As filed with the Securities and Exchange Commission on October 6, 1997
REGISTRATION NO. 333-32753
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
STARTEC GLOBAL COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
MARYLAND 4813 52-1660985
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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<TABLE>
<S> <C>
10411 MOTOR CITY DRIVE RAM MUKUNDA
BETHESDA, MD 20817 PRESIDENT AND CHIEF EXECUTIVE OFFICER
(301) 365-8959 10411 MOTOR CITY DRIVE
(Address, Including Zip Code, and Telephone BETHESDA, MD 20817
Number, Including Area Code, of Registrant's (301) 365-8959
Principal Executive Offices) (Name, Address, Including Zip Code, and
Telephone Number, Including Area Code, of
Agent for Service)
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COPIES TO:
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Thomas L. Hanley, Esq. John L. Sullivan, III, Esq.
Robert B. Murphy, Esq. David L. Kaye, Esq.
Yolanda Stefanou Faerber, Esq. Venable, Baetjer & Howard LLP
Shulman, Rogers, Gandal, Pordy & Ecker, P.A. 2010 Corporate Ridge, Suite 400
11921 Rockville Pike McLean, VA 22102
Rockville, MD 20852 (703) 760-1600
(301) 230-5200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<CAPTION>
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------
PROPOSED
MAXIMUM
PROPOSED AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE PRICE FEE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value ...... 2,990,000 Shares(1) $ 13.00(2) $ 38,870,000(2) $ 11,780(3)
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes 390,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457 under the Securities Act.
(3) $8,817 of the Registration Fee has been previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED , 1997
2,600,000 SHARES
[LOGO]
STARTEC GLOBAL COMMUNICATIONS CORPORATION
COMMON STOCK
------------
All of the shares of common stock, par value $0.01 per share (the "Common
Stock") offered hereby are being sold by Startec Global Communications
Corporation ("STARTEC" or the "Company"). Prior to this offering (the
"Offering"), there has been no public market for the Common Stock of the
Company. It is currently estimated that the initial public offering price will
be between $11.00 and $13.00 per share. For a discussion of the factors
considered in determining the initial public offering price, see "Underwriting."
Application has been made to have the shares of Common Stock approved for
quotation on the Nasdaq National Market under the symbol "STGC."
------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SHARES OF COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
Per Share ...... $ $ $
Total(3) ...... $ $ $
- --------------------------------------------------------------------------------
(1) Excludes a non-accountable expense allowance payable to the Representatives
of the Underwriters equal to 1% of the gross proceeds of the Offering. The
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $_____.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 390,000 additional shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $ , $ and $ , respectively. See "Underwriting."
------------
The shares of Common Stock are offered by the Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to their right to reject any order in whole or in
part. It is expected that delivery of certificates representing the shares of
Common Stock will be made against payment therefor at the offices of Ferris,
Baker Watts, Incorporated, 1720 Eye Street, N.W., Washington, D.C., or through
the Depositary Trust Company, on or about __________, 1997.
------------
FERRIS, BAKER WATTS BOENNING & SCATTERGOOD, INC.
Incorporated
The date of this Prospectus is __________, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING ENTERING INTO STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, including risk factors and
financial statements and notes thereto, appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. See "Underwriting." For
definitions of certain technical and other terms used in this Prospectus, see
"Glossary of Terms."
THE COMPANY
STARTEC is a rapidly growing, facilities-based international long distance
carrier which markets its services to select ethnic U.S. residential communities
that have significant international long distance usage. Additionally, to
maximize the efficiency of its network capacity, the Company sells its
international long distance services to some of the world's leading carriers.
The Company provides its services through a flexible network of owned and leased
transmission facilities, resale arrangements and a variety of operating
agreements and termination arrangements, all of which allow the Company to
terminate traffic in every country which has telecommunications capabilities.
The Company currently owns and operates a switch in Washington, D.C. and leases
switching facilities from other telecommunications carriers. The Company is
currently in the final stages of negotiating the purchase of new switching
equipment, which is expected to be installed and placed in service at a new
facility in New York City by the end of 1997.
The Company's mission is to dominate select international telecom markets
by strategically building network facilities that allow it to manage both sides
of a telephone call. The Company intends to own multiple switches and other
network facilities which will allow it to originate and terminate a substantial
portion of its own traffic. Further, the Company intends to implement a network
hubbing strategy, linking foreign-based switches and other telecommunications
equipment together with the Company's marketing base in the United States. To
implement this hubbing strategy, the Company intends to: (i) build transmission
capacity, including its ability to originate and transport traffic; (ii) acquire
additional termination options to increase routing flexibility; and (iii) expand
its customer base through focused marketing efforts.
STARTEC's residential customers access its network by dialing a carrier
identification code ("CIC Code") prior to dialing the number they are calling.
Using a CIC Code to access the Company's network is known as "dial-around" or
"casual calling," because customers can use the Company's services at any time
without changing their existing long distance carrier. Additionally, the
customer's monthly bill from the local exchange carrier ("LEC") reflects the
charges for the international carrier services rendered by the Company. As part
of the Company's marketing strategy, it maintains a comprehensive database of
customer information which is used for the development of marketing programs,
planning, and other strategic purposes.
Increased deregulation and the globalization of the telecommunications
industry have resulted in accelerated growth in the use of international long
distance services. The international switched telecommunications market was
approximately $56 billion in aggregate carrier revenues for 1995, of which $14
billion was U.S.-originated international traffic. According to the Company's
market research, during the period from 1990 to 1995, the U.S.-originated
international telecommunications market grew at an annual compound rate of
11.7%, from $8 billion to $14 billion, compared with an annual compound growth
rate of 7.25% in the U.S. domestic long distance market. The Company believes
that the international telecommunications market will continue to experience
growth for the foreseeable future as a result of numerous factors, including:
(i) global economic development with corresponding increases in the number of
telephones, particularly in developing countries; (ii) continuing deregulation
of foreign telecommunications markets; (iii) reductions in rates stimulating
higher traffic volumes; (iv) increases in the availability of transmission
capacity; and (v) increases in investment in telephone infrastructure and
consequent increases in access to telecommunications services.
3
<PAGE>
The Company currently markets its services to ethnic residential
communities throughout the United States through a variety of media including
print advertising, direct marketing, radio and television. These marketing
efforts have resulted in significant growth in the Company's residential billed
customer base from approximately 5,000 as of June 30, 1994 to over 43,700 as of
June 30, 1997.
To achieve the economies of scale necessary to maintain cost effective
operations, the Company in late 1995 began reselling its international carrier
capacity to other carriers. As a result, STARTEC has experienced significant
growth in revenues and in the number of its carrier customers. As of June 30,
1997, the Company had 32 carrier customers who were active users of the
Company's international long distance services. Carrier revenues were $20.2
million for the fiscal year ended December 31, 1996 and reached approximately
$18.3 million for the six months ended June 30, 1997. The Company will continue
to market its international long distance services to existing and new carrier
customers.
RECENT DEVELOPMENTS
On July 1, 1997, the Company entered into a Secured Revolving Line of
Credit Facility Agreement with Signet Bank (the "Signet Agreement"), which
provides for maximum borrowings of up to $10 million through the end of 1997,
and the lesser of $15 million or 85% of eligible accounts receivable thereafter
until maturity on December 31, 1999. The Company has used some amounts available
under the Signet Agreement to begin implementing its strategic plan to build its
transmission capacity, acquire additional termination options, and expand its
customer base. Proceeds received under the Signet Agreement have also been
allocated to the Company's marketing programs, the anticipated acquisition of
rights in transatlantic digital undersea fiber optic cable, and the addition of
monitoring equipment and software upgrades to help support the expanded network
and the anticipated increase in traffic. See "Description of Capital Stock -
Signet Agreement."
------------------
The Company was incorporated in Maryland in 1989. The principal executive
offices of the Company are located at 10411 Motor City Drive, Bethesda, Maryland
20817, and its telephone number is (301) 365-8959. The Company recently changed
its name from STARTEC, Inc. to Startec Global Communications Corporation.
THE OFFERING
Common Stock Offered by the Company ...... 2,600,000 shares
Common Stock to be Outstanding After the
Offering .............................. 7,997,999 shares(1)
Use of Proceeds ........................ The Company intends to use the net
proceeds of the Offering as
follows: (i) to acquire cable
facilities, switching, compression
and other related telecommu-
nications equipment; (ii) for
marketing; (iii) to pay down
amounts due under the Signet
Agreement; and (iv) for working
capital and other general
corporate purposes, including
possible future acquisitions and
strategic alliances. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol . STGC
- ----------
(1) Includes 17,175 non-voting common shares which were converted to voting
common shares, and excludes 5,351 non-voting common shares which were
purchased and retired, subsequent to June 30, 1997. Excludes (i) 269,766
shares of Common Stock issuable upon the exercise of options under the
Company's Amended and Restated Stock Option Plan; (ii) 750,000 (254,250 of
which were granted as of the date of this Prospectus) shares of Common
Stock reserved for issuance under the Company's 1997 Performance Incentive
Plan; and (iii) 716,800 shares of Common Stock issuable pursuant to the
exercise of certain warrants and upon conversion of a note. See "Management
- Stock Option Plans," "Description of Capital Stock - Warrants and
Registration Rights," and "Underwriting."
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table presents summary financial data of the Company for the
years ended December 31, 1992, 1993, 1994, 1995 and 1996 and the six months
ended June 30, 1996 and 1997. The historical financial data for the years ended
December 31, 1994, 1995 and 1996 has been derived from the financial statements
of the Company which have been audited by Arthur Andersen LLP, independent
public accountants, as set forth in the financial statements and notes thereto
presented elsewhere herein. The financial data for the years ended December 31,
1992 and 1993, for the six months ended June 30, 1996 and 1997, and as of June
30, 1997 has been derived from the Company's unaudited financial statements in a
manner consistent with the audited financial statements. In the opinion of the
Company's management, these unaudited financial statements include all
adjustments necessary for a fair presentation of such information. Operating
results for interim periods are not necessarily indicative of the results that
might be expected for the entire fiscal year. The following information should
be read in conjunction with the Company's financial statements and notes thereto
presented elsewhere herein. See "Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
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SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
-------- ----------- ----------- ------------ ------------ --------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ..................... $2,394 $ 3,288 $ 5,108 $ 10,508 $ 32,215 $13,206 $28,836
Gross margin ..................... 809 198 407 1,379 2,334 818 3,586
Income (loss) from operations ... 254 (1,610) (933) (1,112) (2,509) (853) 605
Net income (loss) ............... $ 208 $ (1,668) $ (979) $ (1,206) $ (2,830) $ (962) $ 351
PER SHARE DATA:
Net income (loss) per common and
equivalent share ............... $ 0.04 $ (0.33) $ (0.20) $ (0.21) $ (0.49) $(0.17) $ 0.06
Weighted average common and equiva-
lent shares outstanding 4,969 4,989 4,989 5,710 5,796 5,796 5,796
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------------
ACTUAL AS ADJUSTED(1)
----------- ---------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ........................... $ 2,106 $27,510
Working capital .................................... (7,293) 18,111
Total assets ....................................... 14,265 39,669
Long-term obligations, net of current portion ...... 759 1,801
Stockholders' (deficit) equity ..................... $ (5,714) $22,968
</TABLE>
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(1) Adjusted to give effect to (i) the sale of the 2,600,000 shares of Common
Stock offered hereby (at an assumed initial public offering price of $12.00
per share) and the application of the estimated net proceeds therefrom;
(ii) the fair value of 150,000 warrants issued to the Underwriters and the
fair value of the Signet Bank warrants, which are not redeemable upon
completion of the Offering; and (iii) the acceleration of unearned
compensation expense related to stock options which vest upon completion of
the Offering.
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully by prospective investors
prior to making an investment in the Common Stock offered hereby. Information
contained in this Prospectus contains "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology or as discussions of
strategy. No assurance can be given that the future results covered by the
forward-looking statements will be achieved or that the events contemplated
thereby will occur or have the effects anticipated. The following matters
constitute cautionary statements identifying important factors with respect to
such forward-looking statements, including certain risks and uncertainties that
could cause actual results to vary materially from the anticipated results
covered in such forward-looking statements. Other factors could also cause
actual results to vary materially from the anticipated results covered in such
forward-looking statements.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE OPERATING RESULTS
Although the Company has experienced significant revenue growth in recent
years, the Company had an accumulated deficit of approximately $6.7 million as
of June 30, 1997 and its operations have generated a net loss and negative
operating cash flows in each of the last three fiscal years. There can be no
assurance that the Company's revenue will continue to grow or be sustained in
future periods or that the Company will be able to achieve or maintain
profitability in any future period. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Potential Fluctuations in Quarterly Operating Results
The Company's quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future as a result of a variety of factors
which can affect revenues, cost of services and other expenses. These factors
include costs relating to entry into new markets, variations in carrier revenues
from return traffic under operating agreements, variations in user demand, the
mix of residential and carrier services sold, the introduction of new services
by the Company or its competitors, pricing pressures from increased competition,
prices charged by the Company's providers of leased facilities, and capital
expenditures and other costs relating to the expansion of operations. In
addition, general economic conditions, specific economic conditions affecting
the telecommunications industry, and the effects of governmental regulation or
regulatory changes on the telecommunications industry may also cause
fluctuations in the Company's quarterly operating results. Certain of these
factors are outside of the Company's control. In the event that one or more of
such factors cause fluctuations in the Company's quarterly operating results,
the price of the Common Stock could be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING
The Company believes that the net proceeds from this Offering, together
with amounts available under the Signet Agreement, will be sufficient to fund
the Company's capital needs for the next 18 months. The Company expects,
however, that it will need to raise additional capital from public or private
equity or debt sources in order to finance its future growth, including
financing construction or acquisition of additional transmission capacity,
expanding service within its existing markets and into new markets, and the
introduction of additional or enhanced services, all of which can be capital
intensive. In addition, the Company may need to raise additional capital to fund
unanticipated working capital needs and capital expenditure requirements and to
take advantage of unanticipated business opportunities, including accelerated
expansion, acquisitions, investments or strategic alliances. There can be no
assurance that additional financing will be available to the Company on
satisfactory terms or at all. Moreover, the Signet Agreement significantly
limits the Company's ability to obtain additional financing. In the event that
the Signet Agreement is extinguished or otherwise refinanced with a new credit
facility, the Company intends to expense, as an extraordinary item (if
material), the then-existing unamortized debt discount and deferred financing
cost related to the Signet Agreement, which was
6
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approximately $1.2 million as of July 1, 1997. If additional financing is
obtained through the issuance of equity securities, the percentage ownership of
the Company's then-current stockholders would be reduced and, if such equity
securities take the form of preferred stock, the holders of such preferred stock
may have rights, preferences or privileges senior to those of holders of Common
Stock. If the Company is unable to obtain additional financing in a timely
manner or on satisfactory terms, it may be required to postpone or reduce the
scope of its expansion, which could adversely affect the Company's ability to
compete, as well as its business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and "Description of Capital
Stock."
MANAGEMENT OF GROWTH
The Company's recent growth and its strategy to continue such growth has
placed, and is expected to continue to place, a significant strain on the
Company's management, operational and financial resources and increased demands
on its systems and controls. In order to manage its growth effectively, the
Company must continue to implement and improve its operational and financial
systems and controls, accurately forecast customer demand and its need for
transmission facilities, attract additional managerial, technical and customer
service personnel, and train and manage its personnel base. There can be no
assurance that the Company will be successful in these activities. Failure of
the Company to satisfy these requirements or the emergence of unexpected
difficulties in managing its expansion could materially adversely affect the
Company's business, financial condition and results of operations.
COMPETITION
The long distance telecommunications industry is intensely competitive. In
many of the markets targeted by the Company there are numerous entities which
are currently competing with each other and the Company for the same residential
and carrier customers and others which have announced their intention to enter
those markets. International and interstate telecommunications providers compete
on the basis of price, customer service, transmission quality, breadth of
service offerings and value-added services. Residential customers frequently
change long distance providers in response to competitors' offerings of lower
rates or promotional incentives, and, in general, because the Company is a
dial-around provider, the Company's customers can switch carriers at any time.
In addition, the availability of dial-around long distance services has made it
possible for residential customers to use the services of a variety of competing
long distance providers without the necessity of switching carriers. The
Company's carrier customers generally also use the services of a number of
international long distance telecommunications providers. The Company believes
that competition in its international and interstate long distance markets is
likely to increase as these markets continue to experience decreased regulation
and as new technologies are applied to the telecommunications industry. Prices
for long distance calls in several of the markets in which the Company competes
have declined in recent years and are likely to continue to decrease.
The U.S. based international telecommunications services market is
dominated by AT&T, MCI and Sprint. The Company also competes with numerous other
carriers in certain markets, some of which focus their efforts on the same
customers targeted by the Company. Recent and pending deregulation initiatives
in the U.S. and other countries may encourage additional new entrants. The
Telecommunications Act of 1996 (the "Telecommunications Act" or the "1996 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 RBOCs. In addition, pursuant to the terms of
the WTO Agreement on basic telecommunications, countries who are signatories
have committed, to varying degrees, to allow access to their domestic and
international markets to competing telecommunications providers, to allow
foreign ownership interests in existing telecommunications providers and to
establish regulatory schemes and policies designed to accommodate
telecommunications competition. The Company also is likely to be subject to
additional competition as a result of mergers or the formation of alliances
among some of the largest telecommunications carriers. Many of the Company's
competitors are significantly larger, have substantially greater financial,
technical and marketing resources than the Company, own or control larger
networks, transmission and termination facilities, offer a
7
<PAGE>
broader variety of services than the Company, and have strong name recognition,
brand loyalty, and long-standing relationships with many of 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 other costs
of providing services, 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. See "Business - Government Regulation" and "Business -
Competition."
DEPENDENCE ON AVAILABILITY OF TRANSMISSION FACILITIES
Substantially all of the telephone calls made by the Company's customers to
date have been connected through transmission lines of facilities-based long
distance carriers which provide the Company transmission capacity through a
variety of lease and resale arrangements. The Company's ability to maintain and
expand its business is dependent, in part, upon whether the Company continues to
maintain satisfactory relationships with these carriers, many of which are, or
may in the future become, competitors of the Company. The Company's lease
arrangements generally do not have long terms and its resale agreements
generally permit price adjustments on short notice, which makes the Company
vulnerable to adverse price and service changes or terminations. Although the
Company believes that its relationships with these carriers generally are
satisfactory, the failure to continue to maintain satisfactory relationships
with one or more of the carriers could have a material adverse effect upon the
Company's cost structure, service quality, network diversity, results of
operations and financial condition. During the fiscal year ended December 31,
1996, VSNL, Cherry Communications, Inc., and WorldCom accounted for
approximately 25%, 13% and 13%, respectively, of the Company's acquired
transmission capacity (on a cost of services basis). During the six month period
ending June 30, 1997, VSNL and WorldCom accounted for approximately 13% and 15%,
respectively, of the Company's acquired transmission capacity (on a cost of
services basis). No other supplier accounted for 10% or more of the Company's
acquired transmission capacity during either 1996 or the first six months of
1997. See "Business - The STARTEC Network."
The future profitability of the Company will depend in part on its ability
to obtain transmission facilities on a cost effective basis. Presently, the
terms of the Company's agreements for transmission lines subject the Company to
the possibility of unanticipated price increases and service cancellations.
Although the rates the Company is charged generally are less than the rates the
Company charges its customers for connecting calls through these lines, to the
extent these costs increase, the Company may experience reduced or, in certain
circumstances, negative margins for some services. As its traffic volume
increases in particular international markets, however, the Company may reduce
its use of variable usage arrangements and enter into fixed leasing arrangements
on a longer-term basis and/or construct or acquire additional transmission
facilities of its own. To the extent the Company enters into such fixed
arrangements and/or increases its owned transmission facilities and incorrectly
projects traffic volume in particular markets, it would experience higher fixed
costs without any concomitant increase in revenue.
Acquisition of ownership positions in, and other access rights to, digital
undersea fiber optic cable transmission lines is a key element of the Company's
business strategy. Because digital undersea fiber optic lines typically take
several years to plan and construct, international long distance service
providers generally make investments based on anticipated traffic. The Company
does not control the planning or construction of digital undersea fiber optic
cable transmission lines, and must seek access to such facilities through
partial ownership positions or through lease and other access arrangements on
negotiated terms that may vary with industry and market conditions. There can be
no assurance that digital undersea fiber optic cable transmission lines will be
available to the Company to meet its current and/or projected international
traffic volume, or that such lines will be available on satisfactory terms. See
"Business - The STARTEC Network."
DEPENDENCE ON FOREIGN CALL TERMINATION ARRANGEMENTS
The Company currently offers U.S.-originated international long distance
service globally through a network of operating agreements, resale arrangements,
transit and refile agreements, and various other foreign termination
arrangements. The Company's ability to terminate traffic in its targeted foreign
8
<PAGE>
markets is an essential component of its service, and, therefore, the Company is
dependent upon its operating agreements and other termination arrangements.
While to date the Company has negotiated and maintained operating agreements and
termination arrangements sufficient for its current business and traffic levels,
there can be no assurance that the Company will be able to negotiate additional
operating agreements or termination arrangements or maintain agreements or
arrangements with its current foreign partners in the future. Cancellation of
certain operating agreements or other termination arrangements could have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, the failure to enter into additional operating
agreements and termination arrangements could limit the Company's ability to
increase its services to its current target markets, gain entry into new
markets, or otherwise increase its revenues.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
In the normal course of its business, the Company must record and process
significant amounts of data quickly and accurately in order to bill for the
services it has provided to customers and to ensure that it is properly charged
by vendors for services it has used. While the Company believes that its current
management information systems are sufficient to meet its current demands, these
systems have not grown at the same rate as the Company's business and it is
anticipated that additional investment in these systems will be needed. The
successful implementation and integration of any additional or new management
information systems resources is important to the Company's ability to monitor
costs, bill customers, achieve operating efficiencies, and otherwise support its
growth. There can be no assurance, however, that the Company will not encounter
difficulties in the acquisition, implementation, integration and ongoing use of
any additional management information systems resources, including possible
delays, cost-overruns, or incompatibility with the Company's current information
systems resources or its business needs. See "Business - Management Information
and Billing Systems."
CUSTOMER CONCENTRATION
During the fiscal year ended December 31, 1996, the Company's five largest
carrier customers, including one related party, accounted for approximately 40%
of the Company's net revenues, with one of the carrier customers, WorldCom,
accounting for approximately 23% of net revenues during that year. In addition,
during the six month period ending June 30, 1997, the Company's five largest
carrier customers, including one related party, accounted for approximately 41%
of the Company's net revenues, with one of the carrier customers, WorldCom,
accounting for approximately 27% of net revenues during that period. The
Company's agreements and arrangements with its carrier customers generally may
be terminated on short notice without penalty, and do not require the carriers
to maintain their current levels of use of the Company's services. Carriers may
terminate their relationship with the Company or substantially reduce their use
of the Company's services for a variety of reasons, including the entry of
significant new competitors offering lower rates than the Company, problems with
transmission quality and customer service, changes in the regulatory
environment, increased use of the carriers' own transmission facilities, and
other factors. A loss of a significant amount of carrier business could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In addition, this concentration of carrier customers increases the risk of
non-payment or difficulties in collecting the full amounts due from customers.
The Company's four largest carrier customers represented 35% and 22% of gross
accounts receivable as of December 31, 1996 and June 30, 1997, respectively. The
Company performs initial and ongoing credit evaluations of its carrier customers
in an effort to reduce the risk of non-payment. There can be no assurance that
the Company will not experience collection difficulties or that its allowances
for non-payment will be adequate in the future. If the Company experiences
difficulties in collecting accounts receivable from its significant carrier
customers, its business financial condition and results of operations could be
materially adversely affected. See "Business - Customers."
RESPONSE RATES; RESIDENTIAL CUSTOMER ATTRITION
The Company is significantly affected by the residential customer response
rates to its marketing campaigns and residential customer attrition rates.
Decreases in residential customer response rates or
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increases in the Company's residential customer attrition rates, could have a
material adverse impact on the Company's business, financial condition and
results of operations.
RISKS OF INTERNATIONAL TELECOMMUNICATIONS BUSINESS
The Company has to date generated substantially all of its revenues by
providing international long distance telecommunications services and expects
that this will continue in the future. There are certain risks inherent in doing
business on an international level, such as unexpected changes in regulatory
requirements, tariffs, customs, duties and other trade barriers, political
risks, and other factors which could materially adversely impact the Company's
current and planned operations. The international telecommunications industry is
changing rapidly due to deregulation, privatization of Post Telephone and
Telegraphs (the "PTTs"), technological improvements, expansion of
telecommunications infrastructure and the globalization of the world's
economies. There can be no assurance that one or more of these factors will not
vary in a manner that could have a material adverse effect on the Company.
A key component of the Company's business strategy is its planned expansion
into additional international markets. The Company intends to pursue
arrangements with foreign correspondents to gain access to and terminate its
traffic in those markets. In many of these markets, the government may control
access to the local networks and otherwise exert substantial influence over the
telecommunications market, either directly or through ownership or control of
the PTT. In addition, incumbent U.S. carriers serving international markets may
have better brand recognition and customer loyalty, and significant operational
advantages over the Company. Further, the existing carrier may take many months
to allow competitors such as the Company to interconnect to its switches within
the market. The Company has limited recourse if its foreign partners fail to
perform under their arrangements with the Company, or if foreign governments,
PTTs or other carriers take actions that adversely affect the Company's ability
to gain entry into those markets.
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 maintaining business. While
Company policy prohibits such actions, 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.
GOVERNMENT REGULATION
The Company's business is subject to varying degrees of federal and state
regulation. Federal laws and the regulations of the Federal Communications
Commission (the "FCC") apply to the Company's international and interstate
facilities-based and resale telecommunications services, while applicable state
regulatory authorities ("PSCs") have jurisdiction over telecommunications
services originating and terminating within the same state. At the federal level
the Company is subject to common carriage requirements under the Communications
Act of 1934, as amended (the "Communications Act"). Comprehensive amendments to
the Communications Act were made by the Telecommunications Act, which was signed
into law on February 8, 1996. In addition, although the laws of other countries
only directly apply to carriers doing business in those countries, the Company
may be affected indirectly by such laws insofar as they affect foreign carriers
with which the Company does business.
International telecommunications carriers are required to obtain authority
from the FCC under Section 214 of the Communications Act in order to provide
international service that originates or terminates in the United States. U.S.
international common carriers also are required to file and maintain tariffs
with the FCC specifying the rates, terms, and conditions of their services. In
1996, the FCC established new rules that streamlined its Section 214
authorization and tariff regulation processes to provide for shorter notice and
review periods for certain U.S. international carriers including the Company. On
August 27, 1997, the Company was granted global facilities-based Section 214
authority under the FCC's new streamlined processing rules. Facilities-based
global Section 214 authority permits the Company to provide international basic
switched, private line, data, television and business services
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using previously authorized U.S. facilities to virtually every country in the
world. The Company also holds a Section 214 authorization granted in 1989
covering the provision of facilities-based satellite and resold international
services.
The FCC's streamlined rules also provide for global Section 214
authorization to resell switched and private line services of other carriers by
non-dominant international carriers. The FCC decides on a case-by-case basis
however whether to grant Section 214 authority to U.S. carriers to resell the
switched private lines of affiliated foreign carriers to countries where a
foreign carrier is dominant, based on a showing that there are equivalent resale
opportunities for U.S. carriers in the foreign carrier's market. To date, the
FCC has found that Canada, the U.K., Sweden and New Zealand provide equivalent
resale opportunities. The FCC has also found that equivalent resale
opportunities do not exist in Germany, Hong Kong and France. The FCC also is
considering applications for equivalency determinations with respect to
Australia, Chile, Denmark, Finland and Mexico. It is possible that
interconnected private line resale to additional countries may be allowed in the
future. Pursuant to FCC rules and policies, the Company's authorization to
provide service via the resale of interconnected international private lines
will be expanded to include countries subsequently determined by the FCC to
afford equivalent resale opportunities to those available under United States
law, if any. As a result of the recent signing of the WTO Agreement, the FCC has
proposed to replace the equivalency test with a rebuttable presumption in favor
of resale of interconnected private lines to WTO member countries. See "Business
- - Government Regulation."
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 this
type of 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 ITU regulations. It is
possible that the FCC may determine that refiling, as defined, violates U.S.
and/or international law. To the extent that the Company's traffic is routed
through a third country to reach a destination country, such an FCC
determination with respect to transiting and refiling could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company must also conduct its international business in compliance with
the FCC's international settlements policy ("ISP"). The ISP establishes the
parameters by which U.S.-based carriers and their foreign correspondents settle
the cost of terminating each other's traffic over their respective networks. The
precise terms of settlement are established in a correspondent agreement (also
referred to as an "operating agreement"), which also sets forth the term of the
agreement, the types of service covered by the agreement, the division of
revenues between the carrier that bills for the call and the carrier that
terminates the call, the frequency of settlements, the currency in which
payments will be made, the formula for calculating traffic flows between
countries, technical standards, and procedures for the settlement of disputes.
The Company's provision of domestic long distance service in the United
States is subject to regulation by the FCC and certain PSCs, who regulate, to
varying degrees, interstate and intrastate rates, respectively, ownership of
transmission facilities, and the terms and conditions under which the Company's
domestic services are provided. In general, neither the FCC nor the PSCs
exercise direct oversight over cost justification for domestic carriers' rates,
services or profit levels, but either or both may do so in the future. Domestic
carriers such as the Company, however, are required by federal law and
regulations to file tariffs listing the rates, terms and conditions applicable
to their interstate services.
The FCC adopted an order on October 29, 1996, requiring that non-dominant
interstate carriers, such as the Company, eliminate FCC tariffs for domestic
interstate long distance service. This order was to take effect as of December
1997. However, on February 13, 1997, the U.S. Court of Appeals for the District
of Columbia Circuit ruled that the FCC's order be stayed pending judicial review
of appeals challenging the order. Should the appeals fail and the FCC's order
become effective, the Company may
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benefit from the elimination of FCC tariffs by gaining more flexibility and
speed in dealing with marketplace changes. The absence of tariffs, however, will
also require that the Company secure contractual agreements with its customers
regarding many of the terms of its existing tariffs or face possible claims
arising because the rights of the parties are no longer clearly defined. To the
extent that the Company's customer base involves "casual calling" customers, the
potential absence of tariffs would require the Company to establish contractual
methods to limit potential liability to such customers. On August 20, 1997, the
FCC partially reconsidered its order by allowing dial-around carriers such as
the Company the option of maintaining tariffs on file with the FCC.
In addition, the Company generally is also required to obtain certification
from the relevant state PSC prior to the initiation of intrastate service and to
file tariffs with each such state. The Company currently has the certifications
required to provide service in 21 states, and has filed or is in the process of
filing requests for certification in 13 additional states. Although the Company
intends and expects to obtain operating authority in each jurisdiction in which
operating authority is required, there can be no assurance that one or more of
these jurisdictions will not deny the Company's request for operating authority.
Any failure to maintain proper federal and state certification or tariffs, or
any difficulties or delays in obtaining required certifications, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The FCC and certain PSCs also impose prior approval requirements on
transfers or changes of control, including pro forma transfers of control and
corporate reorganizations, and assignments of regulatory authorizations. Such
requirements may have the effect of delaying, deterring or preventing a change
in control of the Company. The Company also is required to obtain state approval
for the issuance of securities. Seven of the states in which the Company is
certificated provide for prior approval or notification of the issuance of
securities by the Company. Although the necessary approvals are being sought and
notification made prior to the Offering, because of time constraints, the
Company may not have obtained approval from two of the states prior to
consummation of the Offering. Although these state filing requirements may have
been preempted by the National Securities Market Improvement Act of 1996, there
is no case law on this point. The Company believes the remaining approvals will
be granted and that obtaining such approvals subsequent to the Offering should
not result in any material adverse consequences to the Company, although there
can be no assurance that such consequence will not result.
The 1996 Act is designed to promote local telephone competition through
federal and state deregulation. As part of its pro-competitive policies, the
1996 Act frees the RBOCs from the judicial orders that prohibited their
provision of long distance services outside of their operating territories
(which are called, Local Access and Transport Areas ("LATAs"). The 1996 Act
provides specific guidelines that allow the RBOCs to provide long distance
interLATA service to customers inside the RBOC's region but not before the RBOC
has demonstrated to the FCC and state regulators that it has opened up its local
network to competition and met a "competitive checklist" of requirements
designed to provide competing network providers with nondiscriminatory access to
the RBOC's local network. To date, the FCC has denied applications for in-region
long distance authority filed by Ameritech Corporation in Michigan and
Southwestern Bell Corporation ("SBC") in Oklahoma. Bell South recently filed a
similar application for Mississippi. If granted, such authority would permit
RBOCs to compete with the Company in the provision of domestic and international
long distance services. See "- Competition."
To originate and terminate calls in connection with providing their
services, long distance carriers such as the Company must purchase "access
services" from LECs or CLECs. Access charges represent a significant portion of
the Company's cost of U.S. domestic long distance services and, generally, such
access charges are regulated by the FCC for interstate services and by PSCs for
intrastate services. The FCC has undertaken a comprehensive review of its
regulation of LEC access charges to better account for increasing levels of
local competition. Under alternative access charge rate structures being
considered by the FCC, LECs would be permitted to allow volume discounts in the
pricing of access charges. While the outcome of these proceedings is uncertain,
if these rate structures are adopted, many long distance carriers, including the
Company, could be placed at a significant cost disadvantage to larger
competitors.
In February 1997, the World Trade Organization ("WTO") announced that 69
countries, including the United States, Japan, and all of the member states of
the European Union ("EU"), reached an agreement (the "WTO Agreement"), within
the framework of the General Agreement of Trade Ser-
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vices ("GATS") to facilitate trade in basic telecommunication services. The WTO
Agreement becomes effective January 1, 1998. Pursuant to the terms of the WTO
Agreement, signatories have committed to varying degrees to allow access to
their domestic and international markets by competing telecommunications
providers, allow foreign ownership interests in domestic telecommunications
providers and establish regulatory schemes to develop and implement policies to
accommodate telecommunications competition. At this time, the Company is unable
to predict the effect the WTO Agreement and related developments might have on
its business, financial condition and results of operations.
There can be no assurance that future regulatory, judicial and legislative
changes will not have a material adverse effect on the Company, that U.S. or
foreign regulators or third parties will not raise material issues with regard
to the Company's compliance or noncompliance with applicable laws and
regulations, or that regulatory activities will not have a material adverse
effect on the Company's business, financial condition and results of operations.
Moreover, the FCC and the PSCs generally have the authority to condition,
modify, cancel, terminate or revoke the Company's operating authority for
failure to comply with federal and state laws and applicable rules, regulations
and policies. Fines or other penalties also may be imposed for such violations.
Any such action by the FCC and/or the PSCs could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business - Government Regulation."
EFFECT OF RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is characterized by rapid and significant
technological advancements and introductions of new products and services
employing new technologies. Improvements in transmission equipment, the
development of switching technology allowing the simultaneous transmission of
voice, data and video, and the commercial availability of Internet-based
domestic and international switched voice, data and video services at prices
lower than comparable services offered by the Company are all possible
developments that could adversely affect the Company. The Company's
profitability will depend on its ability to anticipate and adapt to rapid
technological changes, acquire or otherwise access new technology, and offer, on
a timely and cost-effective basis, services that meet evolving industry
standards. There can be no assurance that the Company will be able to adapt to
such technological changes, maintain competitive services and prices or obtain
new technologies on a timely basis, on satisfactory terms or at all. Failure to
adapt to rapid technological changes could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISK OF NETWORK FAILURE
The success of the Company is largely dependent upon its ability to deliver
high quality, uninterrupted telecommunications services. Any failure of the
Company's network or other systems or hardware that causes interruptions in the
Company's operations could have a material adverse effect on the Company.
Increases in the Company's traffic and the build-out of its network will place
additional strains on its systems, and there can be no assurance that the
Company will not experience system failures. Frequent, significant or prolonged
system failures, or difficulties experienced by customers in accessing or
maintaining connection with the Company's network could substantially damage the
Company's reputation and could have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its management team and technical, marketing and customer
service personnel. The Company's success also depends on its ability to attract
and retain additional qualified management, technical, marketing and customer
service personnel. Competition for qualified employees in the telecommunications
industry is intense and, from time to time, there are a limited number of
persons with knowledge of and experience in particular sectors of the industry.
The process of locating personnel with the combination of skills and attributes
required to implement the Company's strategies is often lengthy, and there can
be no assurance that the Company will be successful in attracting and retaining
such personnel. The loss
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of the services of key personnel, or the inability to attract additional
qualified personnel, could have a material adverse effect on the Company's
operations, its ability to implement its business strategies, and its efforts
to expand. Any such event could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management."
RISKS RELATED TO USE OF STARTEC NAME
Certain other telecommunications companies and related businesses use names
or hold registered trademarks that include the word "star." In addition, several
other companies in businesses that the Company believes are not
telecommunications-related use variations of the "star-technology" word
combination (e.g., Startek and Startech). Although the Company holds a
registered trademark for "STARTEC," there can be no assurance that its continued
use of the STARTEC name will not result in litigation brought by companies using
similar names or, in the event the Company should change its name, that it would
not suffer a loss of goodwill. In addition, the Company is filing for federal
registration of the trademark of "Startec Global Communications Corporation."
While no guarantee can be made that this application will be successful and
mature into a federal trademark registration, the established rights in and
registration of STARTEC provides the basis for expanding the trademark rights to
include the supplemental terms "Global Communications Group."
RISKS ASSOCIATED WITH STRATEGIC ALLIANCES, ACQUISITIONS AND INVESTMENTS
The Company intends to pursue strategic alliances with, and to acquire
assets and businesses or make strategic investments in, businesses that it
believes are complementary to the Company's current and planned operations. The
Company, however, has no present commitments, agreements or understandings with
respect to any strategic alliance, acquisition or investment. Any future
strategic alliances, investments or acquisitions would be accompanied by the
risks commonly encountered in strategic alliances with, or acquisitions of, or
investments in, other companies. Such risks include those associated with
assimilating the operations and personnel of the companies, potential disruption
of the Company's ongoing business, inability of management to maximize the
financial and strategic position of the Company by the successful incorporation
of the acquired technology, know-how, and rights into the Company's business,
maintenance of uniform standards, controls, procedures and policies, and
impairment of relationships with employees and customers as a result of changes
in management. There can be no assurance that the Company would be successful in
overcoming these risks or any other problems encountered with such strategic
alliances, investments or acquisitions.
Further, if the Company were to proceed with one or more significant
strategic alliances, acquisitions or investments in which the consideration
given by the Company consists of cash, a substantial portion of the Company's
available cash could be used to consummate such strategic alliances,
acquisitions or investments. If the Company were to consummate one or more
significant strategic alliances, acquisitions or investments in which the
consideration given by the Company consists of stock, stockholders of the
Company could suffer a significant dilution of their interests in the Company.
Many of the businesses that might become attractive acquisition candidates for
the Company may have significant goodwill and intangible assets, and
acquisitions of these businesses, if accounted for as a purchase, would
typically result in substantial amortization charges to the Company. The
financial impact of acquisitions, investments and strategic alliances could have
a material adverse effect on the Company's business, financial condition and
results of operations and could cause substantial fluctuations in the Company's
future quarterly and yearly operating results. See "- Potential Fluctuations in
Quarterly Operating Results."
CONTROL OF COMPANY BY CURRENT STOCKHOLDERS
After completion of this Offering, the executive officers and directors of
the Company will continue to beneficially own 4,008,491 shares of Common Stock,
representing 46.8% of the Common Stock, including options to purchase 117,616
shares of Common Stock exercisable over time following the completion of this
Offering. Of these amounts, Ram Mukunda, President of the Company will
beneficially own 3,579,675 shares of Common Stock. Mr. Mukunda, Vijay Srinivas
and Usha Srinivas have
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entered into a voting agreement dated as of July 31, 1997 (the "Voting
Agreement"), pursuant to which Mr. Mukunda has the power to vote all of the
shares held by Mr. and Mrs. Srinivas. The Voting Agreement will terminate
December 31, 1997, or at such other time as the parties may otherwise agree.
The Company's executive officers and directors as a group, or Mr. Mukunda,
acting individually, will exercise significant influence over such matters as
the election of the directors of the Company, amendments to the Company's
charter, and other fundamental corporate transactions such as mergers, asset
sales, and the sale of the Company. See "Principal Stockholders" and
"Description of Capital Stock."
RESTRICTIONS IMPOSED BY SIGNET AGREEMENT
The Signet Agreement contains a number of affirmative and negative
covenants, including covenants restricting the Company and its subsidiaries with
respect to the conduct of business and maintenance of corporate existence, the
incurrence of additional indebtedness, the creation of liens, transactions with
Company affiliates, the consummation of certain merger or consolidating
transactions or the sale of substantial amounts of the Company's assets, the
sale of capital stock of any subsidiary, the making of investments or
acquisition of assets, and the making of dividend and similar payments or
distributions. In addition, the Signet Agreement includes a number of financial
covenants, including covenants requiring the Company to maintain certain
financial ratios and thresholds. A material breach of any of these obligations
or covenants could result in an event of default pursuant to which Signet Bank
could declare all amounts outstanding due and payable immediately. There can be
no assurance that one or more of such breaches will not occur or that the assets
or cash flows of the Company, or other sources of financing, would be sufficient
to repay in full all borrowings outstanding under the Signet Agreement in the
event of such breach. Beginning on January 1, 1998 (and extending to July 1,
1998 upon the occurrence of defined events), should Signet Bank determine and
assert based on its reasonable assessment that a material adverse change to the
Company has occurred, it could declare all amounts outstanding to be immediately
due and payable. The warrants issued to Signet Bank in connection with the
Signet Agreement also contain provisions which may adversely affect the
Company's ability to raise additional capital through the sale or issuance of
its Common Stock, options, warrants or other rights to purchase Common Stock, or
securities convertible into Common Stock without providing Signet Bank with the
right to maintain its percentage ownership in the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Description of Capital Stock - Warrants
and Registration Rights."
In addition, the Company's repayment and other obligations under the Signet
Agreement are secured by (i) a first priority security interest in all of the
Company's tangible and intangible assets, including all customer lists and other
intellectual property of all direct and indirect subsidiaries; (ii) a pledge of
all of the capital stock of the Company owned by Ram Mukunda, the Company's
President, director and principal shareholder, and Vijay Srinivas, a Company
director and his wife, Usha Srinivas; and (iii) all leased or owned real estate
and all fixtures and equipment. A breach of any of the Company's obligations or
covenants under the Signet Agreement could result in an event of default
pursuant to which Signet Bank could also seek to foreclose on the security
provided by the Company, Mr. Mukunda and Mr. and Mrs. Srinivas. If Signet Bank
were to take possession of and control over the shares subject to the pledge, it
would acquire voting control of a significant percentage of the issued and
outstanding shares of Common Stock. See "Description of Capital Stock - Signet
Agreement."
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION, BYLAWS AND
MARYLAND LAW
The Company's Amended and Restated Articles of Incorporation (the
"Charter") and Bylaws (the "Bylaws") include certain provisions which may have
the effect of delaying, deterring or preventing a future takeover or change in
control of the Company such as notice requirements for stockholders, staggered
terms for its Board of Directors, limitations on the stockholders' ability to
remove directors, call meetings, or to present proposals to the stockholders for
a vote, and "super-majority" voting requirements for amendments to certain key
provisions of the Charter, unless such takeover or change in control is approved
by the Company's Board of Directors. Such provisions may also render the removal
of directors and management more difficult. In addition, the Company's Board of
Directors has the authority to issue up to 100,000 shares of preferred stock
(the "Preferred Stock") and to determine the
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price, rights, preferences and privileges of those shares without any further
vote or action by the stockholders. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no present plan to issue any shares of
Preferred Stock.
The Company is also subject to the anti-takeover provisions of the Maryland
General Corporation Law, which prohibit the Company from engaging in a "business
combination" with an Interested Stockholder (as defined) for a period of five
years after the date of the transaction in which the person first becomes an
Interested Stockholder, unless the business combination is approved in a
prescribed manner. The Company is also subject to the control share acquisition
provisions of the Maryland General Corporation Law, which provide that shares
acquired by a person with certain levels of voting power have no voting rights
unless the share acquisition is approved by the vote of two-thirds of the votes
entitled to be cast, excluding shares owned by the acquiror and by the Company's
officers and employee-directors, and in certain circumstances, such shares may
be redeemed by the Company. The application of these statutes and certain other
provisions of the Company's Charter could have the effect of discouraging,
delaying or preventing a change of control of the Company not approved by the
Board of Directors, which could adversely affect the market price of the
Company's Common Stock. Additionally, certain Federal regulations require prior
approval of certain transfers of control which could also have the effect of
delaying, deferring or preventing a change of control. See "Business -
Government Regulation" and "Description of Capital Stock Certain Provisions of
the Company's Articles of Incorporation, Bylaws and Maryland Law."
ABSENCE OF PRIOR PUBLIC MARKET; ARBITRARY OFFERING PRICE; POSSIBLE VOLATILITY
OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop after the Offering or that, if a public market develops, the
market price for the Common Stock will equal or exceed the initial public
offering price set forth on the cover page of this Prospectus. The initial
public offering price of the Common Stock offered hereby was determined by
negotiations between the Company and the Representatives of the Underwriters and
may bear no relationship to the price at which the Common Stock will trade after
completion of this Offering. The initial public offering price of the Common
Stock offered hereby does not necessarily bear any relationship to the Company's
earnings, assets, book value, or any other recognized measure of value. For
factors considered in determining the initial public offering price, see
"Underwriting."
Historically, the market prices for securities of emerging companies in the
telecommunications industry have been highly volatile. Future announcements
concerning the Company or its competitors, including results of operations,
technological innovations, government regulations, proprietary rights or
significant litigation, may have a significant impact on the market price of the
Common Stock. In addition, the stock markets recently have experienced
significant price and volume fluctuations that particularly have affected
telecommunications companies and have resulted in changes in the market prices
of the stocks of many companies which have not been directly related to the
operating performance of those companies. Such market fluctuations may
materially adversely affect the market price of the Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and has no
plans to do so in the foreseeable future. The declaration and payment of any
dividends in the future will be determined by the Board of Directors, in its
discretion, and will depend on a number of factors, including the Company's
earnings, capital requirements and overall financial condition. In addition, the
Company's ability to declare and pay dividends is substantially restricted under
the terms of the Signet Agreement. See "Dividend Policy," "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources" and "- Restrictions Imposed by Signet
Agreement."
16
<PAGE>
DILUTION TO PURCHASERS OF COMMON STOCK
Purchasers of Common Stock in this Offering will experience immediate and
substantial dilution. To the extent outstanding options and warrants to purchase
shares of Common Stock are exercised in the future, there will be further
dilution. See "Dilution."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS
Current stockholders of the Company will benefit from the creation of a
public market for the Common Stock as a result of the Offering. Such
stockholders also will have an unrealized gain, represented by the difference
between the aggregate cost of the Common Stock which they currently own
($1,003,259) and the aggregate value of the Common Stock upon completion of the
Offering ($64,775,988, assuming an Offering price per share of $12.00). In
addition, Ram Mukunda, the Company's President and a director, Vijay Srinivas, a
director, and Usha Srinivas may be viewed as receiving a benefit from the
completion of the Offering, as part of the proceeds of the Offering are intended
to be used to partially repay amounts due under the Signet Agreement, which is
secured, in part, by all of the Common Stock owned by Mr. Mukunda and Mr. and
Mrs. Srinivas. See "Dilution" and "Description of Capital Stock Signet
Agreement."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock in the public market following this Offering
by the current stockholders of the Company, or the perception that such sales
could occur, could adversely affect the market price for the Common Stock. The
Company's principal stockholders hold a significant portion of the Company's
outstanding Common Stock and a decision by one or more of these stockholders to
sell shares pursuant to Rule 144 under the Securities Act or otherwise could
materially adversely affect the market price of the Common Stock.
