur in
the future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect upon the Company's business, operating
results and financial condition.
12
<PAGE> 23
SELLING SECURITY HOLDERS
The Reoffer Prospectus relates to shares of Common Stock which have
been acquired by certain former directors of the Company (the "Selling Security
Holders"), pursuant to written stock option agreements between the Company and
such persons dated as of May 15, 1996.
The following table sets forth certain information with respect to the
Selling Security Holders as of July 22, 1997:
<TABLE>
<CAPTION>
Number of Percentage of
Shares Shares
Number of Shares Number of Beneficially Beneficially
Selling Position with Beneficially Owned Shares to be Owned After Owned After
Security Holder the Company as of July 22, 1997 Offered Hereby Offering (1) Offering
--------------- ----------- ------------------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
David S. Hunt Former Director(2) 10,000(3) 10,000 0 0%
Jerry D. Former Director(4) 235,000 10,000 225,000 1.42%
Jackintell
</TABLE>
(1) Assumes that all shares offered hereby are sold.
(2) Mr. Hunt resigned from the Company's board of directors as of December,
1996.
(3) Mr. Hunt is also a beneficiary of the Lyda Hunt-Herbert Trusts-David
Shelton Hunt that holds 357,665 shares of Common Stock but is not deemed to
beneficially own such shares because the co-trustees of such trust hold
voting and investment power with respect to such shares.
(4) Mr. Jackintell resigned from the Company's board of directors as of
September, 1996.
PLAN OF DISTRIBUTION
The shares of Common Stock covered by this Reoffer Prospectus are being
registered by the Company on the account of the Selling Security Holders. The
Company understands that none of such shares will be offered through
underwriters.
Shares of Common Stock covered by this Reoffer Prospectus may be
offered and sold from time to time by the Selling Security Holders through the
Nasdaq National Market System, the over-the-counter market, negotiated
transactions or otherwise, at the prices prevailing at the time of such sales,
at prices relating to such prevailing market prices or at prices otherwise
negotiated. To the Company's knowledge, no specific brokers or dealers have been
designated by the Selling Security Holders nor has any agreement been entered
into in respect of brokerage commissions or for the exclusive or coordinated
sale of any securities which may be offered pursuant to this Reoffer Prospectus.
The Selling Security Holders and any broker dealer through whom sales are made
by the Selling Security Holders may be regarded as "underwriters" within the
meaning of the 1933 Act although the Selling Security Holders disclaim such
status, and their compensation may be regarded as underwriter's compensation.
The Company will not receive any of the proceeds from the offering
hereunder. All expenses of registration incurred in connection with this
offering are being borne by the Company, but all selling and other expenses
incurred by the Selling Security Holders will be borne by such Selling Security
Holders.
On July 21, 1997, the average of the high and low selling prices of the
Common Stock, as reported on the Nasdaq National Market System, was $15.8125.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company hereby incorporates by reference into this Reoffer
Prospectus the following documents previously filed with the SEC:
(a) The Company's prospectus filed with the SEC pursuant to Rule 424(b)
under the 1933 Act, in connection with Registration Statement No. 333-21325 on
Form S-1 filed with the SEC on June 12, 1997, together with any amendment
thereto filed, in which there are set forth audited financial statements for the
Company's fiscal year ended December 31, 1996, and
(b) The description of the Company's outstanding Common Stock contained
in the Company's Registration Statement No. 000-22581 on Form 8-A filed with the
SEC on May 16, 1997, pursuant to Section 12 of the 1934 Act, including any
amendment or report filed for the purpose of updating such description.
All reports and definitive proxy or information statements filed
pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act after the date of
this Reoffer Prospectus and prior to the filing of a post-effective amendment
which indicates that all securities offered hereby have been sold or which
deregisters all securities then remaining unsold shall be deemed to be
incorporated by reference into this Reoffer Prospectus and to be a part hereof
from the date of filing of such documents.
INDEMNIFICATION
Section 145 of the Delaware General Corporation Law authorizes a court
to award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the 1933 Act. The Company's
Bylaws provide for mandatory indemnification of its directors and permissible
indemnification of officers, employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Company's Certificate of
Incorporation provides that, pursuant to Delaware law, its directors shall not
be liable for monetary damages for breach of their fiduciary duty as directors
to the Company and its stockholders. This provision in the Certificate of
Incorporation does not eliminate the fiduciary duty of the directors, and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to the Company for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director and for payment of
dividends or approval of stock repurchase or redemptions that are unlawful under
Delaware law. The provision also does not affect a director's responsibilities
under any other law, such as the federal securities laws or state or federal
environmental laws. The Company has entered into Indemnification Agreements with
its officers and directors. The Indemnification Agreements provide the Company's
officers and directors with further indemnification to the maximum extent
permitted by the Delaware General Corporation Law.
Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the SEC such indemnification is against public policy as expressed in
the 1933 Act, and is, therefore, unenforceable.
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