UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER : 0-23087
STARTEC GLOBAL COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1660985
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
10411 MOTOR CITY DRIVE, BETHESDA, MD 20817
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(301) 365-8959
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required 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
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
OUTSTANDING AS OF
CLASS NOVEMBER 14, 1997
----- -----------------
Common Stock, $.01 par value 8,675,499
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION ----
<S> <C>
Item 1. FINANCIAL STATEMENTS
Statements of Operations ........................................... 3
Balance Sheets....................................................... 4
Statements of Cash Flows............................................. 5
Notes to Financial Statements........................................ 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ................................... 10
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ........................................................... 12
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS........................................... 12
Item 2. CHANGES IN SECURITIES....................................... 12
Item 3. DEFAULT UPON SENIOR SECURITIES.............................. 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS......... 13
Item 5. OTHER INFORMATION........................................... 13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 13
SIGNATURE .............................................................................. 13
EXHIBIT INDEX ........................................................................... 14
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STARTEC GLOBAL COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues.............................. $ 25,757 $ 7,652 $ 54,593 $ 20,859
Cost of services........................... 22,668 6,763 47,919 19,152
--------- --------- --------- ----------
Gross margin......................... 3,089 889 6,674 1,707
General and administrative expenses........ 1,820 1,370 4,281 2,743
Selling and marketing expenses ............ 391 166 696 319
Depreciation and amortization.............. 140 93 354 238
--------- --------- --------- ----------
Income (loss) from operations........ 738 (740) 1,343 (1,593)
Interest expense........................... 326 80 578 198
Interest income............................ 9 5 15 14
--------- --------- --------- ----------
Income (loss) before income tax
provision............................ 421 (815) 780 (1,777)
Income tax provision....................... 8 -- 16 --
--------- --------- --------- ----------
Net income (loss).................... $ 413 $ (815) $ 764 $ (1,777)
========= ========= ========= ==========
Net income (loss) per common and equivalent
share...................................... $ 0.07 $ (0.14) $ 0.13 $ (0.31)
========= ========= ========= ==========
Weighted average common and equivalent
shares outstanding .................... 5,796 5,796 5,796 5,796
========= ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
BALANCE SHEETS
(in thousands, except share amounts)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 1,135 $ 149
Accounts receivable, net of allowance for doubtful accounts of approximately
$1,904 and $1,079........................................................ 15,340 5,334
Accounts receivable, related party........................................... --- 78
Other current assets......................................................... 483 211
--------- --------
Total current assets..................................................... 16,958 5,772
--------- --------
PROPERTY AND EQUIPMENT:
Long distance communications equipment....................................... 2,760 1,773
Computer and office equipment................................................ 717 392
Less - Accumulated depreciation and amortization............................. (1,143) (789)
--------- --------
Total property and equipment, net........................................ 2,334 1,376
--------- --------
Deferred debt financing and offering costs...................................... 1,505 ---
Other noncurrent assets......................................................... 295 ---
Restricted cash................................................................. 180 180
--------- --------
Total assets............................................................. $ 21,272 $ 7,328
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable........................................................... $ 15,186 $ 7,171
Accounts payable, related party............................................ 17 ---
Accrued expenses........................................................... 3,937 2,858
Short-term borrowings under receivables-based credit facility.............. --- 1,812
Short-term borrowings under credit facility, net of unamortized debt
discount of $741 ........................................................ 5,771 ---
Redeemable warrants payable under credit facility.......................... 823 ---
Capital lease obligations.................................................. 323 226
Notes payable to related parties........................................... --- 53
Notes payable to individuals and others.................................... 44 650
--------- --------