On the date of this Prospectus, the 2,600,000 shares of Common Stock to be
sold in this Offering (together with shares sold upon exercise of the
Underwriters' over allotment option, if any) will be eligible immediately for
sale in the public market. An additional 2,073,790 shares will become eligible
for public sale beginning 180 days after the effective date of the Registration
Statement of which this Prospectus forms a part, subject to the provisions of
Rule 144 under the Securities Act. Certain of the stockholders, and certain
holders of warrants to purchase shares of Common Stock, also have the right to
request that the Company register their shares for public sale. If a large
number of shares is registered and sold in the public market pursuant to the
exercise of such registration rights, such sales could have an adverse effect on
the market price of the Common Stock. See "Shares Eligible For Future Sale" and
"Description of Capital Stock - Signet Agreement."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
in this Offering are estimated to be $27.9 million ($32.2 million if the
Underwriters' over-allotment option is exercised in full), after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
The Company intends to use the net proceeds of the Offering as follows:
approximately $14.2 million to acquire cable facilities, switching, compression
and other related telecommunications equipment; approximately $4.7 million for
marketing; approximately $2.5 million to pay down amounts due under the Signet
Agreement, which matures on December 31, 1999 and bears interest, as of October
1, 1997, at a rate of 9.77%; and the balance for working capital and other
general corporate purposes, including possible future acquisitions and strategic
alliances. While the Company continually reviews possible acquisitions and
strategic alliances, it has not entered into any understanding or agreement with
respect to any future acquisition or strategic alliance. Pending application of
the net proceeds, the Company may invest such net proceeds in short-term,
interest-bearing investment grade securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
17
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock, nor does it expect to do so in the foreseeable future. It is anticipated
that all future earnings, if any, generated from operations will be retained by
the Company to develop and expand its business. Any future determination with
respect to the payment of dividends will be at the discretion of the Board of
Directors and will depend upon, among other things, the Company's operating
results, financial condition and capital requirements, the terms of
then-existing indebtedness, general business conditions and such other factors
as the Board of Directors deems relevant. In addition, the terms of the Signet
Agreement prohibit the payment of cash dividends without the lender's consent.
See "Risk Factors - Dividend Policy" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
DILUTION
The deficit in net tangible book value of the Company as of June 30, 1997
was $6.1 million or $1.14 per share of Common Stock. The deficit in net tangible
book value per share represents the amount of total tangible assets of the
Company less the amount of its total liabilities and divided by the total number
of shares of Common Stock outstanding. After giving effect to the sale by the
Company of the 2,600,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $12.00 per share, net of underwriting discounts
and commissions, and receipt of the net proceeds therefrom, the pro forma net
tangible book value of the Company as of June 30, 1997 would have been $21.8
million, or $2.72 per share. This represents an immediate increase in net
tangible book value of $3.86 per share to existing stockholders and an immediate
dilution of $9.28 per share to investors purchasing shares of Common Stock in
the Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share .................................... $12.00
Net tangible book deficit per share as of June 30, 1997 before
Offering ......................................................... $ (1.14)
Increase in net tangible book value per share attributable to
this Offering ................................................... 3.86
-------
Pro forma net tangible book value per share as adjusted for this
Offering ............................................................ 2.72
--------
Dilution in net tangible book value per share to new investors ...... $ 9.28
========
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 1997,
the differences between the existing stockholders and the new investors
purchasing Common Stock in the Offering with respect to the number of shares of
Common Stock to be purchased from the Company, the total consideration paid to
the Company in connection with the Offering and the average price per share paid
or to be paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders ...... 5,397,999 67% $ 1,003,259 3% $ 0.19
New investors ............... 2,600,000 33% 31,200,000 97% 12.00
--------- ---- ------------ ---- -------
Total ..................... 7,997,999 100% $32,203,259 100% $ 4.03
========= ==== ============ ==== =======
</TABLE>
The foregoing table assumes no exercise of the Underwriters' over allotment
option and no conversion or exercise of convertible securities, options or
warrants to purchase additional shares of Common Stock. As of the date of this
Prospectus, there were options outstanding to purchase a total of 524,016 shares
of Common Stock at a weighted average exercise price of $5.59 per share, and
warrants and other rights outstanding to purchase a total of 566,800 shares. To
the extent outstanding options and warrants are exercised, there will be further
dilution to new investors. See "Management - Stock Option Plans," "Principal
Stockholders," "Description of Capital Stock - Warrants and Registration
Rights," and "Underwriting."
18
<PAGE>
CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table sets forth the capitalization of the Company (i) as of
June 30, 1997, (ii) on a pro forma basis to reflect the repayment of debt with
proceeds under the Signet Agreement and the conversion and retirement of
non-voting common stock as if such events had occurred as of June 30, 1997; and
(iii) as adjusted to reflect the sale and issuance of 2,600,000 shares of Common
Stock by the Company in the Offering (at an assumed initial public offering
price of $12.00 per share, and assuming no exercise of the Underwriters' over
allotment option), and the application of the estimated net proceeds therefrom
as described under "Use of Proceeds." This table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and related notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED
----------- -------------- ------------
<S> <C> <C> <C>
Cash and cash equivalents ................................................ $ 2,106 $ 2,106 $ 27,510
======== ======== ========
Current maturities of long-term obligations:
Receivables based credit facility ....................................... $ 2,919 $ - $ -
Notes payable to related parties ....................................... 103 - -
Notes payable to individuals and other ................................. 1,300 - -
Capital lease obligations ................................................ 356 313 313
-------- -------- --------
4,678 313 313
Long-term obligations, net of current portion:
Signet credit facility ................................................... - 3,669 1,169
Redeemable Signet warrants(2) .......................................... - 823 -
Capital lease obligations ................................................ 665 588 588
Notes payable to related parties ....................................... 50 - -
Notes payable to individuals and others ................................. 44 44 44
-------- -------- --------
759 5,124 1,801
-------- -------- --------
Total current and long-term obligations ................................. 5,437 5,437 2,114
-------- -------- --------
Stockholders' (deficit) equity
Common Stock; $0.01 par value; 10,000,000 shares authorized on an actual and
pro forma basis, 20,000,000 shares authorized as adjusted; 5,380,824 shares
issued and outstanding, 5,397,999 pro forma and 7,997,999 as ad-
justed(3) 54 54 80
Non voting common stock; $1.00 par value; 25,000 shares authorized; 22,526
shares issued and outstanding, no shares outstanding pro forma and as
adjusted ............................................................... 23 - -
Preferred stock, $1.00 par value; no shares authorized on an actual and pro
forma basis, 100,000 shares authorized as adjusted; no shares issued and
outstanding ............................................................ - - -
Additional paid-in capital ............................................. 1,063 1,041 28,049
Unearned compensation(2) ............................................. (108) (108) -
Warrants(2) ............................................................ - - 1,693
Accumulated deficit(2) ................................................ (6,746) (6,746) (6,854)
-------- -------- --------
Total Stockholders' (deficit) equity ................................. (5,714) (5,759) 22,968
-------- -------- --------
Total capitalization ................................................ $ (277) $ (322) $ 25,082
======== ======== ========
</TABLE>
- ----------
(1) Gives pro forma effect to (i) proceeds under the Signet Agreement used to
retire amounts due under a receivables-based credit facility, notes payable
to related parties, notes payable to individuals and other and certain
capital lease obligations; (ii) the fair value of 269,900 warrants granted
to Signet Bank, which contain a repurchase feature, recorded as the Signet
Agreement; (iii) the conversion of 17,175 shares of non voting common stock
into an equal number of shares of Common Stock; and (iv) the purchase and
retirement of 5,351 shares of non voting common stock.
(2) Reflects (i) the fair value of 150,000 warrants issued to the Underwriters
and the fair value of the Signet Warrants, which are not redeemable upon
completion of the Offering; and (ii) the acceleration of unearned
compensation expense related to stock options which vest upon completion of
the Offering.
(3) Excludes (i) 269,766 shares of Common Stock issuable upon the exercise of
options under the Amended and Restated Stock Option Plan; (ii) 750,000
(254,250 of which were granted in September 1997) shares of Common Stock
reserved for issuance under the Company's 1997 Performance Incentive Plan;
and (iii) 716,800 shares of Common Stock issuable pursuant to the exercise
of certain warrants and upon conversion of a note. See "Management - Stock
Option Plans," "Description of Capital Stock - Warrants and Registration
Right," and "Underwriting."
19
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table presents selected financial data of the Company for the
years ended December 31, 1992, 1993, 1994, 1995, 1996 and the six months ended
June 30, 1996 and 1997. The historical financial data as of December 31, 1994,
1995, 1996 and for each of the three years in the period ended December 31, 1996
have been derived from the financial statements of the Company which have been
audited by Arthur Andersen LLP, independent public accountants, as set forth in
the financial statements and notes thereto presented elsewhere herein. The
financial data as of December 31, 1992 and 1993, and for the years then ended
and for the six months ended June 30, 1996 and 1997 have been derived from the
Company's unaudited financial statements in a manner consistent with the audited
financial statements. In the opinion of the Company's management, these
unaudited financial statements include all adjustments necessary for a fair
presentation of such information. Operating results for interim periods are not
necessarily indicative of the results that might be expected for the entire
fiscal years. The following information should be read in conjunction with the
Company's selected financial statements and notes thereto presented elsewhere
herein. See "Financial Statements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
-------- ----------- ----------- ------------ ------------ --------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ........................... $2,394 $ 3,288 $ 5,108 $ 10,508 $ 32,215 $13,206 $28,836
Cost of services ........................ 1,585 3,090 4,701 9,129 29,881 12,388 25,250
------- -------- ------- -------- -------- ------- --------
Gross margin ........................... 809 198 407 1,379 2,334 818 3,586
General and administrative expenses ...... 464 1,491 1,159 2,170 3,996 1,373 2,461
Selling and marketing expenses ......... 30 232 91 184 514 154 306
Depreciation and amortization ............ 61 85 90 137 333 144 214
------- -------- ------- -------- -------- ------- --------
Income (loss) from operations ............ 254 (1,610) (933) (1,112) (2,509) (853) 605
Interest expense ........................ 47 71 70 116 337 118 252
Interest income ........................... 1 13 24 22 16 9 5
------- -------- ------- -------- -------- ------- --------
Income (loss) before income tax
provision .............................. 208 (1,668) (979) (1,206) (2,830) (962) 358
Income tax provision ..................... - - - - - - 7
------- -------- ------- -------- -------- ------- --------
Net income (loss) ........................ $ 208 $ (1,668) $ (979) $ (1,206) $ (2,830) $ (962) $ 351
======= ======== ======= ======== ======== ======= ========
PER SHARE DATA:
Net income (loss) per common and
equivalent share ..................... $ 0.04 $ (0.33) $ (0.20) $ (0.21) $ (0.49) $(0.17) $ 0.06
======= ======== ======= ======== ======== ======= ========
Weighted average common and equiva-
lent shares outstanding 4,969 4,989 4,989 5,710 5,796 5,796 5,796
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, JUNE 30,
--------------------------------------------------------- ------------
1992 1993 1994 1995 1996 1997
--------- ----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .................. $ 230 $ 194 $ 257 $ 528 $ 148 $ 2,106
Working capital deficit ..................... (364) (2,097) (3,295) (3,744) (7,000) (7,293)
Total assets ................................. 1,606 1,176 1,954 4,044 7,328 14,265
Long-term obligations, net of current portion 165 248 6 361 646 759
Stockholders' deficit ........................ $ (207) $ (1,824) $ (2,803) $ (3,259) $ (6,089) $ (5,714)
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Prospectus. This discussion, including the Company's plans and strategy for
its business, contains forward-looking statements that involve certain risks and
uncertainties. The Company's actual results could differ materially from those
anticipated by the forward-looking statements as a result of certain factors,
including, but not limited to those discussed under "Risk Factors" and elsewhere
in this Prospectus.
OVERVIEW
The Company is a rapidly growing, facilities-based international long
distance carrier that has implemented a marketing strategy to serve ethnic
residential markets in the U.S. and some of the leading international long
distance carriers. The Company's quarterly revenues have increased fifteen fold
over the last three years from approximately $1.1 million in the quarter ended
June 30, 1994 to approximately $16.5 million in the quarter ended June 30, 1997.
The Company's residential billing customers increased to over 43,700 for June
1997 compared to approximately 5,000 for June 1994, as measured over a 30 day
period. Since its inception in 1989, the Company has focused its marketing
efforts on the residential consumer marketplace in ethnic communities in which
management believes there is a high demand for international long distance
services. To achieve the economies of scale necessary to maintain cost effective
operations, the Company began reselling its capacity to other carriers in late
1995. The Company currently offers U.S.-originated long distance service
worldwide through a flexible network of owned and leased transmission facilities
and resale arrangements, as well as a variety of operating agreements and
termination arrangements.
Until 1995, the Company's business was concentrated in the New York to
Washington, D.C. corridor and focused on the delivery of dial-around access
calling services to India. At the end of 1995, the Company expanded its customer
base to include the West Coast, and began targeting other ethnic groups in the
U.S., such as the Middle Eastern, Philippine and Russian communities. This
expansion was facilitated by utilizing a portion of the proceeds of the sale of
stock to Blue Carol Enterprises Ltd., an affiliate of Portugal Telecom
International. The Company supported this expansion by leasing network capacity
from other domestic telecommunications companies, thereby experiencing higher
per-minute costs. In late 1995, the Company began to market its international
long distance services to other telecommunications carriers. While providing
greater utilization of its own network facilities, the carrier group allowed the
Company to build relationships with other carriers, which in turn, led to
additional termination options for its residential traffic. See "Business -
Strategy."
The Company's strategy is to serve its customers by building its own global
network, which will allow the Company to originate, transmit, and terminate
calls utilizing network capacity the Company manages. The Company anticipates
that this network expansion will allow it to achieve a per-minute cost advantage
over current arrangements. As the Company transitions from leasing to owning or
managing its facilities, the Company's management believes economies in the
per-minute cost of a call will be realized, while fixed costs will increase.
Presently, the facilities owned by the Company are domestically based and
provide a cost advantage only with respect to origination costs. The Company
realizes a per-minute cost savings when it is able to originate calls on network
facilities it owns and manages ("on net") versus calls which must be originated
through the utilization of facilities the Company does not own ("off net"). For
the six months ended June 30, 1997 and for the year ended December 31, 1996,
approximately 58.1% and 44.9% of the Company's residential revenues were
originated on net, resulting in gross margins of approximately 4.4% and 3.7% as
compared to gross margins of approximately 2.2% and 3.1% on residential revenues
originated off net during the respective periods on other carrier facilities
during the respective periods. As a higher percentage of calls are originated,
transmitted, and terminated on the Company's own facilities, per-minute costs
are expected to decline, predicated on call traffic volumes.
21
<PAGE>
Revenues for telecommunication services are recognized as such services are
rendered, net of an allowance for revenue that the Company estimates will
ultimately not be realized. Revenues for return traffic received according to
the terms of the Company's operating agreements with foreign PTT's, as described
below, are recognized as revenue as the return traffic is received and
processed. There can be no assurance that traffic will be delivered back to the
United States or what impact changes in future settlement rates, allocations
among carriers or levels of traffic will have on net payments made and revenues
received and recorded by the Company.
The Company's cost of services consists of origination, transmission and
termination expenses. Origination costs include the amounts paid to LECs and
other domestic telecommunication network providers in areas where the Company
does not have its own network facilities. Transmission expenses are fixed
month-to-month payments associated with capacity on satellites, undersea
fiber-optic cables, and other domestic and international leased lines. Leasing
this capacity subjects the Company to price changes that are beyond the
Company's control and to transmission costs that are higher than transmission
costs on the Company's owned network. As the Company builds its own transmission
capacity, the risk associated with price fluctuations and the relative costs of
transmission are expected to decrease, however, fixed costs will increase. See
"Risk Factors - Potential Fluctuations in Quarterly Operating Results."
Among its various foreign termination arrangements, the Company has entered
into operating agreements with a number of foreign PTTs, under which
international long distance traffic is both delivered and received. Under these
agreements, the foreign carriers are contractually obligated to adhere to the
policy of the FCC, whereby traffic from the foreign country is routed through
U.S. international carriers, such as the Company, in the same proportion as
traffic carried into the country ("return traffic"). Mutually exchanged traffic
between the Company and foreign carriers is reconciled through a formal
settlement arrangement at agreed upon rates. The Company records the amount due
to the foreign PTT as an expense in the period the traffic is terminated. When
the Company receives return traffic in a future period, the Company generally
realizes a higher gross margin on the return traffic as compared to the lower
margin on the outbound traffic. Return traffic accounted for approximately 3.4%
and 3.5% of revenues in the six months ended June 30, 1997 and the year ended
December 31, 1996, respectively.
In addition to the operating agreements, the Company utilizes alternative
termination arrangements offered by third party vendors. The Company seeks to
maintain strong vendor diversity for countries where traffic volume is high.
These vendor arrangements provide service on a variable cost basis subject to
volume. These prices are subject to changes, generally upon seven-days notice.
As the international telecommunications marketplace has been deregulated,
per-minute prices have fallen and, as a consequence, related per-minute costs
for these services have also fallen. As a result, the Company has not been
adversely affected by the price reductions, although there can be no assurance
that this will continue. Although the Company generated positive net income for
the six months ended June 30, 1997, the Company expects selling, general and
administrative costs to increase as it develops its infrastructure to manage
higher business volume. Thus, continued profitability is dependent upon
management's ability to successfully manage growth and operations. See "Risk
Factors - Management of Growth."
22
<PAGE>
Results of Operations
The following table sets forth for the periods indicated certain financial
data as a percentage of net revenues.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------ -------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Net revenues ........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services ........................ 92.0 86.9 92.8 93.8 87.6
--------- --------- --------- --------- ------
Gross margin ........................... 8.0 13.1 7.2 6.2 12.4
General and administrative expenses . 22.7 20.7 12.4 10.4 8.5
Selling and marketing expenses ......... 1.8 1.8 1.6 1.2 1.1
Depreciation and amortization ............ 1.8 1.3 1.0 1.1 0.7
--------- --------- --------- --------- ------
Income (loss) from operations ......... (18.3) (10.7) (7.8) (6.5) 2.1
Interest expense ........................ (1.4) (1.1) (1.1) (0.9) (0.9)
Interest income ........................ 0.5 0.2 0.1 0.1 -
--------- --------- --------- --------- ------
Income (loss) before income tax
provision ........................... (19.2) (11.6) (8.8) (7.3) 1.2
Income tax provision ..................... - - - - -
--------- --------- --------- --------- ------
Net income (loss) ..................... (19.2)% (11.6)% (8.8)% (7.3)% 1.2%
========= ========= ========= ========= ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net Revenues. Net revenues increased approximately $15.6 million or 118.2%,
to $28.8 million in the six months ended June 30, 1997 from $13.2 million for
the six months ended June 30, 1996. Residential revenue increased in comparative
periods by approximately $5.5 million or 110.0%, to $10.5 million in the first
six months of 1997 from approximately $5.0 million for the first six months of
1996. The increase in residential revenue is due to an increase in residential
customers to over 43,700 for June 1997 from approximately 19,800 for June 1996.
Carrier revenue increased approximately $10.1 million or 123.2%, to $18.3
million in the first six months of 1997 from $8.2 million in the first six
months of 1996. The increase in carrier revenue is due to the execution of the
Company's strategy to optimize its capacity on its facilities, which has
resulted in sales to additional customers and increased sales to existing
customers. Carrier revenue also improved due to an increase in return traffic to
approximately $994,000 for the six months ended June 30, 1997 from approximately
$490,000 for the six months ended June 30, 1996.
Gross Margin. Total gross margin increased approximately $2.8 million to
$3.6 million for the six months ended June 30, 1997 from $818,000 for the six
months ended June 30, 1996. Gross margin improved as a percentage of net revenue
to approximately 12.4% for the first six months of 1997 from 6.2% for the first
six months of 1996. The gross margin on residential revenue increased to
approximately 12.4% for the six months ended June 30, 1997 from 9.2% for the six
months ended June 30, 1996, due to an increase in the percentage of residential
traffic originated on net and improved termination costs. In the six months
ended June 30, 1997, approximately 58.1% of residential revenue originated on
net, as compared to approximately 41.6% in the six months ended June 30, 1996.
The gross margin on carrier revenue increased to approximately 12.5% in the
first six months of 1997 from 4.4% for the first six months of 1996. Excluding
the impact of return traffic, which is included in carrier revenue, the gross
margin on carrier revenue would have been approximately 7.4% for the six months
ended June 30, 1997, and negative 1.6% for the six months ended June 30, 1996.
The improvement in margin on carrier revenue is due to reduced termination costs
pursuant to the Company's strategy of diversifying its termination options.
The reported gross margin for the six months ended June 30, 1997 and June
30, 1996 includes the effect of accrued disputed charges of approximately
$67,000 and $487,000, respectively, which represents less than 1.0% and 4.0% of
reported net revenues.
23
<PAGE>
General and Administrative. General and administrative expenses increased
approximately $1.1 million or 78.6%, to $2.5 million for the six months ended
June 30, 1997 from $1.4 million for the six months ended June 30, 1996. As a
percentage of net revenue, general and administrative expenses declined to
approximately 8.5% from 10.4% for the respective periods. The increase in dollar
amounts was primarily due to an increase in personnel to 72 from 54 in the
respective periods and, to a lesser extent, an increase in billing processing
fees.
Selling and Marketing. Selling and marketing expenses decreased as a
percentage of net revenue to approximately 1.1% in the six months ended June 30,
1997 from 1.2% in the six months ended June 30, 1996. In dollar amounts, selling
and marketing expenses increased to approximately $306,000 in the first six
months of 1997, from approximately $154,000 in the first six months of 1996, as
a result of the Company's efforts to market to new customer groups.
Depreciation and Amortization. Depreciation and amortization expenses
increased to approximately $214,000 in the six months ended June 30, 1997 from
$144,000 in the six months ended June 30, 1996, primarily due to increases in
capital expenditures for the expansion of the network infrastructure.
Interest. Interest expense increased to approximately $252,000 for the six
months ended June 30, 1997 from $118,000 for the six months ended June 30, 1996,
as a result of additional debt incurred by the Company to fund working capital
needs.
Net Income. Net income was approximately $351,000 for the six months ended
June 30, 1997 as compared to a loss of $962,000 for the six months ended June
30, 1996. The improvement in net income is largely attributable to the increase
in gross margin dollar amounts as described above.
1996 COMPARED TO 1995
Net Revenues. Net revenues increased approximately $21.7 million or 206.7%,
to $32.2 million for the year ended 1996 from $10.5 million in the year ended
1995. Residential revenue increased in comparative periods by approximately $6.6
million or 122.2%, to $12.0 million in 1996 from $5.4 million in 1995. The
increase in residential revenue is due to a concerted effort to expand marketing
to the West Coast and to target additional ethnic communities such as the Middle
Eastern, Philippine, and Russian communities. The Company's residential customer
base grew to approximately 27,800 customers as of December 31, 1996 from 10,700
customers as of December 31, 1995. Carrier revenue increased approximately $15.1
million or 296.1%, to $20.2 million in 1996 from $5.1 million in 1995. This
growth is a result of the Company's strategy to optimize network utilization by
offering its services to other carriers. In this regard, the Company was
successful in expanding its marketing and increased sales to first and
second-tier carriers. Return traffic decreased to approximately $1.1 million in
1996 from $2.0 million in 1995. Net revenues in 1995 reflect the receipt of
previously undelivered return traffic revenues to the Company.
Gross Margin. Total gross margin increased approximately $900,000 to $2.3
million in 1996 from $1.4 million for 1995. Gross margin decreased as a
percentage of net revenue to approximately 7.2% for 1996 from 13.1% for 1995.
The gross margin on residential revenue decreased to approximately 10.1% in 1996
from 10.4% in 1995 due to initial expenses associated with the entry into new
markets. As a result of the expansion into additional ethnic markets and new
geographic areas, on net origination declined to approximately 44.9% in 1996, as
compared to 62.9% in 1995. The relative decrease in on net originated traffic
was due to customer base growth prior to the expansion of owned or managed
facilities. The gross margin on carrier revenue, excluding return traffic,
increased to approximately negative 0.02% in 1996 from negative 36.9% in 1995.
General and Administrative. General and administrative expenses increased
approximately $1.8 million or 81.8%, to $4.0 million for 1996 from $2.2 million
for 1995. However, as a percentage of net revenue, general and administrative
expenses declined to approximately 12.4% from 20.7% in the respective periods.
The increase in dollar amounts in general and administrative expenses primarily
resulted from increased third party billing and collection fees of approximately
$349,000 to support higher calling volume; increased personnel expenses to $1.5
million in 1996 from $1.1 million in 1995 as a result of new hires; and bad debt
losses of approximately $529,000 attributable to the bankruptcy of one former
customer.
24
<PAGE>
Selling and Marketing. Selling and marketing expenses decreased as a
percentage of net revenue to approximately 1.6% in 1996 from 1.8% in 1995. In
dollar amounts, selling and marketing expenses increased to approximately
$514,000 in 1996 from $184,000 in 1995. The increase is attributable to the
Company's efforts to enter additional ethnic markets and new geographic areas.
Depreciation and Amortization. Depreciation and amortization expenses grew
to approximately $333,000 in 1996 from $137,000 in 1995, primarily due to
increased capital expenditures.
Interest. Interest expense increased to approximately $337,000 for 1996
from $116,000 in 1995, primarily due to increased borrowings under a credit
facility to support growth in accounts receivable, and to a lesser extent,
increased borrowings from related and other parties.
Net Loss. The Company experienced a net loss of approximately $2.8 million
in 1996 as compared to a net loss of $1.2 million in 1995.
1995 COMPARED TO 1994
Net Revenues. Net revenues increased approximately $5.4 million or 105.9%,
to $10.5 million for the year ended 1995 from $5.1 million in the year ended
1994. Residential revenue increased in comparative periods by approximately $2.0
million or 58.8%, to $5.4 million in 1995 from $3.4 million in 1994. The
increase in residential revenue was due to an increase in the number of
customers to approximately 10,700 by the end of 1995 from approximately 6,300 at
the end of 1994. Carrier revenue increased approximately $3.4 million or 200.0%,
to $5.1 million in 1995 from $1.7 million in 1994. The increase in carrier
revenue was primarily the result of both increased sales to existing customers
and an increase in return traffic to approximately $2.0 million in 1995 from
$174,000 in 1994.
Gross Margin. Total gross margin increased approximately $972,000 to $1.4
million in 1995 from $407,000 for 1994. Gross margin increased as a percentage
of net revenue to approximately 13.1% for 1995 from 8.0% for 1994. The gross
margin on residential revenue decreased to approximately 10.4% in 1995 from
21.1% in 1994 due to an expansion from the Company's Mid-Atlantic customer base.
The Company elected to expand its business base in advance of acquiring
facilities, thereby reducing the percentage of on net originating traffic. In
1995, approximately 62.9% of residential revenue originated on net, as compared
to 75.8% in 1994. The gross margin on carrier revenue, excluding the impact of
return traffic, decreased to approximately negative 36.9% in 1995 from negative
33.2% in 1994.
General and Administrative. General and administrative expenses increased
approximately $1.0 million or 83.3%, to $2.2 million for 1995 from $1.2 million
for 1994. As a percentage of revenue, general and administrative expenses
declined to approximately 20.7% from 22.7% in the respective periods. The
increase in dollar amounts was primarily due to increased personnel and
commission expenses incurred to develop new markets.
Selling and Marketing. Selling and marketing expenses remained
approximately the same as a percentage of net revenue in 1995 and 1994 at 1.8%.
In dollar amounts, selling and marketing expenses increased to approximately
$184,000 in 1995 from $91,000 in 1994. The increase in dollar amounts is
attributable to the Company's efforts to enter additional ethnic markets.
Depreciation and Amortization. Depreciation and amortization expenses
increased to approximately $137,000 in 1995 from $90,000 in 1994, primarily due
to an increase in capital expenditures for the expansion of the network
infrastructure.
Interest. Interest expense increased to approximately $116,000 for 1995
from $70,000 in 1994, primarily as a result of increased borrowings under a
credit facility to support growth in accounts receivable.
Net Income. The Company experienced a net loss of approximately $1.2
million in 1995 as compared to a net loss of $979,000 in 1994.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial data
for each of the quarters in the year ended December 31, 1995, the year ended
December 31, 1996, the three months ended March 31, 1997, and the three months
ended June 30, 1997. This quarterly information has been derived from
25
<PAGE>
and should be read in conjunction with the Company's financial statements and
the notes thereto included elsewhere in this Prospectus, and, in management's
opinion, reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information. Operating
results for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------------------
1995 1996
----------------------------------------- -------------------------------------------
MAR. 31, JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
---------- --------- ---------- --------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues ..................... $1,462 $1,860 $2,762 $4,424 $4,722 $8,485 $7,652 $ 11,356
Cost of services .................. 1,137 1,533 2,363 4,096 4,467 7,922 6,763 10,729
------ ------ ------ ------ ------ ------ ------ --------
Gross margin(1) .................. 325 327 399 328 255 563 889 627
General and administrative
expenses ........................ 449 460 484 777 595 778 1,370 1,253
Selling and marketing expenses ... 30 30 39 85 52 101 166 195
Depreciation and amortization ...... 29 31 32 45 52 93 93 95
------ ------ ------ ------ ------ ------ ------ --------
Income (loss) from operations . (183) (194) (156) (579) (444) (409) (740) (916)
Interest expense .................. 22 23 25 46 58 60 80 139
Interest income .................. 5 5 6 6 5 4 5 2
------ ------ ------ ------ ------ ------ ------ --------
Income (loss) before income tax
provision ........................ (200) (212) (175) (619) (497) (465) (815) (1,053)
Income tax provision ............... - - - - - - - -
------ ------ ------ ------ ------ ------ ------ --------
Net income (loss) ............... $ (200) $ (212) $ (175) $ (619) $ (497) $ (465) $ (815) $ (1,053)
====== ====== ====== ====== ====== ====== ====== ========
<CAPTION>
1997
------------------
MAR. 31 JUNE 30
--------- --------
<S> <C> <C>
Net revenues ..................... $12,372 $16,464
Cost of services .................. 10,765 14,485
-------- --------
Gross margin(1) .................. 1,607 1,979
General and administrative
expenses ........................ 1,151 1,310
Selling and marketing expenses ... 104 202
Depreciation and amortization ...... 96 118
-------- --------
Income (loss) from operations . 256 349
Interest expense .................. 117 135
Interest income .................. 1 4
-------- --------
Income (loss) before income tax
provision ........................ 140 218
Income tax provision ............... 3 4
-------- --------
Net income (loss) ............... $ 137 $ 214
======== ========
</TABLE>
- ----------
(1) During the first quarter of 1997, the Company's gross margin improved by
approximately $1.0 million over the fourth quarter 1996. The improvement
was due to (i) approximately $500,000 in costs accrued in the fourth
quarter 1996 for disputed vendor obligations as compared to approximately
$8,000 in costs accrued during the first quarter of 1997; (ii)
approximately $400,000 of cost reductions in 1997 resulting from an
increase in the utilization of alternative termination options; and (iii) a
lesser extent, an increase in the percentage of retail traffic originated
on net.
LIQUIDITY AND CAPITAL RESOURCES
Although founded in 1989, the Company's rapid growth commenced in 1995 as
the Company began actively marketing international services to additional ethnic
communities in major metropolitan areas in the U.S. and to other
telecommunication carriers. This growth required an investment in working
capital to finance the net loss that was incurred through 1996 and the increase
in accounts receivable. Until the first quarter of 1997, however, operating
activities were a net use of cash. Net cash used in operating activities was
$76,000 in 1994, $768,000 in 1995 and $1.4 million in 1996. In the first six
months of 1997, operating activities generated net cash of approximately
$514,000. To facilitate this growth, the Company made investments in property
and equipment of approximately $44,000 in 1994, $200,000 in 1995, $520,000 in
1996 and $184,000 in the first six months of 1997. Through 1996, the Company
funded its growth primarily through borrowings under its receivable credit
facility, notes payable to individuals and the issuance of voting common stock.
Net cash provided by financing activities was approximately $183,000 in 1994,
$1.2 million in 1995 and $1.5 million in 1996, and approximately $1.6 million in
the first six months of 1997.
On July 1, 1997, the Company entered into the Signet Agreement, which
provides for maximum borrowings of up to $10 million through December 31, 1997,
and the lesser of $15 million or 85% of eligible accounts receivable, as
defined, thereafter until maturity on December 31, 1999. The Company may elect
to pay quarterly interest payments at the prime rate, plus 2%, or the adjusted
LIBOR, plus 4%. The Signet Agreement required a $150,000 commitment fee to be
paid at closing, and a quarterly commitment fee of 0.25% of the unborrowed
portion. The Signet Agreement is secured by substantially all of the Company's
assets. It contains certain financial and non-financial covenants, including,
but not limited to, ratios of monthly net revenue to loan balance, interest
coverage, and cash flow leverage, minimum subscribers, limitations on capital
expenditures, additional indebtedness, acquisition or transfer of assets,
payment of dividends, new ventures or mergers, and issuance of additional
equity. The Company is currently in compliance with all financial ratios and
covenants of the Signet Agreement. Beginning on January 1, 1998 (and extending
to July 1, 1998 upon the occurrence of defined events),
26
<PAGE>
should Signet Bank determine and assert based on its reasonable assessment that
a material adverse change to the Company has occurred, it could declare all
amounts outstanding to be immediately due and payable.
The Signet Agreement provides that Signet Bank (the "Lender" or "Signet
Bank") receive warrants to purchase up to 539,800 shares of the Common Stock,
which represents 10% of the issued and outstanding shares of Common Stock as of
July 1, 1997. Warrants representing 5% of the issued and outstanding shares are
currently exercisable. The exercise price of these warrants is $8.46. Further,
beginning in the first calendar quarter of 1998, and continuing until the
Company completes an initial public offering, an additional 1% each calendar
quarter will vest in the Lender. The exercise price of these warrants will be
set at a price which values the Company at 10 times revenue for the immediately
preceding month. So long as the Offering is completed by December 31, 1997, the
Lender will only receive warrants to purchase 269,900 shares of Common Stock,
representing 5% of the issued and outstanding shares of Common Stock as of July
1, 1997. Until the Offering has been completed, the Company is obligated to
repurchase the shares underlying the warrant in certain circumstances at the
then fair value of the Company as determined by an independent appraisal. The
Lender has certain registration rights with respect to the shares underlying the
warrant. See "Description of Capital Stock - Signet Agreement."
The Company will be reporting the warrants to purchase 269,900 shares of
the Common Stock, which are currently exercisable, as a discount to the loan,
which will be amortized to interest expense over the term of the loan. In the
event that the Signet Agreement is extinguished or otherwise refinanced with a
new credit facility, the Company intends to expense, as an extraordinary item
(if material), the then-existing unamortized debt discount and deferred
financing cost related to the Signet Agreement, which was approximately $1.2
million as of July 1, 1997. Until the Offering has been completed, amounts
ascribed to the warrants will be reflected as a liability and will be adjusted
based upon their redemption value. Additional warrants which may become
exercisable in the event that the Company does not complete the Offering in 1997
will be valued at their fair value when and if exercisable and will be charged
to interest expense over the balance of the term of the Signet Bank loan.
Prior to the execution of the Signet Agreement, the Company had a credit
and billing arrangement with a third party. This facility allowed the Company to
receive advances of 70% of all records submitted for billing. These advances
were secured by receivables involved. The credit limit under the agreement was
$3 million and bore an interest rate of prime plus 4%.
The Company is continuing to pursue a flexible approach to expand its
markets and enhance its network facilities by investing in marketing, and in
switching and transmission facilities, where anticipated traffic volumes justify
such investments. Historically, the Company has achieved market penetration with
only modest investments in marketing. There can be no assurance that the
Company's prior marketing achievements can be replicated with increased
marketing investments. A number of factors, including market share, competitor
rates and quality of service determine the effectiveness of the market entry
strategy. See "Business - Strategy."
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 the aggregate. These expenditure needs are expected to be met by
cash from operations, amounts available under the line of credit and the
proceeds of the Offering. See "Use of Proceeds." These capital needs will
continue to expand as the Company executes its business strategy. See "Risk
Factors - Capital Requirements; Need for Additional Financing."
The Company has accrued approximately $2.1 million as of June 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 dispute, these amounts or portions
thereof would be credited to operations in the period of resolution. Conversely,
if the Company does not prevail in its dispute, these amounts or portions
thereof would be paid in cash.
27
<PAGE>
NEW ACCOUNTING STANDARDS
In 1997 the Financial Accounting Standards Board released Statement No.
128, "Earnings per share" ("Statement 128"). Statement 128 requires dual
presentation of basic and diluted earnings per share on the face of the income
statement 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 periods ending after December 15,
1997, and when adopted, will require restatement of prior periods' earnings per
share.
The requirements of the Securities and Exchange Commission require the
dilutive effects of common stock and stock rights issued within 12 months of an
initial public offering be included in the computation of both basic and
dilutive earnings per share. Accordingly, management anticipates that Statement
128 will not have a material impact upon reported earnings per share.
EFFECTS OF INFLATION
Inflation is not a material factor affecting the Company's business and has
not had a significant effect on the Company's operations to date.
28
<PAGE>
BUSINESS
GENERAL
STARTEC is a rapidly growing, facilities-based international long distance
carrier which markets its services to select ethnic U.S. residential communities
that have significant international long distance usage. Additionally, to
maximize the efficiency of its network capacity, the Company sells its
international long distance services to some of the world's leading carriers.
The Company provides its services through a flexible network of owned and leased
transmission facilities, resale arrangements and a variety of operating
agreements and termination arrangements. The Company currently operates a switch
in Washington, D.C. and leases switching facilities from other
telecommunications carriers. The Company is in the process of constructing an
international gateway facility in New York City.
The Company's mission is to dominate select international telecom markets
by strategically building network facilities that allow it to manage both sides
of a telephone call. The Company intends to own multiple switches and other
network facilities which allow it to originate and terminate a substantial
portion of its own traffic. The Company believes that building network
facilities, acquiring additional termination options and expanding its proven
marketing strategy should lead to continued growth and improved profitability.
INDUSTRY BACKGROUND
The international telecommunications industry consists of transmissions of
voice and data that originate in one country and terminate in another. This
industry is experiencing a period of rapid change which has resulted in
substantial growth in international telecommunications traffic. For domestic
carriers, the international market can be divided into two major segments: the
U.S.-originated market, which consists of all international calls which either
originate or are billed in the United States, and the overseas market, which
consists of all calls billed outside the United States. According to the
Company's market research, the international telecommunications services market
was approximately $56 billion in aggregate carrier revenues for 1995, and the
volume of international traffic on the public telephone network is expected to
grow at a compound annual growth rate of 10% or more from 1997 through the year
2000. The U.S.-originated international market has experienced substantial
growth in recent years, with revenues rising from approximately $8 billion in
1990 to approximately $14 billion in 1995.
The Company believes that the international telecommunications market will
continue to experience strong growth for the foreseeable future as a result of
the following developments and trends:
- Global Economic Development and Increased Access to Telecommunications
Services. The dramatic increase in the number of telephone lines around the
world, stimulated by economic growth and development, government mandates
and technological advancements, is expected to lead to increased demand for
international telecommunications services in those markets.
- Deregulation of Telecommunications Markets. The continuing deregulation
and privatization of telecommunications markets has provided, and
continues to provide, opportunities for carriers who desire to penetrate
those markets.
- Reduced Rates Stimulating Higher Traffic Volumes. The reduction of outbound
international long distance rates, resulting from increased competition and
technological advancements, has made, and continues to make, international
calling available to a much larger customer base thereby stimulating
increased traffic volumes.
- Increased Capacity. The increased availability of higher-quality digital
undersea fiber optic cable has enabled international long distance carriers
to improve service quality while reducing costs.
- Popularity and Acceptance of Technology. The proliferation of
communications devices, including cellular telephones, facsimile machines
and communications equipment has led to a general increase in the use of
telecommunications services.
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<PAGE>
- Bandwidth Needs. The demand for bandwidth-intensive data transmission
services, including Internet-based demand, has increased rapidly and is
expected to continue to increase in the future.
Development of U.S. and Foreign Telecommunications Markets
The 1984 court-ordered dissolution of AT&Ts monopoly over local and long
distance telecommunications fostered the emergence of new U.S. long distance
companies. Today there are over 500 U.S. long distance companies, most of which
are small- or medium-sized companies, serving residential and business customers
and other carriers. In order to be successful, these small- and medium-sized
companies must offer customers a full range of services, including international
long distance. However, management believes most of these carriers do not have
the critical mass of traffic to receive volume discounts on international
transmission from the larger facilities-based carriers such as AT&T, MCI and
Sprint, or the financial ability to invest in international facilities.
Alternative international carriers, such as the Company, have capitalized on the
demand created by these small- and medium-sized companies for less expensive
international transmission facilities. These carriers are able to take advantage
of larger traffic volumes to obtain discounts on international routes (through
resale) and/or invest in facilities when volume on particular routes justifies
such investments. As these emerging international carriers have become
established, they have also begun to carry overflow traffic from larger long
distance providers which own international transmission facilities.
Liberalization and privatization have also allowed new long distance
providers to emerge in foreign markets. Liberalization began in the U.K. in 1981
when Mercury, a subsidiary of Cable & Wireless plc, was granted a license to
operate a facilities-based network and compete with British Telecom. The 1990
adoption of the "Directive on Competition in the Market for Telecommunications
Services" marked the beginning of deregulation in Europe, and a series of
subsequent EU directives, reports and actions are expected to result in
substantial deregulation of the telecommunications industries in most EU member
states by 1998. Liberalization is also occurring on a global basis as many
governments in Eastern Europe, Asia and Latin America privatize government-owned
monopolies and open their markets to competition. Also, signatories to the WTO
Agreement have committed, to varying degrees, to allow access to their domestic
and international markets to competing telecommunications providers, allow
foreign ownership interests in existing telecommunications providers and
establish regulatory schemes to develop and implement policies to accommodate
telecommunications competition.
As liberalization erodes the traditional monopolies held by single national
providers, many of which are wholly or partially government-owned PTT's, U.S.
long distance providers have the opportunity to negotiate more favorable
agreements with both the traditional and newly-emerging foreign providers.
Further, deregulation in certain countries is enabling U.S.-based providers to
establish local switching and transmission facilities in those countries,
allowing them to terminate their own traffic and begin to carry international
long distance traffic originating in those countries.
International Switched Long Distance Services
International switched long distance services are provided through
switching and transmission facilities that automatically route calls to circuits
based upon a predetermined set of routing criteria. In the U.S., an
international long distance call typically originates on a LEC's network and is
transported to the caller's domestic long distance carrier. The domestic long
distance provider picks up the call and carries the call to its own or another
carrier's international gateway switch, where an international long distance
provider picks it up and sends it directly or through one or more other long
distance providers to a corresponding gateway switch in the destination country.
Once the traffic reaches the destination country, it is routed to the party
being called through that country's domestic telephone network.
International long distance carriers are often categorized according to
ownership and use of transmission facilities and switches. No carrier utilizes
exclusively-owned facilities for transmission of all of its long distance
traffic. Carriers vary from being primarily facilities-based, meaning that they
own and operate their own land-based and/or undersea cable and switches, to
those that are purely resellers of another carrier's transmission network. The
largest U.S. carriers, such as AT&T, MCI, Sprint and
30
<PAGE>
WorldCom primarily use owned transmission facilities and switches and may
transmit some of their overflow traffic through other long distance providers,
such as the Company. Only very large carriers have the transmission facilities
and operating agreements necessary to cover the over 200 countries to which
major long distance providers generally offer service. A significantly larger
group of long distance providers own and operate their own switches but use a
combination of resale agreements with other long distance providers and leased
and owned facilities to transmit and terminate traffic, or rely solely on resale
agreements with other long distance providers. For a discussion of the Company's
analysis of the mix of providers in the long distance market see "STARTEC's
Industry Paradigm."
Operating Agreements. Traditional operating agreements provide for the
termination of traffic in, and return traffic to, the international long
distance carriers' respective countries for mutual compensation at an
"accounting rate" negotiated by each country's dominant carrier. Under such
traditional operating agreements, the international long distance provider that
originates more traffic compensates the long distance provider in the other
country by paying an amount determined by multiplying the net traffic imbalance
by half of the accounting rate.
Under a typical operating agreement, each carrier owns or leases its
portion of the transmission facilities between two countries. A carrier gains
ownership rights in digital undersea digital fiber optic cable by: (i)
purchasing direct ownership in a particular cable (usually prior to the time the
cable is placed into service); (ii) acquiring an IRU in a previously installed
cable; or (iii) by leasing or otherwise obtaining capacity from another long
distance provider that has either direct ownership or IRU rights in a cable. In
situations in which a long distance provider has sufficiently high traffic
volume, routing calls across cable that is directly owned by a carrier or in
which a carrier has an IRU is generally more cost-effective than the use of
short-term variable capacity arrangements with other long distance providers or
leased cable. Direct ownership and IRU rights, however, require a carrier to
make an initial capital commitment based on anticipated usage.
Transit Arrangements. In addition to using traditional operating
agreements, an international long distance provider may use transit
arrangements, pursuant to which a long distance provider in an intermediate
country carries the traffic to the destination country. Transit arrangements
require agreement among all of the carriers of the countries involved in the
transmission and termination of the traffic, and are generally used for overflow
traffic or in cases in which a direct circuit is unavailable or not volume
justified.
Switched Resale Arrangements. Switched resale arrangements typically
involve the carrier purchase and sale of termination services between two long
distance providers on a variable, per minute basis. The resale of capacity was
first permitted as a result of the deregulation of the U.S. telecommunications
market, and has fostered the emergence of alternative international long
distance providers which rely, at least in part, on transmission services
acquired on a carrier basis from other long distance providers. A single
international call may pass through the facilities of multiple resellers before
it reaches the foreign facilities-based carrier which ultimately terminates the
call. Resale arrangements set per minute prices for different routes, which may
be guaranteed for a set period of time or may be subject to fluctuation
following notice. The resale market for international transmission capacity is
continually changing, as new long distance resellers emerge and existing
providers respond to changing costs and competitive pressures. In order to be
able to effectively manage costs when using resale arrangements, long distance
providers must have timely access to changing market prices and be able to react
to changes in costs through pricing adjustments and routing decisions.
Alternative Transit/Termination Arrangements. As the international long
distance market began to be more competitive, long distance providers developed
alternative transit/termination arrangements in an effort to decrease their
costs of terminating international traffic. Some of the more significant of
these arrangements include refiling, international simple resale ("ISR"), and
ownership of switching facilities in foreign countries. Refiling of traffic,
which takes advantage of disparities in settlement rates between different
countries, allows traffic to a destination country to be treated as if it
originated in another country which enjoys lower settlement rates with the
destination country, thereby resulting in a lower overall termination cost.
Refiling is similar to transit, except that with respect to transit, the
facilities-
31
<PAGE>
based long distance provider in the destination country has a direct
relationship with the originating long distance provider and is aware of the
transit arrangement, while with refiling, it is likely that the long distance
provider in the destination country is not aware that the received traffic
originated in another country with another carrier. To date, the FCC has made no
pronouncement as to whether refiling complies with U.S. or ITU regulations,
although it is considering such issues in an existing proceeding.
With ISR, a long distance provider completely bypasses the accounting rates
system by connecting an international leased private line to the public switched
telephone network of a foreign country or directly to the premises of a customer
or foreign partner. Although ISR is currently sanctioned by applicable
regulatory authorities only on a limited number of routes (including U.S.-U.K.,
U.S.-Canada, U.S.-Sweden, U.S.-New Zealand, U.K.-worldwide and Canada-U.K.), its
use is increasing and is expected to expand significantly as deregulation
continues in the international telecommunications market. In addition,
deregulation has made it possible for U.S.-based long distance providers to
establish their own switching facilities in certain foreign countries, allowing
them to directly terminate traffic. See "- Government Regulation."
STARTEC'S INDUSTRY PARADIGM
It is common in the industry to classify and identify different
telecommunications companies as "first-tier," "second-tier" or "third-tier"
carriers based primarily on their revenue size. The Company analyzes its
competitive market position and its strategy based on a more comprehensive set
of criteria, focusing on technology, network infrastructure and margins.
Broadly, the Company's Industry Paradigm is comprised of four identifiable
segments: Switchless Reseller, Switch-Based Reseller, Single-Sided
Facilities-Based Carrier and Dual-Sided Facilities-Based Carrier.