Total current liabilities................................................ 26,101 12,770
--------- --------
Capital lease obligations, net of current portion............................... 504 546
Notes payable to related parties, net of current portion........................ --- 100
--------- --------
Total liabilities........................................................ $ 26,605 $ 13,416
========= ========
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $1.00 par value, 100,000 shares authorized; no shares
issued..................................................................... --- ---
Voting common stock, $0.01 par value; 20,000,000 shares authorized at
September 30, 1997 and 10,000,000 shares authorized at December 31,
1996; 5,397,999 shares issued and outstanding at September 30, 1997;
5,380,824 shares issued and outstanding at December 31, 1996............... 54 54
Nonvoting common stock, $1.00 par value; 25,000 shares authorized; no
shares issued at September 30, 1997 and 22,526 shares issued and
outstanding at December 31, 1996........................................... --- 23
Additional paid-in capital................................................... 1,040 932
Unearned compensation........................................................ (94) ---
Accumulated deficit ......................................................... (6,333) (7,097)
--------- --------
Total stockholders' deficit.................................................. (5,333) (6,088)
--------- --------
Total liabilities and stockholders' deficit.................................. 21,272 7,328
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ............................................ $ 764 $ (1,777)
Adjustments to net income (loss) -
Depreciation and amortization................................ 354 238
Compensation pursuant to stock options ...................... 37 ---
Amortization of deferred debt financing costs and debt
discount................................................... 118 ---
Changes in operating assets and liabilities:
Accounts receivable, net................................... (10,006) (1,707)
Accounts receivable, related party......................... 78 (190)
Other current assets....................................... (272) (98)
Accounts payable .......................................... 8,015 2,732
Accounts payable, related party............................ 17 ---
Accrued expenses........................................... 137 932
-------- --------
Net cash (used in) provided by operating activities.. (758) 130
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment............................ (934) (343)
Deposits on leasehold improvement.............................. (295) ---
------- --------
Net cash used in investing activities.................. (1,229) (343)
------- --------
FINANCING ACTIVITIES:
Borrowings under credit facility............................... 6,512 ---
Net (payments) borrowings under receivables based credit
facility..................................................... (1,812) 418
Repayments under capital lease obligations .................... (324) (122)
Repayments under notes payable to related parties ............. (153) (5)
Repayments under notes payable to individuals and others....... (650) (75)
Payments of deferred debt financing and offering costs......... (555) ---
Purchase and retirement of nonvoting common stock.............. (45) ---
------- --------
Net cash provided by financing activities ....................
2,973 216
------- --------
Net increase in cash and cash equivalents..................... 986 3
Cash and cash equivalents at the beginning of the period...... 149 528
------- --------
Cash and cash equivalents at the end of the period .......... $ 1,135 $ 531
------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid..................................................... $ 270 $ 200
======= ========
Income taxes paid................................................. $ --- $ ---
======= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Equipment acquired under capital lease............................ $ 378 $ 452
======= ========
Deferred debt financing and offering costs not paid.............. $ 986 $ ---
======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS DESCRIPTION:
ORGANIZATION
Startec Global Communications Corporation (the "Company", formerly Startec,
Inc.), is a Maryland corporation founded in 1989 to provide long-distance
telephone services. The Company currently offers U.S.-originated long-distance
service to residential and carrier customers through foreign termination
arrangements. The Company's marketing targets specific ethnic residential market
segments in the United States that are most likely to seek low-cost
international long-distance service to specific and identifiable country
markets. The Company is headquartered in Bethesda, Maryland.
INITIAL PUBLIC OFFERING
In October 1997, the Company completed an initial public offering of its
common stock (the "Offering"). Together with the exercise of the overallotment
option in November 1997, the Offering placed 3,277,500 shares of common stock,
yielding net proceeds to the Company of approximately $35 million. The Company
intends to use the net proceeds of the Offering: to acquire cable facilities,
switching, compression and other related telecommunications equipment, for
marketing programs, to pay down certain amounts due under the Company's existing
credit facility and for working capital and other general corporate purposes.
RISKS AND OTHER IMPORTANT FACTORS
The Company is subject to various risks in connection with the operation of
its business. These risks include, but are not limited to, dependence on
operating agreements with foreign partners, significant foreign and U.S.-based
customers and suppliers, availability of transmission facilities, U.S. and
foreign regulations, international economic and political instability,
dependence on effective billing and information systems, customer attrition, and
rapid technological change. Many of the Company's competitors are significantly
larger and have substantially greater financial, technical, and marketing
resources than the Company; employ larger networks and control transmission
lines; offer a broader portfolio of services; have stronger name recognition and
loyalty; and have long-standing relationships with the Company's target
customers. In addition, many of the Company's competitors enjoy economies of
scale that can result in a lower cost structure for transmission and related
costs, which could cause significant pricing pressures within the long-distance
telecommunications industry. If the Company's competitors were to devote
significant additional resources to the provision of international long-distance
services to the Company's target customer base, the Company's business,
financial condition, and results of operations could be materially adversely
affected.
In the United States, the Federal Communications Commission ("FCC") and
relevant state Public Service Commissions have the authority to regulate
interstate and intrastate telephone service rates, respectively, ownership of
transmission facilities, and the terms and conditions under which the Company's
services are provided. Legislation that substantially revised the U.S.
Communications Act of 1934 was signed into law on February 8, 1996. This
legislation has specific guidelines under which the Regional Bell Operating
Companies ("RBOCs") can provide long-distance services, which will permit the
RBOCs to compete with the Company in providing domestic and international
long-distance services. Further, the legislation, among other things, opens
local service markets to competition from any entity (including long-distance
carriers, such as AT&T, cable television companies and utilities).
Because the legislation opens the Company's markets to additional
competition, particularly from the RBOCs, the Company's ability to compete may
be adversely affected. Moreover, certain Federal and other governmental
regulations may be amended or modified, and any such amendment or modification
could have material adverse effects on the Company's business, results of
operations, and financial condition.
2. SIGNIFICANT ACCOUNTING PRINCIPLES:
GENERAL
In addition to the principles identified on the following page, Note 2 of the
Notes to Financial Statements, as set forth in the Company's Registration
Statement on Form S-1 File No. 333-32753 ("the Registration Statement"), which
was declared effective by the Securities and Exchange Commission ("SEC") on
October 8, 1997, summarizes the Company's significant accounting principles.
6
<PAGE>
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
BASIS OF PREPARATION OF INTERIM FINANCIAL INFORMATION
The financial statements included herein are unaudited and have been prepared
pursuant to the rules and regulations of the SEC. 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 and cash flows for the interim period. These unaudited financial
statements should be read in conjunction with the audited financial statements
and notes thereto for the year ended December 31, 1996, and the unaudited
financial statements for the quarter ended June 30, 1997, each as set forth in
the Registration Statement. 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.
CONCENTRATIONS OF RISK
Financial instruments that potentially subject the Company to a concentration
of credit risk are accounts receivable. Residential accounts receivable consist
of individually small amounts due from geographically dispersed customers.
Carrier accounts receivable represent amounts due from long-distance carriers.
The Company's allowance for doubtful accounts is based on current market
conditions. The Company's four largest carrier customers represented
approximately 35 and 37 percent of gross accounts receivable as of December 31,
1996, and September 30, 1997, respectively. The Company's five largest carrier
customers represented approximately 40 percent of net revenues for the nine
month period ended September 30, 1997. Purchases from the five largest suppliers
represented approximately 46 percent of cost of services for nine month period
ended September 30, 1997.
NET INCOME (LOSS) PER COMMON AND EQUIVALENT SHARE
Net loss per common and equivalent share for the three and nine month periods
ended September 30, 1996, is based upon the weighted-average number of common
shares outstanding during the period. The effect of outstanding options on net
loss per common share is not included for these periods because such options
would be antidilutive. Net income per common and equivalent share for the three
and nine month periods ended September 30, 1997 is based upon the
weighted-average number of common and common equivalent shares outstanding
during the respective period, using the treasury stock method. Fully diluted net
income per share is not presented as it would not materially differ from the
amounts stated.
Pursuant to the requirements of the SEC under Staff Accounting Bulletin
("SAB") No. 83 , common stock and stock rights issued during the 12 months
immediately preceding the Offering (see Note 1) have been included in the
calculation of the shares used in computing net (loss) income per common share
as if such shares had been outstanding the entire period for all periods prior
to the Offering.