STARTEC'S INDUSTRY PARADIGM
CHARACTERISTICS
DUAL SIDED Sophisticated technology
FACILITIES BASED Highly competent network operations
CARRIER Highest margin
SINGLED SIDED Higher technology
FACILITIES BASED Competent network management
CARRIER Higher margin
SWITCH BASED Limited technology
RESELLER Limited network
SWITCHLESS RESELLER No technology
No network
Low margin
At the bottom of the Industry Paradigm are the Switchless Resellers, which
do not own switching facilities and rely solely on resale agreements with other
long distance carriers to transport and terminate their traffic. Although these
companies generally are able to keep overhead costs down, since they are not
burdened with the costs associated with ownership of facilities, their
dependence on other companies for capacity and service substantially reduces
their ability to control variable costs associated with origination, transport
and termination of telephone calls.
Switch-Based Resellers occupy the next level of the Industry Paradigm.
Companies at this level usually own a switch, which may or may not embody the
most current technology, and may even do their own billing and collection of
customer accounts. While the margins at this level generally are better than for
Switchless Resellers, these companies are also substantially dependent upon
resale agreements with facilities-based long distance carriers to transport and
terminate their traffic.
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<PAGE>
At the level above the Switch-Based Resellers are the Single-Sided
Facilities-Based Carriers. The move up from the reseller levels to the
facilities-based carrier levels is a significant one in terms of costs, required
technology, and available margins. Single-Sided Facilities-Based Carriers
generally operate multiple switches, have the ability to originate at least some
of their own calls, and maintain network management facilities.
The top level of the Industry Paradigm consists of Dual-Sided
Facilities-Based Carriers. The domestic carriers at this level generally own
multiple switches, and other facilities which allow them to originate and
terminate a substantial portion of their own traffic. In addition, the
international carriers at this level also have ownership rights, IRUs or other
arrangements to use undersea fiber optic cable lines and satellite facilities,
operating agreements and other termination arrangements with foreign
telecommunications providers, and may even have switches in foreign countries
which allow them to terminate their own traffic. The domestic and the
international Dual-Sided Facilities-Based Carriers use the latest technology,
have sophisticated network operations, and are best able to control the quality
of their services. The margins are potentially the highest at this level, as the
carriers have the greatest control over costs of service.
STRATEGY
The Company began, and has historically operated, as a Switch-Based
Reseller. The Company currently is investing in network infrastructure which
will allow it to operate as a single-sided facilities-based carrier. Utilizing a
portion of the net proceeds from this Offering, the Company intends to invest in
additional network infrastructure with the objective of becoming an
international dual-sided facilities-based carrier.
The Company intends to implement a network hubbing strategy, linking
foreign-based switches and other telecommunications equipment together with the
Company's marketing base in the United States. To implement this hubbing
strategy, the Company intends to: (i) build transmission capacity, including its
ability to originate and transport traffic; (ii) acquire additional termination
options to increase routing flexibility; and (iii) expand its customer base
through focused marketing efforts.
A "hub" will consist of a switch and/or other telecommunications equipment,
including cables and compression equipment. Hub locations will be selected based
on their similarity to the established U.S. model, in which identifiable
international ethnic communities are accessible, and where it is possible to
connect with some of the leading international carriers. Once established, these
hubs will be connected to the Company's marketing base in the United States.
Management believes the hubbing strategy will allow the Company to move up the
Industry Paradigm, from a single-sided facilities-based carrier to a dual-sided
facilities-based carrier serving ethnic communities and telecommunication
carriers in select markets worldwide.
To implement this hubbing strategy, the Company intends to:
Build Transmission Capacity. The Company originates and transports customer
traffic through a network of Company-owned and managed facilities and facilities
leased or acquired through resale arrangements from other facilities-based long
distance carriers. The additional traffic generated by the Company's expanded
customer base and increased usage of its long distance services will necessitate
the acquisition of additional switching and transmission capacity. To meet these
needs, the Company has begun to implement a strategic build-out of its network,
including installation of improved switching facilities, planned acquisition of
ownership interests in and/or rights to use digital undersea fiber optic cables,
and installation of compression equipment to increase capacity on those cables.
The Company has also taken steps to improve its systems supporting the network
and further enhance the quality of its services by adding equipment upgrades in
its network monitoring and customer service centers, and plans to install
enhanced software which will allow it to monitor call traffic routing, capacity,
and quality. Building additional switching and transmission capacity will
decrease the Company's reliance on leased facilities and exposure to price
fluctuations. The Company's goal in taking these actions is to improve its gross
margin and provide greater assurance of the quality and reliability of its
services.
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Acquire Additional Termination Options. Customer traffic is terminated in
the destination country through a variety of arrangements, including
international operating agreements. The anticipated expansion of the Company's
customer base in existing and new target markets, and the resulting increase in
traffic, will require the Company to provide additional methods to terminate
that traffic. As part of its hubbing strategy, the Company plans to explore a
number of options including additional operating agreements, strategic
alliances, transit and refile arrangements, and the acquisition of switching
facilities in foreign countries. The increase in termination options is expected
to provide greater routing flexibility and reliability, as well as permitting
greater management and control over the cost of transmitting customers' calls.
Expand Customer Base. The Company will continue to target additional ethnic
U.S. residential communities with significant international long distance usage.
In addition, the Company plans to extend its marketing efforts outside the U.S.
into countries which have ethnic communities which the Company believes are
potential customers, and to begin marketing its long distance services to
U.S.-based small businesses which have an international focus. The Company will
also consider opportunities to increase its residential customer base through
strategic alliances and acquisitions. By increasing its residential customer
base, the Company's goal is to capture operating efficiencies associated with
high traffic volumes and to increase its margins.
The Company's marketing strategy, which targets selected ethnic communities
is attractive to foreign carriers who enter into agreements with STARTEC in
order to capture outgoing international U.S. traffic from customers located in
their corresponding U.S. ethnic communities. As a result of the relationships
established by these agreements, STARTEC expects that its global
telecommunications network will become more cost effective and will make the
Company an attractive supplier to the world's leading carriers. The Company also
anticipates that its hubbing strategy will allow it to serve carrier customers
over a wider geographical area.
CUSTOMERS
The number of the Company's residential customers has grown significantly
over the past three years, from approximately 5,000 as of June 30, 1994 to more
than 43,700 as of June 30, 1997 (as measured over a 30 day period). These
customers generally are members of ethnic groups that tend to be concentrated in
major U.S. metropolitan areas, including Middle Eastern, Indian, Russian,
African and Southeast Asian communities. Net revenues from residential customers
accounted for approximately 37% and 36% of the Company's net revenues in the
year ended December 31, 1996 and the six month period ended June 30, 1997,
respectively. No single residential customer accounted for more than one percent
of the Company's revenues during those periods.
The number of the Company's carrier customers also has grown significantly
since the Company first began marketing its services to this segment in late
1995. As of June 30, 1997, the Company had 32 active carrier customers, with
revenues from carrier customers accounting for 63% and 64% of the Company's net
revenues in the year ended December 31, 1996 and the six month period ended June
30, 1997, respectively. One of these carrier customers, WorldCom, accounted for
approximately 23% of total revenues in the year ended December 31, 1996, and
approximately 27% of total revenues for the six months ended June 30, 1997. In
addition, certain carrier customers also accounted for more than 10% of the
Company's net revenues during the fiscal years ended December 31, 1994 and 1995.
In 1994, CST and WorldCom accounted for approximately 12% and 11%, respectively,
of net revenues and in 1995, VSNL accounted for approximately 19% of net
revenues. No other customer accounted for 10% or more of the Company's net
revenues during 1994, 1995, 1996 or the first six months of 1997. In a number of
cases, the Company provides services to carriers which are also suppliers to the
Company.
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Substantially all of the Company's revenues for the past three fiscal years
and the six months ended June 30, 1997 have been derived from calls terminated
outside the United States. The percentages of net revenues attributable on a
region-by-region basis are set forth in the table below.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Asia/Pacific Rim ............... 81.9% 66.4% 43.0% 54.1% 41.9%
Middle East/North Africa ...... 2.7 6.6 25.7 19.8 28.1
Sub-Saharan Africa ............ 0.4 0.3 3.5 2.1 8.2
Eastern Europe ............... 0.5 3.0 8.2 6.9 9.9
Western Europe ............... 12.1 15.7 5.5 4.7 3.1
North America .................. 2.2 4.7 11.5 10.9 5.4
Other ........................ 0.2 3.3 2.6 1.5 3.4
------ ------ ------ ------ ------
Total ..................... 100.0 100.0 100.0 100.0 100.0
====== ====== ====== ====== ======
</TABLE>
The Company has entered into operating agreements with telecommunication
carriers in foreign countries under which international long-distance traffic is
both delivered and received. Under these agreements, the foreign carriers are
contractually obligated to adhere to the policy of the FCC, which requires that
traffic from the foreign country is routed to international carriers, such as
the Company, in the same proportion as traffic carried into the country.
Mutually exchanged traffic between the Company and foreign carriers is settled
through a formal settlement policy at agreed upon rates per minute. The Company
records the amount due to the foreign partner as an expense in the period the
traffic is terminated. When the return traffic is received in the future period,
the Company generally realizes a higher gross margin on the return traffic
compared to the lower margin (or sometimes negative margin) on the outbound
traffic. Revenue recognized from return traffic was approximately $174,000,
$1,959,000, and $1,121,000 or 3%, 19% and 3% of net revenues in 1994, 1995, and
1996, and $490,000 and $994,000 or 4% and 3% of net revenues in the six-month
periods ended June 30, 1996 and 1997, respectively. There can be no assurance
that traffic will be delivered back to the United States or what impact changes
in future settlement rates, allocations among carriers or levels of traffic will
have on net payments made and revenues received.
SERVICES AND MARKETING
STARTEC focuses primarily on the provision of international long distance
services to targeted residential customers in major U.S. metropolitan areas.
STARTEC also offers international long distance services to other
telecommunications carriers and interstate long distance services in the U.S.
Using part of the proceeds obtained under the Signet Agreement, the Company
recently expanded its residential marketing program, targeting additional ethnic
communities with significant international long distance usage and increasing
its efforts within its current target markets. The Company intends to use a
portion of the proceeds of the Offering to expand significantly its residential
marketing programs in the U.S., and to implement its marketing strategy abroad.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources."
Residential Customers
The Company generally provides international and interstate residential
long distance customers with dial-around long distance service. Residential
customers access STARTEC's network by dialing its CIC code before dialing the
number they are calling. Using a CIC Code to access the Company allows customers
to use the Company's services at any time without changing their existing long
distance carrier. It is also possible for a customer to select STARTEC as its
default long distance carrier. In this instance, the LEC would automatically
route all of that customer's long distance calls through STARTEC's network. As
part of its marketing strategy, the Company maintains a comprehensive database
of customer information which is used for the development of marketing programs,
strategic planning, and other purposes.
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The Company invests substantial resources in identifying and evaluating
potential markets for its services. In particular, the Company looks for ethnic
groups having qualities and characteristics which indicate a large potential for
high-volume international telecommunications usage. Once a market has been
identified, the Company evaluates the opportunity presented by that market based
upon factors that include the credit characteristics of the target group,
switching requirements, network access and vendor diversity. Assuming that the
target market meets the Company's criteria, the Company implements marketing
programs targeted specifically at that ethnic group, with the goal of generating
region-specific international long distance traffic. The Company markets its
residential services under the "STARTEC" name through a variety of media,
including low-cost print advertising, radio and television advertising on ethnic
programs and direct mail, all in the customers' native language. The Company
also sponsors and attends community events and trade shows.
Potential customers call a toll free number and are connected to a
multilingual customer service representative. The Company uses this opportunity
to obtain detailed information regarding, among other things, customers'
anticipated calling patterns. The customer service representative then sends out
a welcome pack explaining how to use the services. Once the customer begins to
use the services, the Company monitors usage and periodically communicates with
the customer to gauge service satisfaction. STARTEC also uses proprietary
software to assist it in tracking customer satisfaction and a variety of
customer behaviors, including turnover ("churn"), retention and frequency of
usage.
The Company currently markets its services to the Middle Eastern, Indian,
Russian, African and Southeast Asian communities in the U.S. In addition, the
Company is considering marketing its services in countries such as Canada and
the United Kingdom, which also have ethnic communities that may meet the
Company's criteria for potential target markets.
In addition to its current long distance services, the Company continually
evaluates potential new service offerings in order to increase traffic and
customer retention and loyalty. New services the Company expects to introduce
include Home Country Direct Services which provides customers with access to
STARTEC's network from any country and allows them to place either collect or
credit/debit card calls, and Prepaid Domestic and International Calling Cards
which can be used from any touch tone telephone in the United States, Canada or
the United Kingdom.
Carrier Customers
To maximize the efficiency of its network capacity, the Company sells its
international long distance services to other telecommunication carriers.
STARTEC has been actively marketing its services to carrier customers since late
1995 and believes that it has established a high degree of credibility and
valuable relationships with the leading carriers. The Company participates in
international carrier membership organizations, trade shows, seminars and other
events that provide its marketing staff with opportunities to establish and
maintain relationships with other carriers that are potential customers. The
Company generally avoids providing services to lower-tiered carriers because of
potential difficulties in collecting accounts receivable.
THE STARTEC NETWORK
The Company provides its services through a flexible network of owned and
leased transmission facilities, resale arrangements, and a variety of operating
agreements and termination arrangements, all of which allow the Company to
terminate traffic in every county which has telecommunication capabilities. The
Company has been expanding its network to match increases in its long distance
traffic volume, and has recently begun to implement plans for a significant
strategic build-out of the STARTEC network. The purpose of the build-out is to
increase profitability by controlling costs, while maintaining a high degree of
network quality and reliability. The network employs advanced switching
technologies and is supported by monitoring facilities and the Company's
technical support personnel.
Switching and Transmission Facilities
The Company currently owns and operates a switch in Washington, D.C. and
leases a line to New York City where major telephone cables are terminated. The
Company is currently in the final stages of negotiating the purchase of new
switching equipment which is expected to be installed and placed in
36
<PAGE>
service at a new facility in New York City by the end of 1997. At that time, the
Company intends that its switching functions will be transferred to the New York
City facility and the Washington, D.C. location will become a point-of-presence.
Relocating the switch to New York City is expected to reduce leased line charges
and increase the Company's ability to originate traffic on its own network. In
addition, the New York City facility is larger than the Company's Washington,
D.C. facility, thereby allowing the Company to install a larger and more cost
effective switch. Over the next 12 to 18 months, the Company intends to add
facilities in key locations, such as the United Kingdom and California, which is
a gateway to the Asia/Pacific market.
International long distance traffic is transmitted through an international
gateway switch, across undersea digital fiber optic cable lines or via
satellite, to the destination country. STARTEC currently has access to digital
undersea fiber optic cable and satellite facilities through arrangements with
other carriers. The Company is currently negotiating for the acquisition of
three other trans-Atlantic cables such as Columbus II, Cantat and Americas-, and
is also exploring the possibility of acquiring IRUs in trans-Pacific cables. The
Company believes that it may achieve substantial savings by acquiring additional
IRUs, which would reduce its dependence on leased cable access. Having an
ownership interest rather than a lease interest in undersea cable enables the
Company to increase its capacity without a significant increase in cost, by
utilizing digital compression equipment, which it cannot do under leasing or
similar access arrangements. Digital compression equipment enhances the traffic
capacity of the undersea cable, which permits the Company to maximize cable
utilization while reducing the Company's need to acquire additional capacity.
The Company is currently in negotiations to acquire digital compression
equipment.
The Company enters into lease arrangements and resale agreements with other
telecommunications carriers when cost effective. The Company purchases switched
minute capacity from various carriers and depends on such agreements for
termination of its traffic. The Company currently purchases capacity from
approximately 30 carriers. Purchases from the five largest suppliers of capacity
represented 67% and 47% of the Company's total cost of services for the fiscal
year ended December 31, 1996 and the six months ended June 30, 1997,
respectively. During the fiscal year ended December 31, 1996, VSNL, Cherry
Communications, Inc., and WorldCom accounted for 25%, 13% and 13% of total cost
of services, respectively. During the six months ended June 30, 1997, VSNL and
WorldCom accounted for 13%, and 15% of total costs of services, respectively.
Further, the Company utilizes the services of several alternate, cost
effective carriers in order to transport and terminate its traffic. These
alternative carriers provide the Company with substantial flexibility and cost
efficiency, as well as diversity, in the event one carrier's charges increase or
such carrier is not capable of providing the services STARTEC needs in order to
transport and terminate its traffic.
The Company's efforts to build additional switching and transmission
capacity are intended to decrease the Company's reliance on leased facilities
and resale agreements. The strength of the Company's international operations is
based upon the diversity of its cost effective routes to terminal points. The
primary benefits of owning and operating additional network facilities instead
of leasing or reselling another carrier's capacity arise from reduced
transmission costs and greater control over service quality and reliability. The
transmission cost for a call that is not routed on net through the Company's
owned facilities is dependent upon the cost per minute paid to the underlying
carrier. In contrast, the cost of a call routed on net through the Company's
owned facilities is dependent upon the total fixed costs associated with owning
and operating those facilities. As traffic across the owned facilities
increases, management believes the Company can capture operating efficiencies
and improve its margins.
Termination Arrangements
STARTEC attempts to retain flexibility and maximize its termination options
by using a mix of operating agreements, transit and refile arrangements, resale
agreements and other arrangements to terminate its traffic in the destination
country. The Company's approach is designed to enable it to take advantage of
the rapidly evolving international telecommunications market in order to provide
low cost international long distance services to its customers.
37
<PAGE>
The Company currently has effective operating agreements with the national
telecommunications administrations of India, Uganda, Syria and Monaco under
which it exchanges traffic. The Company pursues additional operating agreements
with other foreign governments and administrations on an ongoing basis. In
addition, the Company uses resale agreements and transit and refile arrangements
to terminate its traffic in countries with which it does not have operating
agreements. These agreements and arrangements provide the Company with multiple
options for routing traffic to each destination country.
The Company is also exploring the possibility of acquiring facilities in
certain foreign countries, including the United Kingdom. This option is becoming
increasingly available as deregulation continues in the international
telecommunications market, and would provide the Company with opportunities to
terminate its own traffic and better control customer calls.
Network Operations, Technical Support and Customer Service
The Company uses proprietary routing software to maximize routing
efficiency. Network operations personnel continually monitor pricing changes by
the Company's carrier-suppliers and adjust call routing to make cost efficient
use of available capacity. In addition, the Company provides 24-hour network
monitoring, trouble reporting and response procedures, service implementation
coordination and problem resolution. The Company has developed and uses
proprietary software which allows it to monitor, on a minute by minute basis,
all key aspects of its services. Recent software upgrades and additional network
monitoring equipment have been installed to enhance the Company's ability to
handle increased traffic and monitor network operations. The Company's customer
service center, which services the residential customer base, is staffed by
trained, multilingual customer service representatives, and operates 16 hours
per day during the week and 12 hours per day on the weekends. The customer
service center uses advanced ACD software to distribute incoming calls to its
customer service representatives. Over time, the Company plans to increase its
customer service coverage and eventually operate 24-hours per day, 7 days per
week.
The Company generally utilizes redundant, highly automated state-of-the-art
telecommunications equipment in its network and has diverse alternate routes
available in cases of component or facility failure, or in the event that cable
transmission wires are inadvertently cut. Back-up power systems and automatic
traffic re-routing enable the Company to provide a high level of reliability for
its customers. Computerized automatic network monitoring equipment allows fast
and accurate analysis and resolution of network problems. In general, the
Company relies upon other carriers' networks to provide redundancy in the event
of technical difficulties in the network. The Company believes that this is a
more cost effective strategy than purchasing or leasing its own redundant
capacity.
MANAGEMENT INFORMATION AND BILLING SYSTEMS
The Company's operations use advanced information systems including call
data collection and call data storage linked to a proprietary reporting system.
The Company also maintains redundant billing systems for rapid and accurate
customer billing. The Company's systems enable it, on a real time basis, to
determine cost effective termination alternatives, monitor customer usage and
manage profit margins. The Company's systems also enable it to ensure accurate
and timely billing and reduce routing errors.
The Company's proprietary reporting software compiles call, price and cost
data into a variety of reports which the Company can use to re-program its
routes on a real time basis. The Company's reporting software can generate
additional reports, as needed, including customer usage, country usage, vendor
rates, vendor usage by minute, dollarized vendor usage, and loss reports.
The Company has built multiple redundancies into its billing and call data
collection systems. Two call collector computers receive redundant call
information simultaneously, one of which produces a file every 24 hours for
filing purposes while the other immediately forwards the called data to
corporate headquarters for use in customer service and traffic analysis. The
Company maintains two independent and redundant billing systems in order to both
verify billing internally and to ensure that bills are sent out on a timely
basis. All of the call data, and resulting billing data, are continuously backed
up on tape drive and redundant storage devices.
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Residential customers are billed for the Company's services through the
LEC, with the Company's charges appearing directly on the bill each residential
customer receives from its LEC. The Company utilizes a third party billing
company to facilitate collections of amounts due to the Company from the LECs.
The third party billing company receives collections from the LEC and transfers
the sums to the Company, after withholding processing fees, applicable taxes,
and provisions for credits and uncollectible accounts. As part of its strategy,
the Company also plans to enter into billing and collection agreements directly
with certain LECs, which will provide the Company with opportunities to reduce
some of the costs currently associated with billing and collection.
COMPETITION
The long distance telecommunications industry is intensely competitive. In
many of the markets targeted by the Company there are numerous entities which
are currently competing for the same residential and carrier customers and
others which have announced their intention to enter those markets.
International and interstate telecommunications providers compete on the basis
of price, customer service, transmission quality, breadth of service offerings
and value-added services. Residential customers frequently change long distance
providers in response to competitors' offerings of lower rates or promotional
incentives, and, in general, the Company's customers can switch carriers at any
time. In addition, the availability of dial-around long distance services has
made it possible for residential customers to use the services of a variety of
competing long distance providers without the necessity of switching carriers.
The Company's carrier customers generally also use the services of a number of
other international long distance telecommunications providers. The Company
believes that competition in its international and interstate long distance
markets is likely to increase as these markets continue to experience decreased
regulation and as new technologies are applied to telecommunications. Prices for
long distance calls in several of the markets in which the Company competes have
declined in recent years and are likely to continue to decrease. While the
Company competes generally with the domestic and international carriers
discussed herein, it believes that STARTEC is a leader in its chosen business
niche - the provision of international long distance services to residential
customers in targeted ethnic markets.
The U.S.-based international telecommunication services market is dominated
by AT&T, MCI and Sprint. The Company also competes with numerous other carriers
in certain markets, including WorldCom, Inc., TresCom International, Inc., and
STAR Telecommunications, Inc. Some of these competitors focus their efforts on
the same customers targeted by the Company. In addition, many of the Company's
current competitors are also Company customers. The Company's business could be
materially adversely affected if a significant number of those customers reduce
or cease doing business with the Company for competitive reasons. See "Risk
Factors - Competition."
Recent and pending deregulation initiatives in the U.S. and other countries
may encourage additional new industry entrants. The Telecommunications 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 RBOCs. In addition, pursuant to the terms of
the WTO Agreement, countries who are signatories to the agreement are expected
to allow access to their domestic and international markets to competing
telecommunications providers, allow foreign ownership interests in existing
telecommunications providers and establish regulatory schemes and policies
designed to accommodate telecommunications competition. The Company also is
likely to be subject to additional competition as a result of mergers or the
formation of alliances among some of the largest telecommunications carriers.
Recent examples of mergers and alliances include the planned merger of British
Telecom and MCI and the "Global One" alliance among Sprint, Deutsche Telekom and
France Telecom.
Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources than the
Company, own or control larger networks, transmission and termination
facilities, and offer a broader variety of services than the Company, and have
strong name recognition, brand loyalty, and long-standing relationships with the
many of 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 other costs of providing services, which could cause
significant
39
<PAGE>
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, results of operations and financial
condition could be materially adversely affected. See "Risk Factors -
Competition."
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
and ground based systems, utilization of the Internet for voice, data and video
communications, and digital wireless communication systems such as personal
communications services ("PCS"). The Company is unable to predict which of many
future product and service offerings will be important to maintain its
competitive position or the expenditures that may be required to acquire,
develop or otherwise provide such products and services.
GOVERNMENT REGULATION
Overview
The Company's business is subject to varying degrees of federal and state
regulation. Federal laws and the regulations of the FCC apply to the Company's
international and interstate facilities-based and resale telecommunications
services, while applicable PSCs have jurisdiction over telecommunications
services originating and terminating within the same state. At the federal level
the Company is subject to common carriage requirements under the Communications
Act. Comprehensive amendments to the Communications Act were made by the
Telecommunications Act. The purpose of the 1996 Act is to promote competition in
all areas of telecommunications by reducing unnecessary regulation at both the
federal and state levels to the greatest extent possible. The FCC and PSCs are
in the process of implementing the 1996 Act's regulatory reforms.
In addition, although the laws of other countries only directly apply to
carriers doing business in those countries, the Company may be affected
indirectly by such laws insofar as they affect foreign carriers with which the
Company does business. There can be no assurance that future regulatory,
judicial and legislative changes will not have a material adverse effect on the
Company, that U.S. or foreign regulators or third parties will not raise
material issues with regard to the Company's compliance or noncompliance with
applicable laws and regulations, or that regulatory activities will not have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, the FCC and the PSCs generally have the
authority to condition, modify, cancel, terminate or revoke the Company's
operating authority for failure to comply with federal and state laws and
applicable rules, regulations and policies. Fines or other penalties also may be
imposed for such violations. Any such action by the FCC and/or the PSCs could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors - Government Regulation."
Federal and State Transactional Approvals
The FCC and certain PSCs also impose prior approval requirements on
transfers or changes of control, including pro forma transfers of control and
corporate reorganizations, and assignments of regulatory authorizations. Such
requirements may have the effect of delaying, deterring or preventing a change
in control of the Company. The Company also is required to obtain state approval
for the issuance of securities. Seven of the states in which the Company is
certificated provide for prior approval or notification of the issuance of
securities by the Company. Although the necessary approvals will be sought and
notifications made prior to the offering, because of time constraints, the
Company may not have obtained such approval from two of the states prior to
consummation of the Offering. The Company's intrastate revenues for the first
half of 1997 for each of the two states was less than $100 for each such state.
Although these state filing requirements may have been preempted by the National
Securities Market Improvement Act of 1996, there is no case law on this point.
After consultation with counsel, the Company believes the approvals will be
granted and that obtaining such approvals subsequent to the Offering should not
result in any material adverse consequences to the Company, although there can
be no assurance that such consequences will not result.
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International Services
International telecommunications carriers are required to obtain authority
from the FCC under Section 214 of the Communications Act in order to provide
international service that originates or terminates in the United States. U.S.
international common carriers also are required to file and maintain tariffs
with the FCC specifying the rates, terms, and conditions of their services. In
1989, the Company received Section 214 authority from the FCC to acquire and
operate satellite facilities for the provision of direct international service
to Italy, Israel, Kenya, India, Iran, Saudi Arabia, Pakistan, Sri Lanka, South
Korea and the United Arab Emirates ("UAE"). The Company also is authorized to
resell services of other common carriers for the provision of switched voice,
telex, facsimile and other data services, and for the provision of INTELSAT
Business Services ("IBS") and international television services to various
overseas points.
In 1996, the FCC established new rules that streamlined its Section 214
authorization and tariff regulation processes to provide for shorter notice and
review periods for certain U.S. international carriers including the Company.
The FCC established streamlined regulation for "non-dominant" carriers service
providers found to lack market power on the routes served. The Company is
classified by the FCC as a non-dominant carrier on its international and
domestic routes. On August 27, 1997, the Company was granted global
facilities-based Section 214 authority under the FCC's new streamlined
processing rules. A facilities-based global Section 214 authorization enables
the Company to provide international basic switched, private line, data,
television and business services using authorized facilities to virtually all
countries in the world.
The FCC's streamlined rules also provide for global Section 214 authority
to resell switched and private line services of other carriers by non-dominant
international carriers. The FCC decides on a case-by-case basis, however,
whether to grant Section 214 authority to U.S. carriers to resell the switched
private lines of affiliated foreign carriers to countries where a foreign
carrier is dominant based on a showing that there are equivalent resale
opportunities for U.S. carriers in the foreign carrier's market. To date, the
FCC has found that Canada, the U.K., Sweden and New Zealand do provide
equivalent resale opportunities. The FCC has found that equivalent resale
opportunities do not exist in Germany, Hong Kong and France. The FCC also is
considering applications for equivalency determinations with respect to
Australia, Chile, Denmark, Finland and Mexico. It is possible that
interconnected private line resale to additional countries may be allowed in the
future. Pursuant to FCC rules and policies, the Company's authorization to
provide service via the resale of interconnected international private lines
will be expanded to include countries subsequently determined by the FCC to
afford equivalent resale opportunities to those available under United States
law, if any. As a result of the recent signing of the WTO Agreement, the FCC has
proposed to replace the "equivalency" test with a rebuttable presumption in
favor of resale of interconnected private lines to WTO member countries.
The Company must also conduct its international business in compliance with
the ISP. The ISP establishes the parameters by which U.S.-based carriers and
their foreign correspondents settle the cost of terminating each other's traffic
over their respective networks. The precise terms of settlement are established
in a correspondent agreement (also referred to as an "operating agreement"),
which also sets forth the term of the agreement, the types of service covered by
the agreement, the division of revenues between the carrier that bills for the
call and the carrier that terminates the call at the other end, the frequency of
settlements, the currency in which payments will be made, the formula for
calculating traffic flows between countries, technical standards, and procedures
for the settlement of disputes. The amount of payments (the "settlement rate")
is determined by the negotiated accounting rate specified in the operating
agreement. Under the ISP, the settlement rate generally must be one-half of the
accounting rate. Carriers must obtain waivers of the FCC's rules if they wish to
use an accounting rate that differs from the prevailing rate or vary the
settlement rate from one-half of the accounting rate.
The ISP is designed to eliminate foreign carriers' incentives and
opportunities to discriminate in their operating agreements among different
U.S.-based carriers through a practice referred to as "whipsawing." Whipsawing
involves a foreign carrier varying the accounting and/or settlement rate offered
to different U.S.-based carriers for the benefit of the foreign carrier, which
could secure various incentives
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<PAGE>
by favoring one U.S.-based carrier over another. Under the uniform settlements
policy, U.S.-based carriers can only enter into operating agreements that
contain the same accounting rate and settlement terms offered to all U.S.-based
carriers in that country and provide for proportionate return traffic. When a
U.S.-based carrier negotiates an accounting rate with a foreign carrier that is
lower than the accounting rate offered to another U.S.-based carrier for the
same service, the U.S.-based carrier with the lower rate must file a
notification letter with the FCC. If a U.S.-based carrier does not already have
an operating agreement in effect, it must file a request with the FCC to modify
the accounting rate for that country to introduce service with the foreign
correspondent in that country. A U.S.-based carrier also must request
modification authority from the FCC for any proposal that is not prospective,
that is not a simple reduction in the accounting rate, or that changes the terms
and conditions of an existing operating agreement. The notification and
modification procedures are intended to provide all U.S.-based carriers with an
opportunity to compete in foreign markets on a nondiscriminatory basis. Among
other efforts to counter the practice of whipsawing and inequitable treatment of
similarly situated U.S.-based carriers, the FCC adopted the principle of
proportionate return - which requires that the U.S. carrier terminate
U.S.-inbound traffic in the same proportion as the U.S-outbound traffic that it
sends to the foreign correspondent - to assure that competing U.S.-based
carriers have roughly equitable opportunities to receive the return traffic that
reduces the marginal cost of providing international service.
Consistent with its pro-competition policies, the FCC also prohibits
U.S.-based carriers from agreeing to accept special concessions from any foreign
carrier or administration. A special concession is any arrangement that affects
traffic flow to or from the U.S. that is offered exclusively by a foreign
carrier or administration to a particular U.S. carrier that is not offered to
similarly situated U.S. carriers authorized to serve a particular route. With
the adoption of the WTO Agreement this year, the FCC is considering modifying
its no-special concessions rule to prohibit only those exclusive arrangements
granted by a foreign correspondent with market power.
In 1996, the FCC amended the ISP to provide carriers with flexibility to
introduce alternative payment arrangements that deviate from the ISP with
foreign correspondents in any foreign country where the FCC has previously
determined that effective competitive opportunities ("ECO") exist. Alternative
arrangements that deviate from the ISP also may be established for international
switched traffic between the U.S. and countries that have not previously been
found to satisfy the ECO test where the U.S. carrier can demonstrate that
deviation from the ISP will promote market-oriented pricing and competition,
while precluding abuse of market power by the foreign correspondent. As a result
of the WTO Agreement, the FCC has proposed to replace the ECO test with a
rebuttable presumption in favor of alternative payment arrangements with WTO
member countries. 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 Company intends, where possible, to take advantage of lowered accounting
rates and more flexible settlement arrangements. On August 7, 1997, the FCC
adopted revisions to reduce the level and increase enforcement of its
international accounting "benchmark" rates, which are the FCC's target ceilings
for prices that U.S. carriers should pay to foreign carriers for terminating
U.S. calls overseas. Certain foreign carriers have challenged the FCC decision
in court appeals as well as petitions for reconsideration filed with the FCC. If
the FCC mandate of benchmark reductions achieves its stated goal of establishing
competitive international settlement rates, the Company may benefit from such
rate reductions.
Pursuant to FCC regulations, U.S. international telecommunications carriers
are required to file copies of their contracts with foreign correspondents,
including operating agreements, with the FCC within 30 days of execution. The
Company has filed each of its operating agreements with the FCC. The FCC's rules
also require the Company to file periodically a variety of reports regarding its
international traffic flows and use of international facilities. The FCC is
engaged in a rulemaking proceeding in which it has proposed to reduce certain
reporting requirements of common carriers. The Company is unable to predict the
outcome of this proceeding or its effect on the Company. The Company currently
has on file with the FCC operating agreements and accounting rate modifications
for India, Syria, Uganda and Monaco. In addition, the Company has on file and
maintains with the FCC annual circuit status reports and traffic data reports.
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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 this
type of 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 ITU regulations. It is
possible that the FCC may determine that refiling, as defined, violates U.S.
and/or international law. To the extent that the Company's traffic is routed
through a third country to reach a destination country, such an FCC
determination with respect to transiting and refiling could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The FCC also regulates the ability of U.S.-based international carriers
affiliated with foreign carriers to serve markets where the foreign affiliate is
dominant. U.S.-based carriers must report to the FCC a 10% ownership affiliation
with a foreign carrier. A U.S. international carrier is required to notify the
FCC prior to entering into an agreement that would provide a foreign carrier
with a 10% or greater interest in the U.S. carrier. This notification is subject
to a public notice and comment period and FCC review to determine whether a U.S.
carrier should be regulated as dominant on routes where the foreign affiliate is
dominant. The Company has provided notification to the FCC of the 15% investment
in the Company by an affiliate of Portugal Telecom, a foreign carrier from a WTO
member country and signatory to the WTO Agreement. Currently, the FCC considers
a U.S. international carrier to be dominant, and will limit its entry, on routes
where a foreign carrier has a 25% or greater or a controlling interest in the
U.S. carrier or where the U.S. carrier has a 25% or greater or controlling
interest in the foreign carrier. In order for a U.S. carrier that has a 25% or
greater affiliation with or controls or is controlled by a foreign carrier to
receive authority from the FCC to enter markets where the foreign carrier is
dominant, the U.S. carrier is required to show to the FCC that it meets the ECO
test, i.e. that effective opportunities exist for other U.S. carriers to compete
in the foreign market. As a result of WTO Agreement, the FCC has proposed to
replace the ECO test with a rebuttable presumption in favor of foreign market
entry by U.S. carriers with foreign affiliates in WTO member countries. If
adopted, the FCC's liberalized foreign market entry policies may have a two-fold
effect on the Company: (i) increased opportunities for foreign investment in and
by the Company and entry by the Company into WTO member countries; and (ii)
increased competition for the Company from other U.S. international carriers
serving or seeking to serve WTO member countries.
The FCC may condition, modify or revoke any of the Section 214
authorizations granted to the Company for violations of the Communications Act,
the FCC's rules and policies or the conditions of those authorizations or may
impose monetary forfeitures for such violations. Any such action on the part of
the FCC may have a material adverse effect on the Company's business, financial
condition and results of operations.
Interstate and Intrastate Services
The Company's provision of domestic long distance service in the United
States is subject to regulation by the FCC and certain state PSCs, who regulate
to varying degrees interstate and intrastate rates, respectively, ownership of
transmission facilities, and the terms and conditions under which the Company's
domestic services are provided. In general, neither the FCC nor the PSCs
exercise direct oversight over cost justification for domestic carriers' rates,
services or profit levels, but either or both may do so in the future. Domestic
carriers such as the Company, however, are required by federal law and
regulations to file tariffs listing the rates, terms and conditions applicable
to their interstate services. The Company has filed domestic long distance
tariffs with the FCC. The FCC adopted an order on October 29, 1996 requiring
that non-dominant interstate carriers, such as the Company, eliminate FCC
tariffs for domestic interstate long distance service. This order was to take
effect as of December 1997. On February 13, 1997, however, the U.S. Court of
Appeals for the District of Columbia Circuit ruled that the FCC's order be
stayed pending judicial review of appeals challenging the order. Should the
appeals fail and the FCC's order become effective, the Company may benefit from
the elimination of FCC tariffs by
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gaining more flexibility and speed in dealing with marketplace changes. The
absence of tariffs, however, will also require that the Company secure
contractual agreements with its customers regarding many of the terms of its
existing tariffs or face possible claims arising because the rights of the
parties are no longer clearly defined. To the extent that the Company's customer
base involves "casual calling" customers, the potential absence of tariffs would
require the Company to establish contractual methods to limit potential
liability. On August 20, 1997, the FCC partially reconsidered its order by
allowing dial-around carriers such as the Company to maintain tariffs on file
with the FCC.
In addition, the Company generally is also required to obtain certification
from the relevant state PSC prior to the initiation of intrastate service and to
file tariffs with such states. The Company currently has the certifications
required to provide service in 21 states, and has filed or is in the process of
filing requests for certification in 13 additional states. Although the Company
intends and expects to obtain operating authority in each jurisdiction in which
operating authority is required, there can be no assurance that one or more of
these jurisdictions will not deny the Company's request for operating authority.
Any failure to maintain proper federal and state certification or tariffs, or
any difficulties or delays in obtaining required certifications could have a
material adverse effect on the Company's business, financial condition and
results of operations. Many states also impose various reporting requirements
and/or require prior approval for transfers of control of certified carriers,
corporate reorganizations, acquisitions of telecommunications operations,
assignments of carrier assets, carrier stock offerings, and incurrence by
carriers of significant debt obligations. Certificates of authority can
generally be conditioned, modified, canceled, terminated, or revoked by state
regulatory authorities for failure to comply with state law and/or the rules,
regulations, and policies of the PSCs. Fines and other penalties also may be
imposed for such violations. Any such action by the PSCs could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company monitors regulatory developments in all 50 states to
ensure regulatory compliance.
Casual Calling Issues
The FCC is currently engaged in a rulemaking proceeding to expand the
number of codes available for casual calling services. An increase in the number
of codes available for casual calling will allow for increased competition in
the casual calling industry. In addition, the FCC is considering rules to
require dominant local exchange carriers and competitive local exchange carriers
to make billing arrangements available on a nondiscriminatory basis to casual
calling service providers. The Company already has LEC billing arrangements in
place but may wish to take advantage of rules the FCC may adopt to develop new
billing arrangements with competing LECs. Competing casual calling providers
without billing arrangements also would benefit from such a nondiscriminatory
billing obligation.
Other Legislative and Regulatory Initiatives
The 1996 Act is designed to promote local competition through state and
federal deregulation. As part of its pro-competitive policies, the 1996 Act
frees the RBOCs from the judicial orders that prohibited their provision of long
distance services outside of their operating territories (LATAs). The 1996 Act
provides specific guidelines that allow the RBOCs to provide long distance
inter-LATA service to customers inside the RBOC's region but not before the RBOC
has demonstrated to the FCC and state regulators that it has opened up its local
network to competition and met a "competitive checklist" of requirements
designed to provide competing network providers with nondiscriminatory access to
the RBOC's local network. To date, the FCC has denied applications for in-region
long distance authority filed by Ameritech Corporation in Michigan and SBC in
Oklahoma. Denial of the SBC Application is pending judicial review. The grant of
such authority could permit RBOCs to compete with the Company in the provision
of domestic and international long distance services. The FCC also has proposed
rules to govern the RBOCs's provision of affiliated out-of-region interstate,
interexchange services. Among other things, the FCC has proposed to allow
affiliates of RBOCs that provide out-of-region interstate, interexchange service
to be regulated as non-dominant carriers, under certain circumstances.
The 1996 Act also contains provisions that will permit the FCC to forbear
from any provision of the Communications Act or FCC regulation upon a finding
that forbearance will promote competition and
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that the carrier seeking forbearance does not possess market power. FCC
forbearance could reduce some of the Company's regulatory requirements, such as
filing specific rates for its domestic interstate interexchange services.
To originate and terminate calls in connection with providing their
services, long distance carriers such as the Company must purchase "access
services" from LECs or CLECs. Access charges represent a significant portion of
the Company's cost of U.S. domestic long distance services and, generally, such
access charges are regulated by the FCC for interstate services and by PSCs for
intrastate services. The FCC has undertaken a comprehensive review of its
regulation of LEC access charges to better account for increasing levels of
local competition. Under alternative access charge rate structures being
considered by the FCC, LECs would be permitted to allow volume discounts in the
pricing of access charges. While the outcome of these proceedings is uncertain,
if these rate structures are adopted, many long distance carriers, including the
Company, could be placed at a significant cost disadvantage to larger
competitors.
Certain additional provisions of the 1996 Act, and the rules that have been
proposed to be adopted pursuant thereto, could materially affect the growth and
operation of the telecommunications industry and the services provided by the
Company. Further, certain of the 1996 Act's provisions have been, and likely
will continue to be, judicially challenged. The Company is unable to predict the
outcome of such rulemakings or litigation or the substantive effect of the new
legislation and the rulemakings on the Company's business, financial condition
and results of operations.
WTO Agreement on Basic Telecommunications
In February 1997, the WTO announced that 69 countries, including the United
States, Japan, and all of the member states of the EU, agreed on the WTO
Agreement to facilitate competition in basic telecommunications services. The
WTO Agreement becomes effective January 1, 1998. Pursuant to the terms of the
WTO Agreement, signatories to the WTO Agreement have committed to varying
degrees to allow access to their domestic and international markets to competing
telecommunications providers, allow foreign ownership interests in existing
telecommunications providers and establish regulatory schemes to develop and
implement policies to accommodate telecommunications competition.
The FCC has initiated certain proceedings which must be completed by the
end of the year to review, and modify if necessary, its current international
telecommunications policies in light of U.S. obligations under the WTO
Agreement. These proceedings address, among other issues, the viability of
equivalency and other reciprocity principles currently applicable to
international facilities-based and resale services, foreign ownership
limitations, foreign carrier entry into the U.S. market, and accounting rate
benchmarks. At the same time, telecommunications markets in many foreign
countries are expected to be significantly liberalized, creating additional
competitive market opportunities for U.S. telecommunications businesses such as
the Company. Although many countries have agreed to make certain changes to
increase competition in their respective markets, there can be no assurance that
countries will enact or implement the legislation required to effect the changes
to which they have committed in a timely manner or at all. Failure by a country
to meet commitments made under the WTO Agreement may give rise to a cause of
action for the injured foreign countries to lodge a trade dispute with the WTO.
At this time, the Company is unable to predict the effect the WTO Agreement and
related developments might have on its business, financial condition and results
of operations.
EMPLOYEES
As of September 1, 1997, the Company had 50 full time employees and 40 part
time employees. None of the Company's employees are currently represented by a
collective bargaining agreement. The Company believes that its relations with
its employees are good.
PROPERTIES
The Company's headquarters are located in approximately 13,300 square feet
of space in Bethesda, Maryland. The Company leases this space under an agreement
under which it pays approximately $18,200 per month, which expires on October
31, 1999. The Company also is a party to a co-location agreement
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pursuant to which it has the right to occupy certain space in Washington, D.C.
as a site for its switching facilities, under which it pays $250 per month and
has recently entered into a co-location agreement with another party pursuant to
which it has the right to occupy approximately 2,000 square feet in New York
City, New York as a site for its switching facilities and under which it pays
approximately $8,000 per month. The Washington, D.C. co-location agreement is
currently renewable on a year-to-year basis, and the New York City co-location
agreement has a term of five years, with a five-year renewal option. The Company
anticipates that it will incur additional lease and co-location expenses as it
adds additional switching capacity.
LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to the
conduct of its business. The Company is not currently a party to any lawsuit or
proceeding which, in the opinion of management, is likely to have a material
adverse effect on the Company's business, financial condition or result of
operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of September 1, 1997, certain
information regarding the Company's directors and executive officers.
<TABLE>
<CAPTION>
YEAR OF EXPIRATION
NAME AGE POSITION OF TERM AS DIRECTOR
- -------------------------- ----- ---------------------------------------- --------------------
<S> <C> <C> <C>
Ram Mukunda ............ 38 President, Chief Executive Officer, 2000
Treasurer and Director
Prabhav V. Maniyar ...... 38 Senior Vice President, Chief Financial 1999
Officer, Secretary and Director
Nazir G. Dossani ......... 55 Director 1998
Richard K. Prins ......... 40 Director 1998
Vijay Srinivas ......... 44 Director 1999
</TABLE>
RAM MUKUNDA is the founder and majority owner of STARTEC. Prior to
founding STARTEC in 1989, Mr. Mukunda was Advisor, Strategic Planning with
INTELSAT, an international consortium responsible for global satellite
services. While at INTELSAT, he was responsible for issues relating to
corporate, business, financial planning and strategic development. Mr. Mukunda
earned a M.S. in Electrical Engineering from the University of Maryland. Mr.
Mukunda and Mr. Srinivas are brothers-in-law.
PRABHAV V. MANIYAR joined STARTEC as Chief Financial Officer in January
1997. From June 1993 until he joined the Company, Mr. Maniyar was the Chief
Financial Officer of Eldyne, Inc., Unidyne Corporation and Diversified Control
Systems, LLC, collectively know as the Witt Group of Companies. The Witt Group
of Companies was acquired by the Titan Corporation in May 1996. From June 1985
to May 1993, he held progressively more responsible positions with NationsBank.
Mr. Maniyar earned a B.S. in Economics from Virginia Commonwealth University
and an M.A. in Economics from Old Dominion University.
NAZIR G. DOSSANI will join STARTEC as a director immediately upon
completion of the Offering. Mr. Dossani has been Vice President for
Asset/Liability Management at Freddie Mac since January 1993. Prior to this
position, Mr. Dossani was Vice President - Pricing and Portfolio Analysis at
Fannie Mae. Mr. Dossani received a Ph.D. in Regional Sciences from the
University of Pennsylvania and an M.B.A. from Wharton School of Business.
RICHARD K. PRINS will join STARTEC as a director immediately upon
completion of the Offering. Mr. Prins is currently Senior Vice President with
Ferris, Baker Watts, Incorporated. From July 1988 through March 1996, he served
as Managing Director of Investment Banking with Crestar Securities Corporation.
Mr. Prins received an M.B.A. from Oral Roberts University and a B.A. from
Colgate University. He currently serves on the Board of Directors for Path Net,
Inc., a domestic telecommunications company, and The Association for Corporate
Growth, National Capital Chapter.
VIJAY SRINIVAS is the brother-in-law of Ram Mukunda and is a founding
director of the Company. He has a Ph.D. in Organic Chemistry from the University
of North Dakota and is a senior research scientist at ELF Atochem, North
America, a diversified chemical company.
CERTAIN KEY EMPLOYEES
ANTHONY DAS joined STARTEC as Vice President of Corporate and International
Affairs in February 1997. Prior to joining the Company, Mr. Das was a Senior
Consultant at Armitage Associates from April 1996 to January 1997. Prior to
joining Armitage Associates, he served as a Senior Career Executive in the
Office of the Secretary, Department of Commerce from 1993 to 1995. From 1990 to
1993, Mr. Das was the Director of Public Communication at the State Department.
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GUSTAVO PEREIRA joined STARTEC in August 1995 and is Vice President for
Engineering. From 1989 until he joined the Company in 1995, Mr. Pereira served
as Director of Switching Systems for Marconi in Portugal. In this capacity he
supervised more than 100 engineers and was responsible for Portugal's
international telecommunications network.
SUBHASH PAI joined STARTEC in January 1992 and is Controller and Assistant
Secretary. Mr. Pai is a CA/CPA. Prior to joining STARTEC, he held various
positions with a multinational shipping company in India.