In 1997, the Financial Accounting Standards Board released Statement No. 128,
"Earnings Per Share." Statement 128 requires dual presentation of basic and
diluted earnings per share on the face of the statement of operations for all
periods presented. Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity.
Diluted earnings per share is computed similarly to fully diluted earnings per
share pursuant to Accounting Principles Bulletin No. 15. Statement 128 is
effective for fiscal and interim periods ending after December 15, 1997, and,
when adopted, will require restatement of prior periods' earnings per share. As
discussed above, SAB 83 requires an entity involved in an initial public
offering to treat those potentially dilutive common shares as outstanding common
shares in the computation of both basic and diluted net (loss) income per share
for all reported periods. Management anticipates that Statement 128 will not
have a material impact upon reported net income (loss) per share.
DEBT DISCOUNT AND DEFERRED DEBT FINANCING COSTS
As more fully discussed in Note 3, on July 1, 1997, the Company entered into
a credit facility (the "Loan") with a bank (the "Lender"). Debt discount costs
represent amounts ascribed to the redeemable warrants issued in connection with
the Loan. Deferred debt financing costs were approximately $329,000 at September
30, 1997 and represent other costs incurred in connection with the issuance of
the Loan. These costs are amortized over the term of the Loan using the
effective interest rate method.
7
<PAGE>
3. BORROWINGS UNDER CREDIT FACILITY:
Prior to July 1, 1997, the Company had an advanced payment agreement with a
third party billing company, which allowed the Company to take advances against
70 percent of all records submitted for billing. Advances were secured by the
receivables involved. In July 1997, the Company paid the remaining amounts owed
under this agreement using proceeds from the Loan discussed below.
The Loan, which the Company entered into in July 1997, provides for maximum
borrowings of up to $10 million through December 31, 1997, and the lesser of $15
million or 85 percent of eligible accounts receivable, as defined, thereafter
until maturity in December 1999. The Company may elect to pay quarterly interest
payments at the prime rate, plus 2 percent, or the adjusted LIBOR, plus 4
percent. The Loan required a $150,000 commitment fee to be paid at closing, and
a quarterly commitment fee of one quarter percent of the unborrowed portion. The
Loan is secured by substantially all of the Company's assets and the common
stock owned by the majority stockholder and another stockholder. The Loan
contains certain financial and non-financial covenants, as defined, including,
but not limited to, ratios of monthly net revenues to Loan balance, interest
coverage, and cash flow leverage, minimum subscribers, and limitations on
capital expenditures, additional indebtedness, acquisition or transfer of
assets, payment of dividends, new ventures or mergers, and issuance of
additional equity (excluding shares issuable in connection with the Offering).
Beginning on July 1, 1998, should the Lender determine and assert based on its
reasonable assessment that a material adverse change has occurred, all amounts
outstanding would become due and payable.
In connection with the Loan, the Company issued the Lender warrants to
purchase 539,800 shares of common stock, representing 10% of the outstanding
common stock on the date of issuance. Warrants with respect to 269,900 of such
shares, or 5% of the outstanding common stock at the time the warrants were
issued, vested fully on the date of the issuance. Vesting of the remaining
warrants was contingent on the occurrence of certain events, and, as the Company
completed the Offering prior to December 31, 1997, no additional warrants will
vest. The exercise price of the warrants is $8.46 per share, and they expire on
July 1, 2002. Upon completion of the Offering, the warrants ceased to be
redeemable and, accordingly, amounts ascribed to the warrants will be classified
as additional paid-in capital for periods subsequent to the Offering.
4. STOCK AND STOCK RIGHTS:
In July 1997, Company exchanged 17,175 shares of its outstanding nonvoting
common stock for authorized voting common stock and purchased the remaining
5,351 shares of outstanding nonvoting common stock from a former officer and
director of the Company for $45,269. In August 1997, the Company increased its
authorized shares of common stock to 20,000,000 and created a preferred class of
stock with 100,000 shares of $1.00 par value preferred stock authorized for
issuance.
STOCK OPTION PLAN
Amended and Restated Stock Option Plan
The Company maintains a stock option plan, reserving 270,000 shares of voting
common stock to be issued to officers and key employees under terms and
conditions to be set by the Company's Board of Directors. Options granted under
this plan may be exercised only upon the occurrence of any of the following
events: (i) a sale of more than 50 percent of the issued and outstanding shares
of stock in one transaction, (ii) a dissolution or liquidation of the Company,
(iii) a merger or consolidation in which the Company is not the surviving
corporation, (iv) a filing by the Company of an effective registration statement
under the Securities Act of 1933, as amended, or (v) the seventh anniversary of
the date of full-time employment of the optionee.
The Company amended its stock option plan as of January 20, 1997 to provide
that options may be exercised on or after the seventh anniversary of the date of
full time employment. In conjunction with this amendment, all options
outstanding were cancelled, and certain options were reissued at their original
exercise prices. Pursuant to APB No. 25, the Company recognizes compensation
expense for the excess of the fair market value of the common stock over the
exercise price of the related option at the date of grant. The Company
recognized approximately $37,000 in compensation expense for the nine month
period ended September 30, 1997, and will recognize approximately $94,000 in the
fourth quarter of fiscal 1997 as the vesting of the options accelerated upon
completion of the Offering (see Note 1).
1997 Performance Incentive Plan
In September 1997, the stockholders of the Company approved the Company's
1997 Performance Incentive Plan (the "Performance Plan"). The Performance Plan
provides for the award to eligible employees of the Company and others of stock
options, stock appreciation rights, restricted stock, and other stock-based
awards, as well as cash-based annual and long-term incentive awards. The
Performance Plan reserves 750,000 shares of common stock for issuance, and the
Company may grant options to acquire up to 480,000 shares of common stock
without triggering the antidilution provisions of the warrants issued to the
Lender (see Note 3). As of September 30, 1997, approximately 231,000 options
have been granted under the Performance Plan, at an exercise price of $10 per
share. The Performance Plan constitutes an unfunded plan for incentive
compensation purposes.
8
<PAGE>
WARRANTS AND REGISTRATION RIGHTS
The Company agreed to issue to representatives of the underwriters of the
Offering, warrants to purchase up to 150,000 shares of common stock at an
exercise price of $13.20 per share. The warrants are exercisable for a period of
five years beginning October 1998. The holders of the warrants will have no
voting or other stockholder rights unless and until the warrants are exercised.
The Company has granted to a consultant the option to acquire 3,000 shares of
common stock in lieu of payment of $30,000 owed by the Company for certain
consulting services.
See Note 3 for a discussion of the warrants issued to the Lender in
connection with the Loan.
5. COMMITMENTS AND CONTINGENCIES:
LITIGATION
Certain claims and suits have been filed or are pending against the Company.
In management's opinion, resolution of these matters will not have a material
impact on the Company's financial position or results of operations and adequate
provision for any potential losses has been made in the accompanying financial
statements.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
--------
The following discussion and analysis of the financial condition and results
of operations should be read in conjunction with the financial statements,
related notes, and other detailed information included elsewhere in this
Quarterly Report on Form 10-Q. This Quarterly Report 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 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 certain
factors including, but not limited to, dependence on operating agreements with
foreign partners, significant foreign and U.S.-based customers and suppliers,
availability of transmission facilities, U.S. and foreign regulations,
international economic and political instability, dependence on effective
billing and information systems, customer attrition, and rapid technological
change. These factors should not be considered 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.
Reference is made to the "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" sections set forth in
the Registration Statement, for a description of certain factors that may affect
the Company's future results.