DHRUVA KUMAR joined STARTEC in April 1993 and is Director of Global Carrier
Services. Prior to managing the Carrier Services group, Mr. Kumar held a series
of progressively more responsible positions within the Company.
T.J. MASTER joined STARTEC in May 1993 and is Manager of Switched
Services. Mr. Master is responsible for the Company's residential marketing
efforts. Previously he was Marketing Executive at the Times of India
publication group in New Delhi.
TEFERI DEJENE joined STARTEC in October 1992 and is Manager of Network
Switching. Since 1992, Mr. Dejene has held a series of progressively more
responsible positions in network operations within the Company.
SOSSINA TAFARI joined STARTEC in May 1993 and is Manager of Network
Operations. Ms. Tafari manages Network Operations for the Company. Previously
she worked in network maintenance for MCI.
CLASSIFIED BOARD OF DIRECTORS
Pursuant to its Charter, the Company's Board of Directors is divided into
three classes of directors each containing, as nearly as possible, an equal
number of directors. Directors within each class are elected to serve three-year
terms, and approximately one-third of the directors stand for election at each
annual meeting of the Company's stockholders. A classified Board of Directors
may have the effect of deterring or delaying an attempt by a person or group to
obtain control of the Company by a proxy contest since such third party would be
required to have its nominees elected at two annual meetings of stockholders in
order to elect a majority of the members of the Board. See "Risk Factors -
Control of Company by Current Stockholders" and "Certain Provisions of the
Company's Articles of Incorporation, Bylaws and Maryland Law."
COMMITTEES OF THE BOARD
Following completion of the Offering, the Board of Directors intends to
establish two standing committees: the Audit Committee and the Compensation
Committee.
The Audit Committee will be charged with recommending the engagement of
independent accountants to audit the Company's financial statements, discussing
the scope and results of the audit with the independent accountants, reviewing
the functions of the Company's management and independent accountants pertaining
to the Company's financial statements, reviewing management's procedures and
policies regarding internal accounting controls, and performing such other
related duties and functions as are deemed appropriate by the Audit Committee
and the Board of Directors. Upon completion of the Offering, it is expected that
Messrs. Dossani and Prins will serve as the members of the Audit Committee.
The Compensation Committee will be responsible for reviewing and approving
salaries, bonuses and benefits paid or given to all executive officers of the
Company and making recommendations to the Board of Directors with regard to
employee compensation and benefit plans. The Compensation Committee will also
administer the Restated Option Plan and 1997 Performance Incentive Plan. Upon
completion of the Offering, it is expected that Messrs. Dossani and Prins will
serve as the members of the Compensation Committee.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors will not have a Compensation Committee until
completion of the Offering. Accordingly, the entire Board of Directors,
including directors who are executive officers of the Company, to date has made
all determinations concerning compensation of executive officers. Following the
completion of the Offering, the Board of Directors intends to establish a
Compensation Committee which will consist entirely of directors who are not
employees of the Company. See "- Committees of the Board."
COMPENSATION OF DIRECTORS
Currently, the Company's directors do not receive cash compensation for
their service on the Board of Directors. Following completion of the Offering,
directors who are not executive officers or employees of the Company may receive
meeting fees, committee fees and other compensation. Each member of the Board
who is not an officer of the Company will receive a grant of options to purchase
5,000 shares of the Common Stock upon joining the Board and additional options
to purchase 2,000 shares per year thereafter. All directors will be reimbursed
for reasonable out-of-pocket expenses incurred in connection with attendance at
Board and committee meetings.
COMPENSATION OF EXECUTIVE OFFICERS
The following Summary Compensation Table sets forth the compensation earned
by the Company's President and Chief Executive Officer and the Vice President
for Engineering (the "Named Officers") during the three years ended December 31,
1994, 1995 and 1996. No other executive officer earned in excess of $100,000 for
services rendered in all capacities to the Company during the three years ended
December 31, 1994, 1995 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------------
NAME AND OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- -------------------------------------- ------ ------------- ------- ----------------
<S> <C> <C> <C> <C>
Ram Mukunda ........................ 1996 $165,875 N/A $18,000(1)
President and Chief Executive Officer 1995 150,000 N/A N/A
1994 127,000 N/A N/A
Gustavo Pereira(2) .................. 1996 110,000 N/A N/A
Vice President, Engineering 1995 32,000 N/A N/A
1994 N/A N/A N/A
</TABLE>
- ----------
(1) This amount represents the value of an automobile allowance.
(2) Mr. Pereira joined the Company in August 1995.
STOCK OPTION GRANTS
During the year ended December 31, 1996, the Named Officers were not
awarded any options to purchase any securities of the Company, nor were the
Named Officers granted any stock appreciation rights during fiscal 1996.
OPTION EXERCISES AND HOLDINGS
There were no options exercised by the Named Officers for the fiscal year
ended December 31, 1996 or outstanding at the end of that year, nor were any
stock appreciation rights exercised during such year or outstanding at the end
of that year.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Ram Mukunda on July
1, 1997 (the "Mukunda Employment Agreement"), pursuant to which Mr. Mukunda
holds the positions of President, Chief Executive Officer and Treasurer of the
Company, is paid an annual base salary of $250,000
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per year, is entitled to participate in the Company's 1997 Performance Incentive
Plan, is eligible to receive a bonus of up to 40% of his base salary, as
determined by the Compensation Committee of Board of Directors of the Company
based upon the financial and operating performance of the Company, and is
entitled to receive an automobile allowance of $1,500 per month. In addition,
the Mukunda Employment Agreement provides that if there is a "Change of Control"
(as defined below), Mr. Mukunda will receive, for the longer of 12 months or the
balance of the term under his employment agreement (which initially could be for
a period of up to three years), the following benefits: (1) a severance payment
equal to $20,830 per month; (2) a pro rata portion of the bonus applicable to
the calendar year in which such termination occurs; (3) all accrued but unpaid
base salary and other benefits as of the date of termination; and (4) such other
benefits as he was eligible to participate in at and as of the date of
termination.
The Company also entered into an employment agreement with Prabhav Maniyar
on July 1, 1997 (the "Maniyar Employment Agreement"), pursuant to which Mr.
Maniyar holds the positions of Senior Vice President, Chief Financial Officer
and Secretary of the Company, is paid an annual base salary of $175,000 per
year, is entitled to participate in the Company's 1997 Performance Incentive
Plan, is eligible to receive a bonus of up to 40% of his base salary, as
determined by the Compensation Committee of Board of Directors of the Company
based upon the financial and operating performance of the Company, and is
entitled to receive an automobile allowance of $750 per month. In addition, the
Maniyar Employment Agreement provides that if there is a "Change of Control" (as
defined below), Mr. Maniyar will receive, for the longer of 12 months or the
balance of the term under his employment agreement (which initially could be for
a period of up to three years), the following benefits: (1) a severance payment
equal to $14,580 per month; (2) a pro rata portion of the bonus applicable to
the calendar year in which such termination occurs; (3) all accrued but unpaid
base salary and other benefits; and (4) such other benefits as he was eligible
to participate in at and as of the date of termination.
The Mukunda Employment Agreement and the Maniyar Employment Agreement each
has an initial term of three years and is renewable for successive one year
terms. In addition, the agreements also contain provisions which restrict the
ability of Messrs. Mukunda and Maniyar to compete with the Company for a period
of one year following termination.
A "Change of Control" shall be deemed to have occurred, with respect to the
terms and conditions set forth in each of the Mukunda Employment Agreement and
the Maniyar Employment Agreement, if (A) any person becomes a beneficial owner,
directly or indirectly, of securities of the Company representing 30% or more of
the combined voting power of all classes of the Company's then outstanding
voting securities; or (B) during any period of two consecutive calendar years
individuals who at the beginning of such period constitute the Board of
Directors, cease for any reason to constitute at least a majority thereof,
unless the election or nomination for the election by the Company's stockholders
of each new director was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
two-year period or whose election or nomination for election was previously so
approved; or (C) the stockholders of the Company approve a merger or
consolidation of the Company with any other company or entity, other than a
merger or consolidation that would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent more than
50% of the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation
(exclusive of the situation where the merger or consolidation is effected in
order to implement a recapitalization of the Company in which no person acquires
more than 30% of the combined voting power of the Company's then outstanding
securities); or (D) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
STOCK OPTION PLANS
Amended and Restated Stock Option Plan
The Company adopted the STARTEC, Inc. Stock Option Plan (the "Option Plan")
in 1993 to encourage stock ownership by key management employees of the Company,
to provide an incentive for such employees to expand and improve the profits and
prosperity of the Company and to assist the
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Company in attracting and retaining key personnel through the grant of options
to purchase shares of Common Stock. The Board of Directors amended and restated
the Option Plan in January 1997 (the "Restated Option Plan") to establish a
determinable date for the exercisability of options granted under the Option
Plan and to make other changes and updates.
The Restated Option Plan provided for the grant of options to purchase up
to an aggregate of 270,000 shares of Common Stock to selected full-time
employees of the Company. Options granted may be exercised only upon the
occurrence of a sale of more than fifty percent of the Common Stock in one
transaction, a dissolution or liquidation of the Company, a merger or
consolidation of the Company in which it is not the surviving corporation, a
filing by the Company of an effective registration statement under the
Securities Act, or the seventh anniversary of the date the participant is first
hired as a full-time employee of the Company. All such options terminate and
expire under the Restated Option Plan on the earlier of ten years from the date
of grant or the date the participant is no longer employed by the Company as a
full-time employee and such participant's employment was not terminated as a
result of death or permanent disability of the participant, or the Company's
termination of the participant's full-time employment without cause.
As of June 30, 1997, options to purchase an aggregate of 269,766 shares of
Common Stock have been granted under the Restated Option Plan to 32 persons with
exercise prices ranging from $0.30 to $1.85 per share. Pursuant to resolution of
the Board of Directors, no further awards may be made under the Restated Option
Plan.
1997 Performance Incentive Plan
On August 18, 1997, the stockholders of the Company approved the Company's
1997 Performance Incentive Plan (the "Performance Plan"). The purpose of the
Performance Plan is to support the Company's ongoing efforts to develop and
retain qualified directors, employees and consultants and to provide the Company
with the ability to provide incentives more directly linked to the profitability
of the Company's business and increases in stockholder value.
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, representing 9.4% of the shares of Common Stock outstanding
including the shares offered hereby. 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 Signet Bank. As of the date of this Prospectus,
254,250 options have been granted under the Performance Plan, at an exercise
price of $10 per share. The Performance Plan will be administered by the
Compensation Committee of the Board of Directors. This committee will select the
persons to whom awards will be granted and will set the terms and conditions of
such awards. The shares of Common Stock subject to any award that terminates,
expires or is cashed out without payment being made in the form of Common Stock
will again be available for distribution under the Performance Plan, as will
shares that are used by an employee to pay withholding taxes or as payment for
the exercise price of an award. See "Description of Capital Stock - Signet
Agreement."
Awards under the Performance Plan are not transferable except in the event
of the person's death or unless otherwise required by law. Other terms and
conditions of each award will be set forth in award agreements. The Performance
Plan constitutes an unfunded plan for incentive compensation purposes.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Company's Charter provides that the Company shall indemnify its current
and former officers and directors against any and all liabilities and expenses
incurred in connection with their services in such capacities to the maximum
extent permitted by Maryland law, as from time to time amended. The Charter
further provides that the right to indemnification shall also include the right
to be paid by the Company for expenses incurred in connection with any
proceeding arising out of such service in advance of its final disposition. The
Charter further provides that the Company may, by action of its Board of
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Directors, provide indemnification to such of the employees and agents of the
Company and such other persons serving at the request of the Company as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, or other enterprise to such extent and to
such effect as is permitted by Maryland law and as the Board of Directors may
determine. The Company expects to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, or agent of the Company,
or is or was serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust, or
other enterprise against any expense, liability, or loss incurred by such person
in any such capacity or arising out of his status as such, whether or not the
Company would have the power to indemnify him against such liability under
Maryland law. The Charter provides that (i) the foregoing rights of
indemnification and advancement of expenses shall not be deemed exclusive of any
other rights to which any officer, director, employee or agent of the Company
may be entitled; and (ii) neither the amendment nor repeal of the Charter, nor
the adoption of any additional or amendment provision of the Charter or the
By-laws shall apply to or affect in any respect the applicability of the
Charter's provisions with respect to indemnification for any act or failure to
act which occurred prior to such amendment, repeal or adoption.
Under Maryland law, the Company is permitted to limit by provision in its
Charter the liability of its directors and officers, so that no director or
officer shall be liable to the Company or to any stockholder for money damages
except to the extent that (i) the director or officer actually received an
improper benefit in money, property, or services, for the amount of the benefit
or profit in money, property or services actually received; or (ii) a judgment
or other final adjudication adverse to the director or officer is entered in a
proceeding based on a finding in the proceeding that the director's or officer's
action, or failure to act, was the result or active and deliberate dishonesty
and was material to the cause of action adjudicated in the proceeding. In
Article VII of its amended Charter, the Company has included a provision which
limits the liability of its directors and officers for money damages in
accordance with the Maryland law. Article VII does not eliminate or otherwise
limit the fiduciary duties or obligations of the Company's directors and
officers, does not limit non-monetary forms of recourse against such directors
and officers, and, in the opinion of the Securities and Exchange Commission,
does not eliminate the liability of a director or officer under the federal
securities laws.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information as of October 1, 1997 and as
adjusted to reflect the sale of the Common Stock offered hereby concerning: (i)
each person or group known to the Company to be the beneficial owner of more
than 5% of the Common Stock; (ii) each current director and director designate
of the Company; (iii) each of the Named Officers; and (iv) all directors and
executive officers of the Company as a group. All information with respect to
beneficial ownership has been furnished to the Company by the respective
stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
----------------------------------------------------
PERCENT OF CLASS
NUMBER OF --------------------------------------
BENEFICIAL OWNER(1) SHARES(2) BEFORE OFFERING AFTER OFFERING(3)
- ----------------------------------------------- ----------- ----------------- ------------------
<S> <C> <C> <C>
Ram Mukunda(4) .............................. 3,579,675 60.0% 41.8%
Blue Carol Enterprises Ltd(5) ............... 807,124 13.5% 9.4%
Vijay Srinivas(6) ........................... 311,200 5.2% 3.6%
Prabhav V. Maniyar ........................... 107,616 1.8% 1.3%
Signet Bank(7) .............................. 269,900 4.5% 3.2%
Nazir G. Dossani(8) ........................... 5,000 *
Richard K. Prins(9) ........................... 5,000 *
All Directors and Executive Officers as a Group
(5 persons) ................................. 4,008,491 67.2% 46.8%
---------- ------ ------
</TABLE>
- ----------
* Represents beneficial ownership of less than 1% of the outstanding shares of
Common Stock.
(1) Unless otherwise noted, the address of all persons listed is c/o Startec
Global Communications Corporation, 10411 Motor City Drive, Bethesda, MD
20817.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission. Shares of Common Stock subject to options, warrants or other
rights to purchase which are currently exercisable or are exercisable within
60 days of September 1, 1997 are deemed outstanding for computing the
percentage ownership of the persons holding such options, warrants or
rights, but are not deemed outstanding for computing the percentage
ownership of any other person. Unless otherwise indicated, each person
possesses sole voting and investment power with respect to the shares
identified as beneficially owned.
(3) Assumes no exercise of the Underwriters' over-allotment option.
(4) Mr. Mukunda has pledged all of his shares of Common Stock as security for
the Company's obligations under the Signet Agreement. In addition, Mr.
Mukunda and Mr. and Mrs. Srinivas have entered into a Voting Agreement
dated as of July 31, 1997 pursuant to which Mr. Mukunda has the power to
vote all of the shares held by Mr. and Mrs. Srinivas. See "Description of
Capital Stock - Signet Agreement."
(5) The address of Blue Carol Enterprises Ltd. is 930 Ocean Center Harbour
City, Kowloon, Hong Kong. Blue Carol Enterprises Ltd. is a subsidiary of
Portugal Telcom International.
(6) Such shares are held by Mr. Srinivas and his wife as joint tenants. Mr. and
Mrs. Srinivas have pledged all of their shares of Common Stock as security
for the Company's obligations under the Signet Agreement. See "Description
of Capital Stock - Signet Agreement." In addition, Mr. Mukunda and Mr. and
Mrs. Srinivas has entered into a Voting Agreement dated as of July 31,
1997 pursuant to which Mr. Mukunda has the power to vote all of the shares
held by Mr. and Mrs. Srinivas.
(7) In connection with the Signet Agreement, the Company issued to Signet Bank
warrants to purchase 539,800 shares of Common Stock. Warrants with respect
to 269,900 shares are currently vested. The remaining 269,900 shares will
not vest if the Company completes the Offering prior to December 31, 1997.
See "Description of Capital Stock - Signet Agreement" and "Risk Factors
Restrictions Imposed by Signet Agreement." The address for Signet Bank is
7799 Leesburg Pike, Suite 500, Falls Church, VA 22043.
(8) Upon joining the Company's Board of Directors, Mr. Dossani will receive
options to purchase 5,000 shares of the Common Stock.
(9) Upon joining the Company's Board of Directors, Mr. Prins will receive
options to purchase 5,000 shares of the Common Stock. In addition, Mr. Prins
is a Senior Vice President of Ferris, Baker Watts, Incorporated, one of the
Representatives of the Underwriters. The Representatives of the Underwriters
will receive warrants to purchase up to 150,000 shares of the Company's
Common Stock upon the completion of the Offering. These warrants are not
currently exercisable. See "Underwriting."
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CERTAIN TRANSACTIONS
The Company has an agreement with Companhia Santomensed De
Telecommunicacoes ("CST"), an affiliate of Blue Carol Enterprises Ltd. ("Blue
Carol"), which currently holds 15% of the outstanding shares of Common Stock,
for the purchase and sale of long distance services. Revenues generated from
this affiliate amounted to approximately $625,000, $1,035,000 and $1,501,000, or
12%, 10% and 5% of the Company's total revenues for the years ended December 31,
1994, 1995 and 1996, respectively. Services provided to the Company by this
affiliate amounted to approximately $134,000 and $663,000 of the Company's costs
of services for the years ended December 31, 1995 and 1996, respectively. No
services were purchased from this affiliate in fiscal 1994. The Company also has
a lease agreement with another Blue Carol affiliate, Marconi, for rights to use
undersea fiber optic cable under which the Company is obligated to pay Marconi
$38,330 semi-annually for five years on a resale basis.
Pursuant to the terms of a Subscription Agreement and an Agreement for
Management Participation by and among Blue Carol, the Company and Ram Mukunda
dated as of February 8, 1995, the Company and Mr. Mukunda granted Blue Carol
certain management rights in the Company. The agreement was subsequently amended
in June 1997 to remove certain restrictions applicable to the Company. This
agreement terminates, and all of Blue Carol's management rights expire, upon the
completion of this Offering.
The Company provided long distance services to EAA, Inc. ("EAA"), an
affiliate owned by Ram Mukunda, the Company's President and Chief Executive
Officer. Payments received by the Company from EAA amounted to approximately
$396,000 and $262,000 for the years ended December 31, 1995 and 1996,
respectively. Accounts receivable from EAA were $167,000 and $64,000 for the
years ended December 31, 1995 and 1996, respectively. There were no transactions
with EAA in 1994. The Company believes that the services provided were on
standard commercial terms, which are no less favorable than those available on
an arms-length basis with an unaffiliated third party.
The Company was indebted to Vijay and Usha Srinivas and Mrs. B.V. Mukunda
under certain notes payable in the amounts of $46,000 and $100,000,
respectively as of June 30, 1997. Mr. and Mrs. Srinivas are the brother-in-law
and sister, and Mrs. B.V. Mukunda is the mother, of Ram Mukunda, the Company's
President and Chief Executive Officer. The interest rates on these notes ranged
from 15% to 25%. These amounts were repaid in July 1997.
In July 1997, the Company offered to exchange shares of its voting common
stock for all of the issued and outstanding shares of its non voting common
stock, or alternatively, to repurchase such shares of non voting common stock
for cash. In connection therewith, Mr. Mukunda exchanged 17,175 shares of non
voting stock for an equal number of shares of voting common stock.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this Offering, the Company will be authorized to
issue 20,000,000 shares of Common Stock, par value $.01 per share, and 100,000
shares of Preferred Stock, par value $1.00 per share.
COMMON STOCK
As of October 1, 1997, there were 5,397,999 shares of Common Stock
outstanding held of record by 15 stockholders. As of October 1, 1997, options to
purchase an aggregate of 524,016 shares of Common Stock were outstanding, of
which none were exercisable. Warrants and other rights to purchase an aggregate
of 566,800 shares of Common Stock were also outstanding, of which options and
warrants to purchase 272,900 shares were then exercisable. After giving effect
to the sale of 2,600,000 shares of Common Stock by the Company in this Offering,
there will be 7,997,999 shares of Common Stock outstanding (8,387,999 shares if
the Underwriters' over-allotment option is exercised in full).
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders, including the election of directors.
There are no cumulative voting rights in the election of directors. Subject to
the prior rights of holders of Preferred Stock, if any, the holders of Common
Stock are entitled to receive such dividends, if any, as may be declared from
time to time by the Board of Directors in its discretion from funds legally
available therefor. Upon liquidation or dissolution of the Company, the
remainder of the assets of the Company will be distributed ratably among the
holders of Common Stock after payment of liabilities and the liquidation
preferences of any outstanding shares of Preferred Stock. The Common Stock has
no preemptive or other subscription rights and there are no conversion rights or
redemption or sinking fund provisions with respect to such shares. All of the
outstanding shares of Common Stock are, and the shares to be sold in this
Offering will be, fully paid and nonassessable.
Prior to the Offering, the Company's capital structure consisted of two
classes of common stock, one class with voting rights and one class without
voting rights. In July 1997, the Company offered to exchange shares of voting
common stock for all of its issued and outstanding shares of non voting common
stock, or, alternatively to repurchase such shares of non voting common stock
for cash. All of the shares of non voting common stock were exchanged or
repurchased pursuant to the offer and the class of non voting common stock has
been eliminated.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 100,000 shares of
Preferred Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting a series or the
designation of such series, without any further vote or action by the Company's
stockholders. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of delaying, deferring or preventing a change in
control of the Company without further action by the stockholders and may
adversely affect the market price of, and the voting and other rights of, the
holders of Common Stock. There are no shares of Preferred Stock outstanding, and
the Company has no current plans to issue any shares of Preferred Stock. See
"Risk Factors - Capital Requirements; Need for Additional Financing."
SIGNET AGREEMENT
In connection with the Signet Agreement, the Company issued to Signet Bank
warrants (the "Signet 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 Signet Warrants were issued, vested fully on the date of
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<PAGE>
issuance. The terms of the Signet Agreement provide that additional Signet
Warrants will become fully vested in the event that the Company's initial public
offering is not consummated by certain target dates. Such additional vesting, if
any, will begin in the first calendar quarter of 1998, and an additional one
percent each calendar quarter will vest, up to an aggregate of 10% of the
outstanding Common Stock, continuing until the Company completes its initial
public offering. No additional Signet Warrants will vest if the Company
consummates an initial public offering prior to December 31, 1997. The exercise
price of the Signet Warrants is $8.46 per share, and they expire July 1, 2002.
The holders of the Signet Warrants will have no voting or other stockholder
rights unless and until the Signet Warrants are exercised. The number of shares
of Common Stock issuable and the exercise price of the Signet Warrants are
subject to antidilution adjustments in the event the Company issues additional
shares of Common Stock or options to purchase shares of Common Stock (except
pursuant to certain outstanding warrants, existing employee options, and up to
750,000 shares that may be issued in connection with issuances of options under
employee incentive plans). The intent of the antidilution provisions is to
permit Signet Bank to maintain its percentage ownership after the Offering,
which will be 3.4%, regardless of future sales or issuance by the Company of its
Common Stock, options, warrants or other rights to purchase Common Stock, or
securities convertible into Common Stock (subject to the exceptions outlined
above), and to give Signet Bank price protection such that the $8.46 purchase
price will be adjusted downward in the event of future sales or issuances by the
Company at an effective price which is below that exercise price. The
antidilution provisions will survive the Offering and may affect the Company's
ability to raise additional capital through the sale or issuance of its Common
Stock, options, warrants or other rights to purchase Common Stock or securities
convertible into Common Stock.
In addition, in connection with the Signet Agreement and the issuance of
the Signet Warrants, the Company agreed to provide the holders of the Signet
Warrants with certain rights to request the Company to register the shares of
Common Stock underlying the Signet Warrants under the Securities Act. At any
time after 90 days following the date of this Prospectus, the holders of the
Signet Warrants may twice demand that the Company register, at the Company's
expense, at least 50% of the shares of Common Stock underlying the Signet
Warrants. Signet Bank has agreed to refrain from selling or otherwise
transferring any shares underlying the Signet Warrants for a period of 180 days
following the date of this Prospectus. In addition to the demand registration
rights, the Signet Warrant holders also have "piggy-back" registration rights
with respect to any offering by the Company following this Offering.
The Company's repayment and other obligations under the Signet Agreement
are secured by, among other things, a pledge of all of the capital stock of the
Company owned by Ram Mukunda, the Company's President, Chief Executive Officer,
director and principal stockholder, and Vijay Srinivas, a Company director and
his wife, Usha Srinivas. Beginning on January 1, 1998 (and extending to July 1,
1998 upon the occurrence of defined events), should Signet Bank determine and
assert based on its reasonable assessment that a material adverse change to the
Company has occurred, all amounts outstanding would be immediately due and
payable. Under certain circumstances, if an event a default occurs under the
Signet Agreement which would permit Signet Bank to take possession and control
over the shares subject to the pledge, Signet Bank would acquire voting control
of a significant percentage of the issued and outstanding shares of Common
Stock.
WARRANTS AND REGISTRATION RIGHTS
The Company has agreed to issue to the Representatives of the Underwriters,
for consideration of $.01 per warrant, warrants (the "Representatives'
Warrants") to purchase up to 150,000 shares of Common Stock at an exercise price
per share equal to 110% of the initial public offering price. The
Representatives' Warrants are exercisable for a period of five years beginning
one year from the date of this Prospectus. The holders of the Representatives'
Warrants will have no voting or other stockholder rights unless and until the
Representatives' Warrants are exercised. See "Underwriting."
In connection with the issuance of the Representatives' Warrants, the
Company will agree to provide the holders of the Representatives' Warrants with
certain rights to request the Company to register the shares of Common Stock
underlying the Representatives' Warrants under the Securities Act, in
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addition to "piggy-back" registration rights with respect to certain offerings
by the Company following this Offering. See "Underwriting."
Further, the Company has granted to Atlantic-ACM the option to acquire
3,000 shares of Common Stock in lieu of payment in the amount of $30,000 owed by
the Company to Atlantic-ACM for certain consulting services.
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION, BYLAWS AND
MARYLAND LAW
Amended and Restated Articles of Incorporation and Bylaws
The Company's Charter and Bylaws include certain provisions which may have
the effect of delaying, deterring or preventing a future takeover or change in
control of the Company, by proxy contest, tender offer, open-market purchases or
otherwise, unless such takeover or change in control is approved by the
Company's Board of Directors. Such provisions may also make the removal of
directors and management more difficult.
In this regard, the Charter and Bylaws provide that the number of directors
shall be five but may not be fewer than three nor more than twenty-five members.
The Charter divides the Board of Directors into three classes, with one class
having a term of one year, one class having a term of two years, and one class
having a term of three years. Each class is to be as nearly equal in number as
possible. At each annual meeting of stockholders, directors will be elected to
succeed those directors whose terms have expired, and each newly elected
director will serve for a three-year term. In addition, the Charter and Bylaws
provide that any director or the entire Board may be removed by stockholders
only for cause and with the approval of the holders of 80% of the total voting
power of all outstanding securities of the Company then entitled to vote
generally in the election of directors, voting together as a single class. The
Charter and Bylaws also provide that all vacancies on the Board of Directors,
including those resulting from an increase in the number of directors, may be
filled solely by a majority of the remaining directors; provided, however, that
if the vacancy occurs as a result of the removal of a director, the stockholders
may elect a successor at the meeting at which such removal occurs.
The classification of directors and the provisions in the Charter that
limit the ability of stockholders to remove directors and that permit the
remaining directors to fill any vacancies on the Board, will have the effect of
making it more difficult for stockholders to change the composition of the Board
of Directors. As a result, at least two annual meetings of stockholders will be
required, in most cases, for the stockholders to change a majority of the
directors, whether or not a change in the Board of Directors would be beneficial
to the Company and its stockholders and whether or not a majority of the
Company's stockholders believes that such a change would be desirable.
The Bylaws also contain provisions relating to the stockholders' ability to
call meetings of stockholders, present stockholder proposals, and nominate
candidates for the election of directors. The Bylaws provide that special
meetings of stockholders can be called only by the Chairman of the Board of
Directors, the President, the Board of Directors, or by the Secretary at the
request of holders of at least 25% of all votes entitled to be cast. These
provisions may have the effect of delaying consideration of a stockholder
proposal until the next annual meeting unless a special meeting is called. In
addition, the Charter and Bylaws establish procedures requiring advanced notice
with regard to stockholder proposals and the nomination of candidates for
election as directors (other than by or at the direction of the Board of
Directors or a committee of the Board of Directors). Pursuant to these
procedures, stockholders desiring to introduce proposals or make nominations for
the election of directors must provide written notice, containing certain
specified information, to the Secretary of the Company not less than 60 nor more
than 90 days prior to the meeting. If less than 30 days notice or prior public
disclosure of the date of the meeting is given, the required notice regarding
stockholder proposals or director nominations must be in writing and received by
the Secretary of the Company no later than the tenth day following the day on
which notice of the meeting was mailed. The Company may reject a stockholder
proposal or nomination that is not made in accordance with such procedures.
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The Charter also includes certain "super-majority" voting requirements,
which provide that the affirmative vote of the holders of at least 80% of the
aggregate combined voting power of all classes of capital stock entitled to vote
thereon, voting as one class, is required to amend certain provisions of the
Charter, including those provisions relating to the number, election, term of
and removal of directors; the amendment of the Bylaws; and the provision
governing applicability of the Maryland Control Share Act (summarized below).
The effect of these provisions will be to make it more difficult to amend
provisions of the Charter, even if such amendments are favored by a majority of
stockholders. In addition, the Charter includes provisions which require the
vote of a simple majority of the Company's issued and outstanding Common Stock
to approve certain significant corporate transactions, including the sale of all
or substantially all of the Company's assets, rather than the vote of two-thirds
of the issued and outstanding Common Stock.
The description of the Charter and Bylaw provisions set forth above are
intended to be summaries only. The forms of Charter and Bylaws, as amended and
restated, are filed as exhibits to the Registration Statement filed with the
Commission of which this Prospectus forms a part. This summary is qualified in
its entirety by reference to such documents. See "Risk Factors - Control of
Company by Current Stockholders" and "- Certain Provisions of the Company's
Articles of Incorporation, Bylaws and Maryland Law."
Maryland Law
Section 3-601, et seq. of the Maryland General Corporation Law (the
"Business Combination Statute"), and Section 3-701 et seq. of the Maryland
General Corporation Law with respect to acquisitions of "control shares" may
also have the effect of delaying, deterring or preventing a future takeover or
change in control of the Company, by proxy contest, tender offer, open-market
purchases or otherwise.
Under the Business Combination Statute, certain "business combinations"
(including mergers or similar transactions subject to a statutory stockholder
vote and additional transactions involving transfers of assets or securities in
specified amounts) between a Maryland corporation subject to the Business
Combination Statute and an Interested Stockholder, or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder unless an exemption is available.
Thereafter, any such business combination must be recommended by the board of
directors of the corporation and approved by the affirmative vote of at least:
(i) 80% of the votes entitled to be cast by all holders of outstanding shares of
voting stock of the corporation; and (ii) two-thirds of the votes entitled to be
cast by holders of voting stock of the corporation other than voting stock held
by the Interested Stockholder who will or whose affiliate will be a party to the
business combination voting together as a single voting group, unless the
corporation's stockholders receive a minimum price (as described in the Business
Combination Statute) for their stock and the consideration is received in cash
or in the same form as previously paid by the Interested Stockholder for its
shares. The Business Combination Statute defines an "Interested Stockholder" as
any person who is the beneficial owner, directly or indirectly, of 10% or more
of the outstanding voting stock of the corporation after the date on which the
corporation had 100 or more beneficial owners of its stock; or any affiliate or
associate of the corporation who, at any time within the two-year period
immediately prior to the date in question was the beneficial owner of 10% or
more of the voting power of the then-outstanding stock of the corporation.
These provisions of the Business Combination Statute do not apply, unless
the corporation's charter or Bylaws provide otherwise, to a corporation that on
July 1, 1983 had an existing Interested Stockholder, unless, at any time
thereafter, the Board of Directors elects to be subject to the law. These
provisions of the Business Combination Statute also would not apply to business
combinations that are approved or exempted by the Board of Directors of the
corporation prior to the time that any other Interested Stockholder becomes an
Interested Stockholder. A Maryland corporation may adopt an amendment to its
charter electing not to be subject to the special voting requirements of the
Business Combination Statute. Any such amendment would have to be approved by
the affirmative vote of at least 80% of the votes entitled to be cast by all
holders of outstanding shares of voting stock of the corporation voting together
as a single voting group, and 66 2/3% of the votes entitled to be cast by
58
<PAGE>
persons (if any) who are not Interested Stockholders of the corporation or
affiliates or associates of Interested Stockholders voting together as a single
voting group. The Company has not adopted such an amendment to its Charter.
In addition to the Business Combination Statute, Section 3-701 et seq. of
the Maryland General Corporation Law provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by the stockholders at a special meeting by
the affirmative vote of two-thirds of all the votes entitled to be cast on the
matter, excluding all interested shares. "Control shares" are voting shares of
stock which, if aggregated with all other such shares previously acquired by the
acquiror, or in respect of which the acquiror is able to exercise or direct the
exercise of voting power, would entitle the acquiror, directly or indirectly, to
exercise or direct the exercise of the voting power in electing directors within
any one of the following ranges of voting power: (i) 20% or more but less than
33 1/3%; (ii) 33 1/3% or more but less than a majority or (iii) a majority or
more of all voting power. Control shares do not include shares the acquiror is
then entitled to vote as a result of having previously obtained stockholder
approval. A "control share acquisition" means the acquisition, directly or
indirectly, by any person, of ownership of, or the power to direct the exercise
of voting power with respect to, issued and outstanding control shares.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses and
delivery of an "acquiring person statement"), may compel a corporation's board
of directors to call a special meeting of stockholders to be held within 50 days
of a demand to consider the voting rights to be accorded the shares acquired or
to be acquired in the control share acquisition. If no request for a meeting is
made, the corporation may itself present the question at any stockholders'
meeting. Unless the charter or bylaws provide otherwise, if the acquiring person
does not deliver an acquiring person statement within 10 days following a
control share acquisition then, subject to certain conditions and limitations,
the corporation may redeem any or all of the control shares (except those for
which voting rights have previously been approved) for fair value determined,
without regard to the absence of voting rights for the control shares, at any
time during a period commencing on the 11th day after the control share
acquisition and ending 60 days after a statement has been delivered. Moreover,
unless the charter or bylaws provide otherwise, if voting rights for control
shares are approved at a stockholders' meeting and the acquiror becomes entitled
to exercise or direct the exercise of a majority or more of all voting power,
other stockholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws of
the corporation. The shares of Common Stock held by Ram Mukunda and his family
are not subject to the restrictions imposed by the Maryland Control Share Act.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Continental Stock
Transfer & Trust Company.
LISTING
The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the symbol "STGC."
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 7,997,999
outstanding shares of Common Stock, and options, warrants and other rights to
purchase up to an additional 1,240,816 shares of Common Stock (of which 566,666
currently are exercisable) at prices ranging from $0.30 to $13.20 per share.
Of the Common Stock outstanding upon completion of the Offering, the
2,600,000 shares of Common Stock (excluding the shares subject to the
Underwriters' over allotment option) sold in the Offering will be freely
tradeable without restriction or further registration under the Securities Act,
except for any shares held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act, and the regulations promulgated
thereunder (an "Affiliate"), or persons who have been Affiliates within the
preceding three months. The remaining 5,397,999 outstanding shares of Common
Stock will be "restricted securities" as that term is defined in Rule 144 and
may be sold in the public market only if registered or if they qualify for an
exemption from registration, including under Rule 144, as described below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
restricted securities for a period of at least one year from the later of the
date such restricted securities were acquired from the Company or from an
Affiliate, is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
Common Stock or the average weekly trading volume in the Common Stock during the
four calendar weeks preceding such sale. Such sales under Rule 144 are also
subject to certain provisions relating to the manner and notice of sale and the
availability of current public information about the Company. Further, under
Rule 144(k), if a period of at least two years has elapsed from the later of the
date restricted securities were acquired from the Company or from an Affiliate,
a holder of such restricted securities who is not an Affiliate at the time of
the sale and has not been an Affiliate for at least three months prior to the
sale would be entitled to sell the shares immediately without regard to the
volume, manner of sale or current information requirements described above. In
addition, Rule 701 under the Securities Act also permits resales of shares
acquired pursuant to certain compensation plans and arrangements.
The Company and its executive officers, directors and all stockholders,
have agreed that for a period of 180 days following the Offering, without the
prior written consent of the Representatives, they will not, directly or
indirectly, offer or agree to sell, hypothecate, pledge or otherwise dispose of
any shares of Common Stock (or securities convertible into, exchangeable, or
exercisable for or evidencing the right to purchase shares of Common Stock). In
addition, Signet Bank has agreed to refrain from selling or otherwise
transferring any shares underlying the Signet Warrants for a period of 180 days
following the Offering. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rule 144 under the Securities Act, the terms of the Signet Warrants or
otherwise, shares subject to lock-up agreements will not be saleable until such
agreements expire.
In addition, the Company intends to register on Form S-8 under the
Securities Act 270,000 of Common Stock issuable under Restated Option Plan and
750,000 shares under its 1997 Performance Incentive Plan. Shares issued under
these plans (other than shares issued to Affiliates) generally may be sold
immediately in the public market, subject to vesting requirements and lock-up
agreements. The Company has also agreed to provide certain holders of warrants
to purchase its Common Stock with rights to request the registration of the
shares underlying the warrants under the Securities Act. See "Description of
Capital Stock - Warrants and Registration Rights."
Future sales of Common Stock in the public market following this Offering
by the current stockholders of the Company, or the perception that such sales
could occur, could adversely affect the market price for the Common Stock. The
Company's principal stockholders hold a significant portion of the outstanding
shares of Common Stock and a decision by one or more of these stockholders to
sell shares pursuant to Rule 144 under the Securities Act or otherwise could
materially adversely affect the market price of the Common Stock. See "Risk
Factors - Shares Eligible for Future Sale."
60
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the underwriters named
below (the "Underwriters"), for whom Ferris, Baker Watts, Incorporated and
Boenning & Scattergood, Inc. are acting as representatives (the
"Representatives"), and each of the Underwriters has severally agreed to
purchase from the Company, the respective number of shares of Common Stock set
forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------- ----------
<S> <C>
Ferris, Baker Watts, Incorporated ......
Boenning & Scattergood, Inc ............
Total ................................. 2,600,000
=========
</TABLE>
The nature of the respective obligations of the Underwriters is such that
all of the shares of Common Stock must be purchased if any are purchased. The
Underwriting Agreement provides that the obligations of the Underwriters to pay
for and accept delivery of the shares of Common Stock are subject to certain
conditions, including the approval of certain legal matters by counsel.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock initially at the public offering
price set forth on the cover page of this Prospectus and to certain selected
dealers at such price less a concession not to exceed $___ per share; that the
Underwriters may allow, and such selected dealers may reallow, a concession to
certain other dealers not to exceed $___ per share; and that after the
commencement of the Offering, the public offering price and the concessions may
be changed.
The Company has granted the Underwriters an option to purchase in the
aggregate up to 390,000 additional shares of Common Stock solely to cover
over-allotments, if any. The option may be exercised in whole or in part at any
time within 30 days after the date of this Prospectus. To the extent the option
is exercised, the Underwriters will be severally committed, subject to certain
conditions, to purchase the additional shares of Common Stock in proportion to
their respective purchase commitments as indicated in the preceding table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and, where such
indemnification is unavailable, to contribute to payments that the Underwriters
may be required to make in respect of such liabilities.
The executive officers, directors and stockholders of the Company have
agreed that they will not offer, sell, contract to sell or grant an option to
purchase or otherwise dispose of any shares of the Company's Common Stock,
options to acquire shares of Common Stock or any securities exercisable for, or
convertible into Common Stock owned by them, for a period of 180 days from the
date of this Prospectus, without the prior written consent of the
Representatives. The Company also has agreed not to offer, sell, or issue any
shares of Common Stock, options to acquire Common Stock or any securities
exercisable for, or convertible into Common Stock, for a period of 180 days from
the date of this Prospectus, without the prior written consent of the
Representatives, except that the Company may issue securities pursuant to the
Company's stock option and incentive plans and upon the exercise of any
outstanding options and warrants. In addition, Signet Bank has agreed to refrain
from selling or otherwise transferring any shares of Common Stock underlying the
Signet Warrants for a period of 180 days following the Offering.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the shares of Common Stock included
in this Offering will be determined by negotiation among the Company and the
Representatives. Among the factors to be considered in determining such price
will be the history of and prospects for the Company's business and the industry
in which it operates, an assessment of the Company's management, past and
present revenues and earnings of the Company, the prospects for growth of the
Company's revenues and earnings and currently prevailing conditions in the
securities markets, including current market valuations of publicly traded
companies
61
<PAGE>
which are comparable to the Company. There can be no assurance, however, that
the prices at which the shares of Common Stock will sell in the public market
after this Offering will not be lower than the price at which it is sold by the
Underwriters.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Certain persons participating in the Offering may over allot or engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock, including entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting any purchase for the purpose of pegging, fixing
or maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the Offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
Offering when the Common Stock sold by the syndicate member is purchased in
syndicate covering transactions. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. Such
stabilizing activities, if commenced, may be discontinued at any time.
The Company has agreed to issue to the Representatives, for consideration
of $.01 per warrant, warrants (the "Representatives' Warrants") to purchase up
to 150,000 shares of the Common Stock at an exercise price per share equal to
110% of the initial public offering price. The Representatives' Warrants are
exercisable for a period of five years beginning one year from the effective
date of the Company's registration statement, of which this Prospectus is a
part. The holders of the Representatives' Warrants will have no voting or other
stockholder rights unless and until the Representatives' Warrants are exercised.
The Representatives' Warrants may not be sold, transferred, assigned, pledged or
hypothecated by any person, other than among the Underwriters and bona fide
officers or partners of the Underwriters, for a period of one year following the
effective date of the Company's registration statement, of which this Prospectus
is a part. Pursuant to an arrangement between Ferris, Baker Watts, Incorporated
and Richard K. Prins, a Senior Vice President of Ferris, Baker Watts,
Incorporated and who will be named a director of the Company upon completion of
the Offering, Mr. Prins will receive a portion of the Representatives' Warrants
for the purchase of up to 25,000 shares of the Common Stock. In addition, the
Company has granted the holders of the Representatives' Warrants certain rights
to register the shares of Common Stock underlying the Representatives' Warrants
under the Securities Act.
The Company has also agreed to pay the Representative a non-accountable
expense allowance equal to 1.0% of the gross proceeds of the Offering for
expenses incurred in connection therewith.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Shulman, Rogers, Gandal, Pordy & Ecker, P.A., Rockville,
Maryland. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Venable, Baetjer & Howard LLP, McLean, Virginia.
EXPERTS
The audited financial statements of the Company included in this Prospectus
and the audited financial statement schedule included in the Registration
Statement of which this Prospectus forms a part have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
62
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules to the Registration Statement. For further information with respect to
the Company and such Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed as a part of the
Registration Statement. Statements contained in this Prospectus concerning the
contents of any contract or any other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement. Each such statement
is qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits and schedules thereto, as well as the reports and
other information filed by the Company with the Commission, may be inspected
without charge at the Public Reference Room of the Commission's principal office
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can also be obtained at prescribed rates from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Electronic filings made through the Electronic
Data Gathering Analysis and Retrieval System are also publicly available through
the Commission's Web Site (http://www.sec.gov).
The Company is not currently subject to the periodic reporting and
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). As a result of the Offering, the Company will be required
to file reports and other information with the Commission pursuant to the
requirements of the Exchange Act. Such reports and other information may be
obtained from the Commission's Public Reference Section and copied at the public
reference facilities and regional offices of the Commission referred to above.
The Company intends to furnish holders of the Common Stock with annual reports
containing financial statements audited by an independent public accounting firm
and with quarterly reports containing unaudited summary financial statements for
each of the first three quarters of each fiscal year.
63
<PAGE>
GLOSSARY OF TERMS
Access Charges: The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on their local networks.
Accounting or Settlement Rate: The per minute rate negotiated between
carriers in different countries for termination of international long distance
traffic in, and return traffic to, the carriers' respective countries.
Call reorigination: a form of dial up access that allows a user to access a
telecommunications company's network by placing a telephone call and waiting for
an automated callback. The callback then provides the user with dial tone which
enables the user to place a call.
CLEC: Competitive Local Exchange Carrier.
Correspondent agreement: Agreement between international long distance
carriers that provides for the termination of traffic in, and return traffic to,
the carriers' respective countries at a negotiated per minute rate and provides
for a method by which revenues are distributed between the two carriers (also
known as an "operating agreement").
CST: Companhia Santomensed De Telecommunicacoes.
Dedicated access: A means of accessing a network through the use of a
permanent point-to-point circuit typically leased from a facilities-based
carrier. The advantage of dedicated access is simplified premises-to-anywhere
calling, faster call set-up times and potentially lower access costs (provided
there is sufficient traffic over the circuit to generate economies of scale).
Dial up access: A form of service whereby access to a network is obtained
by dialing a toll-free number or a paid local access number.
Direct access: A method of accessing a network through the use of private
lines.
EU (European Union): Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden,
and the United Kingdom.
Facilities-based carrier: A carrier which transmits a significant portion
of its traffic over owned or leased transmission facilities.
FCC: Federal Communications Commission.
Fiber optic: A transmission medium consisting of high-grade glass fiber
through which light beams are transmitted carrying a high volume of
telecommunications traffic.
International gateway: A switching facility that provides connectivity
between international carriers and performs any necessary signaling conversions
between countries.
IRU (Indefeasible Rights of Use): The rights to use a telecommunications
system, usually an undersea cable, with most of the rights and duties of
ownership, but without the right to control or manage the facility and,
depending upon the particular agreement, without any right to salvage or duty to
dispose of the cable at the end of its useful life.
ISDN (Integrated Services Digital Network): A hybrid digital network
capable of providing transmission speeds of up to 128 kilobits per second for
both voice and data.
ISR (International Simple Resale): The use of international leased lines
for the resale of switched telephony to the public, bypassing the current system
of accounting rates.
ITO (Incumbent Telecommunications Operator): The dominant carrier in each
country, often government-owned or protected; commonly referred to as the
Postal, Telephone and Telegraph Company, or PTT.
ITU: The International Telecommunications Union.
G-1
<PAGE>
LEC (Local Exchange Carrier): Companies from which the Company and other
long distance providers must purchase "access services" to originate and
terminate calls in the U.S.
Local connectivity: Physical circuits connecting the switching facilities
of a telecommunications services provider to the interexchange and transmission
facilities of a facilities-based carrier.
Local exchange: A geographic area determined by the appropriate regulatory
authority in which calls generally are transmitted without toll charges to the
calling or called party.
Long distance carriers: Long distance carriers provide services between
local exchanges on an interstate or intrastate basis. A long distance carrier
may offer services over its own or another carriers facilities.
Marconi: Companhia Portuguesa Radio Marconi, S.A.
PBX (Public Branch Exchange): Switching equipment that allows connection
of private extension telephones to the PSTN or to a private line.
PSTN (Public Switched Telephone Network): A telephone network which is
accessible by the public at large through private lines, wireless systems and
pay phones.
PTT: A foreign telecommunication carrier that has been dominant in its home
market and which may be wholly or partially government-owned, often referred to
as Post Telephone and Telegraph or "PTT".
Private line: A dedicated telecommunications connection between end-user
locations.