Results of Operations
---------------------
The following table sets forth certain financial data as a percentage of net
revenues for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues.................................. 100.0% 100.0% 100.0% 100.0%
Cost of services.............................. 88.0 88.4 87.8 91.8
------- ------- ------- -----
Gross margin............................... 12.0 11.6 12.2 8.2
General and administrative expenses........... 7.1 17.9 7.8 13.2
Selling and marketing expenses................ 1.5 2.2 1.3 1.5
Depreciation and amortization................. 0.5 1.2 0.6 1.1
------- ------- ------- -----
Income (loss) from operations............. 2.9 (9.7) 2.5 (7.6)
Interest expense.............................. (1.3) (1.0) (1.1) (1.0)
Interest income............................... - 0.1 - 0.1
------- ------- ------- -----
Income (loss) before income tax provision.. 1.6 (10.6) 1.4 (8.5)
Income tax provision.......................... - - - -
======= ======= ======= =====
Net income (loss).......................... 1.6% (10.6)% 1.4% (8.5)%
======= ======= ======= =====
</TABLE>
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTH PERIOD ENDED
SEPTEMBER 30, 1996
Net Revenues. Net revenues for the three month period ended September 30,
1997 increased 236.6 percent to approximately $25.8 million from $7.7 million
for the three month period ended September 30, 1996. The increase in net
revenues is due to an increase in residential subscribers in new ethnic markets
and new geographic regions. The increase in net revenues is also due to the
execution of the Company's strategy to optimize its capacity on its facilities,
which has resulted in sales to additional carrier customers and increased sales
to existing carrier customers.
Gross Margin. Gross margin increased approximately $2.2 million to $3.1
million for the three month period ended September 30, 1997 from $889,000 for
the three month period ended September 30, 1996. Gross margin improved as a
percentage of net revenues for the three month period ended September 30, 1997
to 12.0 percent from 11.6 percent for the three month period ended September 30,
1996. The increase in gross margin as a percentage of net revenues resulted from
savings derived from an increase in the percentage of residential traffic
originated on net. In the three month period ended September 30, 1997, 60.5
percent of residential traffic originated on net as compared to 46.0 percent for
the three month period ended September 30, 1996. The increase in gross margin as
a percentage of net revenues also results from improved termination costs
pursuant to the Company's strategy of diversifying its termination options.
10
<PAGE>
The reported gross margin for the three month periods ended September 30,
1997 and September 30, 1996 includes the effect of accrued disputed charges of
approximately $0 and $432,000, respectively, which represents no percent and
less than 6 percent of reported net revenues.
General and Administrative. General and administrative expenses for the three
month period ended September 30, 1997 increased 32.8 percent to approximately
$1.8 million from $1.4 million for the three month period ended September 30,
1996. As a percentage of net revenues, general and administrative expenses
declined to 7.1 percent from 17.9 percent for the respective periods. The
increase in dollar amounts was primarily due to an increase in personnel to 111
at September 30, 1997 from 55 at September 30, 1996, and to a lesser extent, an
increase in billing processing fees.
Selling and Marketing. Selling and marketing expenses for the three month
period ended September 30, 1997 increased 135.5 percent to approximately
$391,000 from approximately $166,000 for the three month period ended September
30, 1996. As a percentage of net revenues, selling and marketing expenses
declined to 1.5 percent from 2.2 percent in the respective periods. The increase
in dollar amounts is primarily due to the Company's efforts to market to new
customer groups.
Depreciation and Amortization. Depreciation and amortization expenses for the
three month period ended September 30, 1997 increased to approximately $140,000
from $93,000 for the three month period ended September 30, 1996, primarily due
to increases in capital expenditures pursuant to the Company's strategy of
expanding its network infrastructure.
Interest. Interest expense for the three month period ended September 30,
1997 increased to approximately $326,000 from $80,000 for the three month period
ended September 30, 1996, as a result of additional debt incurred by the Company
to fund working capital needs.
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1996
Net Revenues. Net revenues for the nine month period ended September 30, 1997
increased 161.7 percent to approximately $54.6 million from $20.9 million for
the nine month period ended September 30, 1996. The increase in net revenues is
due to an increase in residential subscribers in new ethnic markets and new
geographic regions. The increase in net revenues is also due to the execution of
the Company's strategy to optimize its capacity on its facilities, which has
resulted in sales to additional carrier customers and increased sales to
existing carrier customers.