Proportional return traffic: Under the terms of the operating agreements,
the foreign partners are required to deliver to the U.S. carriers the traffic
flowing to the U.S. in the same proportion as the U.S. carriers delivered
U.S.-originated traffic to the foreign carriers.
RBOC (Regional Bell Operating Company): The seven local telephone companies
established by the 1982 agreement between AT&T and the Department of Justice.
Resale: Resale by a provider of telecommunications services of services
sold to it by other providers or carriers on a wholesale basis.
Securities Act: The Securities Act of 1933, as amended.
Switch: Equipment that accepts instructions from a caller in the form of a
telephone number. Like an address on an envelope, the numbers tell the switch
where to route the call. The switch opens or closes circuits or selects the
paths or circuits to be used for transmission of information. Switching is a
process of interconnecting circuits to form a transmission path between users.
Switches allow telecommunications service providers to connect calls directly to
their destination, while providing advanced features and recording connection
information for future billing.
Switched minutes: The number of minutes of telephone traffic carried on a
network using switched access.
Voice telephony: A term used by the EU, defined as the commercial provision
for the public of the direct transport and switching of speech in real-time
between public switched network termination points, enabling any user to use
equipment connected to such a network termination point in order to communicate
with another termination point.
WTO: World Trade Organization.
G-2
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants ............................................. F-2
Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 .................. F-3
Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and
the Six Months ended June 30, 1996 and 1997 ....................................... F-4
Statements of Changes in Stockholders' Deficit for the years ended December 31, 1994,
1995 and 1996 and the Six Months ended June 30, 1997 .............................. F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and
the Six Months ended June 30, 1996 and 1997 ....................................... F-6
Notes to Financial Statements ...................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Startec Global Communications Corporation (formerly Startec, Inc.):
We have audited the accompanying balance sheets of Startec Global
Communications Corporation (a Maryland corporation, formerly Startec, Inc.) as
of December 31, 1995 and 1996, and the related statements of operations, changes
in stockholders' deficit, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Startec Global
Communications Corporation, as of December 31, 1995 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
September 11, 1997
F-2
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
(FORMERLY STARTEC, INC.)
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
<TABLE>
<CAPTION>
JUNE 30,
1995 1996 1997
-------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 528,198 $ 148,469 $ 2,105,521
Accounts receivable, net of allowance for doubtful accounts
of approximately $457,000, $1,079,000 and $1,576,000 ............ 2,220,755 5,334,183 9,244,023
Accounts receivable, related party .............................. 319,040 78,347 347,809
Other current assets ............................................. 130,449 210,522 230,258
------------ ------------ ------------
Total current assets .......................................... 3,198,442 5,771,521 11,927,611
------------ ------------ ------------
PROPERTY AND EQUIPMENT:
Long distance communications equipment ........................... 906,568 1,773,137 2,225,087
Computer and office equipment .................................... 215,685 392,238 502,251
Less - Accumulated depreciation and amortization .................. (456,527) (789,053) (1,002,778)
------------ ------------ ------------
Total property and equipment, net .............................. 665,726 1,376,322 1,724,560
------------ ------------ ------------
Deferred debt financing and offering costs ........................ - - 433,000
Restricted cash ................................................... 180,000 180,000 180,000
------------ ------------ ------------
Total assets ................................................... $ 4,044,168 $ 7,327,843 $ 14,265,171
============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ................................................ $ 4,655,119 $ 7,170,904 $ 11,203,392
Accrued expenses ................................................ 1,279,506 2,858,090 3,338,941
Receivables-based credit facility ................................. 570,446 1,812,437 2,918,888
Capital lease obligations ....................................... 79,100 226,464 356,103
Notes payable to related parties ................................. 58,160 53,160 103,160
Notes payable to individuals and other ........................... 300,000 650,000 1,300,000
------------ ------------ ------------
Total current liabilities ....................................... 6,942,331 12,771,055 19,220,484
------------ ------------ ------------
Capital lease obligations, net of current portion .................. 260,861 545,643 664,878
Notes payable to related parties, net of current portion ......... 100,000 100,000 50,000
Notes payable to individuals and other, net of current portion . - - 44,400
------------ ------------ ------------
Total liabilities ............................................. 7,303,192 13,416,698 19,979,762
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT (NOTES 5 AND 12):
Voting common stock, $.01 par value; 10,000,000 shares au-
thorized; 5,380,824 shares issued and outstanding 53,808 53,808 53,808
Nonvoting common stock, $1.00 par value; 25,000 shares au-
thorized; 22,526 shares issued and outstanding 22,526 22,526 22,526
Additional paid-in capital ....................................... 932,276 932,276 1,063,283
Unearned compensation ............................................. - - (108,167)
Accumulated deficit ............................................. (4,267,634) (7,097,465) (6,746,041)
------------ ------------ ------------
Total stockholders' deficit .................................... (3,259,024) (6,088,855) (5,714,591)
------------ ------------ ------------
Total liabilities and stockholders' deficit ..................... $ 4,044,168 $ 7,327,843 $ 14,265,171
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
(FORMERLY STARTEC, INC.)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1994 1995 1996 1996 1997
------------ ---------------- ---------------- ------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues .............................. $5,108,709 $ 10,507,450 $ 32,214,506 $13,206,583 $28,836,145
Cost of services ........................ 4,701,262 9,128,609 29,880,629 12,388,348 25,250,492
---------- ------------ ------------ ----------- -----------
Gross margin ........................... 407,447 1,378,841 2,333,877 818,235 3,585,653
General and administrative expenses ...... 1,159,382 2,169,946 3,995,966 1,372,624 2,461,406
Selling and marketing expenses ............ 91,062 183,927 514,298 153,650 305,537
Depreciation and amortization ............ 90,069 137,019 332,526 144,442 213,725
---------- ------------ ------------ ----------- -----------
Income (loss) from operations ............ (933,066) (1,112,051) (2,508,913) (852,481) 604,985
Interest expense ........................ 70,015 115,713 336,887 118,395 251,743
Interest income ........................... 24,244 21,750 15,969 8,649 5,405
---------- ------------ ------------ ----------- -----------
Income (loss) before
income tax provision .................. (978,837) (1,206,014) (2,829,831) (962,227) 358,647
Income tax provision ..................... - - - - (7,223)
---------- ------------ ------------ ----------- -----------
Net (loss) income ........................ $(978,837) $ (1,206,014) $ (2,829,831) $ (962,227) $ 351,424
========== ============ ============ =========== ===========
Net (loss) income per common and equiv-
alent share $ (0.20) $ (0.21) $ (0.49) $ (0.17) $ 0.06
========== ============ ============ =========== ===========
Weighted average common and equivalent
shares outstanding ........................ 4,988,837 5,709,720 5,795,961 5,795,961 5,795,961
========== ============ ============ =========== ===========
Pro forma net (loss) income per common
and equivalent share (unaudited) .........
$ (0.43) $ (0.14) $ 0.08
============ =========== ===========
Pro forma weighted average common
and equivalent shares outstanding
(unaudited) ..............................
6,028,903 6,028,903 6,028,903
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
(FORMERLY STARTEC, INC.)
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE SIX MONTHS ENDED
JUNE 30, 1997
<TABLE>
<CAPTION>
VOTING NONVOTING
COMMON STOCK COMMON STOCK
--------------------- ------------------
SHARES AMOUNT SHARES AMOUNT
----------- --------- -------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 .............................. 4,573,700 $45,737 22,526 $22,526
Net loss ............................................. - - - -
---------- -------- ------- --------
Balance, December 31, 1994 .............................. 4,573,700 45,737 22,526 22,526
Net loss ............................................. - - - -
Issuance of common stock .............................. 807,124 8,071 - -
---------- -------- ------- --------
Balance, December 31, 1995 .............................. 5,380,824 53,808 22,526 22,526
Net loss ............................................. - - - -
---------- -------- ------- --------
Balance, December 31, 1996 .............................. 5,380,824 53,808 22,526 22,526
Net income (unaudited) ................................. - - - -
Unearned compensation pursuant to issuance of stock
options (unaudited) .................................... - - - -
Amortization of unearned compensation (unaudited) ...... - - - -
---------- -------- ------- --------
Balance, June 30, 1997 (unaudited) ..................... 5,380,824 $53,808 22,526 $22,526
========== ======== ======= ========
<CAPTION>
ADDITIONAL
PAID-IN UNEARNED ACCUMULATED
CAPITAL COMPENSATION DEFICIT TOTAL
------------ -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 .............................. $ 190,347 $ - $ (2,082,783) $ (1,824,173)
Net loss ............................................. - - (978,837) (978,837)
----------- ---------- ------------ ------------
Balance, December 31, 1994 .............................. 190,347 - (3,061,620) (2,803,010)
Net loss ............................................. - - (1,206,014) (1,206,014)
Issuance of common stock .............................. 741,929 - - 750,000
----------- ---------- ------------ ------------
Balance, December 31, 1995 .............................. 932,276 - (4,267,634) (3,259,024)
Net loss ............................................. - - (2,829,831) (2,829,831)
----------- ---------- ------------ ------------
Balance, December 31, 1996 .............................. 932,276 - (7,097,465) (6,088,855)
Net income (unaudited) ................................. - - 351,424 351,424
Unearned compensation pursuant to issuance of stock
options (unaudited) .................................... 131,007 (131,007) - -
Amortization of unearned compensation (unaudited) ...... - 22,840 - 22,840
----------- ---------- ------------ ------------
Balance, June 30, 1997 (unaudited) ..................... $1,063,283 $ (108,167) $ (6,746,041) $ (5,714,591)
=========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
(FORMERLY STARTEC, INC.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
1994 1995
--------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .............................. $ (978,837) $ (1,206,014)
Adjustments to net loss-
Depreciation and amortization ............... 90,069 137,019
Compensation pursuant to stock options ...... - -
Changes in operating assets and liabilities:
Accounts receivable ........................ (417,055) (1,342,047)
Accounts receivable, related party ......... (273,145) (45,895)
Other current assets ........................ (16,678) (83,532)
Accounts payable ........................... 1,421,249 1,135,137
Accrued expenses ........................... 98,624 637,084
----------- ------------
Net cash (used in) provided by operating
activities .............................. (75,773) (768,248)
----------- ------------
INVESTING ACTIVITIES:
Purchases of property and equipment ............ (44,258) (199,526)
----------- ------------
FINANCING ACTIVITIES:
Net borrowings under receivables-based credit
facility .................................... - 570,446
Repayments under capital lease obligations ... (102,158) (96,680)
Borrowings under notes payable to related par-
ties 49,999 -
Repayments under notes payable to related par-
ties - -
Borrowings under notes payable to individuals
and other .................................... 235,000 50,000
Repayments under notes payable to individuals
and other .................................... - (35,000)
Proceeds from issuance of voting common stock - 750,000
----------- ------------
Net cash provided by financing activities 182,841 1,238,766
----------- ------------
Net increase (decrease) in cash and cash
equivalents .............................. 62,810 270,992
Cash and cash equivalents at the begin-
ning of the period 194,396 257,206
----------- ------------
Cash and cash equivalents at the end of
the period .............................. $ 257,206 $ 528,198
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ................................. $ 62,526 $ 87,046
=========== ============
Income taxes paid .............................. $ - $ -
=========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Equipment acquired under capital lease ......... $ 53,944 $ 285,230
=========== ============
Deferred debt financing and offering costs not
paid .......................................... $ - $ -
=========== ============
<PAGE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1996 1996 1997
---------------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .............................. $ (2,829,831) $ (962,227) $ 351,424
Adjustments to net loss-
Depreciation and amortization ............... 332,526 144,442 213,725
Compensation pursuant to stock options ...... - - 22,840
Changes in operating assets and liabilities:
Accounts receivable ........................ (3,113,428) (3,545,778) (3,909,840)
Accounts receivable, related party ......... 240,693 (326,212) (269,462)
Other current assets ........................ (80,073) (59,179) (19,736)
Accounts payable ........................... 2,515,785 4,236,681 4,032,488
Accrued expenses ........................... 1,578,584 373,424 92,251
------------ ------------- -------------
Net cash (used in) provided by operating
activities .............................. (1,355,744) (138,849) 513,690
------------ ------------- -------------
INVESTING ACTIVITIES:
Purchases of property and equipment ............ (519,519) (258,089) (184,061)
------------ ------------- -------------
FINANCING ACTIVITIES:
Net borrowings under receivables-based credit
facility .................................... 1,241,991 342,370 1,106,451
Repayments under capital lease obligations ... (91,457) (65,883) (129,028)
Borrowings under notes payable to related par-
ties - - -
Repayments under notes payable to related par-
ties (5,000) (5,000) -
Borrowings under notes payable to individuals
and other .................................... 475,000 - 650,000
Repayments under notes payable to individuals
and other .................................... (125,000) - -
Proceeds from issuance of voting common stock - - -
------------ ------------- -------------
Net cash provided by financing activities 1,495,534 271,487 1,627,423
------------ ------------- -------------
Net increase (decrease) in cash and cash
equivalents .............................. (379,729) (125,451) 1,957,052
Cash and cash equivalents at the begin-
ning of the period 528,198 528,198 148,469
------------ ------------- -------------
Cash and cash equivalents at the end of
the period .............................. $ 148,469 $ 402,747 $ 2,105,521
============ ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ................................. $ 296,926 $ 115,668 $ 269,933
============ ============= =============
Income taxes paid .............................. $ - $ - $ -
============ ============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Equipment acquired under capital lease ......... $ 523,603 $ 425,368 $ 377,902
============ ============= =============
Deferred debt financing and offering costs not
paid .......................................... $ - $ - $ 433,000
============ ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
(FORMERLY STARTEC, INC.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS 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.
RISKS AND OTHER IMPORTANT FACTORS
For each of the three years in the period ending December 31, 1996, the
Company's operations have generated a net loss and negative operating cash
flows. As of June 30, 1997, the Company had a deficit in working capital of
approximately $7,293,000, and total liabilities exceeded total assets by
approximately $5,715,000. As more fully described in Note 12, on July 1, 1997,
the Company entered into a credit facility with a bank. The credit facility
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 will require
significant additional capital to finance its expansion plans. There can be no
assurance that the Company will be successful in raising additional capital.
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).
F-7
<PAGE>
Startec Global Communications Corporation
(FORMERLY STARTEC, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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:
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.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The interim financial data as of June 30, 1997 and for the six-month
periods ended June 30, 1996 and 1997 has been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and include, in the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
interim periods results. The results of operations for the six months ended June
30, 1997 are not necessarily indicative of the results to be expected for the
full year.
REVENUE RECOGNITION
Revenues for telecommunication services provided to customers are
recognized as services are rendered, net of an allowance for revenue that the
Company estimates will ultimately not be realized. Revenues for return traffic
received according to the terms of the Company's operating agreements with its
foreign partners are recognized as revenue as the return traffic is received and
processed.
The Company has entered into operating agreements with telecommunications
carriers in foreign countries under which international long-distance traffic is
both delivered and received. Under these agreements, the foreign carriers are
contractually obligated to adhere to the policy of the FCC, whereby traffic from
the foreign country is routed to international carriers, such as the Company, in
the same proportion as traffic carried into the country. Mutually exchanged
traffic between the Company and foreign carriers is settled through a formal
settlement policy at agreed upon rates per-minute. The Company records the
amount due to the foreign partner as an expense in the period the traffic is
terminated. When the return traffic is received in the future period, the
Company generally realizes a higher gross margin on the return traffic compared
to the lower margin (or sometimes negative margin) on the outbound traffic.
Revenue recognized from return traffic was approximately $174,000, $1,959,000,
and $1,121,000 or 3 percent, 19 percent, and 3 percent of net revenues in 1994,
1995, and 1996, and $490,000 and $994,000 or 4 and 3 percent of net revenues in
the six-month periods ended June 30, 1996 and 1997, respectively. There can be
no assurance that traffic will be delivered back to the United States or what
impact changes in future settlement rates, allocations among carriers or levels
of traffic will have on net payments made and revenues received and recorded by
the Company.
COST OF SERVICES
Cost of services represents direct charges from vendors that the Company
incurs to deliver service to its customers. These include costs of leasing
capacity and rate-per-minute charges from carriers that originate, transmit, and
terminate traffic on behalf of the Company. See Note 4 for further discussion.
F-8
<PAGE>
Startec Global Communications Corporation
(FORMERLY STARTEC, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with original maturities
of 90 days or less to be cash equivalents. Cash equivalents consist primarily of
money market accounts that are available on demand. The carrying amount reported
in the accompanying balance sheets approximates fair value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for current assets and current liabilities, other than
the current portion of notes payable to related parties and individuals and
other, approximate their fair value due to their short maturity. The carrying
value of the receivables based credit facility approximates fair value, since it
bears interest at a variable rate which reprices frequently. The carrying value
of restricted cash approximates fair value plus accrued interest. The fair value
of notes payable to individuals and other and notes payable to related parties
cannot be reasonably and practicably estimated due to the unique nature of the
related underlying transactions and terms (Note 7). However, given the terms and
conditions of these instruments, if these financial instruments were with
unrelated parties, interest rates and payment terms could be substantially
different than the currently stated rates and terms. These notes were paid in
full subsequent to June 30, 1997 (Note 12).
LONG-LIVED ASSETS
Long-lived assets and identifiable assets to be held and used are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount should be addressed. Impairment is measured by comparing the
carrying value to the estimated undiscounted future cash flows expected to
result from the use of the assets and their eventual dispositions. The Company
considers expected cash flows and estimated future operating results, trends,
and other available information in assessing whether the carrying value of the
assets is impaired.
The Company's estimates of anticipated gross revenues, the remaining
estimated lives of tangible and intangible assets, or both, could be reduced
significantly in the future due to changes in technology, regulation, available
financing, or competitive pressures (see Note 1). As a result, the carrying
amount of long-lived assets could be reduced materially in the future.
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost. Depreciation is
provided for financial reporting purposes using the straight line method over
the following estimated useful lives:
Long-distance communications equipment ...... 7 years
Computer and office equipment ............... 3 to 5 years
Long-distance communications equipment includes assets financed under
capital lease obligations of approximately $763,000, $1,287,000, and $1,665,000
at December 31, 1995 and 1996, and June 30, 1997, respectively. Accumulated
depreciation on these assets as of December 31, 1995 and 1996, and June 30,
1997, was approximately $403,000, $587,000, and $667,000, respectively.
Maintenance and repairs are expensed as incurred. Replacements and
betterments are capitalized. The cost and related accumulated depreciation of
assets sold or retired are removed from the balance sheet, and any resulting
gain or loss is reflected in the statement of operations.
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
second-tier
F-9
<PAGE>
Startec Global Communications Corporation
(FORMERLY STARTEC, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
long-distance carriers. The Company's allowance for doubtful accounts is based
on current market conditions. The Company's four largest carrier customers
represented 35 and 22 percent of gross accounts receivable as of December 31,
1996, and June 30, 1997, respectively. Revenues from several customers
represented more than 10 percent of net revenues for the periods presented (see
Note 10). Including charges in dispute (see Note 4), purchases from the five
largest suppliers represented 67 and 47 percent of cost of services in the year
ended December 31, 1996, and the six month period ended June 30, 1997,
respectively. Services purchased from several suppliers represented more than 10
percent of cost of services in the periods presented (see Note 10). One of these
suppliers, representing 25 and 13 percent of cost of services in the year ended
December 31, 1996, and the six-month period ended June 30, 1997, respectively,
is based in a foreign country.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires that deferred income taxes reflect the expected tax
consequences on future years of differences between the tax bases of assets and
liabilities and their bases for financial reporting purposes. Valuation
allowances are established when necessary to reduce deferred tax assets to the
estimated amount to be realized.
NET (LOSS) INCOME PER COMMON AND EQUIVALENT SHARE
Net loss per common share for the years ended December 31, 1994, 1995 and
1996, and for the six-month period ended June 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
share for the six-month period ended June 30, 1997 is based upon the
weighted-average number of common and common equivalent shares outstanding
during the period, using the treasury stock method. Fully diluted net (loss)
income per share is not presented as it would not materially differ from the
amounts stated.
Pursuant to the requirements of the Securities and Exchange Commission
under Staff Accounting Bulletin ("SAB") No. 83 , common stock and stock rights
issued by the Company during the 12 months immediately preceding an anticipated
initial public offering (the "Offering") 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 periods prior to the Offering.
Pro forma net income (loss) per share gives effect to the anticipated
repayment of $2,500,000 in debt with proceeds from the Offering and has been
computed by dividing pro forma net income (loss), after adjustment for
applicable interest expense, by the pro forma weighted average common shares
outstanding. The pro forma weighted average common shares outstanding has been
adjusted for the estimated number of shares that the Company would need to issue
to repay debt.
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 income statement 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 periods ending after December 15, 1997, and when adopted,
it will require restatement of prior periods' earnings per share.
F-10
<PAGE>
Startec Global Communications Corporation
(FORMERLY STARTEC, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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. Accordingly, management anticipates that Statement 128
will not have a material impact upon reported net (loss) income per share.
3. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------ ---------------
1995 1996 1997
------------ --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Residential ........................... $2,605,958 $ 3,840,707 $ 5,906,036
Carrier .............................. 71,826 2,572,954 4,913,833
---------- ------------ ------------
2,677,784 6,413,661 10,819,869
Allowance for doubtful accounts ...... (457,029) (1,079,478) (1,575,846)
---------- ------------ ------------
$2,220,755 $ 5,334,183 $ 9,244,023
========== ============ ============
</TABLE>
The Company has certain service providers that are also customers. The
Company carries and settles amounts receivable and payable from and to certain
of these parties on a net basis.
Approximately $1,195,000, $3,428,000, and $5,502,000 of retail receivables
as of December 31, 1995 and 1996, and June 30, 1997, respectively, were pledged
as security under the receivable credit facility agreement discussed in Note 6.
4. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------- ------------
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Disputed vendor obligations .................. $ 642,515 $2,056,957 $2,124,228
Accrued payroll and related taxes ............ 348,545 368,266 365,978
Accrued debt financing and offering costs ...... - - 433,000
Accrued excise taxes and related charges ...... 197,993 182,286 182,439
Accrued interest .............................. 47,960 87,921 69,731
Other .......................................... 42,493 162,660 163,565
----------- ----------- -----------
$1,279,506 $2,858,090 $3,338,941
=========== =========== ===========
</TABLE>
Disputed vendor obligations represent an assertion from one of the
Company's foreign carriers for minutes processed that are in excess of the
Company's records. The Company has accrued approximately $643,000, $1,414,000,
and $67,000 in the years ended December 31, 1995 and 1996, and the six-month
period ended June 30, 1997, respectively, related to disputed minutes for which
the Company has not recognized any corresponding revenue. If the Company
prevails in its dispute, these amounts or portions thereof would be credited to
operations in the period of resolution. Conversely, if the Company does not
prevail in its dispute, these amounts or portions thereof would be paid in cash.
F-11
<PAGE>
Startec Global Communications Corporation
(FORMERLY STARTEC, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED )
5. STOCK AND STOCK RIGHTS:
As of June 30, 1997, the Company had 5,380,824 shares of voting common
stock issued and outstanding and 22,526 shares of nonvoting common stock issued
and outstanding. For 17,175 shares of outstanding nonvoting common stock, the
Company has agreed to exchange one share of its authorized voting common stock
for each presently outstanding share of nonvoting common stock. As of July 29,
1997, the Company has agreed to purchase 5,351 shares of outstanding nonvoting
common stock from a former officer and director of the Company for $45,269.
STOCK OPTION PLAN
The Company has elected to account for stock and stock rights in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") and its related interpretations. In October 1995, the
Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which established an alternative method of expense
recognition for stock-based compensation awards to employees based on fair
values. The Company has elected not to adopt SFAS No. 123 for expense
recognition purposes.
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.
Pursuant to APB No. 25, compensation expense is recognized for financial
reporting purposes when it becomes probable that the options will be
exercisable. The amount of compensation expense that will be recognized is
determined by the excess of the fair value of the common stock over the exercise
price of the related option at the measurement date.
Pro forma information regarding net income is required by SFAS No. 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method prescribed by SFAS No. 123. The fair value
of options granted in the year ended December 31, 1995, and the six-month period
ended June 30, 1997, was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: risk-free
interest rates of 5.4 percent and 6.17 percent; no dividend yield;
weighted-average expected lives of the options of five years, and expected
volatility of 50 percent. There were no options granted in 1996.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
characteristics that are significantly different from those of traded options.
Because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
The weighted-average fair value of options granted during the year ended
December 31, 1995, and the six-month period ended June 30, 1997, was $0.34 and
$1.04, respectively. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the estimated service period.
If the Company had used the fair value accounting provisions of SFAS No. 123,
the pro forma net loss for 1995 and 1996 would have been $1,208,714 and
$2,832,531, respectively, or $0.21 and $0.49 per share, respectively, and net
income for the six months ended June 30, 1997 would have been $323,283, or $0.06
per share.
F-12
<PAGE>
Startec Global Communications Corporation
(FORMERLY STARTEC, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
A summary of the Company's stock option activity and related information, is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------- SIX MONTHS ENDED
1994 1995 1996 JUNE 30, 1997
---------------------- --------------------- ---------------------- ------------------------
(UNAUDITED)
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ----------- --------- ----------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period ...... 75,000 $ 0.30 103,200 $ 0.30 143,200 $ 0.38 138,300 $ 0.38
Granted .................. 32,700 0.30 40,000 0.60 - - 269,966 1.44
Exercised .................. - - - - - - -
Forfeited .................. (4,500) 0.30 - - (4,900) 0.36 (138,500) 0.38
------- ------- -------- ------- ------- ------- --------- -------
Options outstanding at end
of period ............... 103,200 $ 0.30 143,200 $ 0.38 138,300 $ 0.38 269,766 $ 1.44
======= ======= ======== ======= ======= ======= ========= =======
Options exercisable at end
of period ............... - - - -
======= ======== ======= =========
</TABLE>
Exercise prices for options outstanding as of June 30, 1997, are as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------------------
WEIGHTED-AVERAGE
REMAINING WEIGHTED-
RANGE OF NUMBER OUTSTANDING CONTRACTUAL LIFE AVERAGE
EXERCISE PRICES AS OF JUNE 30, 1997 IN YEARS EXERCISE PRICE
- ------------------------- --------------------- ------------------ ---------------
<S> <C> <C> <C>
$0.30 - 0.30 39,300 9.56 $ 0.30
0.60 - 0.60 39,000 9.56 0.60
1.85 - 1.85 191,466 9.56 1.85
----------------------- -------- ---- -------
$0.30 - 1.85 269,766 9.56 $ 1.44
======================= ======== ==== =======
</TABLE>
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 addition to other events discussed above. 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 $22,840 in compensation expense for
the six-month period ended June 30, 1997, and expects to recognize approximately
$108,167 over the remaining term of the options, subject to accelerated vesting
in the event of a public offering or a change in control.
SHAREHOLDER AND MANAGEMENT AGREEMENTS
In 1995, the Company issued 807,124 shares of voting common stock for
$750,000. In connection with this transaction, the Company executed a
Subscription Agreement ("Shareholder Agreement") and a Management Participation
Agreement ("Management Agreement"). Among other provisions, the Shareholder
Agreement provides the investor certain antidilution provisions and a right of
first refusal as to any shares offered for sale, at the offering price. Further,
with certain exceptions, the Company's primary shareholder may not sell,
transfer, or assign any shares unless they are first offered to the investor;
and under certain circumstances, if the investor declines to purchase the shares
offered, such shares may not be sold to any third party unless such third party
also offers to purchase all of the investor's shares at the same price.
F-13
<PAGE>
Startec Global Communications Corporation
(FORMERLY STARTEC, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The Management Agreement contains several covenants that provide the
investor protection with respect to dilution, nonroutine changes in the Articles
of Incorporation or Bylaws, and the declaration of dividends.
The provisions of the Shareholder Agreement and the Management Agreement
expire upon the earlier of a public offering under the Securities Act of 1933,
as amended, or the sale or other transfer of 50 percent or more of the shares
owned by the investor.
6. BILLING ARRANGEMENT AND RECEIVABLES BASED CREDIT FACILITY:
The Company has a billing and information management services agreement
with a third party, which provides for its residential customers to be billed
directly by their local exchange carrier. The third party receives collections
from the local exchange carrier and submits these funds to the Company, after
withholding processing fees, applicable taxes, and provisions for credits and
uncollectible accounts.
The Company has an advanced payment agreement with this third party, which
allows the Company to take advances against 70 percent of all records submitted
for billing. Advances are secured by the receivables involved. The credit limit
under the advanced payment agreement was $3,000,000 as of June 30, 1997. The
agreement provides for interest at the prime rate (8.5 percent at June 30, 1997)
plus 4 percent.
7. Notes Payable to Related Parties and Notes Payable to Individual and Other:
NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- ------------
1995 1996 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to parties related to the primary shareholder and
president of the Company, bearing interest at rates ranging from
15 to 25 percent ............................................. $158,160 $153,160 $ 153,160
Less - Current portion ....................................... (58,160) (53,160) (103,160)
--------- --------- ----------
$100,000 $100,000 $ 50,000
========= ========= ==========
</TABLE>
NOTES PAYABLE TO INDIVIDUALS AND OTHER
Notes payable to individuals and other consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------- ---------------
1995 1996 1997
------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to various parties, bearing interest at rates ranging from
15 to 33.3 percent at December 31, 1995, and from 15 to 25 percent
at December 31, 1996 and June 30, 1997, all due within one year ...... $ 300,000 $ 650,000 $ 800,000
Note payable to an individual, non-interest bearing, convertible into
24,000 shares of voting common stock upon the earlier of the com-
pletion of a public offering or maturity in 1999 - - 44,400
Note payable to a bank, bearing interest at the prime rate plus 2 per-
cent. Subsequent to period-end, this note was refinanced with the
credit facility described in Note 12. ................................. - - 500,000
---------- ---------- ------------
300,000 650,000 1,344,400
Less-current portion ................................................... (300,000) (650,000) (1,300,000)
---------- ---------- ------------
$ - $ - $ 44,400
========== ========== ============
</TABLE>
F-14
<PAGE>
Startec Global Communications Corporation
(FORMERLY STARTEC, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The aggregate maturities of notes payable to related parties and notes
payable to individuals and other are as follows as of December 31, 1996:
YEAR ENDING RELATED INDIVIDUALS
DECEMBER 31, PARTIES AND OTHER
- -------------- ---------- ------------
1997 $ 53,160 $650,000
1998 50,000 -
1999 50,000 -
--------- ---------
$153,160 $650,000
========= =========
8. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases office space and equipment under noncancelable operating
leases. Rent expense was approximately $63,000, $94,000, and $97,000 for the
years ended December 31, 1994, 1995, and 1996, and $47,000 and $65,000 for the
six-month periods ended June 30, 1996 and 1997, respectively. The terms of the
office lease require the Company to pay a proportionate share of real estate
taxes and operating expenses. As discussed in Note 2, the Company also leases
equipment under capital lease obligations. The future minimum commitments under
lease obligations are as follows:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- -------------------------------------------------- ------------- ----------
1997 ....................................... $ 318,913 $154,219
1998 ....................................... 305,443 165,025
1999 ....................................... 283,376 140,710
2000 ....................................... 59,225 -
2001 ....................................... 12,586 -
---------- ---------
979,543 $459,954
=========
Less - Amounts representing interest ...... (207,436)
Less - Current portion ..................... (226,464)
----------
$ 545,643
==========
LEASE WITH RELATED PARTY
The Company has entered into an agreement with an affiliate of a
shareholder to lease capacity in certain undersea fiber optic cable. The
agreement grants a perpetual right to use the cable and requires ten semiannual
payments of $38,330 beginning on June 30, 1996. The Company has recorded $76,660
in accounts payable as of June 30, 1997, related to this agreement. Unpaid
amounts bear interest at the 180-day LIBOR rate, plus one quarter percent.
The Company is required to pay a proportional share of the cost of
operating and maintaining the cable. The Company can cancel this agreement
without further obligation, except for amounts related to past usage, at any
time.
F-15
<PAGE>
Startec Global Communications Corporation
(FORMERLY STARTEC, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
RESTRICTED CASH
The Company was required to provide a bank guarantee of $180,000 in
connection with one of its foreign operating agreements. This guarantee is in
the form of a certificate of deposit and is shown as restricted cash in the
accompanying balance sheets.
PROFESSIONAL SERVICES AND CONSULTING AGREEMENTS
The Company has arrangements with its legal counsel and investment bankers
to represent the Company in a proposed public offering of the Company's common
stock. These arrangements for professional services and other expenses commit
the Company to costs of up to $300,000 in the event that such an offering is not
successful.
The Company has agreed to issue warrants to acquire 150,000 shares of
common stock to its investment bankers at the close of the Offering. The
warrants will have a five-year term, will vest after one year, and will have an
exercise price of 110 percent of the Offering price. The warrants will include
certain anti-dilution provisions.
The Company has a consulting agreement with an individual who will serve as
an agent for the Company in a foreign country. Under the agreement, the Company
will pay a total of $90,000 over a three-year period, commencing March 1, 1997.
In addition, the Company will pay other office facilities and general expenses
approximating $12,000 per year.
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. RELATED-PARTY TRANSACTIONS:
The Company has an agreement with an affiliate of a shareholder of the
Company that calls for the purchase and sale of long distance services. Revenues
generated from this affiliate amounted to approximately $625,000, $1,035,000,
and $1,501,000, or 12 percent, 10 percent, and 5 percent of total revenues for
the years ended December 31, 1994, 1995, and 1996, and $717,000 and $1,159,000,
or 5 and 4 percent of total revenues for the six-month periods ended June 30,
1996 and 1997, respectively. The Company was in a net account receivable
position with this affiliate of approximately $152,000, $14,000, and $336,000 as
of December 31, 1995 and 1996, and June 30, 1997, respectively. Services
provided by this affiliate and recognized in cost of services amounted to
approximately $134,000 and $663,000 for the years ended December 31, 1995 and
1996, and $122,000 and $495,000 for the six-month periods ended June 30, 1996
and 1997, respectively. There were no services purchased from this affiliate in
1994.
The Company provided long-distance services to an affiliated entity owned
by the primary shareholder and president of the Company. In the opinion of
management, these services were provided on standard commercial terms. The
affiliate provided long-distance services to customers in certain foreign
countries. Payments received by the Company from this affiliate amounted to
approximately $396,000 and $262,000 for the years ended December 31, 1995 and
1996, respectively, and $52,000 for the six month period ended June 30, 1997.
The affiliate was unable to collect approximately $150,000 and $95,000 from its
residential customers in the years ended December 31, 1995 and 1996,
respectively. Accounts receivable from this affiliated entity were approximately
$167,000 as of December 31, 1995, $64,000 as of December 31, 1996, and $12,000
as of June 30, 1997, respectively. There was no activity related to this entity
for the year ended December 31, 1994.
F-16
<PAGE>
Startec Global Communications Corporation
(FORMERLY STARTEC, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The Company has notes payable from parties related to the primary
shareholder and president of the Company (see Note 7) and a lease with an
affiliate of a shareholder of the Company (see Note 8).
10. SEGMENT DATA AND SIGNIFICANT CUSTOMERS AND SUPPLIERS:
SEGMENT DATA
The Company classifies its operations into one industry segment,
telecommunications services. Substantially all of the Company's revenues for
each period presented were derived from calls terminated outside the United
States.
Net revenues terminated by geographic area were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------ ------------- ------------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Asia/Pacific Rim ............... $4,187,799 $ 6,970,140 $13,823,875 $ 7,152,989 $12,083,360
Middle East/North Africa ...... 136,419 693,948 8,276,205 2,613,998 8,090,191
Sub-Saharan Africa ............ 18,521 34,400 1,135,695 279,728 2,370,960
Eastern Europe ............... 25,562 316,470 2,649,759 913,099 2,848,335
Western Europe .................. 617,255 1,647,446 1,782,435 615,951 903,826
North America .................. 110,643 493,811 3,718,172 1,433,128 1,558,848
Other ........................... 12,510 351,235 828,365 197,690 980,625
----------- ------------ ------------ ------------ ------------
$5,108,709 $10,507,450 $32,214,506 $13,206,583 $28,836,145
=========== ============ ============ ============ ============
</TABLE>
SIGNIFICANT CUSTOMERS
A significant portion of the Company's revenues is derived from a limited
number of customers. During 1996, the Company's five largest carrier customers
accounted for approximately 40% of the Company's net revenues, with one carrier
customer accounting for approximately 23% of net revenues during that year. In
addition, during the six-month period ended June 30, 1997, the Company's five
largest carrier customers accounted for approximately 41% of net revenues, with
one carrier customer accounting for approximately 27% during the period. The
Company's agreements and arrangements with its carrier customers generally may
be terminated on short notice without penalty. The following customers provided
10 percent or more of the Company's net revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ----------------------------
1994 1995 1996 1996 1997
---------- ------------ ------------ ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Videsh Sanchar Nigam Limited
(foreign) ............... $ * $1,958,827 $ * $ * $ *
Companhia Sao Tomense (relat-
ed party) 624,613 * * * *
WorldCom, Inc. ............ 564,345 * 7,383,218 2,921,150 7,694,384
</TABLE>
- ----------
* Revenue provided was less than 10 percent of total revenues for the period.
F-17
<PAGE>
Startec Global Communications Corporation
(FORMERLY STARTEC, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SIGNIFICANT SUPPLIERS
A significant portion of the Company's cost of services is purchased from a
limited number of suppliers. The following suppliers provided 10 percent or more
of the Company's cost of services:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ----------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Videsh Sanchar Nigam Limited ("VSNL")
(foreign) ........................ $3,733,464 $7,154,552 $7,524,983 $2,898,939 $3,404,664
Cherry Communications ............... * * 3,896,555 3,327,605 *
WorldCom, Inc. ..................... * * 3,971,654 1,351,906 3,774,134
Teleglobe, Inc. ..................... * * * 1,255,757 *
</TABLE>
- ----------
* Cost of services provided was less than 10 percent of total cost of sales
for the period.
The cost of services attributable to VSNL include charges that are in
dispute, as discussed in Note 4. VSNL is a government-owned, foreign carrier
that has a monopoly on telephone service in that country.
11. INCOME TAXES:
THE COMPANY HAS NET OPERATING LOSS ("NOLS") CARRYFORWARDS FOR FEDERAL
INCOME TAX PURPOSES OF approximately $2,564,000 and $2,248,000, as of December
31, 1996 and June 30, 1997, respectively, which may be applied against future
taxable income and expire in years 2005 through 2011. The Company utilized a
portion of these NOLs to partially offset its taxable income for the six months
ended June 30, 1997. The use of the NOLs is subject to statutory and regulatory
limitations regarding changes in ownership. SFAS No. 109 requires that the tax
benefit of NOLs for financial reporting purposes be recorded as an asset to the
extent that management assesses the realization of such deferred tax assets is
"more likely than not." A valuation reserve is established for any deferred tax
assets that are not expected to be realized.
As a result of historical operating losses and the fact that the Company
has a limited operating history, a valuation allowance equal to the deferred tax
asset was recorded for all periods presented, which resulted in no tax benefit
being realized during any period.
The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- JUNE 30,
1995 1996 1997
--------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ...... $ 418,934 $ 1,014,072 $ 888,982
Allowance for doubtful accounts ...... 149,273 336,127 532,506
Contested liabilities .................. 254,115 813,526 840,132
Cash to accrual adjustment ............ 1,043,264 777,917 648,265
Other ................................. - 18,086 22,516
------------ ------------ ------------
Total deferred tax assets ............ 1,865,586 2,959,728 2,932,401
------------ ------------ ------------
Deferred tax liabilities:
Depreciation ........................... 34,794 66,434 82,254
Other ................................. 2,628 - -
------------ ------------ ------------
Total deferred tax liabilities ...... 37,422 66,434 82,254
------------ ------------ ------------
Net deferred tax assets ............ 1,828,164 2,893,294 2,850,147
Valuation allowance ..................... (1,828,164) (2,893,294) (2,850,147)
------------ ------------ ------------
$ - $ - $ -
============ ============ ============
</TABLE>
F-18
<PAGE>
Startec Global Communications Corporation
(FORMERLY STARTEC, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Pursuant to Section 448 of the Internal Revenue Code, the Company is
required to change from the cash to the accrual method of accounting. The effect
of this change will be amortized over four years for tax purposes.
The Company recorded no benefit or provision for income taxes for each of
the three years in the period ended December 31, 1996 or for the six-month
period ended June 30, 1996. A current provision for Federal alternative minimum
tax was recorded for the six-month period ended June 30, 1997. The components of
income tax expense for the six-month period ended June 30, 1997 are as follows:
SIX MONTHS ENDED
JUNE 30, 1997
----------------
(UNAUDITED)
Current provision
Federal .......................................... $ 187,523
Federal alternative minimum tax .................. 7,223
State ............................................. 40,328
Deferred benefit
Federal .......................................... (35,511)
State ............................................. (7,636)
Benefit of net operating loss carryforwards ...... (199,150)
----------
$ 7,223
==========
The provision for income taxes results in an effective rate which differs
from the Federal statutory rate as follows:
SIX MONTHS ENDED
JUNE 30, 1997
-----------------
(UNAUDITED)
Statutory Federal income tax rate ............... 35.0%
Impact of graduated rate ........................ (1.0)
State income taxes, net of Federal tax benefit ... 4.6
Federal alternative minimum tax .................. 2.0
Benefit of net operating loss carryforwards ...... (38.6)
------
Effective rate .................................... 2.0%
======
12. SUBSEQUENT EVENTS:
CREDIT FACILITY
On July 1, 1997, the Company entered into a credit facility ("Loan") with a
bank ("Lender"). The Loan 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 revenue 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 January 1, 1998
(and extending to July 1, 1998 upon the occurrence of defined events), should
the Lender determine and assert based on its reasonable assessment that a
material adverse change has occurred, all amounts outstanding would be due and
payable.
F-19
<PAGE>
Startec Global Communications Corporation
(FORMERLY STARTEC, INC.)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The Loan provides that the Lender receive warrants to purchase up to
539,800 shares of the Company's voting common stock representing 10 percent of
the issued and outstanding shares of the Company. Warrants representing 5
percent of the issued and outstanding shares are immediately exercisable. The
exercise price of these warrants is $8.46. Further, beginning in the first
calendar quarter of 1998, and continuing until the Company completes an initial
public offering, the Lender will vest in an additional 1 percent for each
calendar quarter. The exercise price of these warrants will be set at a price
which values the Company at 10 times revenue for the immediately preceding
month. Until the Company is a public registrant, the Company is obligated to
repurchase the shares under warrant in certain circumstances at the then fair
value of the Company as determined by an independent appraisal. The Lender has
certain registration rights with respect to the shares under warrant.
Prior to closing the above described credit facility, the Company obtained
a $500,000 credit facility from the Lender at prime plus 2 percent. Amounts
outstanding under this facility were refinanced under the Loan.
Proceeds from the loan were used to pay down the receivables based credit
facility (Note 6), to retire the notes payable to related parties and
individuals and other (Note 7), to retire certain capital lease obligations, to
purchase long-distance communications equipment, and for general working capital
purposes.
1997 PERFORMANCE PLAN
In August 1997, the Board of Directors and the stockholders approved the
Company's 1997 Performance Incentive Plan (the "Performance Plan"). The
Performance Plan provides for the award of stock options, stock appreciation
rights, restricted stock and other stock-based awards to eligible employees of
the Company, as well as cash-based annual and long-term incentive awards. The
Performance Plan provides for the issuance of options to acquire up to 750,000
shares of common stock. The Company may grant options to acquire up to 480,000
shares of common stock without triggering the antidilution privileges granted
under the warrants issued in connection with the Loan.
GRANT OF OPTIONS AND WARRANTS
In September 1997, the Company granted options and warrants to employees,
directors, and other parties to acquire 257,250 shares of common stock at an
exercise price of $10.00 per share.
CHANGE IN AUTHORIZED SHARES
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.
OTHER
In July 1997, the Company paid off approximately $3,990,000 of its existing
debt as of June 30, 1997, using proceeds from the Loan.
In August 1997, the Company entered into a co-location and facilities
management services agreement. This agreement requires the Company to make
monthly payments of approximately $7,500 for five years, and to pay buildout
fees of approximately $500,000 by the end of October 1997.
F-20
<PAGE>
======================================== =====================================
NO DEALER, SALES REPRESENTATIVE OR ANY
OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY 2,600,000 SHARES
SECURITIES OTHER THAN THE SHARES OF
COMMON STOCK TO WHICH IT RELATES OR AN
OFFER TO, OR A SOLICITATION OF, ANY
PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE [LOGO]
HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE COMMON STOCK
------
<S> <C>
Prospectus Summary ........... 3
Risk Factors .................... 6
Use of Proceeds ................. 17
Dividend Policy ................. 18
Dilution ....................... 18
Capitalization ................. 19
Selected Financial Data ........ 20
Management's Discussion and
Analysis of Financial
Condition and Results -------------------------------
of Operations .................. 21 PROSPECTUS
Business ....................... 29 -------------------------------
Management .................... 47 FERRIS, BAKER WATTS
Principal Stockholders ........ 53 Incorporated
Certain Transactions ........... 54
Description of Capital Stock .. 55
Shares Eligible for Future Sale.. 60
Underwriting .................... 61
Legal Matters ................. 62
Experts ....................... 62
Available Information ........... 62 BOENNING & SCATTERGOOD, INC.
Glossary of Terms .............. G-1
Index to Financial Statements .. F-1
</TABLE>
UNTIL _____, 1997 (25 DAYS AFTER
THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE
COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO UNSOLD ALLOTMENTS OR ___________, 1997
SUBSCRIPTIONS.
======================================== =====================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an estimate (except for the SEC registration
fee, NASD filing fee and Nasdaq National Market listing fee) of the fees and
expenses, all of which will be borne by the Registrant, in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions.
SEC registration fee .............................. $ 11,880
NASD filing fee .................................... 32,000
Nasdaq National Market listing fee .................. 5,000
Legal fees and expenses ........................... 425,000
Accounting fees and expenses ........................ 300,000
Blue Sky fees and expenses ........................... 5,000
Printing and engraving expenses ..................... 150,000
Transfer Agent and Registrar fees and expenses ...... 300
Miscellaneous ....................................... 25,000
Total ....................................... $954,180
========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 2-418 of the Corporations and Associations Article of the Annotated
Code of Maryland permits a corporation to indemnify its present and former
officers and directors, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their services in
those or other capacities, unless it is established that (a) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or (ii) was the result of active
and deliberate dishonesty; or (b) the director or officer actually received an
improper personal benefit in money, property, or services; or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. Maryland law permits a corporation to
indemnify a present and former officer to the same extent as a director, and to
provide additional indemnification to an officer who is not also a director. In
addition, Section 2-418(f) of the Corporations and Associations Article of the
Annotated Code of Maryland permits a corporation to pay or reimburse, in advance
of the final disposition of a proceeding, reasonable expenses (including
attorney's fees) incurred by a present or former director or officer made a
party to the proceeding by reason of his service in that capacity, provided that
the corporation shall have received (a) a written affirmation by the director or
officer of his good faith belief that he has met the standard of conduct
necessary for indemnification by the corporation; and (b) a written undertaking
by or on his behalf to repay the amount paid or reimbursed by the corporation if
it shall ultimately be determined that the standard of conduct was not met.
The Registrant has provided for indemnification of directors, officers,
employees, and agents in Article VIII of its charter. This provision reads as
follows:
(a) To the maximum extent permitted by the laws of the State of Maryland
in effect from time to time, any person who is or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by
II-1
<PAGE>
reason of the fact that such person (i) is or was a director or officer of
the Corporation or of a predecessor of the Corporation, or (ii) is or was a
director or officer of the Corporation or of a predecessor of the Corporation
and is or was serving at the request of the Corporation as a director,
officer, partner, trustee, employee or agent of another foreign or domestic
corporation, limited liability company, partnership, joint venture, trust,
other enterprise, or employee benefit plan, shall be indemnified by the
Corporation against judgments, penalties, fines, settlements and reasonable
expenses (including, but not limited to attorneys' fees and court costs)
actually incurred by such person in connection with such action, suit or
proceeding, or in connection with any appeal thereof (which reasonable
expenses may be paid or reimbursed in advance of final disposition of any
such suit, action or proceeding).
(b) To the maximum extent permitted by the laws of the State of Maryland
in effect from time to time, any person who is or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the
fact that such person (i) is or was an employee or agent of the Corporation
or of a predecessor of the Corporation, or (ii) is or was an employee or
agent of the Corporation or of a predecessor of the Corporation and is or was
serving at the request of the Corporation as a director, officer, partner,
trustee, employee or agent of another foreign or domestic corporation,
limited liability company, partnership, joint venture, trust, other
enterprise, or other employee benefit plan, may (but need not) be indemnified
by the Corporation against judgments, penalties, fines, settlements and
reasonable expenses (including, but not limited to, attorneys' fees and court
costs) actually incurred by such person in connection with such action, suit
or proceeding, or in connection with any appeal thereof (which reasonable
expenses may be paid or reimbursed in advance of final disposition of any
such suit, action or proceeding).
(c) Neither the amendment nor repeal of this Article, nor the adoption or
amendment of any other provision of the charter or bylaws of the Corporation
inconsistent with this Article, shall apply to or affect in any respect the
applicability of this Article with respect to indemnification for any act or
failure to act which occurred prior to such amendment, repeal or adoption.
(d) The foregoing right of indemnification and advancement of expenses
shall not be deemed exclusive of any other rights of which any officer,
director, employee or agent of the Corporation may be entitled apart from the
provisions of this Article.
Under Maryland law, a corporation is permitted to limit by provision in its
charter the liability of directors and officers, so that no director or officer
of the corporation shall be liable to the corporation or to any stockholder for
money damages except to the extent that (i) the director or officer actually
received an improper benefit in money, property, or services, for the amount of
the benefit or profit in money, property or services actually received, or (ii)
a judgment or other final adjudication adverse to the director or officer is
entered in a proceeding based on a finding in the proceeding that the director's
or officer's action, or failure to act, was the result or active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. The Registrant has limited the liability of its directors and
officers for money damages in Article VII of its charter, as amended. This
provision reads as follows:
No director or officer of the Corporation shall be liable to the
Corporation or to any stockholder for money damages except to the extent that
(i) the director or officer actually received an improper personal benefit in
money, property, or services, for the amount of the benefit or profit in
money, property or services actually received, or (ii) a judgment or other
final adjudication adverse to the director or officer is entered in a
proceeding based on a finding in the proceeding that the director's or
officer's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. Neither the amendment nor repeal of this Article, nor the
adoption or amendment of any provision of the charter or bylaws of the
Corporation inconsistent with this Article, shall apply to or affect in any
respect the applicability of the preceding sentence with respect to any act
or failure to act which occurred prior to such amendment, repeal or adoption.
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth information as of August 31, 1997, regarding all
sales of unregistered securities of the Registrant during the past three years.
All such shares were issued in reliance upon an exemption or exemptions from
registration under the Securities Act by reason of Section 4(2) of the
Securities Act or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under Rule 701. In
connection with each of these transactions, the securities were sold to a
limited number of persons, such persons were provided access to all relevant
information regarding the Registrant and/or represented to the Registrant that
they were "sophisticated" investors, and such persons represented to the
Registrant that the shares were purchased for investment purposes only and with
no view toward distribution.
(a) In February 1995, the Registrant completed a private sale of 807,124
shares of Common Stock to a foreign corporation for an aggregate investment
of $750,000. No underwriters were used in connection with either private
transactions.
(b) During the period, the Registrant also granted options pursuant to
its Amended and Restated Stock Option Plan to 32 persons to purchase an
aggregate of up to 269,766 shares of Common Stock at exercise prices ranging
from $.30 to $1.85 per share. In addition, the Registrant granted options
pursuant to its 1997 Performance Incentive Plan to 55 persons to purchase an
aggregate of up to 254,250 shares of Common Stock at an exercise price of
$10.00 per share.
(c) On July 1, 1997, the Registrant issued warrants to purchase up to
539,800 shares of its Common Stock to Signet Bank in connection with the
provision by Signet of a revolving credit facility.
(d) On July 29, 1997, the Registrant exchanged 17,175 shares of its non
voting common stock held of record by Ram Mukunda for an equal number of
shares of its voting common stock.
(e) On September 11, 1997, the Registrant granted Atlantic-ACM the option
to acquire 3,000 shares of Common Stock in lieu of payment in the amount of
$30,000 owed by the Registrant to Atlantic-ACM for certain consulting
services.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ------------------------------------------------------------------------------------------
<S> <C>
1.1** Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation.
3.2* Amended and Restated Bylaws.
4.1* Specimen of Common Stock Certificate.
4.2* Warrant Agreement dated as of July 1, 1997 by and between Startec, Inc.
and Signet Bank.
4.3** Form of Underwriters' Warrant Agreement (including Form of Warrant).
4.4* Voting Agreement dated as of July 31, 1997 by and between Ram Mukunda and Vijay and
Usha Srinivas.
5.1** Opinion of Shulman, Rogers, Gandal, Pordy & Ecker, P.A. with respect
to the Registrant's Common Stock.
10.1* Secured Revolving Line of Credit Facility Agreement dated as of July 1, 1997 by and be-
tween Startec, Inc. and Signet Bank.
10.2* Lease by and between Vaswani Place Limited Partnership and Startec, Inc. dated as of Sep-
tember 1, 1994, as amended.
10.3* Agreement by and between World Communications, Inc. and Startec, Inc. dated as of April
25, 1990.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------
<S> <C>
10.4* Co-Location and Facilities Management Services Agreement by and between Extranet Tele-
communications, Inc. and Startec, Inc. dated as of August 28, 1997.
10.5* Employment Agreement dated as of July 1, 1997 by and between Startec, Inc. and Ram
Mukunda.
10.6* Employment Agreement dated as of July 1, 1997 by and between Startec, Inc. and Prabhav
V. Maniyar.
10.7* Amended and Restated Stock Option Plan.
10.8* 1997 Performance Incentive Plan.
10.9* Subscription Agreement by and among Blue Carol Enterprises, Limited, Startec, Inc. and
Ram Mukunda dated as of February 8, 1995.
10.10* Agreement for Management Participation by and among Blue Carol Enterprises, Limited,
Startec, Inc. and Ram Mukunda dated as of February 8, 1995, as amended as of June 16,
1997.
10.11* Service Agreement by and between Companhia Santomensed De Telecommunicacoes and
Startec, Inc. as amended on February 8, 1995.
10.12*+ Lease Agreement between Companhia Portuguesa Radio Marconi, S.A. and Startec, Inc.
dated as of June 15, 1996.
10.13*+ Indefeasible Right of Use Agreement between Companhia Portuguesa Radio Marconi, S.A.
and Startec, Inc. dated as of January 1, 1996.
10.14*+ International Telecommunication Services Agreement between Videsh Sanchar Nigam Ltd.
and Startec, Inc. dated as of November 12, 1992.
10.15*+ Digital Service Agreement with Communications Transmission Group, Inc. dated as of Oc-
tober 25, 1994.
10.16*+ Lease Agreement by and between GPT Finance Corporation and Startec, Inc. dated as of
January 10, 1990.
10.17*+ Carrier Services Agreement by and between Frontier Communications Services, Inc. and
Startec, Inc. dated as of February 26, 1997.
10.18*+ Carrier Services Agreement by and between MFS International, Inc. and Startec, Inc. dated
as of July 3, 1996.
10.19*+ International Carrier Voice Service Agreement by and between MFS International, Inc. and
Startec, Inc. dated as of June 6, 1996.
10.20*+ Carrier Service Agreement by and between Cherry Communications, Inc. and Startec, Inc.
dated as of June 7, 1995.
11.1** Statement regarding computation of earnings per share.
23.1** Consent
of Arthur Andersen LLP.
23.2** Consent of Shulman, Rogers, Gandal, Pordy & Ecker, P.A. (included in Exhibit 5.1).
24.1* Power of Attorney (contained on the signature page).
27.1** Financial Data Schedule.
99.1* Consent of Nazir G. Dossani.
99.2* Consent of Richard K. Prins.
</TABLE>
- ----------
* Previously filed.
** Filed herewith.
+ Portions of the Exhibit have been omitted pursuant to a request for
Confidential Treatment filed with the Securities and Exchange Commission
under Rule 406 of the Securities Act and the Freedom of Information Act.
II-4
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedules are included in Part II of this
Registration Statement:
Schedule II-Valuation and Qualifying Accounts
All other schedules are omitted because they are inapplicable or because
the information required is included in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Company's Charter or Bylaws, Maryland law, or
otherwise, the Registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denomination and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus 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.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Montgomery
County, State of Maryland, on the 6th day of October, 1997.
STARTEC GLOBAL COMMUNICATIONS
CORPORATION
By: /s/ Ram Mukunda
------------------------------------
Ram Mukunda
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------- ---------------------------------------- ----------------
<S> <C> <C>
/s/ Ram Mukunda October 6, 1997
- -------------------------
Ram Mukunda President, Chief Executive Officer,
Treasurer and Director (Principal
Executive Officer)
/s/ * October 6, 1997
- -------------------------
Prabhav V. Maniyar Senior Vice President, Chief Financial
Officer, Secretary and Director
(Principal Financial and Accounting
Officer)
/s/ * October 6, 1997
- ------------------------- Director
Vijay Srinivas
</TABLE>
*By: /s/ Ram Mukunda
--------------------
Attorney-in-Fact
II-6
<PAGE>
Report of Independent Public Accountants
To Startec Global Communications Corporation (formerly Startec, Inc.):
We have audited in accordance with generally accepted auditing standards,
the financial statements of Startec Global Communications Corporation (formerly
Startec, Inc.) included in this registration statement and have issued our
report thereon dated September 11, 1997. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
Schedule II - Valuation And Qualifying Accounts is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
September 11, 1997
S-1
<PAGE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
(FORMERLY STARTEC, INC.)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ---------------------------------------------- ------------ ------------ ------------------ -------------- -----------
ADDITIONS
-------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS - DEDUCTIONS - END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE(A) DESCRIBE(B) PERIOD
- ---------------------------------------------- ------------ ------------ ------------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
Reflected as reductions to the related assets:
Provision for uncollectible accounts (deduc-
tions from trade accounts receivable)
Year ended December 31, 1994 ............... $696 $ - $120 $ (64) $ 752
Year ended December 31, 1995 ............... 752 150 174 (619) 457
Year ended December 31, 1996 ............... 457 783 464 (625) 1,079
</TABLE>
- ----------
(a) Represents reduction of revenue for accrued credits on residential
business.
(b) Represents amounts written off as uncollectible.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBITS NUMBER
- ---------- --------------------------------------------------------------------------------- -----------
<S> <C> <C>
1.1** Form of Underwriting Agreement.
3.1* Amended and Restated Articles of Incorporation.
3.2* Amended and Restated Bylaws.
4.1* Specimen of Common Stock Certificate.
4.2* Warrant Agreement dated as of July 1, 1997 by and between Startec, Inc. and
Signet Bank.
4.3** Form of Underwriters' Warrant Agreement (including Form of Warrant).
4.4* Voting Agreement dated as of July 31, 1997 by and between Ram Mukunda and
Vijay and Usha Srinivas.
5.1** Opinion of Shulman, Rogers, Gandal, Pordy & Ecker, P.A. with
respect to the Registrant's Common Stock.
10.1* Secured Revolving Line of Credit Facility Agreement dated as of July 1, 1997 by
and between Startec, Inc. and Signet Bank.
10.2* Lease by and between Vaswani Place Limited Partnership and Startec, Inc. dated
as of September 1, 1994, as amended.
10.3* Agreement by and between World Communications, Inc. and Startec, Inc. dated
as of April 25, 1990.
10.4* Co-Location and Facilities Management Services Agreement by and between
Extranet Telecommunications, Inc. and Startec, Inc. dated as of August 28, 1997.
10.5* Employment Agreement dated as of July 1, 1997 by and between Startec, Inc. and
Ram Mukunda.
10.6* Employment Agreement dated as of July 1, 1997 by and between Startec, Inc. and
Prabhav V. Maniyar.
10.7* Amended and Restated Stock Option Plan.
10.8* 1997 Performance Incentive Plan.
10.9* Subscription Agreement by and among Blue Carol Enterprises, Limited, Startec,
Inc. and Ram Mukunda dated as of February 8, 1995.
10.10* Agreement for Management Participation by and among Blue Carol Enterprises,
Limited, Startec, Inc. and Ram Mukunda dated as of February 8, 1995, as amended
as of June 16, 1997.
10.11* Service Agreement by and between Companhia Santomensed De Telecommuni-
cacoes and Startec, Inc. as amended on February 8, 1995.
10.12*+ Lease Agreement between Companhia Portuguesa Radio Marconi, S.A. and
Startec, Inc. dated as of June 15, 1996.
10.13*+ Indefeasible Right of Use Agreement between Companhia Portuguesa Radio
Marconi, S.A. and Startec, Inc. dated as of January 1, 1996.
10.14*+ International Telecommunication Services Agreement between Videsh Sanchar
Nigam Ltd. and Startec, Inc. dated as of November 12, 1992.
10.15*+ Digital Service Agreement with Communications Transmission Group, Inc. dated
as of October 25, 1994.
10.16*+ Lease Agreement by and between GPT Finance Corporation and Startec,
Inc. dated as of January 10, 1990.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBITS NUMBER
- ---------- ------------------------------------------------------------------------------- -----------
<S> <C> <C>
10.17*+ Carrier Services Agreement by and between Frontier Communications Services,
Inc. and Startec, Inc. dated as of February 26, 1997.
10.18*+ Carrier Services Agreement by and between MFS International, Inc. and Startec,
Inc. dated as of July 3, 1996.
10.19*+ International Carrier Voice Service Agreement by and between MFS Interna-
tional, Inc. and Startec, Inc. dated as of June 6, 1996.
10.20*+ Carrier Service Agreement by and between Cherry Communications, Inc. and
Startec, Inc. dated as of June 7, 1995.
11.1** Statement regarding computation of earnings per share.
23.1** Consent of Arthur Andersen LLP.
23.2** Consent of Shulman, Rogers, Gandal, Pordy & Ecker, P.A. (included in Exhibit
5.1).
24.1* Power of Attorney (contained on the signature page).
27.1** Financial Data Schedule.
99.1* Consent of Nazir G. Dossani.
99.2* Consent of Richard K. Prins.
</TABLE>
- ----------
* Previously filed.
** Filed herewith.
+ Portions of the Exhibit have been omitted pursuant to a request for
Confidential Treatment filed with the Securities and Exchange Commission
under Rule 406 of the Securities Act and the Freedom of Information Act.
2,600,000 SHARES
STARTEC GLOBAL COMMUNICATIONS CORPORATION
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
UNDERWRITING AGREEMENT
September __, 1997
FERRIS, BAKER WATTS, INCORPORATED
BOENNING & SCATTERGOOD, INC.
As Representatives of the
Several Underwriters Identified
In Schedule I Hereto,
c/o Ferris, Baker Watts, Incorporated
1720 Eye Street, N.W.
Washington, D.C. 20006
Ladies and Gentlemen:
SECTION 1. INTRODUCTION. STARTEC Global Communications Corporation, a
Maryland corporation (the "Company"), proposes, subject to the terms and
conditions stated herein, to issue and sell to the Underwriters named in
Schedule I hereto (the "Underwriters"), for which Ferris, Baker Watts, Inc. and
Boenning & Scattergood, Inc. are acting as Representatives (the
"Representatives"), an aggregate of 2,600,000 shares and, at the election of the
Underwriters, up to 390,000 additional shares of Common Stock, par value $0.01
per share ("Stock"), of the Company. The 2,600,000 shares to be sold by the
Company are herein called the "Firm Shares" and the 390,000 additional shares to
be sold by the Company are herein called the "Optional Shares." The Firm Shares
and the Optional Shares that the Underwriters elect to purchase pursuant to
Section 3 hereof are herein collectively called the "Shares."
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, each of the Underwriters that:
<PAGE>
(a) A registration statement on Form S-1 (File No. 333-32753)
under the Securities Act of 1933, as amended (the "Act"), with respect to the
Shares, including a form of prospectus subject to completion, has been prepared
by the Company in conformity with the requirements of the Act and the rules and
regulations of the Securities and Exchange Commission (the "Commission")
thereunder (the "Rules and Regulations"). Such registration statement has been
filed with the Commission under the Act and one or more amendments to such
registration statement may also have been so filed. After the execution of this
Agreement, the Company shall file with the Commission a Prospectus (as
hereinafter defined) which shall have been provided to, and approved by, the
Representatives prior to the filing thereof. As used in this Agreement, the term
"Registration Statement" means such registration statement, as amended and
revised at the time when such registration statement becomes effective,
including all financial schedules and exhibits thereto and any information
omitted therefrom pursuant to Rule 430A under the Act and included in the
Prospectus (as hereinafter defined). The term "Preliminary Prospectus" means
each prospectus subject to completion contained in such registration statement
or any amendment thereto before the Registration Statement was or is declared
effective, or such prospectus subject to completion filed pursuant to Rule
424(a) under the Act which omits the information permitted under Rule 430A. The
term "Prospectus" means a prospectus, including any amendments or supplements
thereto, relating to the Registration Statement that includes all the
information contained in the most recently filed Preliminary Prospectus in
addition to such information which may have been omitted in any Preliminary
Prospectus pursuant to Rule 430A under the Act. To the extent the Company relies
on Rule 462(b) under the Act to increase the maximum aggregate offering price,
the Company shall have made in a timely manner any filing required under Rule
462(b) and such filing shall be in compliance with such Rule. Copies of the
Registration Statement, any amendment thereto and any Preliminary Prospectus
filed with the Commission have been delivered by the Company to the
Representatives on behalf of the Underwriters. The Registration Statement any
and post-effective amendments thereto have been declared effective by the
Commission.
(b) The Commission has not issued any order suspending the
effectiveness of the Registration Statement, any post-effective amendment
thereto or Rule 462(b) Registration Statement, if any, or preventing or
suspending the use of any Preliminary Prospectus, the Prospectus, the
Registration Statement or any amendment or supplement thereto or suspending the
registration of the Shares, nor has the Commission instituted or threatened to
institute any proceedings with respect to such an order. Each Preliminary
Prospectus, at the time of filing thereof, conformed in all material respects to
the requirements of the Act and the Rules and Regulations thereunder, and did
not contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading;
provided, however, that this representation and warranty shall not apply to any
statements or omissions made in
-2-
<PAGE>
reliance upon and in conformity with information furnished in writing to the
Company by an Underwriter through the Representatives expressly for use therein.
(c) The Registration Statement conforms, and the Prospectus
(or the most recent Preliminary Prospectus) and any further amendments or
supplements to the Registration Statement or the Prospectus will conform, in all
material respects, to the requirements of the Act and the Rules and Regulations
thereunder. The Registration Statement and any post-effective amendment thereto,
as of the applicable effective date or dates, and each Preliminary Prospectus
and Prospectus, as of the date each such Preliminary Prospectus or Prospectus is
filed and at all times subsequent thereto up to and including the Closing Date
(as defined in Section 5 hereof) and any Option Closing Date (as defined in
Section 5 hereof), and during such longer period during which the Prospectus may
be required to be delivered in connection with sales to any dealer and during
such longer period until any post-effective amendment thereto shall become
effective, do not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that this
representation and warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished in writing to the
Company by an Underwriter through the Representatives expressly for use therein,
and no event will have occurred which should have been set forth in an amendment
or supplement to the Registration Statement or the Prospectus which has not then
been set forth in such an amendment or supplement.
(d) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of Maryland, its
jurisdiction of incorporation, and has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification, except for those
jurisdictions in which the failure to so qualify has not had and will not have a
Material Adverse Effect (as hereinafter defined), and has all power and
authority necessary to own or hold its properties and to conduct the business in
which it is engaged. Each subsidiary of the Company in existence as of the date
hereof (each a "Subsidiary" and together the "Subsidiaries") has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and each has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties,
or conducts any business so as to require such qualification (except for those
jurisdictions in which the failure to so qualify has not had and will not have a
Material Adverse Effect (as hereinafter defined). "Material Adverse Effect"
means, when used in connection with the Company, any development, change or
effect that is materially adverse to the business, properties, assets, net
worth, condition (financial or other), results of operations, or prospects of
the Company and its Subsidiaries, taken as a whole.
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(e) The Company has the duly authorized capitalization as set
forth in the Prospectus (or most recent Preliminary Prospectus) and will have
the adjusted capitalization set forth therein at the Closing Date, based on the
assumptions set forth therein. All of the shares of capital stock of the Company
issued and outstanding have been duly and validly authorized and issued, are
fully paid and non-assessable, without personal liability attaching to the
ownership thereof, and none of such shares have been issued or are owned or held
in violation of any preemptive or other rights of securityholders or other
persons to acquire securities of the Company. As of the Closing Date, the
securities of the Company including, without limitation, the Stock, the Shares,
the warrants (the "Underwriters' Warrants") to be issued to the Representatives
pursuant to the Underwriters' Warrant Agreement of even date herewith (the
"Underwriters' Warrant Agreement") conform in all material respects to all
statements relating thereto contained in the Registration Statement or the
Prospectus. With respect to each Subsidiary of the Company, all of the issued
and outstanding shares of capital stock are fully paid and non-assessable,
without personal liability attaching to the ownership thereof, and none of such
shares have been issued or are owned or held in violation of any preemptive or
other rights of securityholders or other persons to acquire securities of the
Company and (except as otherwise described in the Prospectus (or the most recent
Preliminary Prospectus)) are owned directly by the Company, free and clear of
all liens, encumbrances, equities or claims. Other than as disclosed in the
Prospectus (or the most recent Preliminary Prospectus), there are no holders of
the securities of the Company having rights to registration thereof or
preemptive rights to purchase capital stock of the Company. Except as created
hereby or described in the Prospectus or most recently filed Preliminary
Prospectus, there are no commitments, plans or arrangements to issue, and no
outstanding options, warrants or other rights, calling for issuance of, any
shares of capital stock of the Company or any of its Subsidiaries or any
security or other instrument which, by its terms, is convertible into,
exercisable for, or exchangeable for capital stock of the Company or any of its
Subsidiaries. Except as described in the Prospectus or the most recently filed
Preliminary Prospectus, there is no outstanding security or other instrument
which, by its terms, is convertible into, exercisable for, or exchangeable for
capital stock of the Company or any of its Subsidiaries.
(f) The Shares and the Underwriters' Warrants have been duly
and validly authorized. When the Shares are issued and delivered against payment
therefor as provided herein, or when the Underwriters' Warrants are issued and
delivered in accordance with the terms hereof, thereof and of the Underwriters'
Warrant Agreement, such Shares and such Underwriters' Warrants, will be duly and
validly issued, fully paid and non-assessable, will not have been issued in
violation of any preemptive or other rights of securityholders or other persons
to acquire securities of the Company and will conform in all material respects
to all statements relating thereto in the Registration Statement and the
Prospectus. Good and marketable title to the Shares and the Underwriters'
Warrants will pass to the Underwriters on the Closing Date free and clear of any
lien, encumbrance, security interest, claim or other restriction whatsoever. The
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<PAGE>
shares to be issued upon exercise of the Underwriters' Warrants (the "Warrant
Shares") have been duly authorized and validly reserved for issuance and, when
issued, paid for and delivered in accordance with the terms of the Underwriters'
Warrants and the Underwriters' Warrant Agreement will be duly and validly issued
and fully paid and non-assessable, will not have been issued in violation of any
preemptive or other rights of securityholders or other persons to acquire
securities of the Company and will conform in all material respects to all
statements relating thereto in the Registration Statement and the Prospectus (or
most recent Preliminary Prospectus). Good and marketable title, free and clear
of any lien, encumbrance, security interest, claim or other restriction
whatsoever, will pass to the holders of Warrant Shares issued upon exercise of
Underwriters' Warrants in accordance with the terms thereof and of the
Underwriters' Warrant Agreement. The Company has received, subject to notice of
issuance, approval to have the Shares listed on The Nasdaq National Market
("NNM") and the Company knows of no reason or set of facts which is likely to
adversely affect such approval.
(g) The financial statements and the related notes and
schedules thereto included in the Registration Statement and the Prospectus or
the most recent Preliminary Prospectus fairly present the financial condition,
results of operations, stockholders' equity and cash flows, and the other
information purported to be shown therein, of the Company and its Subsidiaries,
on a consolidated basis at the respective dates and for the respective periods
specified therein. Such financial statements and the related notes and schedules
thereto have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved (except as
otherwise noted therein) and have been properly derived from the books and
records of the Company and such financial statements as are audited have been
examined by Arthur Andersen LLP, who are independent public accountants within
the meaning of the Act and the Rules and Regulations, as indicated in their
reports filed therewith. The selected financial information and statistical data
set forth under the captions "Prospectus Summary--Summary Financial Data,"
"Capitalization," "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" in the
Prospectus (or the most recent Preliminary Prospectus) fairly present, on the
basis stated in the Prospectus or such Preliminary Prospectus, the information
included therein and have been properly derived from the financial statements
and other operating records of the Company and its Subsidiaries. No other
financial statements or financial information, except that which is contained in
the Registration Statement, the Prospectus or the most recent Preliminary
Prospectus, is required by Form S-1, the Rules and Regulations, or otherwise, to
be included in the Registration Statement, the Prospectus or such Preliminary
Prospectus.
(h) Since the respective dates as of which information is
given in the Prospectus (or the most recent Preliminary Prospectus), and except
as otherwise may be stated therein (i) neither the Company, nor any of its
Subsidiaries has entered into any transaction or incurred any liability or
obligation, contingent or otherwise, which is material
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<PAGE>
to the Company and its Subsidiaries, taken as a whole, (ii) there has not been
any change in the outstanding capital stock of the Company or any of its
Subsidiaries, or any issuance of options, warrants or rights to purchase the
capital stock of the Company or any of its Subsidiaries, or any material
increase in the long-term debt of the Company or any of its Subsidiaries, or any
material adverse change in the business, condition (financial or otherwise) or
results of operations of the Company or any of its Subsidiaries, (iii) no loss
or damage (whether or not insured) to the properties of the Company or any of
its Subsidiaries has been sustained which has resulted in a Material Adverse
Effect, (iv) neither the Company nor any of its Subsidiaries has paid or
declared any dividend or other distribution with respect to its capital stock,
and (v) there has not been any change, contingent or otherwise, in the direct or
indirect control of the Company or any of its Subsidiaries nor, to the best
knowledge of the Company, do there exist any circumstances which would likely
result in such a change.
(i) The Company and each of its Subsidiaries has filed all
foreign, federal, state and local income, franchise and other material tax
returns required to be filed (or have obtained extensions with respect thereto)
and has paid all taxes shown as due thereunder and all assessments received by
it to the extent that payment has become due, and the Company has no knowledge
of any tax deficiency which might be assessed against the Company or any of its
Subsidiaries which, if so assessed, would be reasonably expected to have a
Material Adverse Effect.
(j) The Company and each of its Subsidiaries maintains
insurance of the types and in amounts which the Company reasonably believes to
be adequate for its business, in such amounts and with such deductibles as are
customary for companies in the same or similar business, all of which insurance
is in full force and effect.
(k) Other than as set forth in the Prospectus (or most recent
Preliminary Prospectus), there are no legal or governmental proceedings pending
to which the Company or any of its Subsidiaries is a party or to which any
property of the Company or any of its Subsidiaries is the subject which (i)
challenges the validity of the capital stock of the Company or this Agreement or
the Underwriters' Warrant Agreement, or of any action taken or to be taken by
the Company pursuant to or in connection herewith or therewith, (ii) is required
to be disclosed in the Registration Statement or Prospectus (or most recent
Preliminary Prospectus), or (iii) if determined adversely to the Company or any
of its Subsidiaries, could reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect, and to the Company's best
knowledge, no such proceedings are threatened or contemplated by governmental
authorities or threatened by others. Any such proceedings that are set forth in
the Prospectus (or most recent Preliminary Prospectus) are fairly and accurately
summarized therein.
(l) The Company has full legal right, power and authority to
enter into this Agreement and the Underwriters' Warrant Agreement and to
consummate the
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<PAGE>
transactions provided for, and perform its obligations as provided, herein and
therein. All necessary corporate proceedings of the Company have been duly taken
to authorize the execution, delivery and performance by the Company of this
Agreement and the Underwriters' Warrant Agreement. This Agreement and the
Underwriters' Warrant Agreement have been duly authorized, executed and
delivered by the Company and, assuming each is a binding agreement of yours,
constitutes a legal, valid and binding agreement of the Company enforceable
against the Company in accordance with its terms (except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws of general application relating to or affecting the enforcement of
creditors' rights and the application of equitable principles relating to the
availability of remedies and except as rights to indemnity or contribution may
be limited by federal or state securities laws and the public policy underlying
such laws).
(m) The Company's execution and performance of this Agreement
and the Underwriters' Warrant Agreement, including, without limitation,
application of the net proceeds of the offering, if and when received, as
described in the Prospectus (or most recent Preliminary Prospectus) under the
caption "Use of Proceeds," will not violate any provision of the Charter or
Bylaws or any similar constitutive documents of the Company or any of its
Subsidiaries, or any law, rule or regulation applicable to the Company or any of
its Subsidiaries of any government, court, regulatory body, administrative
agency or other governmental body having jurisdiction over the Company or any of
its Subsidiaries or any of their respective businesses or properties, and will
not result in the breach, or be in contravention, of any loan agreement, lease,
franchise, license, note, bond, other evidence of indebtedness, indenture,
mortgage, deed of trust, voting trust agreement, stockholders' agreement, note
agreement or other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which their respective properties are or may be
subject, or any statute, judgment, decree, order, rule or regulation applicable
to the Company or any of its Subsidiaries of any government, arbitrator, court,
regulatory body or administrative agency or other governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any of its
Subsidiaries or any of their respective businesses, activities or properties,
except those, if any, that are described in the Prospectus (or most recent
Preliminary Prospectus) or those which would not, individually or in the
aggregate, have a Material Adverse Effect.
(n) All executed agreements or copies of executed agreements
filed as exhibits to the Registration Statement to which the Company or any of
its Subsidiaries is a party or by which any of them is or may be bound or to
which any of their respective assets, properties or businesses is or may be
subject have been duly and validly authorized, executed and delivered by the
Company or the relevant Subsidiary or Subsidiaries and, assuming that each is a
binding obligation of the other party or parties thereto, constitutes the legal,
valid and binding agreement of the Company or such Subsidiary or Subsidiaries,
enforceable against it or them in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
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<PAGE>
reorganization or other similar laws relating to enforcement of creditors'
rights generally, and general equitable principles relating to the availability
of remedies, and except as rights to indemnity or contribution may be limited by
federal or state securities laws and the public policy underlying such laws).
The descriptions in the Prospectus and Preliminary Prospectus of contracts and
other documents are accurate and fairly present in all material respects the
information required to be disclosed with respect thereto by the Act and the
Rules and Regulations, and there are no contracts or other documents which are
required by the Act or the Rules and Regulations to be described in the
Prospectus or filed as exhibits to the Registration Statement which are not
described or filed as required, and the exhibits which have been filed are
complete and correct copies of the documents of which they purport to be copies.
(o) The Company and each of its Subsidiaries has good and
marketable title in fee simple to all real property and good title to all other
property and assets owned thereby as set forth in the Prospectus (or most recent
Preliminary Prospectus), in each case free and clear of all liens, security
interests, pledges, charges, mortgages and other defects and encumbrances,
except such as are described in the Prospectus (or most recent Preliminary
Prospectus) or such as do not materially affect the value of such property, and
do not interfere with the use made and proposed to be made of such property by
the Company or its Subsidiaries; and any real properties and buildings held
under lease by the Company or any of its Subsidiaries are held under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its Subsidiaries. No real property owned, leased,
licensed or used by the Company or any of its Subsidiaries is situated in an
area which is, or to the best knowledge of the Company, will be subject to
zoning, use, or building code restrictions which would prohibit (and no state of
facts relating to the actions or inaction of another person or entity or his or
its ownership, leasing, licensing, or use of any real or personal property
exists or will exist which would prevent) the continued effective ownership,
leasing, licensing, or use of such real property in the business of the Company
or its Subsidiaries as presently conducted or as the Prospectus (or most recent
Preliminary Prospectus) indicates any of them contemplate conducting such
business in the future, except as disclosed in the Prospectus (or most recent
Preliminary Prospectus).
(p) No consent, authorization, approval, order, license,
certificate, declaration or permit of or from, or filing with, any governmental
or regulatory authority, agent, board or other body is required for the issue
and sale of the Shares by the Company and the execution, delivery or performance
by the Company of this Agreement or the Underwriters' Warrant Agreement, or the
issuance of the Warrant Shares in accordance with the terms of the Underwriters'
Warrants and the Underwriters' Warrant Agreement, except for the registration
under the Act of the Shares and the registration of the Stock under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), each of which
has been made or obtained, and such consents, approvals, authorizations,
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<PAGE>
registrations or qualifications as may be required under state securities or
blue sky laws in connection with the purchase and distribution of the Shares by
the Underwriters, and such approval as may be required from the NNM to have the
Shares listed thereon. No consent of any party to any contract, agreement,
instrument, lease, license, arrangement or understanding to which the Company or
any of its Subsidiaries is a party, or to which any of their properties or
assets are subject, is required for the execution, delivery or performance of
this Agreement or the Underwriters' Warrant Agreement.
(q) Neither the Company nor any of its Subsidiaries is in
violation of its Charter or Bylaws or similar constitutive documents; neither
the Company nor any of its Subsidiaries is (or, as a result of the passage of
time or based on its projected plans of operations, will be) in default in the
performance or observance of any obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which it is a party or by which it or any of
its properties may be bound, which default may reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect, or which could in
any way, individually or in the aggregate, impair or delay the consummation of
the transactions contemplated by this Agreement or the offering of the Shares in
the manner contemplated herein and in the Registration Statement and the
Prospectus (or most recent Preliminary Prospectus), and each such indenture,
mortgage, deed of trust, loan agreement lease or other agreement or instrument
is in full force and effect and is a legal, valid and binding obligation of the
Company or is Subsidiary or Subsidiaries, as the case may be and, to the best
knowledge of the Company, of each other party thereto.
(r) The statements set forth in the Prospectus (or most recent
Preliminary Prospectus) under the caption "Description of Capital Stock,"
insofar as they purport to constitute a summary of the terms of the Company's
securities, and under the captions "Shares Eligible for Future Sale,"
"Business," "Management" and "Underwriting" (except, with respect to the
statements under the caption "Underwriting," for information furnished in
writing to the Company by the Underwriters through the Representatives expressly
for use therein), insofar as they purport to describe the provisions of the laws
and the provisions of documents referred to therein, are accurate and fairly
summarize such provisions.
(s) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be, an "investment company" or an
"affiliated person" of or a "promoter" or "principal underwriter" of or an
entity "controlled" by an "investment company," as such terms are defined in the
Investment Company Act of 1940 (the "Investment Company Act").
(t) The Company and each of its Subsidiaries owns or is
licensed or otherwise has sufficient right to use the proprietary knowledge,
inventions, patents, trademarks, service marks, trade names, logo marks and
copyrights ("Intellectual
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<PAGE>
Property") currently used in the conduct of their respective businesses, except
for those patents, trademarks, service marks, trade names, logo marks or
copyrights with respect to which the failure to own or license same would not
have a Material Adverse Effect. To the best knowledge of the Company, none of
the activities engaged in by the Company or any of its Subsidiaries infringes
upon or otherwise conflicts with Intellectual Property rights of others, except
for any such conflicts that would not have a Material Adverse Effect, and no
claims have been asserted against the Company or any of its Subsidiaries by any
person with respect to the use of any such rights or challenging or questioning
the validity or effectiveness of any such rights.
(u) No labor disturbance by, or labor dispute with, the
employees of the Company or any of its Subsidiaries exists or, to the Company's
knowledge, is threatened or imminent which may have a Material Adverse Effect.
(v) Since its inception, the Company has not incurred any
liability arising under or as a result of the application of the provisions of
the Act.
(w) The Company and each of its Subsidiaries (i) is in
compliance with all environmental, safety, health or similar law or regulation
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws") applicable to its business, (ii) has received all
permits, licenses or other approvals required under applicable Environmental
Laws to conduct its business, and (iii) is in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance, failure to receive such license or approval or failure to comply
would not have a Material Adverse Effect.
(x) The Company and each of its Subsidiaries is in compliance
with all federal or state laws, including the rules and regulations promulgated
thereunder, relating to discrimination in the hiring, promotion or pay of
employees, any applicable federal or state wages and hours law, and the
provisions of the Employee Retirement Income Security Act of 1974, as amended,
applicable to its business, except where such noncompliance would not have a
Material Adverse Effect.
(y) The Company and each of its Subsidiaries has full
corporate power and authority and has obtained and holds all necessary consents,
authorizations, approvals, orders, certificates and permits of and from, and
have made all declarations and filings with, all U.S. and foreign, federal state
or provincial, local and other governmental authorities, all self-regulatory
organizations and all courts and other tribunals, to own, lease, license and use
its properties and assets and to conduct its business in the manner described in
the Prospectus (or most recent Preliminary Prospectus), except to the extent
that the failure to obtain or file would not have Material Adverse Effect, and
except as otherwise described in the Prospectus (or most recent Preliminary
Prospectus). Neither the Company nor any of its Subsidiaries has received
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any notice of proceedings relating to, and does not have reason to believe that
any governmental body or agency is considering limiting, suspending, modifying
or revoking, any such consent, authorization, approval, order, certificate or
permit which, individually or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a Material Adverse Effect.
(z) The Company and each of its Subsidiaries has all necessary
applications, statements, reports, information, forms, consents, authorizations,
approvals, orders, certificates and permits ("Licenses") of and from all United
States federal or state authorities, including the Federal Communications
Commission (the "FCC") and State Public Utilities Commissions to own, lease,
license and use its properties and assets and to conduct its business in the
manner described in the Prospectus (or most recent Preliminary Prospectus),
except to the extent that the failure to obtain or file would not have a
Material Adverse Effect, and except as described in the Prospectus (or most
recent Preliminary Prospectus).
(aa) The Licenses are in full force and effect without
conditions that would have a Material Adverse Effect, except for such conditions
imposed generally by the FCC upon such licenses or conditions stated on the face
of the Licenses, (ii) all express conditions in the Licenses have been satisfied
where the failure to satisfy such conditions would have a Material Adverse
Effect, and (iii) neither the Company nor any of its Subsidiaries has received
any notification that any revocation or limitation of the Licenses is threatened
or pending that would have a Material Adverse Effect.
(bb) The Licenses are validly issued. The Company and each of
its Subsidiaries has filed with the FCC all applications, statements, reports,
information, forms, or any other document required under the Communications Act
of 1934, as amended (the "Communications Act") and the rules and regulations
thereunder, except where the failure to so file would not have a Material
Adverse Effect, such filings or submissions were in compliance with applicable
laws or regulations when filed or submitted and no deficiencies have been
asserted by the FCC with respect to such filings or submissions, except where
the deficiency is of such a nature that failure to cure would not have a
Material Adverse Effect, and the information contained in such filings or
submissions was, in all material respects, accurate, complete and up-to-date at
the time the filings or submissions were made.
(cc) With respect to matters relating to the regulation of
long distance telecommunications carriers administered by United States federal
or state authorities, including, and not limited to, the FCC and state and
public utility commissions or similar state governmental agencies (collectively
"PUCs" and individually a "PUC"), the execution and delivery by the Company of,
and the performance by the Company of its obligations under, this Agreement and
the Underwriters' Warrant Agreement will not contravene any provisions of
applicable law or any judgment, order or decree of any
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governmental body, agency or court having jurisdiction over the Company or any
of its Subsidiaries, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company of its obligations hereunder or thereunder.
(dd) There is no proceeding, formal or informal complaint or
investigation before the FCC against the Company or any of its Subsidiaries or
any of the Licenses or based on any violation or alleged violation by the
Company or any of its Subsidiaries of the Communications Act, except for
proceedings affecting the industry generally to which neither the Company nor
any of its Subsidiaries is a specific party.
(ee) Neither the execution, delivery and performance of this
Agreement by the Company, nor the issuance and sale of the Shares, the
Underwriters' Warrants or the Warrant Shares, as described in the Registration
Statement and Prospectus (or most recent Preliminary Prospectus), will conflict
with, violate or require any authorization, approval, or consent under the
Communications Act or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, or cause any forfeiture or
impairment of, any of the Licenses.
(ff) Neither the Company nor any other person associated with
or acting on behalf of the Company including, without limitation, any director,
officer, agent, or employee of the Company has, directly or indirectly, while
acting on behalf of the Company (i) used any corporate funds for unlawful
contributions, gifts, entertainment, or other unlawful expenses relating to
political activity, (ii) made any unlawful contribution to any candidate for
foreign or domestic office, or to any foreign or domestic government officials
or employees or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof or to foreign or domestic political parties or
campaigns from corporate funds, or failed to disclose fully any contribution in
violation of law, (iii) violated any provision of the Foreign Corrupt Practices
Act of 1977, as amended, or (iv) made any other unlawful payment.
(gg) Neither the Company nor, to the Company's best knowledge,
any employee or agent of the Company, has made any payment of funds of the
Company or received or retained any funds which constitutes a violation by the
Company of any law, rule or regulation or of a character required to be
disclosed in the Prospectus (or most recent Preliminary Prospectus).
(hh) With respect to state certificates of public convenience
and necessity of other operating authorizations issued by PUCs (such PUC
certificates and authorizations are hereinafter referred to collectively as the
"State Authorizations") held by the Company or any of its Subsidiaries, such
State Authorizations are in full force and effect and are unimpaired by any act
or omission of the Company or any of its employees
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or agents or the Company's Subsidiaries, in each case except where such
authorization is not required or where the failure to so hold any such State
Authorization would not have a Material Adverse Effect. The State Authorizations
are all of the licenses, authorizations, consents and approvals necessary from
the PUCs in order to allow the Company and each of its Subsidiaries to own their
respective assets and carry on their respective businesses as currently being
conducted, except where the failure to so hold any State Authorizations would
not have a Material Adverse Effect. To the Company's best knowledge, there are
no proceedings of any kind, including but not limited to rulemaking proceedings
of general applicability in the industry or industries in which the Company
operates, by or before any PUC, now pending or threatened, which, if adversely
determined, would have a Material Adverse Effect. Neither the execution and
delivery of this Agreement or the Underwriters' Warrant Agreement, nor the
consummation of the transactions contemplated herein, therein and in the
Registration Statement, will conflict with or result in a breach of, or require
any authorization, approval or consent under the Communications Act, or the
rules of the FCC or the communications statutes of any state or the policies or
rules of any PUC. All applications, reports and other filings required by the
FCC or any PUC to be filed as of the date hereof with respect to any FCC license
or the State Authorizations, as the case may be, have been duly and currently
filed as of the date hereof, except where the failure to so file would not have
a Material Adverse Effect.
(ii) The Company and each of its Subsidiaries has filed with
the applicable foreign and domestic regulatory authorities each and every
statement, report, information or form required by any applicable law,
regulation or order, except where the failure to so file would not have a
Material Adverse Effect, and all such filings or submissions were in compliance
with applicable laws when filed, and no deficiencies have been asserted by any
regulatory commission, agency or authority with respect to such filings or
submissions, except where the failure to so file or cure would not have a
Material Adverse Effect. The Company and each of its Subsidiaries has maintained
in full force and effect all licenses and permits necessary or proper for the
conduct of its business, except where the failure to do so would not have a
Material Adverse Effect, and neither the Company nor any of its Subsidiaries has
received any notification that any revocation or limitation thereof is
threatened or pending that would have such an Effect. Except as disclosed in the
Registration Statement and the Prospectus (or most recent Preliminary
Prospectus), there is not pending any change under any law, regulation, license
or permit that would have a Material Adverse Effect. Neither the Company nor any
or its Subsidiaries has received any notice of, or, to the best knowledge of the
Company, been threatened with or is under investigation with respect to, a
violation or a possible violation of any provision of any law, regulation or
order, except such violation or violations as would not have a Material Adverse
Effect.
(jj) The books, records and accounts and systems of internal
accounting controls of the Company currently comply with the requirements of
Section 13(b)(2) of the Exchange Act.
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(kk) Neither the Company nor any of its officers, directors or
affiliates (within the meaning of the Rules and Regulations) has taken, directly
or indirectly, any action designed to stabilize or manipulate the price of any
security of the Company, or which has constituted or which might in the future
reasonably be expected to, cause or result in, stabilization or manipulation of
the price of any security of the Company, to facilitate the sale or resale of
the Shares or otherwise.
(ll) The minute books of the Company and each of its
Subsidiaries are current and contain a correct and complete record of all
corporate action taken by the respective Boards of Directors and stockholders of
the Company and the Subsidiaries and all signatures contained therein are true
signatures of the persons whose signatures they purport to be.
(mm) Except as described in the Prospectus (or most recent
Preliminary Prospectus), to the best knowledge of the Company there is no loss
or threatened loss of any key customer, supplier, or account which loss would
result in a Material Adverse Effect.
(nn) Neither the Company nor any of its Subsidiaries has
incurred, directly or indirectly, any liability for a fee, commission or other
compensation on account of the employment of a broker or finder in connection
with the offering and sale of the Shares contemplated by this Agreement.
(oo) There are no business relationships or related party
transactions of the nature described in Item 404 of Regulation S-K of the Rules
and Regulations involving the Company, any of its Subsidiaries and any person
referred to in Items 401 or 404 of such Regulation S-K, except as required to be
described, and as so described, in the Prospectus (or most recent Preliminary
Prospectus).
SECTION 3. PURCHASE OF SECURITIES BY THE UNDERWRITERS. On the basis of
the representations, warranties, covenants and agreements herein contained, and
subject to the terms and conditions herein set forth (i) the Company agrees to
sell to each of the Underwriters, and each of the Underwriters agrees, severally
and not jointly, to purchase from the Company, at a purchase price per share of
$_______, the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto and (ii) in the event and to the extent that
the Underwriters shall exercise the election to purchase Optional Shares as
provided below, the Company agrees to sell to each of the Underwriters, and each
of the Underwriters agrees, severally and not jointly, to purchase from the
Company, at the purchase price per share set forth in clause (i) of this Section
3, its proportionate share of the number of Optional Shares as to which such
election shall have been exercised (based on the monetary obligation of the
several Underwriters hereunder on account of the purchase of Firm Shares).
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The Company hereby grants to the Underwriters the right to
purchase at their election up to 390,000 Optional Shares, at the purchase price
per share set forth in the paragraph above, for the sole purpose of covering
over-allotments, if any, in the sale of the Firm Shares. Each such election to
purchase Optional Shares may be exercised only by written notice from the
Representatives to the Company, given within a period of thirty (30) calendar
days after the date of this Agreement and setting forth the aggregate number of
Optional Shares to be purchased and the date on which such Optional Shares are
to be delivered, as determined by you but in no event earlier than the Closing
Date or, unless you and the Company otherwise agree in writing, no earlier than
two (2) nor later than ten (10) business days after the date of such notice.
SECTION 4. OFFERING OF THE SHARES BY THE UNDERWRITERS. Upon the
authorization by the Representatives of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
SECTION 5. DELIVERY OF AND PAYMENT FOR THE SHARES.
(a) The Firm Shares to be purchased by each Underwriter
hereunder, in definitive form, and in such authorized denominations and
registered, in such names as the Representatives may request upon at least
forty-eight (48) hours' prior notice to the Company shall be delivered by or on
behalf of the Company to the Representatives, for the account of such
Underwriter, against payment by or on behalf of such Underwriter of the purchase
price therefor in Federal (same day) funds. The Company will cause the
certificates representing the Firm Shares to be made available for checking and
packaging at least twenty-four (24) hours prior to the Closing Date (as defined
below) with respect thereto at the office of Ferris, Baker Watts, Incorporated,
1720 Eye Street, N.W., Washington, D.C. 20006 or such other location as the
Representatives may reasonably designate (the "Designated Office"). The time and
date of such delivery and payment shall be, with respect to the Firm Shares, at
______ o'clock a.m., Washington, DC time, on ______________, 1997 or such other
time and date as the Representatives and the Company may agree. Such time and
date for delivery of the Firm Shares is herein called the "Closing Date."
(b) Delivery and payment of any Optional Shares to be
purchased by each Underwriter pursuant hereto shall be made at the Designated
Office at _____ o'clock a.m., Washington, DC time, on the date specified by the
Representatives in the written notice of the Underwriters' election to purchase
such Optional Shares, or such other time and date as the Representatives and the
Company may agree. Such time and date for delivery of Optional Shares, if not
the Closing Date, is herein called the "Option Closing Date."