Gross Margin. Gross margin increased approximately $5.0 million to $6.7
million for the nine month period ended September 30, 1997 from $1.7 million for
the nine month period ended September 30, 1996. Gross margin improved as a
percentage of net revenues for the nine month period ended September 30, 1997 to
12.2 percent from 8.2 percent for the nine month period ended September 30,
1996. The increase in gross margin as a percentage of net revenues results from
savings derived from an increase in the percentage of residential traffic
originated on net. In the nine month period ended September 30, 1997, 60.5
percent of residential traffic originated on net as compared to 44.6 percent for
the nine month period ended September 30, 1996. The increase in gross margin as
a percentage of net revenues also results from improved termination costs
pursuant to the Company's strategy of diversifying its termination options.
The reported gross margin for the nine month periods ended September 30, 1997
and September 30, 1996 includes the effect of accrued disputed charges of
approximately $67,000 and $918,000, respectively, which represents less than 1
percent and 5 percent of reported net revenues.
General and Administrative. General and administrative expenses for the nine
month period ended September 30, 1997 increased 56.1 percent to $4.3 million
from $2.7 million for the nine month period ended September 30, 1996. As a
percentage of net revenues, general and administrative expenses declined to 7.8
percent from 13.2 percent for the respective periods. The increase in dollar
amounts was primarily due to an increase in personnel to 111 at September 30,
1997 from 55 at September 30, 1996, and to a lesser extent, an increase in
billing processing fees.
Selling and Marketing. Selling and marketing expenses for the three month
period ended September 30, 1997 increased 118.2 percent to approximately
$696,000 from approximately $319,000 for the nine month period ended September
30, 1996. As a percentage of net revenues, selling and marketing expenses
declined to 1.3 percent from 1.5 percent in the respective periods. The increase
in dollar amounts is primarily due to the Company's efforts to market to new
customer groups.
Depreciation and Amortization. Depreciation and amortization expenses for the
nine month period ended September 30, 1997 increased to approximately $354,000
from $238,000 for the nine month period ended September 30, 1996, primarily due
to increases in capital expenditures pursuant to the Company's strategy of
expanding its network infrastructure.
Interest. Interest expense for the nine month period ended September 30, 1997
increased to approximately $578,000 from $198,000 for the nine month period
ended September 30, 1996, as a result of additional debt incurred by the Company
to fund working capital needs.
11
<PAGE>
Liquidity and Capital Resources
-------------------------------
The Company's liquidity requirements arise from cash used in operating
activities, purchases of network equipment, and payments on outstanding
indebtedness. The Company has financed its growth through capital lease
financing, notes payable from individuals, and a credit and billing arrangement
with a third party company prior to July 1, 1997. This facility allowed the
Company to receive advances of 70 percent of all records submitted for billing,
subject to a credit limit of $3 million. Subsequent to July 1, 1997 until the
Offering, the Company has primarily financed its growth through the Loan, which
provides for maximum borrowings of up to $10 million through December 31, 1997,
and the lesser of $15 million or 85 percent of eligible accounts receivable, as
defined, thereafter until maturity on December 31, 1999. See Note 3 of the
"Notes to Financial Statements" for a further discussion of the Loan. As
previously discussed in Note 1 of the "Notes to Financial Statements", the
Offering yielded net proceeds to the Company of approximately $35 million in the
fourth quarter of 1997.
The Company's cash and cash equivalents increased to $1.1 million at
September 30, 1997 from $531,000 at September 30, 1996. Net cash used in
operating activities was approximately $758,000 for the nine month period ended
September 30, 1997, as compared to net cash provided for operating activities of
$130,000 for the nine month period ended September 30, 1996. The decrease in
cash from operations for the nine month period ended September 30, 1997 was the
result of the significant growth in net revenues and the corresponding accounts
receivable for the period.
Net cash used in investing activities was $1.2 million and $343,000 for the
nine month periods ended September 30, 1997 and 1996, respectively. Net cash
used in investing activities for the nine month period ended September 30, 1997
primarily related to capital expenditures made to expand the Company's network
infrastructure.