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(c) The documents to be delivered at the Closing Date or any
Option Closing Date, as the case may be, by or on behalf of the parties hereto
pursuant to Section 8 hereof, including the cross-receipt for the Shares and any
additional documents requested by the Underwriters will be held at the offices
of Venable, Baetjer, Howard & Civiletti, LLP, 1201 New York Avenue, NW,
Washington, DC 20005 (the "Closing Location"), and the Shares will be delivered
at the Designated Office, on the Closing Date or the Option Closing Date, as the
case may be.
(d) A meeting will be held at the Closing Location at 2:00
p.m., Washington, D.C. time, on the business day next preceding Closing Date or
any Option Closing Date, as the case may be, or at such other time as is
mutually agreed upon by the parties hereto, at which meeting the final drafts of
the documents to be delivered pursuant to the preceding paragraph will be
available for review by the parties hereto.
SECTION 6. COVENANTS OF THE COMPANY. The Company covenants and agrees
with each of the Underwriters as follows:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto, to become effective as promptly as
practicable. If required, the Company will file the Prospectus and any
amendments or supplements thereto with the Commission in the manner and within
the time period required by Rule 424(b). During any time when a prospectus
relating to the Shares is required to be delivered under the Act, the Company
will comply with all requirements imposed upon it by the Act and the Rules and
Regulations to the extent necessary to permit the continuance of sales of or
dealings in the Shares in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented. With respect to any registration
statement, prospectus, amendment, or supplement to be filed with the Commission
in connection with the Shares, the Company will provide a copy of each such
document to each of the Representatives a reasonable time prior to the date such
document is proposed to be filed with the Commission and will not file any such
document without the consent of the Representatives. Any such registration
statement, prospectus, amendment or supplement, when filed, will comply with the
Act. In the event that the Registration Statement is effective at the time of
execution of this Agreement, but the total number of Shares subject to this
Agreement exceeds the number of Shares covered by the Registration Statement,
the Company will promptly file with the Commission on the date hereof a
registration statement pursuant to Rule 462(b) in accordance with the
requirements of such Rule and will make payment of the filing fee therefor in
accordance with the requirements of Rule 111(b) under the Act.
(b) The Company will advise the Representatives promptly (i)
when the Registration Statement, as amended, has become effective; (ii) if the
provisions of Rule 430A promulgated under the Act will be relied upon, when
the Prospectus has been
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filed in accordance with said Rule 430A; (iii) when any post-effective amendment
to the Registration Statement becomes effective; (iv) of any request made by the
Commission for amendments or supplements to the Registration Statement, any
Preliminary Prospectus or Prospectus or for additional information; (v) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or any order
preventing or suspending the use of any Preliminary Prospectus or Prospectus or
any amendment or supplement thereto or the institution or threat of any
investigation or proceeding for that purpose, and will use its best efforts to
prevent the issuance of any such order; and (vi) of the receipt of any comments
from the Commission regarding the Registration Statement, any post-effective
amendment thereto, the Preliminary Prospectus, the Prospectus, or any amendment
or supplement thereto. The Company will use its best efforts to prevent the
issuance of any stop order by the Commission, and if at any time the Commission
shall issue any stop order, the Company will use its best efforts to obtain the
withdrawal of such stop order at the earliest possible moment.
(c) The Company will cooperate with the Representatives, their
counsel and the Underwriters in qualifying or registering the Shares for sale,
or obtaining an exemption therefrom, under the blue sky laws of such
jurisdictions as the Representatives shall designate, and will continue such
qualifications or registrations or exemptions in effect so long as reasonably
requested by the Representatives to effect the distribution of the Shares. The
Company shall not be required to qualify as a foreign corporation or to file a
general consent to service of process in any such jurisdiction where it is not
presently qualified.
(d) The Company consents to the use of the Prospectus (and any
amendment or supplement thereto) by the Underwriters and all dealers to whom the
Shares may be sold, in connection with the offering or sale of the Shares and
for such period of time thereafter as the Prospectus is required by law to be
delivered in connection therewith. If, at any time when a prospectus relating to
the Shares is required to be delivered under the Act, any event occurs as a
result of which the Prospectus, as then amended or supplemented, would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein not misleading, or if it becomes
necessary at any time to amend or supplement the Prospectus to comply with the
Act or the Rules and Regulations, the Company promptly will so notify the
Representatives and will prepare and file with the Commission an amendment to
the Registration Statement or an amendment or supplement to the Prospectus which
will correct such statement or omission or effect such compliance; each such
amendment or supplement to be reasonably satisfactory to counsel to the
Underwriters.
(e) As soon as practicable, but in any event not later than
forty-five (45) calendar days after the end of the 12-month period beginning on
the day after the end of the fiscal quarter of the Company during which the
effective date of the Registration
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Statement occurs (90 calendar days in the event that such quarter is the
Company's last fiscal quarter), the Company will make generally available to its
securityholders, in the manner specified in Rule 158(b) of the Rules and
Regulations, and will deliver to each of the Representatives, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and Regulations, which statement need not be audited unless required by the Act
or the Rules and Regulations, covering a period of at least twelve (12)
consecutive months after the effective date of the Registration Statement.
(f) During the period of five (5) years commencing with the
date hereof, the Company will deliver to the Representatives:
(i) Within ninety (90) calendar days after the end of each
fiscal year, financial statements for the Company, certified by the Company's
independent certified public accountants, including a balance sheet, statement
of operations, statement of stockholders' equity and statement of cash flows,
with supporting schedules, prepared in accordance with generally accepted
accounting principles, as at the end of such fiscal year and for the twelve (12)
months then ended, accompanied by a copy of the certificate or report thereon of
such independent certified public accountants; provided that if, during such
five-year period, the Company has active subsidiaries, the foregoing financial
statements will be on a consolidated basis to the extent that the accounts of
the Company and its subsidiaries are consolidated, and will be accompanied by
similar financial statements for any significant subsidiary which is not so
consolidated;
(ii) as soon as practicable after filing with the
Commission, all such reports, forms or other documents as may be required from
time to time, under the Act, the Rules and Regulations, the Exchange Act and the
rules and regulations thereunder;
(iii) as soon as they are available, copies of all
information (financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the National
Association of Securities Dealers, Inc. ("NASD"), the NNM or any other
securities exchange or market;
(v) promptly following release by the Company, every
press release and every material news item or article of interest to the
financial community in respect of the Company or its affairs which was released
or prepared by the Company; and
(vi) as soon as possible following receipt of a
request, any additional information of a public nature concerning the Company or
its business which the Representatives may reasonably request.
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(g) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the Transfer Agent) for its Stock.
(h) The Company will furnish, without charge, to the
Representatives or on the Representatives' order, at such place as the
Representatives may designate, copies of the Preliminary Prospectus, the
Registration Statement and any pre-effective or post-effective amendments
thereto, and any registration statement filed pursuant to Rule 462(b) (of which
three (3) copies will be signed and will include all financial statements and
exhibits) and the Prospectus, and all amendments and supplements thereto in each
case as soon as available and in such quantities as the Representatives may
reasonably request.
(i) Except pursuant to this Agreement, the Company will not,
directly or indirectly, without the prior written consent of the
Representatives, issue, offer, sell, offer to sell, contract to sell, grant any
option to purchase, pledge or otherwise dispose (or announce any issuance,
offer, sale, offer of sale, contract of sale, grant of any option to purchase,
pledge or other disposition) of any shares of Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Stock for a
period of one hundred eighty (180) calendar days after the date hereof, other
than issuances pursuant to the exercise of stock options outstanding on or
granted subsequent to the date hereof, pursuant to a stock option or other
employee benefit plan in existence on the date hereof. With respect to
securities issued or issuable under stock option plans and employee benefit
plans, the Company will not file any registration statement on Form S-8 (or
other applicable form) for a period of one hundred eighty (180) calendar days
after the date hereof.
(j) The Company will cause the Shares to be duly approved for
listing on the NNM prior to the Closing Date. The Company shall take all
necessary and appropriate action such that the Shares are authorized for
quotation on the NNM as soon as practicable after the effectiveness of the
Registration Statement and the Shares shall remain so authorized for at least
thirty-six (36) months thereafter.
(k) Neither the Company nor any of its officers or directors,
nor affiliates of any of them (within the meaning of the Rules and Regulations)
will take, directly or indirectly, any action designed to, or which might in the
future reasonably be expected to, cause or result in, or which will constitute,
stabilization or manipulation of the price of any securities of the Company.
(l) The Company will apply the net proceeds of the offering
received in the manner set forth under the caption "Use of Proceeds" in the
Prospectus. The Company will operate its business in such a manner and, pending
application of the net
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proceeds of the offering for the purposes and in the manner set forth under the
caption "Use of Proceeds" in the Prospectus, will invest such net proceeds in
such securities so as not to become an "investment company" as such term is
defined under the Investment Company Act.
(m) The Company will timely file all such reports, forms or
other documents as may be required from time to time, under the Act, the Rules
and Regulations, the Exchange Act and the rules and regulations thereunder, and
all such reports, forms and documents so filed will comply as to form and
substance with the applicable requirements under the Act, the Rules and
Regulations, the Exchange Act and the rules and regulations thereunder which may
from time to time be applicable to the Company. Without limiting the generality
of the foregoing, the Company has filed a registration statement on Form 8-A
covering the Shares pursuant to Section 12(g) of the Exchange Act and will use
its best efforts to cause said registration statement to become effective on the
Effective Date. The Company shall comply with the provisions of all undertakings
contained in the Registration Statement.
(n) Except as described in the Prospectus, the Company will
not, until the earlier to occur of (i) thirty (30) calendar days following the
date of this Agreement or (ii) the Option Closing Date immediately after which
all Optional Shares shall have been so purchased, incur any liability or
obligation, direct or contingent, or enter into any material transaction, other
than in the ordinary course of business.
(o) For a period of thirty (30) calendar days following the
date of this Agreement the Company will not acquire any of the Company's capital
stock, declare or pay any dividend or make any other distribution upon its
capital stock payable to its holders of record on a date prior to the expiration
of such 30-day period.
(p) The Company will comply or cause to be complied with the
conditions to the Underwriters' obligations set forth in Section 8 hereof.
(q) On the Closing Date, the Company will enter into the
Underwriters' Warrant Agreement and, pursuant thereto will sell to the
Representatives the Underwriters' Warrants to purchase in the aggregate, 150,000
shares of Stock at an aggregate price of $1,500.
(r) During the period of thirty (30) calendar days commencing
with the date of this Agreement, the Company shall neither issue any press
release or other communication, directly or indirectly, nor hold any press
conference with respect to the offering of the Shares, the Company, its
Subsidiaries or its business, results of operations, condition (financial or
otherwise), property, assets, liabilities or prospects of the Company or any of
its Subsidiaries, without the prior written consent of the Representatives,
which consent shall not unreasonably be denied or delayed; provided, however,
that if counsel to
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the Company is of the opinion that the issuance of a press release or other
communication or a press conference is required to comply with or avoid a
violation of applicable law, and having been so informed the Representatives
decline to consent thereto, the Company shall be permitted to issue such press
release or other communication or hold such press conference in the manner
advised by its counsel.
(s) Neither the Company nor any of its Subsidiaries will grant
any person or entity registration rights with respect to any of its securities,
except such rights as are subordinate to the registration rights contained in
the Underwriters' Warrant Agreement and are exercisable no earlier than six (6)
months after the securities to be registered upon exercise of such registration
rights contained in the Underwriters' Warrant Agreement have been offered for
sale pursuant to an effective registration statement under the Act and
registered or qualified for sale under the blue sky or state securities law,
rules or regulations of the jurisdictions in which such securities are to be
offered for sale.
SECTION 7. EXPENSES.
(a) If the Underwriters purchase the Firm Shares, in
accordance with the terms of this Agreement, the Company will pay the
Representatives, out of the first proceeds of the offering contemplated by this
Agreement, a non-accountable expense allowance of one percent (1%) of the gross
proceeds raised, in order to compensate the Representatives for their expenses
in connection with the transactions contemplated hereby The costs and expenses
of registration, filings and fees of all counsel in completing the applications
and in clearing the offering contemplated by this Agreement through the state
securities commissions or similar regulatory authorities of the various states
or other jurisdictions shall be borne and paid by the Company in addition to the
non-accountable expense allowance referred to in the immediately preceding
sentence.
(b) If the purchase of the Firm Shares as herein contemplated
is not consummated for any reason other than the Underwriters' default under
this Agreement or other than by reason of Section 11(a), the Company shall
reimburse the several Underwriters, in an amount not to exceed $100,000 in the
aggregate, for their out-of-pocket expenses (including but not limited to
counsel fees and disbursements) in connection with any investigation made by
them, and any preparation made by them in respect of marketing of the Shares or
in contemplation of the performance by them of their obligations hereunder.
SECTION 8. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations
of each Underwriter to purchase and pay for the Shares set forth opposite the
name of such Underwriter in Schedule I are subject to the continuing accuracy of
the representations and warranties of the Company herein as of the date hereof,
as of the Closing Date, and as of each Option Closing Date, if any, as if they
had been made on and as of the Closing Date or Option Closing Date, as the case
may be; the accuracy on and as of the Closing
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Date, and each Option Closing Date, if any, of the statements of officers of the
Company made pursuant to the provisions hereof; the performance by the Company
on and as of the Closing Date, and each Option Closing Date, as the case may be,
of their respective covenants and agreements hereunder; and the following
additional conditions:
(a) The Registration Statement shall have been declared
effective, and the Prospectus (containing the information omitted pursuant to
Rule 430(A)) shall have been filed with the Commission not later than the
Commission's close of business on the second business day following the date
hereof or such later time and date to which the Representatives shall have
consented. No stop order suspending the effectiveness of the Registration
Statement or any amendment thereto shall have been issued, and no proceedings
for that purpose shall have been instituted or threatened or, to the best
knowledge of the Company or the Representatives, shall be contemplated by the
Commission. The Company shall have complied with any request of the Commission
for additional information (to be included in the Registration Statement or the
Prospectus or otherwise).
(b) The Representatives shall not have advised the Company
that the Registration Statement, or any amendment thereto, contains an untrue
statement of fact which, in the Representatives' opinion, is material, or omits
to state a fact which, in the Representatives' opinion, is material and is
required to be stated therein or is necessary to make the statements therein not
misleading, or that the Prospectus, or any supplement thereto, contains an
untrue statement of fact which, in the Representatives' opinion, is material, or
omits to state a fact which, in the Representatives' opinion, is material and is
required to be stated thein or is necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading
(c) On or prior to the Closing Date, and any Option Closing
Date, as the case may be, the Representatives shall have received from counsel
to the Underwriters, such opinion or opinions with respect to the issuance and
sale of the Firm Shares, the Registration Statement and the Prospectus and such
other related matters as the Representatives reasonably may request and such
counsel shall have received such documents and other information as they request
to enable them to pass upon such matters.
(d) On the Closing Date, the Underwriters shall have received
the opinion, dated the Closing Date, of Shulman, Rogers, Gandal, Pordy & Ecker,
P.A., counsel to the Company (which opinion may rely, with respect to certain
regulatory matters, upon the opinion, dated the Closing Date, of Kelley Drye &
Warren LLP, regulatory counsel to the Company, copies of which shall be provided
to counsel for the Underwriters and shall be attached to the opinion of counsel
of the Company and may be referred to therein), to the effect set forth below:
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(i) The Company has been duly incorporated and
is validly existing as a corporation in good standing under the laws of
Maryland, its jurisdiction of incorporation, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, (except for those
jurisdictions in which the failure to so qualify has not had and will not have a
Material Adverse Effect). Each of the Subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and each has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under the
laws of each other jurisdiction in which it owns or leases properties, or
conducts any business so as to require such qualification (except for those
jurisdictions in which the failure to so qualify has not had and will not have a
Material Adverse Effect).
(ii) The Company has the duly authorized capitalizat-
ion as set forth in the Prospectus. All of the shares of capital stock of the
Company issued and outstanding immediately prior to the Closing Date or an
Option Closing Date, as the case may be, have been duly and validly authorized
and issued, are fully paid and non-assessable, without personal liability
attaching to the ownership thereof, and none of such shares have been issued or
are owned or held in violation of any preemptive or other rights of
securityholders or other persons to acquire securities of the Company. The
securities of the Company including, without limitation, the Shares, the Stock,
the Underwriters' Warrants and the Warrant Shares, conform to all statements
relating thereto contained in the Registration Statement or the Prospectus. With
respect to each Subsidiary of the Company, all of the issued and outstanding
shares of capital stock are fully paid and non-assessable, without personal
liability attaching to the ownership thereof, and none of such shares have been
issued or are owned or held in violation of any preemptive or other rights of
securityholders or other persons to acquire securities of the Company and
(except as otherwise described in the Prospectus) are owned directly by the
Company, free and clear of all liens, encumbrances, equities or claims. Other
than as disclosed in the Prospectus, to the best knowledge of such counsel,
there are no holders of the securities of the Company or any of its Subsidiaries
having rights to registration thereof or pre-emptive rights to purchase capital
stock of the Company or any such Subsidiary. Except as created hereby or
described in the Prospectus, to the best knowledge of such counsel, there are no
commitments, plans or arrangements to issue, and no outstanding options,
warrants or other rights, calling for issuance of, any shares of capital stock
of the Company or any of its Subsidiaries or any security or other instrument
which, by its terms, is convertible into, exercisable for, or exchangeable for
capital stock of the Company or any of its Subsidiaries.
(iii) The Shares and the Underwriters' Warrants have
been duly and validly authorized and, when the Shares are issued and delivered
against payment therefor as provided herein, or when such Underwriters' Warrants
are issued and
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delivered in accordance with the terms thereof and of the Underwriters' Warrant
Agreement, will be duly and validly issued and fully paid and non-assessable,
will not have been issued in violation of any preemptive or other rights of
securityholders or other persons to acquire securities of the Company and will
conform to all statements relating thereto in the Registration Statement and the
Prospectus. Good and marketable title to the Shares and the Underwriters'
Warrants will pass to the Underwriters on the Closing Date free and clear of any
lien, encumbrance, security interest, claim or other restriction whatsoever. The
Warrant Shares have been duly authorized and validly reserved for issuance and,
when issued, paid for and delivered in accordance with the terms of the
Underwriters' Warrant Agreement and the Underwriters' Warrants, the Warrant
Shares will be duly and validly issued and fully paid and non-assessable, will
not have been issued in violation of any preemptive or other rights of
securityholders or other persons to acquire securities of the Company and will
conform to all statements relating thereto in the Prospectus. Good and
marketable title, free and clear of any lien, encumbrance, security interest,
claim or any other restriction will pass to the holders of Warrant Shares issued
upon exercise of Underwriters' Warrants in accordance with the terms thereof and
of this Agreement and the Underwriters' Warrant Agreement.
(iv) The Shares have been duly approved for listing
on the NNM.
(v) The Registration Statement is effective under the
Act. Any required filing of a registration statement pursuant to Rule 462(b) has
been made in the manner and within the time period required by Rule 462(b). The
Prospectus has been filed with the Commission pursuant to the appropriate
subparagraph of Rule 424(b) under the Act and no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto has been
issued, and no proceedings for that purpose have been instituted or are pending
or, to the best knowledge of such counsel, are threatened or contemplated under
the Act.
(vi) The registration statement originally filed with
respect to the Shares and each amendment thereto, each Preliminary Prospectus
and Prospectus and, if any, each amendment and supplement thereto (except for
the financial statements, schedules and other financial data included therein,
as to which such counsel need not express any opinion), complies as to form in
all material respects with the requirements of the Act and the Rules and
Regulations.
(vii) The descriptions and summaries contained in the
Prospectus of contracts, agreements, instruments leases, licenses and other
documents, are accurate and fairly represent, in all material respects, the
information required to be disclosed with respect thereto by the Act and the
Rules and Regulations. To the best knowledge of such counsel, all contracts,
agreements, instruments, leases, licenses or other documents which are required
by the Act or the Rules and Regulations to be
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described in the Prospectus or to be filed as exhibits to the Registration
Statement have been so described or filed.
(viii) To the best knowledge of such counsel, there
is not pending or threatened against the Company any action, suit or proceeding
by any person or any action, suit, proceeding or investigation before or by any
court, regulatory body, or administrative agency or any other governmental
agency or body, domestic or foreign, of a character required to be disclosed in
the Registration Statement or the Prospectus which is not so disclosed therein.
(ix) The statements set forth under the captions
"Risk Factors," "Use of Proceeds," "Business," "Management," "Shares Eligible
for Future Sale," and "Description of Capital Stock" in the Prospectus, insofar
as such statements constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly and accurately summarize such legal
matters, documents and proceedings.
(x) The Company has full legal right, power, and
authority to enter into this Agreement and the Underwriters' Warrant Agreement
and to consummate the transactions provided for herein and therein. All
necessary corporate proceedings of the Company have been taken to authorize the
execution, delivery and performance, by the Company, of this Agreement and the
Underwriters' Warrant Agreement. This Agreement and the Underwriters' Warrant
Agreement have been duly authorized, executed and delivered by the Company and,
assuming due authorization, execution and delivery by each other party hereto or
thereto, constitute the valid and binding agreements of the Company, enforceable
in accordance with their respective terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws now or
hereafter in effect relating to or affecting creditors' rights generally or by
general principles of equity relating to the availability of remedies and except
as rights to indemnity and contribution may be limited by federal or state
securities laws or the public policy underlying such laws.
(xi) All required consents from any party to any
material contract, agreement, instrument, lease, license, or other document, or
any arrangement or understanding to which the Company or any of its Subsidiaries
is a party, or to which any of the property, assets or business of the Company
or any of its Subsidiaries is subject, is required for the execution, delivery
and performance of this Agreement and the Underwriters Warrant Agreement have
been obtained. None of the Company's execution and delivery of this Agreement
and the Underwriters Warrant Agreement, performance of its obligations hereunder
and thereunder, consummation of the transactions contemplated herein or therein,
and application of the net proceeds of the offering in the manner set forth
under the caption "Use of Proceeds" in the Prospectus will conflict with or
results in any breach or violation of any of the terms or provisions of, or
constitute a default under, or entitle any other party to terminate or call a
default under, or result in the creation or
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imposition of any lien, charge or encumbrance upon, any property or asset of the
Company or any of its Subsidiaries pursuant to the terms of (i) the Charter or
Bylaws of the Company or any of its Subsidiaries; (ii) the terms of any
indenture, mortgage, deed of trust, voting trust agreement, stockholders
agreement, note agreement or other agreement or instrument known to such counsel
after reasonable investigation to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries is or may be bound
or to which any of their respective properties, assets or businesses may be
subject; (iii) any statute, rule or regulation of any regulatory body or
administrative agency or other governmental agency or body, domestic or foreign,
having jurisdiction over the Company or any of its Subsidiaries or any of their
respective businesses, activities or properties; or (iv) any order or decree of
any government, arbitrator, court, regulatory body or administrative agency or
other governmental agency or body, domestic or foreign, having such
jurisdiction.
(xii) All legally required proceedings in connection
with the authorization, issue and sale of the Shares, the Underwriters' Warrants
and the Warrant Shares by the Company in accordance with the provisions of this
Agreement and the Underwriters' Warrant Agreement have been taken and no
consent, approval, authorization, order, license, certificate, declaration or
permit from or of any court, regulatory body or administrative agency or other
governmental agency or body, domestic or foreign has been or is required for the
Company's performance of this Agreement and the Underwriters Warrant Agreement
or the consummation of the transactions contemplated hereby and thereby, except
such as may be required under federal or state securities laws in connection
with the purchase and distribution by the Underwriters of the Shares.
(xiii) To such counsel's best knowledge, the conduct
of the business of the Company and each of its Subsidiaries is not in violation
of any federal, state or local statute, administrative regulation or other law,
which violation could have a Material Adverse Effect. The Company and each of
its Subsidiaries possesses all licenses, permits, approvals and other
governmental authorizations required for the conduct of its business, as
described in the Prospectus; all such licenses, permits and other governmental
authorizations are in full force and effect and the Company and each of its
Subsidiaries is in all material respects in compliance therewith. To such
counsel's best knowledge, there is no reason why the Company would not receive,
or would be unlikely to receive, such licenses, permits, approvals and other
governmental authorization as would be required for the conduct of the Company's
business as contemplated by the Prospectus.
(xiv) Neither the Company nor any of its Subsidiaries
is in violation or breach of its respective Charter or Bylaws or similar
constitutive documents. To such counsel's best, except as disclosed in the
Prospectus, none of the Company, any of its Subsidiaries, or any other party is
now in violation or breach of, or in default with respect
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to complying with, any material provision of any indenture, mortgage, deed of
trust, debenture, note or other evidence of indebtedness, contract, agreement,
instrument, lease or license, or arrangement or understanding which is material
to the Company, and each such indenture, mortgage, deed of trust, debenture,
note or other evidence of indebtedness, contract, agreement, instrument, lease
or license is in full and force and is the legal, valid and binding obligation
of the Company or its Subsidiary or Subsidiaries, except to the extent that the
enforceability of the rights and remedies of the Company or any of its
Subsidiaries under any such lease or other agreement may be limited by
bankruptcy, insolvency, or similar laws generally affecting the rights of
creditors and by equitable principles limiting the right to specific performance
or other equitable relief.
(xv) To such counsel's best knowledge, the Company
and each of its Subsidiaries has good and marketable title, in fee simple, to
all the real property owned thereby as set forth in the Prospectus, subject to
no lien, mortgage, pledge, charge or encumbrance of any kind or nature
whatsoever except those, if any, referred to in the Prospectus (or reflected in
the financial statements included therein) or which, in the aggregate, are not
material to the Company and its business and do not materially affect the value
of such property; and the real properties held or used by the Company and each
of its Subsidiaries under material leases or other material agreements as set
forth in the Prospectus are held under valid, subsisting and enforceable leases
or other agreements with respect to which neither the Company nor any of its
Subsidiaries is in default, except to the extent that the enforceability of the
rights and remedies of the Company or any of its Subsidiaries under any such
lease or other agreement may be limited by bankruptcy, insolvency, or similar
laws generally affecting the rights of creditors and by equitable principles
limiting the right to specific performance or other equitable relief.
(xvi) The Company is not and, after giving effect to
the offering and sale of the Shares, will not be an "investment company," or an
"affiliated person" of or a "promoter" or "principal underwriter" of or an
entity "controlled" by an "investment company," as such terms are defined in the
Investment Company Act.
(xvii) Neither the Company nor any other person
associated with or acting on behalf of the Company including, without
limitation, any director, officer, agent, or employee of the Company has,
directly or indirectly, while acting on behalf of the Company, (i) used any
corporate funds for unlawful contributions, gifts, entertainment, or other
unlawful expenses relating to political activity; (ii) made any unlawful
contribution to any candidate for foreign or domestic office, or to any foreign
or domestic government officials or employees or other person charged with
similar public or quasi-public duties, other than payments required or permitted
by the laws of the United States or any jurisdiction thereof or to foreign or
domestic political parties or campaigns from corporate funds, or failed to
disclose fully any contribution in violation of law; (iii) violated any
provision of the Foreign Corrupt Practices Act of 1977, as amended; or (iv) made
any other unlawful payment.
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(xviii) To the best knowledge of such counsel, since
the effective date of the Registration Statement or the later effective date of
any amendment thereto, no event has occurred which should have been set forth in
an amendment or supplement to the Registration Statement or Prospectus which has
not been so set forth.
(xix) Schedule 1 hereto accurately and completely
lists all of the licenses, permits, and authorizations issued by the FCC
(collectively, the "Licenses") necessary for the Company to carry on its
business as described in the Registration Statement and Prospectus. Schedule 2
hereto accurately and completely lists all pending applications filed by the
Company with the FCC.
(xx) To the best knowledge of such counsel, the
Licenses are validly issued. "Validly issued" as used herein means that the
Licenses have been issued through the means of regular FCC procedures applied in
conformity with the Communications Act and prior FCC practice and there is no
legal basis under the Communications Act to conclude that the Company cannot
hold one or more of the Licenses as a matter of law. To the best of knowledge of
such counsel (i) the Licenses are in full force and effect without conditions
that would have a Material Adverse Effect, except for such conditions imposed
generally by the FCC upon such licenses or conditions stated on the face of the
Licenses, (ii) all express conditions in the Licenses have been satisfied where
the failure to satisfy such conditions would have a Material Adverse Effect, and
(iii) the Company has not received any notification that any revocation or
limitation of the Licenses is threatened or pending that would have a Material
Adverse Effect.
(xxi) Except as specified in Schedule 3 hereto, the
Company has filed with the FCC all applications, statements, reports,
information, forms, or any other document required under the Communications Act,
except where the failure to so file would not have a Material Adverse Effect,
and, to the best knowledge of such counsel, such filings or submissions were in
compliance with applicable laws or regulations when filed or submitted and no
deficiencies have been asserted by the FCC with respect to such filings or
submissions except where the deficiency is of such a nature that failure to cure
any such deficiency would not have a Material Adverse Effect, and the
information contained in such filings or submissions was, in all material
respects, accurate, complete and up-to-date at the time the filings or
submissions were made.
(xxii) The Company has filed with the applicable
foreign and domestic regulatory authorities each and every statement, report,
information or form required by any applicable law, regulation or order, except
where the failure to so file would not have a Material Adverse Effect, and all
such filings or submissions were in compliance with applicable laws when filed,
and no deficiencies have been asserted by any regulatory commission, agency or
authority with respect to such filings or
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submissions, except where the failure to so file or cure any such deficiency
would not have a Material Adverse Effect. The Company has maintained in full
force and effect all licenses and permits necessary or proper for the conduct of
its business, except where the failure to do so would not have a Material
Adverse Effect, and the Company has not received any notification that any
revocation or limitation thereof is threatened or pending that would have such
an effect. Except as disclosed in the Registration Statement and the Prospectus,
there is not pending any change under any law, regulation, license or permit
that would have a Material Adverse Effect. The Company has not received any
notice of, or, to the best knowledge of such counsel, been threatened with or is
under investigation with respect to, a violation or a possible violation of any
provision of any law, regulation or order, except such violation or violations
as would not have a Material Adverse Effect.
(xxiii) With respect to State Authorizations issued
by PUCs held by the Company, such State Authorizations are in full force and
effect and are unimpaired by any act or omission of the Company or any of its
employees or agents, in each case except where such authorization is not
required or where the failure to so hold any such State Authorization would not
have a Material Adverse Effect. The State Authorizations are all of the
licenses, authorizations, consents and approvals necessary from the PUCs in
order to allow the Company to own its assets and carry on its business as
currently being conducted, except where the failure to so hold any State
Authorizations would not have a Material Adverse Effect. To the best knowledge
of such counsel, there are no proceedings of any kind, including but not limited
to rulemaking proceedings of general applicability in the industry or industries
in which the Company operates, by or before any PUC, now pending or threatened,
which, if adversely determined, would have a Material Adverse Effect. Neither
the execution and delivery of this Agreement and the Underwriters' Warrant
Agreement nor the consummation of the transactions contemplated herein and
therein and in the Registration Statement will conflict with or result in a
breach of, or require any authorization, approval or consent under the
Communications Act or the rules of the FCC or the communications statutes of any
state or the policies or rules of any PUC.
(xxiv) To the best knowledge of such counsel, there is no
proceeding, formal or informal complaint or investigation before the FCC or any
PUC against the Company or any of the Licenses identified in Schedule 1 or based
on any violation or alleged violation by the Company of the Communications Act
or any state law, except for proceedings affecting the industry generally to
which the Company is not a specific party.
In addition, such counsel shall state that in the course of the
preparation of the Registration Statement and the Prospectus, such counsel has
participated in conferences with officers and representatives of the Company and
its Subsidiaries, with the Company's independent public accountants, and with
the Representatives, at which conferences such counsel made inquiries of such
officers, representatives and accountants
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and discussed the contents of the Registration Statement and the Prospectus and
on the basis of the foregoing, nothing has come to such counsel's attention that
would lead such counsel to believe that either the Registration Statement or any
amendment thereto, as of the date the Registration Statement or such amendment
is or was declared effective, and as of the Closing Date or any Option Closing
Date, as the case may be, or the Prospectus as of the date thereof and as of the
Closing Date or any Option Closing Date, as the case may be, contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need not express any belief
with respect to the financial statements, and the notes and schedules related
thereto and other financial information or statistical data included in the
Registration Statement, any amendment thereto, or the Prospectus).
In rendering any such opinions, such counsel may rely, (i) as
to matters of fact, to the extent such counsel deems proper, on certificates of
responsible officers of the Company provided that copies of any such
certificates shall be delivered to counsel for the Underwriters; and (ii) to the
extent such counsel deems proper, upon written statements or certificates of
public officials, provided that copies of any such statements or certificates
shall be delivered to counsel for the Underwriters.
References to the Registration Statement and the Prospectus in
this paragraph (d) shall include any amendment or supplement thereto at the date
of such opinion.
(e) On or prior to the Closing Date or any Option Closing
Date, as the case may be, counsel to the Underwriters shall have been furnished
such documents, certificates and opinions as they may reasonably require in
order to evidence the accuracy, completeness or satisfaction of any of the
representations or warranties of the Company or conditions herein contained.
(f) At the time that this Agreement is executed by the Company
the Underwriters shall have received from Arthur Andersen LLP a letter as of the
date of this Agreement in form and substance satisfactory to the Representatives
(the "Original Letter"), and on the Closing Date and any Option Closing Date the
Underwriters shall have received from such firm a letter dated the Closing Date
or such Option Closing Date, stating that, as of a specified date not earlier
than five (5) calendar days prior to the Closing Date or Option Closing Date, as
the case may be, nothing has come to the attention of such firm to suggest that
the statements made in the Original Letter are not true and correct.
(g) On the Closing Date and any Option Closing Date, the
Underwriters shall have received a certificate, dated the Closing Date or such
Option
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Closing Date, as the case may be, of the principal executive officer and the
principal financial or accounting officer of the Company to the effect that each
such person has carefully examined the Registration Statement and the Prospectus
and any amendments or supplements thereto and this Agreement, and that:
(i) the representations and warranties of the Company
in this Agreement are true and correct, as if made on and as of the Closing Date
or the Option Closing Date, as the case may be, and the Company has complied
with all agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to the Closing
Date or such Option Closing Date;
(ii) No stop order suspending the effectiveness of
the Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or, to the best knowledge of each such
person, are contemplated or threatened under the Act and any and all filings
required by Rule 424, Rule 430A and Rule 462(b) have been timely made;
(iii) The Registration Statement and Prospectus and,
if any, each amendment and each supplement thereto, contain all statements and
information required by the Act or the Rules and Regulations to be included
therein, and neither the Registration Statement or the Prospectus nor any
amendment or supplement thereto includes any untrue statement of a material fact
or omits to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus or any
amendment or supplement thereto, up to and including the Closing Date or the
Option Closing Date, as the case may be, neither the Company nor any of its
Subsidiaries has incurred, other than in the ordinary course of its business or
as described in the Prospectus or in an amended or supplemented Prospectus, any
material liabilities or obligations, direct or contingent; the Company has not
purchased any of its outstanding capital stock or paid or declared any dividends
or other distributions on its capital stock; neither the Company nor any of its
Subsidiaries has entered into any transactions not in the ordinary course of
business; and there has not been any change in the capital stock or long-term
debt or any increase in the short-term borrowings (other than any increase in
short-term borrowings in the ordinary course of business) of the Company or any
material adverse change to the business, properties, assets, net worth,
condition (financial or other), results of operations or prospects of the
Company; the Company has not sustained any material loss or damage to its
property or assets, whether or not insured; there is no litigation which is
pending or threatened against the Company which is required under the Act or the
Rules and Regulations to be set forth in an amended or supplemented Prospectus
which has not been
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set forth; and there has not occurred any event required to be set forth in an
amended or supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in
this paragraph (g) are to such documents as amended and supplemented at the date
of the certificate required hereby.
(h) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus up to and including
the Closing Date or any Option Closing Date, as the case may be, there has not
been (i) any change or decrease specified in the letter or letters referred to
in paragraph (f) of this Section 8 or (ii) any change, or any development
involving a prospective change, in the business or properties of the Company
which change or decrease in the case of clause (i) or change or development in
the case of clause (ii) makes it impractical or inadvisable in the
Representatives' judgment to proceed with the public offering or the delivery of
the Shares as contemplated by the Prospectus.
(i) No order suspending the sale of the Shares in any
jurisdiction designated by you pursuant to Section 6(c) hereof has been issued
on or prior to the Closing Date or any Option Closing Date, as the case may be,
and no proceedings for that purpose have been instituted or, to the best
knowledge of such persons or that of the Company, have been or are contemplated.
(j) The Representatives shall have received from each person
who is a director or officer of the Company, each stockholder, and each other
person, if any, who has the right to acquire more than five percent (5%) or more
of the outstanding shares of Stock, assuming exercise of currently exercisable
stock options on a fully diluted basis, an agreement to the effect that such
person will not, directly or indirectly, without the prior written consent of
the Representatives, on behalf of the Underwriters, offer, sell, offer to sell,
contract to sell, grant any option to purchase, pledge or otherwise dispose (or
announce any offer, sale, offer of sale, contract of sale, grant of an option to
purchase, pledge or other disposition) of any shares of Common Stock or any
securities convertible into, or exchangeable or exercisable for, shares of
Common Stock for a period of 180 calendar days after the date of this Agreement.
(k) The Shares shall have been duly authorized for listing on
the NNM.
(l) The NASD, upon review of the terms of the public offering
of the Shares contemplated hereby, shall have indicated that it has no objection
to the underwriting arrangements pertaining to the sale of the Shares and the
Underwriters' participation in the sale of the Shares as so contemplated.
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(m) The Company shall have furnished the Underwriters with
such further opinions, letters, certificates or documents as the Representatives
or counsel for the Underwriters may reasonably request.
All opinions, certificates, letters and documents to be furnished by
the Company will comply with the provisions hereof only if they are reasonably
satisfactory in all material respects to the Underwriters and to counsel for the
Underwriters. The Company shall furnish the Underwriters with manually signed or
conformed copies of such opinions, certificates, letters and documents in such
quantities as you reasonably request. The certificates delivered under this
Section 8 shall constitute representations, warranties and agreements of the
Company as to all matters set forth therein as fully and effectively as if such
matters had been set forth in Section 2 of this Agreement.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at either the Closing Date or any Option Closing Date is
not so satisfied, this Agreement, at the Representatives' election, will
terminate upon notification to the Company without liability on the part of any
Underwriter (including the Representatives) or the Company, except for the
expenses to be paid by the Company pursuant to Section 7 hereof and except to
the extent provided in Section 9 hereof.
SECTION 9. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each Underwriter,
and its officers, directors, partners, employees, agents and counsel, and each
person, if any, who controls such Underwriter within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, against any and all losses,
claims, damages, liabilities or expenses whatsoever (which shall include, for
all purposes of this Section 9, but not be limited to, attorneys' fees and any
and all fees and expenses whatsoever incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any claim
whatsoever and any and all amounts paid in settlement), joint or several (and
actions in respect thereof), to which such Underwriter, officer, director,
partner, employee, agent, counsel or controlling person may become subject,
under the Act or other federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities, expenses
or actions arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or the
Prospectus or any Preliminary Prospectus, or any amendment or supplement
thereto, or any blue sky application or other document executed by the Company
specifically for the purposes of qualifying, or based upon written information
furnished by the Company in any state or other jurisdiction in order to qualify,
any or all of the Shares under the securities or blue sky laws thereof (any such
application, document or information being hereinafter called a "Blue Sky
Application"), or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not
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misleading, and will reimburse, as incurred, expenses of such Underwriter,
partner, employee, agent, counsel or controlling person in connection with
investigating, defending or appearing as a third party witness in connection
with any such loss, claim, damage, liability, expense or action; provided,
however, that the Company will not be liable in any such case to the extent that
any such loss, claim, damage, liability, expense or action arises out of or is
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in any of such documents in reliance upon and in
conformity with information furnished in writing to the Company on behalf of
such Underwriter through the Representatives expressly for use therein, and
provided, further, that such indemnity with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter (or to the benefit
of any person controlling such Underwriter) from whom the person asserting any
such loss, claim, damage, liability or action purchased Shares which are the
subject thereof to the extent that any such loss, claim, damage, liability or
action (i) results from the fact that such Underwriter failed to send or give a
copy of the Prospectus (as amended or supplemented) to such person at or prior
to the confirmation of the sale of such Shares to such person in any case where
such delivery is required by the Act and (ii) arises out of or is based upon an
untrue statement or omission of a material fact contained in such Preliminary
Prospectus that was corrected in the Prospectus (as amended and supplemented),
unless such failure resulted from non-compliance by the Company with Section
6(h) hereof. The indemnity agreement in this paragraph (a) shall be in addition
to any liability which the Company may otherwise have.
(b) Each of the Underwriters agrees severally, but not jointly,
to indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act against any and all losses, claims, damages, liabilities or
expenses whatsoever (which shall include, for all purposes of this Section 9,
but not be limited to, attorneys' fees and any and all fees and expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever and any and all
amounts paid in settlement), (and actions in respect thereof) to which the
Company or any such director, officer, or controlling person may become subject,
under the Act or other federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities, expenses
or actions arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or the
Prospectus or any Preliminary Prospectus, or any amendment or supplement thereto
or in any Blue Sky Application, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with information furnished in writing by that Underwriter through the
Representatives to the Company expressly for use therein. The Company
acknowledges that the statements with
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respect to the public offering of the Shares set forth under the caption
"Underwriting" and the stabilization legend in the Prospectus have been
furnished by the Underwriters to the Company expressly for use therein and
constitute the only information furnished in writing by or on behalf of the
Underwriters for inclusion in the Prospectus. The indemnity agreement contained
in this paragraph (b) shall be in addition to any liability which the
Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section 9
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof it to be made against one or more indemnifying parties
under this Section 9, notify such indemnifying party or parties of the
commencement thereof; but the failure so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under paragraph (a) or (b) of this Section 9 to the extent that
the indemnifying party was not adversely affected by such omission. In case any
such action is brought against an indemnified party and it notifies an
indemnifying party or parties of the commencement thereof, the indemnifying
party or parties against which a claim is to be made will be entitled to
participate therein and, to the extent that it or they may wish, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party has
reasonably concluded that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall have
the right to select separate counsel to assume such legal defenses and otherwise
to participate in the defense of such action on behalf of such indemnified party
or parties. Upon receipt of notice from the indemnifying party to such
indemnified party of its election so to assume the defense of such action and
approval by the indemnified party of counsel, the indemnifying party will not be
liable to such indemnified party under this Section 9 for any legal or other
expenses (other than the reasonable costs of investigation) subsequently
incurred by such indemnified party in connection with the defense thereof unless
(i) the indemnified party has employed such counsel in connection with the
assumption of such different or additional legal defenses in accordance with the
proviso to the immediately preceding sentence, (ii) the indemnifying party has
not employed counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, or (iii) the indemnifying party has authorized in
writing the employment of counsel for the indemnified party at the expense of
the indemnifying party.
(d) If the indemnification provided for in this Section 9 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) above in respect of any losses, claims, damages,
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liabilities or expenses (or actions in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) (i) in such proportion as is
appropriate to reflect the relative benefits received by each of the
contributing parties, on the one hand, and the party to be indemnified, on the
other hand, from the offering of the Shares or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each of the contributing parties, on the
one hand, and the party to be indemnified, on the other hand in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. In any case
where the Company is a contributing party and the Underwriters are the
indemnified party, the relative benefits received by the Company on the one
hand, and the Underwriters, on the other hand, shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Shares (before
deducting expenses) bear to the total underwriting discounts received by the
Underwriters hereunder, in each case as set forth in the table on the cover page
of the Prospectus. Relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, liabilities or
expenses (or actions in respect thereof) referred to above in this paragraph (d)
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this paragraph (d), the
Underwriters shall not be required to contribute any amount in excess of the
underwriting discounts applicable to the Shares purchased by the Underwriters
hereunder. The Underwriters' obligations to contribute pursuant to this
paragraph (d) are several in proportion to their respective underwriting
obligations, and not joint. No person guilty of fraudulent misrepresentations
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this paragraph (d), (i) each person, if any,
who controls an Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act shall have the same rights to contribution as
such Underwriter and (ii) each director of the Company, each officer of the
Company who has signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act shall have the same rights to contribution as the Company.
Any party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect to
which claim for contribution may be made against another party or parties under
this paragraph (d), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any other
obligation (x) it or they may have hereunder or otherwise than under this
paragraph (d) or (y) to the extent that such party or parties were not adversely
affected by
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<PAGE>
such omission. The contribution agreement set forth above shall be in addition
to any liabilities which any indemnifying party may otherwise have.
SECTION 10. REPRESENTATIONS, ETC. TO SURVIVE DELIVERY. The respective
representations, warranties, agreements, covenants, indemnities and statements
of, and on behalf of, the Company and its officers and the Underwriters,
respectively, set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf of
the Underwriters, and will survive delivery of and payment for the Shares. Any
successors to the Underwriters shall be entitled to the indemnity, contribution
and reimbursement agreements contained in this Agreement.
SECTION 11. EFFECTIVE DATE AND TERMINATION.
(a) This Agreement shall become effective at _____ a.m.,
Washington, D.C. time, on the first business day following the date hereof, or
at such earlier time after the Registration Statement becomes effective as the
Representatives, in their sole discretion, shall release the Shares for the sale
to the public, unless prior to such time the Representatives shall have received
written notice from the Company that it elects that this Agreement shall not
become effective, or the Representatives shall have given written notice to the
Company that the Representatives on behalf of the Underwriters elect that this
Agreement shall not become effective; provided, however, that the provisions of
this Section 11 and of Section 7 and Section 9 hereof shall at all times be
effective. For purposes of this Section 11(a), the Shares to be purchased
hereunder shall be deemed to have been so released upon the earlier of
notification by the Representatives to securities dealers releasing such Shares
for offering or the release by the Representatives for publication of the first
newspaper advertisement which is subsequently published relating to the Shares.
(b) This Agreement (except for the provisions of Sections 7
and 9 hereof) may be terminated by the Representatives by notice to the Company
in the event that the Company has failed to comply in any respect with any of
the provisions of this Agreement required on its part to be performed at or
prior to the Closing Date or any Option Closing Date, as the case may be, or if
any of the representations or warranties of the Company are not accurate in any
respect or if the covenants, agreements or conditions of, or applicable to, the
Company herein contained have not been complied with in any respect or satisfied
within the time specified on the Closing Date or any Option Closing Date, as the
case may be, or if prior to the Closing Date or any such Option Closing Date:
(i) the Company shall have sustained a loss by
strike, fire, flood, accident or other calamity of such a character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss was insured;
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<PAGE>
(ii) trading in the Stock shall have been suspended
by the Commission or the NNM or trading in securities generally on the New York
Stock Exchange or the NNM shall have been suspended or a material limitation on
such trading shall have been imposed or minimum or maximum prices shall have
been established on either such exchange or market;
(iii) a banking moratorium shall have been declared
by New York or United States
authorities;
(iv) there shall have been an outbreak or escalation
of hostilities between the United States and any foreign power or an outbreak or
escalation of any other insurrection or armed conflict involving the United
States;
(v) there shall have been commenced any action, suit
or proceeding at law or in equity against the Company, or by any federal, state
or other commission, board or agency, wherein any unfavorable decision would
materially adversely affect the business, properties or financial condition of
the Company;
(vi) there shall have occurred any material adverse
market conditions, of which the Representatives shall be the sole judge;
(vii) Company's independent public accountants shall
have imposed qualifications in certifying to, or its attorneys in opining upon,
material items including, without limitation, information in the footnotes to
the financial statements or matters incident to the issuance and sale of the
Shares, corporate proceedings or other subjects; or
(viii) there shall have been a material adverse
change in (i) general economic, political or financial conditions or (ii) the
present or prospective business or condition (financial or other) of the Company
that, in each case, in the Representatives' judgment makes it impracticable or
inadvisable to make or consummate the public offering, sale or delivery of the
Company's Shares on the terms and in the manner contemplated in the Prospectus
and the Registration Statement.
(c) Termination of this Agreement under this Section 11 or
Section 12 after the Firm Shares have been purchased by the Underwriters
hereunder shall be applicable only to the Optional Shares. Termination of this
Agreement shall be without liability of any party to any other party other than
as provided in Sections 7 and 9 hereof.