Net cash provided by financing activities was approximately $3.0 million and
$216,000 for the nine month periods ended September 30, 1997 and 1996,
respectively. Cash provided by financing activities for the nine month period
ended September 30, 1997 primarily resulted from borrowings under the Loan, as
previously discussed, after offsetting the repayment amounts under the
receivables based credit facility, capital lease obligations, and various notes
payable.
The Company has planned capital expenditures through 1998 of $8.5 million.
Additionally, marketing expenditures for 1997 and 1998 are expected to reach
$4.5 million in aggregate. These expenditure needs are expected to be met from
operations, amounts available under the Loan, and the proceeds of the Offering.
These capital needs will continue to expand as the Company executes its business
strategy.
Although management has no definitive plans to extinguish or repay the Loan,
if such an event were to occur in the fourth quarter of 1997, the Company would
record a charge related to the unamortized debt discount and deferred financing
costs in the fourth quarter of 1997. This charge would represent a noncash
charge.
The Company has accrued approximately $2.1 million as of September 30, 1997,
for disputed vendor obligations asserted by one of the Company's foreign
carriers for minutes processed in excess of the minutes reflected on the
Company's records. If the Company prevails in its disputes, these amounts or
portions thereof would be credited to operations in the period of resolution.
Conversely, if the Company does not prevail in its disputes, these amounts or
portions thereof would be paid in cash.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This requirement is not currently applicable to the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
See Note 4 of the "Notes to the Financial Statements" for a discussion of
this item.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
A special meeting of the stockholders was held on August 18, 1997. The
following matters presented at the meeting were approved by votes from
stockholders representing 4,190,875 shares of voting common stock. Stockholders
representing 1,189,949 shares of voting common stock did not vote on these
matters.
1. The Amended and Restated Articles of Incorporation of the Company
2. The Company's 1997 Performance Incentive Plan
3. The Amended and Restated Bylaws of the Company
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11.1 Statement regarding computation of earnings per share
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1997.
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 on the 14th day of November, 1997.
STARTEC GLOBAL COMMUNICATIONS CORPORATION
-----------------------------------------
(Registrant)
/s/ Prabhav V. Maniyar
----------------------
Prabhav V. Maniyar
Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
-----------
11.1 Statement regarding computation of earnings per share
27.1 Financial Data Schedule
14
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE (in thousands, except per
share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1997 1996 1997 1996
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) ............. $ 413 $ (815) $ 764 $ (1,777)
Weighted average common and
equivalent shares
outstanding:
Weighted average common
shares outstanding.......... 5,403 5,403 5,403 5,403
Dilutive effect of options.. 53 --- 53 ---
Effect of cheap stock....... 340 393 340 393
Total weighted average common
and equivalent shares
outstanding............... 5,796 5,796 5,796 5,796
--------- --------- -------- --------
Net income (loss) per share $ 0.07 $ (0.14) $ 0.13 $ (0.31)
========= ========= ======== ========
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<EXCHANGE-RATE> 1 1
<CASH> 149 1,135
<SECURITIES> 0 0
<RECEIVABLES> 5,412 15,340
<ALLOWANCES> 1,079 1,904
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,772 16,958
<PP&E> 2,165 3,477
<DEPRECIATION> 789 1,143
<TOTAL-ASSETS> 7,328 21,272
<CURRENT-LIABILITIES> 12,770 26,101
<BONDS> 0 0
0 0
0 0
<COMMON> 77 54
<OTHER-SE> (6,165) (5,387)
<TOTAL-LIABILITY-AND-EQUITY> 7,328 21,272
<SALES> 0 0
<TOTAL-REVENUES> 32,215 54,593
<CGS> 0 0
<TOTAL-COSTS> 29,880 47,919
<OTHER-EXPENSES> 4,843 5,331
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 337 578
<INCOME-PRETAX> (2,830) 780
<INCOME-TAX> 0 16
<INCOME-CONTINUING> (2,830) 764
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,830) 764
<EPS-PRIMARY> (0.49) 0.07
<EPS-DILUTED> (0.49) 0.07
</TABLE>