SECTION 12. SUBSTITUTION OF UNDERWRITERS. If one or more of the
Underwriters shall fail or refuse (otherwise than for a reason sufficient to
justify the termination of this Agreement under the provisions of Section 8 or
11 hereof) to purchase and pay for (a) in the case of the Closing Date, the
number of Firm Shares agreed to be purchased by such
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<PAGE>
Underwriter or Underwriters upon tender to the Representatives such Firm Shares
in accordance with the terms hereof or (b) in the case of any Option Closing
Date, the number of Optional Shares agreed to be purchased by such Underwriter
or Underwriters upon tender to the Representatives of such Optional Shares in
accordance with the terms hereof, and the number of such Shares shall not exceed
ten percent (10%) of the Firm Shares or Optional Shares required to be purchased
on the Closing Date or such Option Closing Date, as the case may be, then, each
of the non-defaulting Underwriters shall purchase and pay for (in addition to
the number of such Shares which it has severally agreed to purchase hereunder)
its proportionate share (based on the monetary obligations of the several
Underwriters hereunder on account of the purchase of Firm Shares, excluding the
Firm Shares allocable to the defaulting Underwriter or Underwriters) which the
defaulting Underwriter or Underwriters shall have so failed or refused to
purchase on such Closing Date or Option Closing Date, as the case may be. In
such case, the Representatives, on behalf of the Underwriters, shall have the
right to postpone the Closing Date or the Option Closing Date, as the case may
be, to a date not exceeding seven (7) full business days after the date
originally fixed as such Closing Date or the Option Closing Date, as the case
may be, pursuant to the terms hereof in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made.
If one or more of the Underwriters shall fail or refuse (otherwise than
for a reason sufficient to justify the termination of this Agreement under the
provisions of Section 8 or 11 hereof) to purchase and pay for (a) in the case of
the Closing Date, the number of Firm Shares agreed to be purchased by such
Underwriter or Underwriters upon tender to you of such Firm Shares in accordance
with the terms hereof or (b) in the case of the Option Closing Date, the number
of Optional Shares agreed to be purchased by such Underwriter or Underwriters
upon tender to you of such Optional Shares in accordance with the terms hereof,
and the number of such Shares shall exceed ten percent (10%) of the Firm Shares
or Optional Shares required to be purchased by all the Underwriters on the
Closing Date or the Option Closing Date, as the case may be, then (unless within
forty-eight (48) hours after such default arrangements to your satisfaction
shall have been made for the purchase of the defaulted Shares by an Underwriter
or Underwriters) and subject to the provisions of Section 11(b) hereof, this
Agreement will terminate without liability on the part of any non-defaulting
Underwriter or on the part of the Company except as otherwise provided in
Sections 7 and 9 hereof. As used in this Agreement, the term "Underwriter"
includes any person substituted for an Underwriter under this paragraph. Nothing
in this Section 12, and no action taken hereunder, shall relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 13. NOTICES. All communications hereunder shall be in writing
and if sent to the Representatives shall be mailed or delivered or sent by
facsimile transmission and confirmed by letter to Ferris, Baker Watts,
Incorporated at 1720 Eye Street, N.W., Washington, D.C. 20006, Attention:
Richard K. Prins (facsimile number: (703) 761-
-39-
<PAGE>
9610) or, if sent to the Company,
shall be mailed or delivered or sent by facsimile transmission and confirmed by
letter to the Company at 10411 Motor City Drive, Bethesda, Maryland 20817,
attention: Ram Mukunda (facsimile number: (301) 365-8969).
SECTION 14. SUCCESSORS. This Agreement shall inure to the benefit of
and be binding upon the Company and each Underwriter and the Company's and each
Underwriter's respective successors and legal representatives, and nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any other person any legal or equitable right, remedy or claim under or in
respect of this Agreement, or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of such persons and for the benefit of no other
person, except that the representatives, warranties, indemnities and
contribution agreements of the Company contained in this Agreement shall also be
for the benefit of the partners, employees agents of each Underwriter and any
person or persons, if any, who control any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, and except that the
Underwriters' indemnity and contribution agreements shall also be for the
benefit of the directors of the Company, the officers of the Company who have
signed the Registration Statement and any person or persons, if any, who control
the Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act. No purchaser of Shares from the Underwriters will be deemed a
successor because of such purchase.
SECTION 15. APPLICABLE LAW; JURISDICTION. This
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<PAGE>
Agreement shall be governed by and construed in accordance with the laws of the
State of Maryland, without giving effect to the choice of law or conflict of law
principles thereof. Each party hereto consents to the jurisdiction of each court
in which any action is commenced seeking indemnity or contribution pursuant to
Section 9 above and agrees to accept, either directly or through an agent,
service of process of each such court.
SECTION 16. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, and all of
which together shall be deemed to be one and the same instrument.
If the foregoing is in accordance with your understanding,
please sign and return to us three (3) counterparts hereof, and upon the
acceptance hereof by you, on behalf of each of the Underwriters, this letter and
such acceptance hereof shall constitute a binding agreement among each of the
Underwriters and the Company. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in a form of Agreement among Underwriters, the form of which shall be
submitted to the Company for examination, upon request, but without warranty on
your part as to the authority of the signers thereof.
Very truly yours,
STARTEC GLOBAL COMMUNICATIONS, INC.
By: ________________________________
Name: _____________________________
Title: ____________________________
ACCEPTED AS OF THE DATE HEREOF
FERRIS, BAKER WATTS, INCORPORATED
1720 EYE STREET, N.W.
WASHINGTON, D.C. 20006
BY: FERRIS, BAKER WATTS, INCORPORATED
ON BEHALF OF EACH OF THE UNDERWRITERS
By:
Name:
Title:
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<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
NUMBER OF SHARES TO BE
PURCHASED BY EACH UNDERWRITER
<S> <C> <C>
Number of Firm Shares to be
Purchased from the Company
Name of Underwriter Percentage
Ferris, Baker Watts, Incorporated..............
Boenning & Scattergood.........................
</TABLE>
STARTEC GLOBAL COMMUNICATIONS CORPORATION
UNDERWRITERS' WARRANT AGREEMENT
UNDERWRITERS' WARRANT AGREEMENT dated as of ___________, 1997
by and between STARTEC GLOBAL COMMUNICATIONS CORPORATION, a Maryland Corporation
(the "Company"), and FERRIS, BAKER WATTS, INCORPORATED ("FERRIS") and BOENNING &
SCATTERGOOD, INC. ("BOENNING") (Ferris and Boenning sometimes being referred to
collectively herein as the "Underwriters").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue warrants to the
Underwriters (the "Warrants") to purchase up to 150,000 shares of common stock,
par value $0.01 per share, of the Company (the "Stock"), of which 110,000
Warrants are to be issued to Ferris and the remaining 40,000 Warrants are to be
issued to Boenning; and
WHEREAS, the Underwriters have agreed, pursuant to an
underwriting agreement (the "Underwriting Agreement") dated _________, 1997, to
which the Underwriters and the Company are parties, to act as the co-lead
underwriters in connection with the Company's public offering of up to 2,600,000
shares of its Stock at a public offering price of $_____ per share (the "Public
Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement
will be issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Underwriters in the amounts set forth in the
first recital above written, in consideration for, and as part of their
compensation in connection with, acting as underwriters pursuant to the
Underwriting Agreement;
NOW, THEREFORE, in consideration of the foregoing premises,
which are incorporated into the terms hereof, of the payment by Ferris and
Boenning to the Company of $1,100 and $400 respectively for the Warrants to be
purchased hereunder, the agreements herein set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. GRANT. The Holders (as that term is defined in Section 3
hereof) of the Warrants issued hereunder are hereby granted the right to
purchase, by exercising the Warrants, at any time from _______________, 1998
(the first anniversary of the effective date of the Company's Registration
Statement relating to the Public Offering (the "Effective Date")) until no later
than 5:00 p.m., Washington, DC time, on _________, 2002 (the fifth anniversary
of the Effective Date), up to an aggregate of 150,000 shares of the Stock of the
Company, at an initial exercise price (subject to
<PAGE>
adjustment as provided in Section 8 hereof) of $____ per Share (110% of the
initial public offering price per share in the Public Offering), subject to the
terms and conditions of this Agreement. The shares issuable upon exercise of the
Warrants are referred to herein as the "Warrant Shares".
2. WARRANT CERTIFICATES. The warrant certificates (the
"Warrant Certificates") delivered and to be delivered pursuant to this Agreement
shall be in the form set forth in Exhibit A, attached hereto and made a part
hereof, with such appropriate insertions, omissions, substitutions, and other
variations as required or permitted by this Agreement.
3. EXERCISE OF WARRANTS. The Warrants are exercisable during
the term set forth in Section 1 hereof at the Exercise Price (defined below) per
Warrant Share set forth in Section 6 hereof, payable by certified or cashier's
check or money order payable in lawful money of the United States, subject to
adjustment as provided in Section 8 hereof; provided, however, that if the fair
market value of one share of Stock is greater than the Exercise Price (at the
date of calculation as set forth below), in lieu of exercising a Warrant for
cash, the Holder may elect to receive Warrant Shares equal to the value (as
determined below) of the Warrant (or the portion thereof being canceled) by
surrender of the Warrant Certificate at the principal office of the Company
together with the properly completed and executed Form of Election to Purchase
in the form attached as Exhibit B, in which event the Company shall issue to the
Holder a number of Warrant Shares computed using the following formula:
Y(A-B)
X = ------
A
Where: X = the number of Warrant Shares to be issued to the Holder;
Y = the number of shares of Stock purchasable pursuant to the
Warrant Certificate surrendered, or, if only a portion of
the Warrant represented by such Warrant Certificate is
being exercised, the portion of the Warrant being canceled
(at the date of such calculation);
A = the fair market value of one share of the Company's
Stock (at the date of such calculation); and
B = Exercise Price (as adjusted to the date of such
calculation).
For purposes of the above calculation, fair market value of one share of Stock
shall be determined by the Company's Board of Directors in good faith; provided,
however, that where there exists a public market for the Stock at the time of
such exercise, the fair
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<PAGE>
market value per share shall be equal to the average of the closing bid and
asked prices of the Stock quoted in the Over-The-Counter Market Summary or the
last reported sale price of the Stock or the closing price quoted on the Nasdaq
National Market or on any exchange on which the Stock is listed, whichever is
applicable, as published in The Wall Street Journal for the five (5) trading
days prior to the date of determination of fair market value. Notwithstanding
the foregoing, in the event the Warrant is exercised in connection with a pubic
offering by the Company (except for the Public Offering), the fair market value
per share shall be equal to the per share offering price to the public of the
Stock in such public offering. Upon surrender of a Warrant Certificate with the
annexed Form of Election to Purchase duly executed, together with payment of the
Exercise Price (as hereinafter defined) for the Warrant Shares (and such other
amounts, if any, arising pursuant to Section 4 hereof) at the Company's
principal office, the registered holder of a Warrant Certificate (each, a
"Holder" and, collectively, the "Holders") shall be entitled to receive a
certificate or certificates for the Warrant Shares so purchased. (References
herein to a "Holder" or "Holders of Warrant Shares shall mean the registered
holder or holders thereof). The purchase rights represented by each Warrant
Certificate are exercisable, at the option of the Holder thereof, in whole or in
part, (but not as to fractional Warrant Shares). In the case of the purchase of
less than all the Warrant Shares purchasable on the exercise of the Warrants
represented by a Warrant Certificate, the Company shall cancel the Warrant
Certificate represented thereby upon the surrender thereof and shall execute and
deliver a new Warrant Certificate of like tenor for the balance of the Warrant
Shares purchasable thereunder.
4. ISSUANCE OF CERTIFICATES. Upon the exercise of the Warrants
and payment of the Exercise Price therefor, the issuance of certificates for the
Warrant Shares underlying such Warrants shall be made forthwith (and, in any
event, within three (3) business days thereafter) without further charge to the
Holder thereof, and such certificates shall (subject to the provisions of
Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder effecting such exercise; provided, however, that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any such certificates in a
name other than that of such Holder, and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid. The Warrant Certificates and the certificates representing
the Warrant Shares shall be executed on behalf of the Company by the persons and
in the manner prescribed by the Bylaws of the Company and by applicable law.
Warrant Certificates shall be dated the date of execution by the Company upon
initial issuance, division, exchange, substitution or transfer.
5. RESTRICTIONS ON TRANSFER OF WARRANTS. The Holder of a
Warrant Certificate (and its Permitted Transferee, as defined below), by its
acceptance thereof,
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<PAGE>
covenants and agrees that the Warrants are being acquired as an investment and
not with a view to the distribution thereof; that the Warrants may be sold,
transferred, assigned, hypothecated or otherwise disposed of, in whole or in
part, to (i) any person who is an officer, director, employee, agent or other
affiliate of the Underwriters or (ii) such other person as may be approved by
counsel for the Company (a "Permitted Transferee"), provided such transfer,
assignment, hypothecation or other disposition is made in accordance with the
provisions of the Securities Act of 1933, as amended (the "1933 Act"). Any
transfer of a Warrant Certificate shall be effected by delivery of such Warrant
Certificate at the principal office of the Company, together with the properly
completed and executed Form of Assignment in the form attached as Exhibit C.
6. EXERCISE PRICE
A. INITIAL AND ADJUSTED EXERCISE PRICE. Except as otherwise
provided in Section 8 hereof, the initial exercise price of each Warrant to
purchase Warrant Shares shall be $____ per Share. The adjusted exercise price
shall be the price which shall result from time to time from any and all
adjustments of the initial exercise price in accordance with the provisions of
Section 8 hereof.
B. EXERCISE PRICE. The term "Exercise Price" herein shall
mean the initial exercise price or the adjusted exercise price, depending upon
the context.
7. REGISTRATION RIGHTS.
A. WARRANT LEGEND. The Warrant Certificates shall bear
the following legends:
THE SECURITIES ISSUABLE UPON EXERCISE OF THE WARRANT REPRESENTED BY
THIS CERTIFICATE MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (I) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "1933 ACT"), (II) TO THE EXTENT APPLICABLE, RULE 144 UNDER
SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE
DISPOSITION OF SECURITIES), OR (III) AN OPINION OF COUNSEL, IF SUCH
OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER,
THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR
SALE OR SOLD EXCEPT PURSUANT TO (I) AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE 1933
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<PAGE>
ACT, OR (II) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY
SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION FROM
REGISTRATION UNDER SUCH 1933 ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANT REPRESENTED BY THIS CERTIFICATE
IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO
HEREIN.
B. DEMAND REGISTRATION. On any one (1) occasion commencing
at any time one (1) year after the Effective Date and expiring five (5) years
after the Effective Date, the Holders of the Warrants and the Warrant Shares
representing at least a Majority (as hereinafter defined) of such securities
shall have the right, exercisable by written notice to the Company, to have the
Company prepare and file with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1, SB-2 (or other appropriate
form) and such other documents, including a prospectus, as may be necessary in
the opinion of both counsel for the Company and counsel for the Holders, in
order to comply with the provisions of the 1933 Act, so as to permit a public
offering and sale, for a period of not less than twelve (12) months, of the
Warrant Shares by such Holders, and any other Holders of the Warrants and/or
Warrant Shares who shall notify the Company within thirty (30) business days
after receipt of the notice described in the succeeding sentence. The Company
covenants and agrees to give written notice of any registration request under
this Section 7(b) by any Holder(s) of Warrants or Warrants Shares to all other
Holders of the Warrants and the Warrant Shares within ten (10) calendar days
from the date of the receipt of any such registration request. For purposes of
this Agreement, the term "Majority," or any stated percentage, in reference to
the Holders of the Warrants and/or Warrant Shares or any category thereof, shall
mean the Holders of Warrant Shares and Warrants or category thereof
representing, in the aggregate, in excess of fifty percent (50%) or such other
stated percentage of the then-outstanding Warrant Shares and Warrant Shares or
category thereof into which then-outstanding Warrants or category thereof are
then exercisable, excluding all Warrant Shares and Warrants that (i) are held by
the Company, an affiliate, officer, director, employee or agent thereof or any
of their respective affiliates, members of their family, persons acting as
nominees or in conjunction therewith, or (ii) have been resold to the public
pursuant to a registration statement filed with the Commission under the 1933
Act. For the purposes of subsection (i) above, the Underwriters and their
respective officers, directors, employees and agents shall not be deemed to be
affiliates, officers, directors, employees or agents of the Company. No
registration statement filed pursuant to this demand registration provision
(without the consent of the Holders holding a Majority of the Warrant Shares
requested to be registered pursuant to such registration statement) may relate
to any securities other than the Warrant Shares, and no other securities may be
sold incidentally to any such underwritten public offering of Warrant Shares so
registered.
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<PAGE>
C. PIGGYBACK REGISTRATION. If, at any time within seven (7)
years after the Effective Date, the Company should file a registration statement
with the Commission under the 1933 Act (other than in connection with a merger
or pursuant to Form S-8) it will give written notice by registered mail, at
least forty-five (45) calendar days prior to the filing of each such
registration statement, to each of the Underwriters (if then a Holder) and to
all other Holders of the Warrants and/or the Warrant Shares of its intention to
do so. If the Underwriters or other Holders of the Warrants and/or the Warrant
Shares notify the Company within thirty (30) calendar days after receipt of any
such notice of its or their desire to include any Warrant Shares in such
proposed registration statement, the Company shall afford such Underwriters and
Holders of the Warrants and/or Warrant Shares the opportunity to have any such
Warrant Shares registered under such registration statement; provided, however,
that the Holders shall not be entitled to piggyback registration rights in
respect of any registration statement filed pursuant to the demand registration
rights granted to Signet Bank pursuant to that certain Warrants Agreement dated
as of July 1, 1997. Notwithstanding the provisions of this Section 7(c), the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 7(c) (irrespective of whether a written request
for inclusion of any such securities shall have been made) to elect not to file
any such proposed registration statement, or to withdraw the same after the
filing but prior to the effective date thereof.
If the underwriter of an offering to which the above piggyback
registration rights apply objects to such rights, such objection shall preclude
such inclusion. However, in the event (i) the Holders of Warrant Shares or
Warrants do not constitute at least forty percent (40%) of the Warrant Shares to
be sold by Holders requesting to sell shares in such offering, or (ii) such
offering is pursuant to a registration pursuant to a demand for registration
made by Signet Bank, the Company will, within one hundred eighty (180) days of
completion of such subsequent underwriting, file at its sole expense, a
registration statement relating to such excluded Warrant Shares, which shall be
in addition to any registration statement required to be filed pursuant to
Section 7(b), unless such Holders had refused an opportunity provided with the
consent of the underwriter, to be included in the registration statement on the
condition that they agree not to offer the securities for sale (without the
prior written consent of the underwriter) for a period not exceeding (60)
calendar days from the effective date of such registration statement.
If the underwriter in such underwritten offering shall advise the
Company that it declines to include a portion or all of the Warrant Shares
requested by the Underwriters and the Holders to be included in the registration
statement, then (i) registration of all of the Warrant Shares shall be excluded
from such registration statement on the condition that all securities to be
registered by other selling security holders, if any, are also excluded and (ii)
registration of a portion of such Warrant Shares allocated among the
Underwriters and the Holders and any other selling securityholders in proportion
to the
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<PAGE>
respective numbers of securities to be registered by the Underwriters and each
such Holder and other selling securityholder (provided that, for purposes of
such allocation, Warrants shall be treated as representing the number of Warrant
Shares then represented thereby). In such event the Company shall give the
Underwriters and the Holders prompt notice of the number of Warrant Shares
excluded.
D. COVENANTS OF THE COMPANY IN RESPECT OF
REGISTRATION. In connection with any registrations under Sections 7(b) and 7(c)
hereof, the Company covenants and agrees as follows:
(1) The Company shall use its best efforts to
file a registration statement within sixty
(60) calendar days of receipt of any demand
therefor; provided, however, that the
Company shall not be required to produce
audited or unaudited financial statements
for any period prior to the date such
financial statements are required to be
filed in a report on Form 10-K or Form 10-Q
(or Form 10-KSB or Form 10-QSB), as the case
may be. The Company shall use its best
efforts to have any registration statement
declared effective at the earliest possible
time, and shall furnish each Holder desiring
to sell Warrant Shares such number of
prospectuses as shall reasonably be
requested.
(2) The Company shall pay all costs (excluding
any underwriting discounts or commissions),
fees and expenses in connection with any
registration statement filed pursuant to
Sections 7(b) or 7(c) hereof including,
without limitation, the actual and
reasonable costs and expenses of one firm
serving as legal counsel to the Holders, the
Company's legal and accounting fees,
printing expenses, and any blue sky fees and
expenses.
(3) The Company will take all necessary and
reasonable steps which may be required to
qualify or register the Warrant Shares
included in a registration statement for
offering and sale under the securities or
blue sky laws of such states as reasonably
are requested by the Holder(s), provided
that the Company shall not be obligated to
execute or file any general consent to
service of process or to qualify as a
foreign corporation to do business under the
laws of any such jurisdiction.
-7-
<PAGE>
(4) The Company shall indemnify the Holder(s) of
the Warrant Shares to be sold pursuant to
any registration statement, each, director,
officer, partner, employee and agent of each
such Holder and each person, if any, who
controls such Holder within the meaning of
Section 15 of the 1933 Act or Section 20(a)
of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), against all
losses, claims, damages, expenses or
liability (including, without limitation,
all expenses reasonably incurred in
investigating, preparing or defending
against any claim whatsoever) to which any
of them may become subject under the 1933
Act, the Exchange Act or otherwise, arising
from such registration statement, but only
to the same extent and with the same effect
as the provisions pursuant to which the
Company has agreed to indemnify the
Underwriters contained in Section 9 of the
Underwriting Agreement.
(5) The Holder(s) of the Warrant Shares to be
sold pursuant to a registration statement,
and their successors and assigns, shall
severally, and not jointly, indemnify the
Company, its officers and directors and each
persons, if any, who controls the Company
within the meaning of Section 15 of the 1933
Act or Section 20(a) of the Exchange Act,
against all losses, claims, damages,
expenses or liability (including all
expenses reasonably incurred in
investigating, preparing or defending
against any claim whatsoever) to which they
may become subject under the 1933 Act, the
Exchange Act or otherwise, arising from
information furnished by or on behalf of
such Holders, or their successors or
assigns, for specific inclusion in such
registration statement to the same extent
and with the same effect as the provisions
contained in Section 9 of the Underwriting
Agreement pursuant to which the Underwriters
have agreed to indemnify the Company.
(6) Nothing contained in this Agreement shall be
construed as requiring the Holder(s) to
exercise their Warrants prior to the initial
filing of any registration statement or the
effectiveness thereof.
(7) If the manner of distribution proposed by
the Holders is an underwriting, the Company
shall furnish to each Holder
-8-
<PAGE>
participating in the offering and to each
underwriter of such offering, a signed
counterpart, addressed to such Holder or
underwriter of (i) an opinion of counsel to
the Company, dated the effective date of
such registration statement (and, if such
registration includes an underwritten public
offering, an opinion dated the date of the
closing under the underwriting agreement),
and (ii) a "cold comfort" letter dated the
effective date of such registration
statement (and, if such registration
includes an underwritten public offering, a
letter dated the date of the closing under
the underwriting agreement) signed by the
independent public accountants who have
issued a report (or reports) on the
Company's financial statements included in
such registration statements, in each case
covering substantially the same matters with
respect to such registration statement (and
the prospectus included therein) and, in the
case of such accountants' letter, with
respect to events subsequent to the date of
such financial statements, as are
customarily covered in opinions of issuer's
counsel and in accountants' letters, with
respect to events subsequent to the date of
such financial statements, as are
customarily covered in opinions of issuer's
counsel in accountants' letters delivered to
underwriters in underwritten public
offerings of securities.
(8) The Company shall, as soon as practicable
after the effective date of the registration
statement, and in any event within the first
full four fiscal quarters following the
effective date, make "generally available to
its security holders" (within the meaning of
Rule 158 under the 1933 Act) an earnings
statement (which need not be audited)
complying with Section 11(a) of the 1933
Act.
(9) The Company shall deliver promptly to one
designated representative for each Holder
participating in the offering requesting the
correspondence described below and any
managing underwriter, copies of all
correspondence between the Commission and
the Company, its counsel or auditors with
respect to the registration statement and
permit each Holder and underwriter to do
such investigation, upon reasonable advance
notice, with respect to information
contained in or omitted from the
registration statement as it deems
reasonably necessary to comply with
applicable securities laws or rules of the
National
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<PAGE>
Association of Securities Dealers, Inc. (the
"NASD"). Such investigation shall include
access to books, records and properties and
opportunities to discuss the business of the
Company with its officers and independent
auditors, all to such reasonable extent and
at such reasonable times and as often as any
such Holder shall reasonably request.
(10) In connection with an offering for which the
Holders have demand rights, the Company
shall enter into an underwriting agreement
with the managing underwriter selected for
such underwriting by Holders holding a
Majority of the Warrant Shares requested to
be included in such underwriting. In
connection with an offering for which the
Holders have piggyback rights, the Company
shall have the sole right to select the
managing underwriter. Such underwriting
agreement shall be satisfactory in form and
substance to the Company, a Majority of such
Holders and such managing underwriter, and
shall contain such representations,
warranties and covenants by the Company and
such other terms as are customarily
contained in agreements of that type used by
the managing underwriter. The Holders shall
be parties to any underwriting agreement
relating to an underwritten sale of their
Warrant Shares and may, at their option,
require that any or all the representations,
warranties and covenants of the Company to
or for the benefit of such underwriter shall
also be made to and for the benefit of such
Holders. Such Holders shall not be required
to make any representations or warranties to
or agreements with the Company or the
underwriter except as they may relate to
such Holders, their ownership of Warrant
Shares subject to registration, and their
intended methods of distribution.
8. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES.
A. ADJUSTMENT OF EXERCISE PRICE. Except as hereinafter
provided, in the event the Company shall, at any time or from time to time after
the date hereof, issue any shares of Stock as a stock dividend to the holders of
Stock, or subdivide or combine the outstanding shares of Stock into a greater or
lesser number of shares (any such issuance, subdivision or combination being
herein called a "Change of Shares"), then, and thereafter upon each Change of
Shares, the Exercise Price for the Warrants (whether or not the same shall be
issued and outstanding) in effect immediately prior to such Change of Shares
shall be changed to a price (including any applicable fraction of a
-10-
<PAGE>
cent to the nearest cent) determined by dividing (i) the sum of (a) the total
number of shares of Stock outstanding immediately prior to such Change of
Shares, multiplied by the Exercise Price in effect immediately prior to such
Change of Shares, and (b) the consideration, if any, received by the Company
upon such issuance, subdivision or combination by (ii) the total number of
shares of Stock outstanding immediately after such Change of Shares; provided,
however, that in no event shall the Exercise Price be adjusted pursuant to this
computation to an amount in excess of the Exercise Price in effect immediately
prior to such computation, except in the case of a combination of outstanding
shares of Stock.
For the purposes of any adjustment to be made in accordance with this
Section 8(a) the following provisions shall be applicable:
(1) Shares or equivalents of Stock issuable by
way of dividend or other distribution on any
stock of the Company shall be deemed to have
been issued immediately after the opening of
business on the day following the record
date for the determination of stockholders
entitled to receive such dividend or other
distribution and shall be deemed to have
been issued without consideration.
(2) The reclassification of securities of the
Company other than shares of Stock into
securities including shares of Stock shall
be deemed to involve the issuance of such
shares of Stock for a consideration other
than cash immediately prior to the close of
business on the date fixed for the
determination of security holders entitled
to receive such shares, and the value of the
consideration allocable to such shares of
Stock shall be determined in good faith by
the Board of Directors of the Company on the
basis of a record of values of similar
property or services.
(3) The number of shares of Stock at any one
time outstanding shall be deemed to include
the aggregate maximum number of shares
issuable (subject to readjustment upon the
actual issuance thereof) upon the exercise
of options, rights or warrants and upon the
conversion or exchange of convertible or
exchangeable securities.
B. ADJUSTMENT OF NUMBER OF WARRANTS. Upon each adjustment
of the Exercise Price pursuant to Section 8(a) above, the number of Shares
purchasable upon the exercise of each Warrant shall be the number derived by
multiplying the number of shares of Stock purchasable immediately prior to such
-11-
<PAGE>
adjustment by the Exercise Price in effect prior to such adjustment and dividing
the product so obtained by the applicable adjusted Exercise Price.
C. ACTION UPON RECLASSIFICATION, MERGER, ETC. The Company
will not merge, reorganize or take any other action which would terminate the
Warrants without first making adequate provision for the Warrants as provided
for herein. In case of any reclassification or change of the outstanding shares
of Stock (other than a change in par value to no par value, or from nor par
value to par value, or as a result of a subdivision or combination), or in case
of any consolidation of the Company with, or merger of the Company with or into,
another corporation (other than a consolidation or merger in which the Company
is the continuing corporation and which does not result in any reclassification
or change of the outstanding Stock except a change as a result of a subdivision
or combination of such shares or a change in par value, as aforesaid), or in the
case of a sale or conveyance to another corporation or other entity of the
property of the Company as an entirety, the Holder of each Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Warrant) to purchase, upon exercise of such Warrant, the kind
and number of shares of stock and other securities and property receivable upon
such reclassification, change, consolidation, merger, sale or conveyance as if
the Holder were the owner of the Shares underlying such Warrants immediately
prior to any such events at a price equal to the product of (x) the number of
shares issuable upon exercise of the Warrants and (y) the Exercise Prices in
effect immediately prior to the record date for such reclassification, change,
consolidation, merger, sale or conveyance, as if such Holder has exercised the
Warrants. In the event of a consolidation, merger, sale or conveyance of
property, the corporation formed by such consolidation or merger, or acquiring
such property, shall execute and deliver to the Holders a supplemental warrant
agreement to such effect. Such supplemental warrant agreement shall provide for
adjustments which shall be identical to the adjustment to those provided in
Section 8. The provisions of this Section 8(c) shall similarly apply to
successive reclassifications, changes, consolidations, mergers, sales or
conveyances.
D. EFFECT OF ADJUSTMENTS ON WARRANT CERTIFICATES.
Irrespective of any adjustments or changes in the Exercise Price or the number
of Shares purchasable upon exercise of the Warrants, the Warrant Certificates
theretofore and thereafter issued shall, unless the Company shall exercise its
option to issue new Warrant Certificates, continue to express the Exercise Price
per share and the number of shares purchasable thereunder as the Exercise Price
per share and the number of shares purchasable thereunder were expressed in the
Warrant Certificates when the same were originally issued.
E. NOTIFICATION TO HOLDERS. After each adjustment of the
Exercise Price pursuant to this Section 8, the Company will promptly prepare a
certificate signed by the Chairman or President, and by the Treasurer or an
Assistant Treasurer or
-12-
<PAGE>
the Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Exercise Price as so adjusted; (ii) the number of Shares purchasable upon
exercise of each Warrant, after such adjustment; and (iii) a brief statement of
the facts accounting for such adjustment. The Company will promptly cause a copy
of such certificate to be sent by first class mail to each Holder at his last
address as it shall appear on the registry books of the Company. No failure to
mail such notice nor any defect therein or in the mailing thereof shall affect
the validity thereof except as to the Holder to whom the Company failed to mail
such notice, or except as to the Holder whose notice was defective. The
affidavit of the Secretary or an Assistant Secretary of the Company that such
notice has been mailed shall, in the absence of fraud, be prima facie evidence
of the facts stated therein.
F. EVENTS NOT TRIGGERING ADJUSTMENT. No adjustment of the
Exercise Price shall be made upon the issuance or sale of: (i) the Warrants or
the Warrant Shares; (ii) the shares of Stock pursuant to the Public Offering; or
(iii) the shares of Stock issuable upon the exercise of the options or warrants
outstanding or shares reserved for issuance pursuant to stock option plans in
effect on the date hereof as described in the prospectus relating to the Public
Offering. In addition, no adjustment of the Exercise Price shall be made if the
amount of said adjustments shall be less than five cents ($.05) per Warrant
Share, provided, however, that in such case any adjustment that would otherwise
be required then to be made shall be carried forward and shall be made at the
time of and together with the next subsequent adjustment which, together with
any adjustment so carried forward, shall amount to at least five cents ($.05)
per Warrant Share.
G. SECURITIES INCLUDED IN THE DEFINITION OF "STOCK". For
the purpose of this Agreement, the term "Stock" shall mean (i) the class of
stock designated as Common Stock in the Charter of the Company as it may be
amended as of the date hereof, or (ii) any other class of stock resulting from
successive changes or reclassification of such stock consisting solely of
changes in par value, or from par value to no par value, or from no par value to
par value. In the event that the Company shall, after the date hereof issue
securities with greater or superior voting rights than those of the shares of
stock outstanding as of the date hereof, each Holder, at its option, may receive
upon exercise of any Warrant either shares of Stock or a like number of such
securities with greater or superior voting rights.
H. NONCASH DIVIDENDS AND OTHER DISTRIBUTIONS. In the event
that the Company shall at any time prior to the exercise or expiration of all
the Warrants declare a dividend (other than a dividend consisting solely of
shares of Stock) or otherwise distribute to its stockholders any assets,
property, rights, evidences of indebtedness, securities (other than shares of
Stock), whether issued by the Company or by another, or any other thing of
value, the Holders of the unexercised Warrants shall thereafter be entitled, in
addition to the shares of Stock or other securities and property
-13-
<PAGE>
receivable upon the exercise thereof, to receive, upon the exercise of such
Warrants, the same property, assets, rights, evidences of indebtedness,
securities or any other thing of value that they would have been entitled to
receive at the time of such dividend or distribution as if the Warrants had been
exercised immediately prior to such dividend or distribution. At the time of any
such dividend or distribution, the Company shall make appropriate reserves to
ensure the timely performance of the provisions of this Section 8h.
I. SUBSCRIPTION RIGHTS FOR SHARES OF STOCK AND OTHER
SECURITIES. In the event that the Company or an affiliate of the Company shall,
at any time after the date hereof and prior to the exercise or expiration of all
the Warrants, issue any rights to subscribe for shares of Stock or any other
securities of the Company or of such affiliate to all the stockholders of the
Company, the Holders of the unexercised Warrants shall be entitled to receive,
in addition to the Warrant Shares receivable upon the exercise of the Warrants,
such rights at the time such rights are distributed to the other stockholders of
the Company.
9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. Each
Warrant Certificate is exchangeable, without charge, upon the surrender thereof
by the Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender. Upon
receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of any Warrant Certificate, and, in case of
loss, theft or destruction, of indemnity or security reasonably satisfactory to
it, and reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of the Warrants, if mutilated, the
Company will make and deliver a new Warrant Certificate of like tenor, in lieu
thereof.
10. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not
be required to issue certificates representing fractions of Warrant Shares upon
the exercise of the Warrants, nor shall it be required to issue scrip or pay
cash in lieu of fractional interests; provided, however, that if a Holder
exercises all Warrants held of record by such Holder the fractional interests
shall be eliminated by rounding any fraction up to the nearest whole number of
Warrant Shares.
11. RESERVATION AND LISTING OF SECURITIES. The Company shall
at all times reserve and keep available out of its authorized shares of Stock,
solely for the purpose of issuance upon the exercise of the Warrants, such
number of shares of Stock as shall be issuable as Warrant Shares upon the
exercise thereof. The Company covenants and agrees that, upon exercise of the
Warrants and payment of the Exercise Price therefor, all the Warrant Shares
issuable upon such exercise shall be duly and validly issued, fully paid,
nonassessable and not subject to the preemptive rights of any stockholder. As
long as the Warrants shall be outstanding, the Company shall use its best
efforts to cause the
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<PAGE>
Stock to be listed and quoted (subject to official notice of issuance) on all
securities exchanges or associations on which the Stock issued to the public in
connection with the Public Offering may then be listed or quoted.
12. LIMITATIONS ON RIGHTS OF, AND CERTAIN NOTICES TO WARRANT
HOLDERS. Nothing contained in this Agreement shall be construed as conferring
upon the Holders of Warrants, prior to the exercise thereof, the right to
receive cash dividends to vote or to consent or to receive notice as a
stockholder in respect of any meetings of stockholders for the election of
directors or any other matter, or as having any rights whatsoever as a
stockholder of the Company. If, however, at any time prior to the expiration of
the Warrants or their earlier exercise, any of the following events shall occur:
(1) the Company shall take a record of the
holders of its shares of Stock for the
purpose of entitling them to receive a
dividend or distribution payable otherwise
than in cash, or a cash dividend or
distribution payable otherwise than out of
current or retained earnings, as indicated
by the accounting treatment of such dividend
or distribution on the books of the Company;
or
(2) the Company shall offer to all the holders
of its Stock any additional shares of
capital stock of the Company or securities
convertible into or exchangeable for shares
of Stock or such other capital stock of the
Company, or any option, right or warrant to
subscribe therefor; or
(3) a dissolution, liquidation or winding up of
the Company (other than in connection with a
consolidation or merger) or a sale of all or
substantially all of its property, assets
and business as an entirety shall be
proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least thirty (30) calendar days prior to the date fixed as a
record date or the date of closing the transfer books for the determination of
the stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
-15-
<PAGE>
13. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made when (i) personally delivered, (ii) three (3) business days after
having been properly addressed, enclosed in a properly sealed envelope or
wrapper and sent postage-paid by first class mail, (iii) transmitted by
facsimile transmission, if acknowledged by such facsimile equipment as received,
or (iv) one (1) business day after being sent, at the expense of the sender, by
Federal Express, Airborne, U.S. Express Mail or similar overnight carrier (a) if
to a Holder of the Warrants, to the address of such Holder as shown on the books
of the Company or (b) if to the Company, at its principal office or to such
other address as the Company may designate by notice to the Holders.
14. SUPPLEMENTS AND AMENDMENTS. The Company and the
Underwriters may, from time to time, supplement or amend this Agreement without
the approval of any Holders of Warrants (other than the Underwriters) in order
to cure any ambiguity, to correct or supplement any provision contained herein
which may be defective or inconsistent with any provisions herein, or to make
any other provisions in regard to matters or questions arising hereunder which
the Company and the Underwriters may deem necessary or desirable and which the
Company and the Underwriters deem shall not adversely affect the interests of
the Holders of Warrants other than the Underwriters.
15. SUCCESSORS. All the covenants and provisions of this
Agreement shall be binding upon and inure to the benefit of the Company, the
Underwriters, the Holders and their respective successors and assigns hereunder.
16. TERMINATION. This Agreement shall terminate at the close
of business on __________, 2006 (the eighth anniversary of the Effective Date).
Notwithstanding the foregoing, the registration provisions and indemnification
provisions of Section 7 shall survive such termination until the close of
business on the later of the expiration of any applicable statue of limitations
or ________, 2008.
17. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement
and each Warrant Certificate issued hereunder shall be deemed to be a contract
made under the laws of the State of Maryland and for all purposes shall be
construed in accordance with the laws of said State without giving effect to the
rules of said State governing the conflicts of laws. The Company, each of the
Underwriters and each and any Holders hereby agrees that any action, proceeding
or claim against it arising out of, or relating in any way to, this Agreement,
the Warrants or the Warrant Certificates shall be brought and enforced in the
courts of the State of Maryland or of the United States of America for the
District of Maryland, and irrevocably submits to such jurisdiction, which
jurisdiction shall be exclusive. The Company, each of the Underwriters and each
and any Holders hereby irrevocably waives any objection to such exclusive
jurisdiction or inconvenient forum. Any such process or summons to be served
upon any of the
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<PAGE>
Company, the Underwriters and the Holders (at the option of the party bringing
such action, proceeding or claim) may be served by transmitting a copy thereof,
by registered or certified mail, return receipt requested, postage prepaid,
addressed to it at the address provided for in Section 13 hereof. Such mailing
shall be deemed personal service and shall be legal and binding upon the party
so served in any action, proceeding or claim.
18. ENTIRE AGREEMENT; MODIFICATION. This Agreement (including
the Underwriting Agreement to the extent portions thereof are referred to
herein) contains the entire understanding between the parties hereto with
respect to the subject matter hereof. Subject to Section 14, this Agreement may
not be modified except upon the express agreement of the Company and a Majority
of the of the Holders of the Warrants and the Warrant Shares.
19. SEVERABILITY. If any provision of this Agreement shall be
held to be invalid or unenforceable, such invalidity or unenforceability shall
not affect any other provision of this Agreement.
20. CAPTIONS. The caption headings of the Sections of this
Agreement are for convenience of reference only and are not intended, nor should
they be construed as, a part of this Agreement and shall be given no substantive
effect.
21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
shall be construed to give to any person or corporation, other than the Company
and the Underwriters and any other Holder(s) of the Warrants or Warrant Shares,
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and the
Underwriters and any other Holder(s) of the Warrants or Warrant Shares.
22. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts together shall together constitute but
one and the same instrument.
23. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the Company, each of the Underwriters and their
successors and assigns and the Holders from time to time of the Warrant(s) or
any of them.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
STARTEC GLOBAL COMMUNICATIONS
CORPORATION
By:_________________________________
Print Name:_________________________
Title:______________________________
FERRIS, BAKER WATTS, INCORPORATED
By:_________________________________
Print Name:_________________________
Title:______________________________
BOENNING & SCATTERGOOD, INC.
By:_________________________________
Print Name:_________________________
Title:______________________________
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EXHIBIT A
STARTEC GLOBAL COMMUNICATIONS CORPORATION
WARRANT CERTIFICATE
THE SECURITIES ISSUABLE UPON EXERCISE OF THE WARRANT REPRESENTED BY THIS
CERTIFICATE MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (I) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933
ACT"), (II) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (III) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL
FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE OR
SOLD EXCEPT PURSUANT TO (I) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933
ACT, OR (II) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY
SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER
SUCH 1933 ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANT REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
<TABLE>
<CAPTION>
<S> <C>
EXERCISABLE COMMENCING ________, 1998 THROUGH 5:00 P.M., WASHINGTON, DC TIME ________, 2003
NO. WC- ___ _________ WARRANTS
</TABLE>
This Warrant Certificate certifies that ______________ _______________
or registered assigns, is the registered holder of _________ warrants (the
"Warrants") to purchase initially, at any time from _______, 1998, until 5:00
p.m., Washington, DC time on _______, 2003 (the "Expiration Date"), up to
_____________ fully paid and non-assessable shares (the "Shares"), of the Common
Stock, par value $0.01 per share (the "Stock"), of STARTEC Global Communications
Corporation, a Maryland corporation
<PAGE>
(the "Company") at the initial exercise price of $____ per Share (the "Exercise
Price"), upon the surrender of this Warrant Certificate and payment of the
Exercise Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the warrant agreement dated as of
____________________, 1997 (the "Warrant Agreement") by and between the Company
and Ferris, Baker Watts, Incorporated and Boenning & Scattergood, Inc. Payment
of the Exercise Price shall be made as provided in Section 3 of the Warrant
Agreement.
No Warrant may be exercised after 5:00 P.M, Washington, DC time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted. In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange as provided herein,
without any charge except for any tax or other governmental charge imposed in
connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
<PAGE>
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the undersigned has executed this certificate this
__th day of _______, 1997.
STARTEC Global Communications Corporation
By:______________________________________
Print Name:______________________________
Title:___________________________________
[SEAL]
ATTEST:
By:____________________________
<PAGE>
EXHIBIT B
<TABLE>
<CAPTION>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:
_______ Shares
<S> <C>
and herewith tenders in payment for such securities the amount of $____________, in accordance with the terms
of this Warrant Certificate and of the Warrant Agreement. The undersigned requests that a certificate for such
securities be registered in the name of ______________________________________, whose address is
__________________ ________________________________________________________________________, and that such
Certificate be delivered to ___________________________________, whose address is
_________________________________________________________ ____________________________________________.
</TABLE>
Dated:____________________
Signature:
------------------------------------
(Signature must conform in
all respects to the name of
holder as specified on the
face of the Warrant
Certificate.)
------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
EXHIBIT C
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
Warrant Certificate.)
FOR VALUE RECEIVED __________________________________ hereby sells, assigns and
transfers unto __________________________________ (Please print name and address
of transferee) this Warrant Certificate, together with all right, title and
interest therein, and does hereby irrevocably constitute and appoint
___________________________________ Attorney, to transfer the within Warrant
Certificate on the books of STARTEC Global Communications Corporation, with full
power of substitution.
Dated:______________________ Signature:
------------------------------------
(Signature must conform in
all respects to the name of
holder as specified on the
face of the Warrant
Certificate.)
------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
Exhibit 5.1
LAW FIRM
SHULMAN, ROGERS, GANDAL, PORDY & ECKER, P.A.
11921 ROCKVILLE PIKE, THIRD FLOOR
ROCKVILLE, MD 20852-2743
(301)230-5200
TELECOPIER (301)230-2891
TDD (301)230-6570
October 6, 1997
Startec Global Communications Corporation
10411 Motor City Drive
Bethesda, MD 20817
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We are acting as counsel to Startec Global Communications Corporation, a
Maryland corporation (the "Company"), in connection with the registration of
2,990,000 shares of the Company's Common Stock, par value $0.01 per share,
including 390,000 shares subject to an over-allotment option (collectively, the
"Shares"), pursuant to a Registration Statement on Form S-1 (Registration No.
333-32753), as amended (the "Registration Statement"), filed with the Securities
and Exchange Commission under the Securities Act of 1933, as amended.
As counsel for the Company, we have examined originals or copies, certified
or otherwise identified to our satisfaction, of such documents, corporate
records, certificates of public officials and other instruments as we have
deemed necessary for the purposes of rendering this opinion. In our examination,
we have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals and the conformity with the originals of
all documents submitted to us as copies. As to various questions of fact
material to such opinion, we have relied, to the extent we deemed appropriate,
upon representations, statements and certificates of officers and
representatives of the Company and others.
Based upon the foregoing, we are of the opinion that the Shares to be
registered for sale by the Company have been duly authorized by the Company, and
when issued, delivered and paid for in accordance with the terms of the
underwriting agreement referred to in the Registration Statement and in
accordance with the
<PAGE>
resolutions adopted by the Board of Directors of the Company, will be, validly
issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and we consent to the use of our name under the caption "Legal
Maters" in the Prospectus forming a part of the Registration Statement.
Very truly yours,
/s/ SHULMAN, ROGERS, GANDAL
PORDY AND ECKER, P.A.
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, SIX MONTHS SIX MONTHS
--------------------------------------------------- ENDED ENDED
1994 1995 1996 JUNE 30, 1996 JUNE 30, 1997
--------------- ----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net (loss) income .................. $ (978,837) $ (1,206,014) $ (2,829,831) $ (962,227) $ 351,424
Weighted average common and equiv-
alent shares outstanding:
Weighted average common shares
outstanding ..................... 4,596,226 5,317,109 5,403,350 5,403,350 5,403,350
Dilutive effect of options ......... - - - - 52,728
Effect of cheap stock ............... 392,611 392,611 392,611 392,611 339,883
----------- ------------- ------------- ----------- -----------
Total weighted average common and
equivalent shares outstanding ...... 4,988,837 5,709,720 5,795,961 5,795,961 5,795,961
=========== ============= ============= =========== ===========
Net (loss) income per share ......... $ (0.20) $ (0.21) $ (0.49) $ (0.17) $ 0.06
=========== ============= ============= =========== ===========
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
AS INDEPENDENT PUBLIC ACCOUNTANTS, WE HEREBY CONSENT TO THE USE OF OUR
REPORTS AND TO ALL REFERENCES TO our Firm included in or made a part of this
registration statement.
Washington, D.C.
October 3, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 JUN-30-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<EXCHANGE-RATE> 1 1
<CASH> 148 2,106
<SECURITIES> 0 0
<RECEIVABLES> 6,413 10,820
<ALLOWANCES> 1,079 1,576
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,772 11,928
<PP&E> 2,165 2,728
<DEPRECIATION> 789 1,003
<TOTAL-ASSETS> 7,328 14,265
<CURRENT-LIABILITIES> 12,771 19,220
<BONDS> 0 0
0 0
0 0
<COMMON> 76 76
<OTHER-SE> (6,165) (5,791)
<TOTAL-LIABILITY-AND-EQUITY> 7,328 14,265
<SALES> 0 0
<TOTAL-REVENUES> 32,215 28,836
<CGS> 0 0
<TOTAL-COSTS> 29,881 25,250
<OTHER-EXPENSES> 847 520
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 337 252
<INCOME-PRETAX> (2,830) 359
<INCOME-TAX> 0 7
<INCOME-CONTINUING> (2,830) 351
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,830) 351
<EPS-PRIMARY> (0.49) 0.06
<EPS-DILUTED> (0.49) 0.06
</TABLE>
